You are on page 1of 348

1.

YUJUICO VS QUIAMBAO

G.R. No. 180416 June 2, 2014

ADERITO Z. YUJUICO and BONIFACIO C. SUMBILLA, Petitioners,


vs.
CEZAR T. QUIAMBAO and ERIC C. PILAPIL, Respondents.

DECISION

PEREZ, J.:

This case is a Petition for Review on Certiorari1 from the Orders2 dated 4 June
2007 and 5 November 2007 of the Regional Trial Court (RTC), Branch 154, of
Pasig City in S.C.A. No. 3047.

The facts:

Background

Strategic Alliance Development Corporation (STRADEC) is a domestic


corporation operating as a business development and investment company.

On 1 March 2004, during the annual stockholder's meeting of STRADEC,


petitioner Aderito Z. Yujuico (Yujuico) was elected as president and chairman of
the company.3 Yujuico replaced respondent Cezar T. Quiambao (Quiambao),
who had been the president and chairman of STRADEC since 1994.4

With Yujuico at the helm, STRADEC appointed petitioner Bonifacio C. Sumbilla


(Sumbilla) as treasurer and one Joselito John G. Blando (Blando) as corporate
secretary.5 Blando replaced respondent Eric C. Pilapil (Pilapil), the previous
corporate secretary of STRADEC.6

The Criminal Complaint

On 12 August 2005, petitioners filed a criminal complaint7 against respondents


and one Giovanni T. Casanova (Casanova) before the Office of the City
Prosecutor (OCP) of Pasig City. The complaint was docketed in the OCP as LS.
No. PSG 05-08-07465.

The complaint accuses respondents and Casanova of violating Section 74 in


relation to Section 144 of Batas Pambansa Blg. 68 or the Corporation Code. The
petitioners premise such accusation on the following factual allegations:8

1. During the stockholders' meeting on 1 March 2004, Yujuico-as newly


elected president and chairman of STRADEC-demanded Quiambao for
the turnover of the corporate records of the company, particularly the
accounting files, ledgers, journals and other records of the corporation's
business. Quiambao refused.

2. As it turns out, the corporate records of STRADEC were in the


possession of Casanova-the accountant of STRADEC. Casanova was
keeping custody of the said records on behalf of Quiambao, who allegedly
needed the same as part of his defense in a pending case in court.

3. After the 1 March 2004 stockholders' meeting, Quiambao and


Casanova caused the removal of the corporate records of STRADEC from
the company's offices in Pasig City.

4. Upon his appointment as corporate secretary on 21 June 2004, Blando


likewise demanded Pilapil for the turnover of the stock and transfer book
of STRADEC. Pilapil refused.

5. Instead, on 25 June 2004, Pilapil proposed to Blando to have the stock


and transfer book deposited in a safety deposit box with Equitable PCI
Bank, Kamias Road, Quezon City. Blando acceded to the proposal and
the stock and transfer book was deposited in a safety deposit box with the
bank identified. It was agreed that the safety deposit box may only be
opened in the presence of both Quiambao and Blando.

6. On 30 June 2004, however, Quiambao and Pilapil withdrew the stock


and transfer book from the safety deposit box and brought it to the offices
of the Stradcom Corporation (STRADCOM) in Quezon City. Quiambao
thereafter asked Blando to proceed to the STRADCOM offices. Upon
arriving thereat, Quiambao pressured Blando to make certain entries in
the stock and transfer books. After making such entries, Blando again
demanded that he be given possession of the stock and transfer book.
Quiambao refused.

7. On 1 July 2004, Blando received an order dated 30 June 2004 issued


by the RTC, Branch 71, of Pasig City in Civil Case No. 70027, which
directed him to cancel the entries he made in the stock and transfer book.
Hence, on even date, Blando wrote letters to Quiambao and Pilapil once
again demanding for the turnover of the stock and transfer book. Pilapil
replied thru a letter dated 2 July 2004 where he appeared to agree to
Blando's demand.

8. However, upon meeting with Pilapil and Quiambao, the latter still
refused to turnover the stock and transfer book to Blando. Instead, Blando
was once again constrained to agree to a proposal by Pilapil to have the
stock and transfer book deposited with the RTC, Branch 155, of Pasig
City. The said court, however, refused to accept such deposit on the
ground that it had no place for safekeeping.

9. Since Quiambao and Pilapil still refused to turnover the stock and
transfer book, Blando again acceded to have the book deposited in a
safety deposit box, this time, with the Export and Industry Bank in San
Miguel A venue, Pasig City.

Petitioners theorize that the refusal by the respondents and Casanova to


turnover STRADEC's corporate records and stock and transfer book violates
their right, as stockholders, directors and officers of the corporation, to inspect
such records and book under Section 7 4 of the Corporation Code. For such
violation, petitioners conclude, respondents may be held criminally liable
pursuant to Section 144 of the Corporation Code.

Preliminary investigation thereafter ensued.

Resolution of the OCP and the Informations

After receiving the counter-affidavits of the respondents and Casanova, as well


as the other documentary submissions9 by the parties, the OCP issued a
Resolution10 dated 6 January 2006 in I.S. No. PSG 05-08-07465. In the said
resolution, the OCP absolved Casanova but found probable cause to hail
respondents to court on two (2) offenses: (1) for removing the stock and transfer
book of STRADEC from its principal office, and (2) for refusing access to, and
examination of, the corporate records and the stock and transfer book of
STRADEC at its principal office.

Pursuant to the resolution, two (2) informations11 were filed against the
respondents before the Metropolitan Trial Court (MeTC) of Pasig City. The
informations were docketed as Criminal Case No. 89723 and Criminal Case No.
89724 and were raffled to Branch 69.

Criminal Case No. 89723 is for the offense of removing the stock and transfer
book of STRADEC from its principal office. The information reads:12

On and/or about the period between March 1 and June 25, 2004, inclusive, in
Pasig City and within the jurisdiction of this Honorable Court, the above accused,
being then members of the Board of Directors and/or officers, as the case
maybe, of Strategic Alliance Development Corporation (STRADEC, for short),
conspiring and confederating together and mutually helping and aiding one
another, did then and there willfully, unlawfully and feloniously, remove the stock
and transfer book of the said STRADEC at its principal office at the 24th Floor,
One Magnificent Mile-CITRA City Bldg., San Miguel A venue, Ortigas Center,
Pasig City, where they should all be kept, in violation of the aforesaid law, and to
the prejudice of the said complainants.
Criminal Case No. 89724, on the other hand, covers the offense of refusing
access to, and examination of, the corporate records and the stock and transfer
book of STRADEC at its principal office. The information reads:13

On and/or about the period between March 1 and June 25, 2004, inclusive, in
Pasig City, and within the jurisdiction of this Honorable Court, the above
accused, being then members of the Board of Directors and/or officers, as the
case maybe, of Strategic Alliance Development Corporation (STRADEC, for
short), conspiring and confederating together and mutually helping and aiding
one another, did then and there willfully, unlawfully and feloniously, refuse to
allow complainants Bonifacio C. Sumbilla and Aderito Z. Yujuico, being then
stockholders and/or directors of STRADEC, access to, and examination of, the
corporate records, including the stock and transfer book, of STRADEC at its
principal office at the 24th Floor, One Magnificent Mile-CITRA Bldg., San Miguel
Avenue, Ortigas Center, Pasig City, where they should all be kept, in violation of
the aforesaid law, and to the prejudice of the said complainants.

Urgent Omnibus Motion and the Dismissal of Criminal Case No. 89723

On 18 January 2006, respondents filed before the MeTC an Urgent Omnibus


Motion for Judicial Determination of Probable Cause and To Defer Issuance of
Warrants of Arrest (Urgent Omnibus Motion).14

On 8 May 2006, the MeTC issued an order15 partially granting the Urgent
Omnibus Motion. The MeTC dismissed Criminal Case No. 89723 but ordered the
issuance of a warrant of arrest against respondents in Criminal Case No. 89724.

In dismissing Criminal Case No. 89723, the MeTC held that Section 74, in
relation to Section 144, of the Corporation Code only penalizes the act of
"refus[ing] to allow any director, trustee, stockholder or member of the
corporation to examine and copy excerpts from the records or minutes of the
corporation"16 and that act is already the subject matter of Criminal Case No.
89724. Hence, the MeTC opined, Criminal Case No. 89723-which seeks to try
respondents for merely removing the stock and transfer book of STRADEC from
its principal office-actually charges no offense and, therefore, cannot be
sustained.17

Anent directing the issuance of a warrant of arrest in Criminal Case No. 89724,
the MeTC found probable cause to do so; given the failure of the respondents to
present any evidence during the preliminary investigation showing that they do
not have possession of the corporate records of STRADEC or that they allowed
petitioners to inspect the corporate records and the stock and transfer book of
STRADEC.18

Unsatisfied, the respondents filed a motion for partial Reconsideration19 of the 8


May 2006 order of the MeTC insofar as the disposition in Criminal Case No.
89724 is concerned. The MeTC, however, denied such motion on 16 August
2006.20

Certiorari Petition and the Dismissal of Criminal Case No. 89724 After their
motion for partial reconsideration was denied, respondents filed a certiorari
petition,21 with prayer for the issuance of a temporary restraining order (TRO),
before the RTC of Pasig City on 27 September 2006. The petition was docketed
as S.C.A. No. 3047.

On 16 November 2006, the RTC issued a TRO enjoining the MeTC from
conducting further proceedings in Criminal Case No. 89724 for twenty (20)
days.22

On 4 June 2007, the R TC issued an Order23 granting respondents' certiorari


petition and directing the dismissal of Criminal Case No. 89724. According to the
RTC, the MeTC committed grave abuse of discretion in issuing a warrant of
arrest against respondents in Criminal Case No. 89724.

The RTC found that the finding of probable cause against the respondents in
Criminal Case No. 89724 was not supported by the evidence presented during
the preliminary investigation but was, in fact, contradicted by them:24

1. The R TC noted that, aside from the complaint itself, no evidence was
ever submitted by petitioners to prove that they demanded and was
refused access to the corporate records of STRADEC between 1 March to
25 June 2004. What petitioners merely submitted is their letter dated 6
September 2004 demanding from respondents access to the corporate
records of STRADEC.

2. The allegations of petitioners in their complaint, as well as 6 September


2004 letter above-mentioned, however, are contradicted by the sworn
statement dated 1 July 2004 of Blando25 wherein he attested that as early
as 25 June 2004, Pilapil already turned over to him "two binders
containing the minutes, board resolutions, articles of incorporation, copies
of contracts, correspondences and other papers of the corporation, except
the stock certificate book and the stock and transfer book."

3. The RTC also took exception to the reason provided by the MeTC in
supporting its finding of probable cause against the respondents. The R
TC held that it was not incumbent upon the respondents to provide
evidence proving their innocence. Hence, the failure of the respondents to
submit evidence showing that they do not have possession of the
corporate records of STRADEC or that they have allowed inspection of the
same cannot be taken against them much less support a finding of
probable cause against them.
The RTC further pointed out that, at most, the evidence on record only supports
probable cause that the respondents were withholding the stock and transfer
book of STRADEC. The RTC, however, opined that refusing to allow inspection
of the stock and transfer book, as opposed to refusing examination of other
corporate records, is not punishable as an offense under the Corporation
Code.26 Hence, the directive of the RTC dismissing Criminal Case No. 89724.

The petitioners moved for reconsideration,27 but the R TC remained steadfast.28

Hence, this petition by petitioners.

The Instant Petition

In their petition, petitioners claim that Criminal Case No. 89724 may still be
sustained against the respondents insofar as the charge of refusing to allow
access to the stock and transfer book of STRADEC is concerned. They argue
that the R TC made a legal blunder when it held that the refusal to allow
inspection of the stock and transfer book of a corporation is not a punishable
offense under the Corporation Code. Petitioners contend that such a refusal still
amounts to a violation of Section 74 of the Corporation Code, for which Section
144 of the same code prescribes a penalty.

OUR RULING

The RTC indeed made an inaccurate pronouncement when it held that the act of
refusing to allow inspection of the stock and transfer book of a corporation is not
a punishable offense under the Corporation Code. Such refusal, when done in
violation of Section 74(4) of the Corporation Code, properly falls within the
purview of Section 144 of the same code and thus may be penalized as an
offense.

The foregoing gaffe nonetheless, We still sustain the dismissal of Criminal Case
No. 89724 as against the respondents.

A criminal action based on the violation of a stockholder's right to examine or


inspect the corporate records and the stock and transfer book of a corporation
under the second and fourth paragraphs of Section 74 of the Corporation Code-
such as Criminal Case No. 89724--can only be maintained against corporate
officers or any other persons acting on behalf of such corporation. The
submissions of the petitioners during the preliminary investigation, however,
clearly suggest that respondents are neither in relation to STRADEC.

Hence, we deny the petition.

The act of ref using to allow inspection of the


stock and transfer book of a corporation,
when done in violation of Section 74(4) of
the Corporation Code, is punishable as an
offense under Section 144 of the same code.

We first address the inaccurate pronouncement of the RTC.

Section 74 is the provision of the Corporation Code that deals with the books a
corporation is required to keep. It reads:

Section 74. Books to be kept; stock transfer agent. - Every corporation shall keep
and carefully preserve at its principal office a record of all business transactions
and minutes of all meetings of stockholders or members, or of the board of
directors or trustees, in which shall be set forth in detail the time and place of
holding the meeting, how authorized, the notice given, whether the meeting was
regular or special, if special its object, those present and absent, and every act
done or ordered done at the meeting. Upon the demand of any director, trustee,
stockholder or member, the time when any director, trustee, stockholder or
member entered or left the meeting must be noted in the minutes; and on a
similar demand, the yeas and nays must be taken on any motion or proposition,
and a record thereof carefully made. The protest of any director, trustee,
stockholder or member on any action or proposed action must be recorded in full
on his demand.

The records of all business transactions of the corporation and the minutes of
any meetings shall be open to inspection by any director, trustee, stockholder or
member of the corporation at reasonable hours on business days and he may
demand, in writing, for a copy of excerpts from said records or minutes, at his
expense.

Any officer or agent of the corporation who shall refuse to allow any director,
trustees, stockholder or member of the corporation to examine and copy excerpts
from its records or minutes, in accordance with the provisions of this Code, shall
be liable to such director, trustee, stockholder or member for damages, and in
addition, shall be guilty of an offense which shall be punishable under Section
144 of this Code: Provided, That if such refusal is made pursuant to a resolution
or order of the board of directors or trustees, the liability under this section for
such action shall be imposed upon the directors or trustees who voted for such
refusal: and Provided, further, That it shall be a defense to any action under this
section that the person demanding to examine and copy excerpts from the
corporation's records and minutes has improperly used any information secured
through any prior examination of the records or minutes of such corporation or of
any other corporation, or was not acting in good faith or for a legitimate purpose
in making his demand.

Stock corporations must also keep a book to be known as the "stock and transfer
book'', in which must be kept a record of all stocks in the names of the
stockholders alphabetically arranged; the installments paid and unpaid on all
stock for which subscription has been made, and the date of payment of any
installment; 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 the by-laws
may prescribe. The stock and transfer book shall be kept in the principal office of
the corporation or in the office of its stock transfer agent and shall be open for
inspection by any director or stockholder of the corporation at reasonable hours
on business days.

No stock transfer agent or one engaged principally in the business of registering


transfers of stocks in behalf of a stock corporation shall be allowed to operate in
the Philippines unless he secures a license from the Securities and Exchange
Commission and pays a fee as may be fixed by the Commission, which shall be
renewable annually: Provided, That a stock corporation is not precluded from
performing or making transfer of its own stocks, in which case all the rules and
regulations imposed on stock transfer agents, except the payment of a license
fee herein provided, shall be applicable. (5 la and 32a; P.B. No. 268.) (Emphasis
supplied)

Section 144 of the Corporation Code, on the other hand, is the general penal
provision of the Corporation Code. It reads:

Section 144. Violations of the Code. - Violations of any of the provisions of this
Code or its amendments not otherwise specifically penalized therein shall be
punished by a fine of not less than one thousand (₱1,000.00) pesos but not more
than ten thousand (₱10,000.00) pesos or by imprisonment for not less than thirty
(30) days but not more than five (5) years, or both, in the discretion of the court. If
the violation is committed by a corporation, the same may, after notice and
hearing, be dissolved in appropriate proceedings before the Securities and
Exchange Commission: Provided, That such dissolution shall not preclude the
institution of appropriate action against the director, trustee or officer of the
corporation responsible for said violation: Provided, further, That nothing in this
section shall be construed to repeal the other causes for dissolution of a
corporation provided in this Code. (190 112 a) (Emphasis supplied)

In the assailed Orders, the RTC expressed its opinion that the act of refusing to
allow inspection of the stock and transfer book, even though it may be a violation
of Section 74(4), is not punishable as an offense under the Corporation
Code.29 In justifying this conclusion, the RTC seemingly relied on the fact that,
under Section 7 4 of the Corporation Code, the application of Section 144 is
expressly mentioned only in relation to the act of "refus[ing] to allow any director,
trustees, stockholder or member of the corporation to examine and copy excerpts
from [the corporation's] records or minutes" that excludes its stock and transfer
book.

We do not agree.
While Section 74 of the Corporation Code expressly mentions the application of
Section 144 only in relation to the act of "refus[ing] to allow any director, trustees,
stockholder or member of the corporation to examine and copy excerpts from
[the corporation's] records or minutes," the same does not mean that the latter
section no longer applies to any other possible violations of the former section.

It must be emphasized that Section 144 already purports to penalize "[v]iolations"


of "any provision" of the Corporation Code "not otherwise specifically penalized
therein." Hence, we find inconsequential the fact that that Section 74 expressly
mentions the application of Section 144 only to a specific act, but not with respect
to the other possible violations of the former section.

Indeed, we find no cogent reason why Section 144 of the Corporation Code
cannot be made to apply to violations of the right of a stockholder to inspect the
stock and transfer book of a corporation under Section 74(4) given the already
unequivocal intent of the legislature to penalize violations of a parallel right, i.e.,
the right of a stockholder or member to examine the other records and minutes of
a corporation under Section 74(2). Certainly, all the rights guaranteed to
corporators under Section 7 4 of the Corporation Code are mandatory for the
corporation to respect. All such rights are just the same underpinned by the same
policy consideration of keeping public confidence in the corporate vehicle thru an
assurance of transparency in the corporation's operations.

Verily, we find inaccurate the pronouncement of the RTC that the act of refusing
to allow inspection of the stock and transfer book is not a punishable offense
under the Corporation Code. Such refusal, when done in violation of Section
74(4) of the Corporation Code, properly falls within the purview of Section 144 of
the same code and thus may be penalized as an offense.

A criminal action based on the violation of a


stockholder's right to examine or inspect the
corporate records and the stock and transfer
book of a corporation under the second and
fourth paragraphs of Section 74 of the
Corporation Code can only be maintained
against corporate officers or any other persons
acting on behalf of such corporation.

The foregoing notwithstanding, and independently of the reasons provided


therefor by the RTC, we sustain the dismissal of Criminal Case No. 89724.

Criminal Case No. 89724 accuses respondents of denying petitioners' right to


examine or inspect the corporate records and the stock and transfer book of
STRADEC. It is thus a criminal action that is based on the violation of the second
and fourth paragraphs of Section 7 4 of the Corporation Code.
A perusal of the second and fourth paragraphs of Section 74, as well as the first
paragraph of the same section, reveal that they are provisions that obligates a
corporation: they prescribe what books or records a corporation is required to
keep; where the corporation shall keep them;

and what are the other obligations of the corporation to its stockholders or
members in relation to such books and records.1âwphi1 Hence, by parity of
reasoning, the second and fourth paragraphs of Section 74, including the first
paragraph of the same section, can only be violated by a corporation.

It is clear then that a criminal action based on the violation of the second or fourth
paragraphs of Section 74 can only be maintained against corporate officers or
such other persons that are acting on behalf of the corporation. Violations of the
second and fourth paragraphs of Section 74 contemplates a situation wherein a
corporation, acting thru one of its officers or agents, denies the right of any of its
stockholders to inspect the records, minutes and the stock and transfer book of
such corporation.

The problem with the petitioners' complaint and the evidence that they submitted
during preliminary investigation is that they do not establish that respondents
were acting on behalf of STRADEC. Quite the contrary, the scenario painted by
the complaint is that the respondents are merely outgoing officers of STRADEC
who, for some reason, withheld and refused to turn-over the company records of
STRADEC; that it is the petitioners who are actually acting on behalf of
STRADEC; and that STRADEC is actually merely trying to recover custody of the
withheld records.

In other words, petitioners are not actually invoking their right to inspect the
records and the stock and transfer book of STRADEC under the second and
fourth paragraphs of Section 74. What they seek to enforce is the proprietary
right of STRADEC to be in possession of such records and book. Such right,
though certainly legally enforceable by other means, cannot be enforced by a
criminal prosecution based on a violation of the second and fourth paragraphs of
Section 74. That is simply not the situation contemplated by the second and
fourth paragraphs of Section 74 of the Corporation Code.

For this reason, we affirm the dismissal of Criminal Case No. 89724 for lack of
probable cause.

WHEREFORE, premises considered, the petlt10n is hereby DENIED. The


Orders dated 4 June 2007 and 5 November 2007 of the Regional Trial Court,
Branch 154, of Pasig City in S.C.A. No. 3047, insofar as said orders effectively
dismissed Criminal Case No. 89724 pending before Metropolitan Trial Court,
Branch 69, of Pasig City, are hereby AFFIRMED.

SO ORDERED.
JOSE PORTUGAL PEREZ
Associate Justice

WE CONCUR:

2. MIRANTS PHILS CORP VS CARO

MIRANT (PHILIPPINES) CORPORATION AND EDGARDO A.


BAUTISTA, Petitioners,
vs.
JOSELITO A. CARO, Respondent.

DECISION

VILLARAMA, JR., J.:

At bar is a petition1 under Rule 45 of the 1997 Rules of Civil Procedure, as


amended, assailing the Decision2 and Resolution3 of the Court of Appeals (CA)
dated June 26, 2007 and January 11, 2008, respectively, which reversed and set
aside the Decision4 of the National Labor Relations Commission (NLRC) in
NLRC NCR CA No. 046551-05 (NCR-00-03-02511-05). The NLRC decision
vacated and set aside the Decision5 of the Labor Arbiter which found that
respondent Joselito A. Caro (Caro) was illegally dismissed by petitioner Mirant
(Philippines) Corporation (Mirant).

Petitioner corporation is organized and operating under and by virtue of the laws
of the Republic of the Philippines. It is a holding company that owns shares in
project companies such as Mirant Sual Corporation and Mirant Pagbilao
Corporation (Mirant Pagbilao) which operate and maintain power stations located
in Sual, Pangasinan and Pagbilao, Quezon, respectively. Petitioner corporation
and its related companies maintain around 2,000 employees detailed in its main
office and other sites. Petitioner corporation had changed its name to CEPA
Operations in 1996 and to Southern Company in 2001. In 2002, Southern
Company was sold to petitioner Mirant whose corporate parent is an Atlanta-
based power producer in the United States of America.6 Petitioner corporation is
now known as Team Energy Corporation.7

Petitioner Edgardo A. Bautista (Bautista) was the President of petitioner


corporation when respondent was terminated from employment.8

Respondent was hired by Mirant Pagbilao on January 3, 1994 as its Logistics


Officer. In 2002, when Southern Company was sold to Mirant, respondent was
already a Supervisor of the Logistics and Purchasing Department of petitioner. At
the time of the severance of his employment, respondent was the Procurement
Supervisor of Mirant Pagbilao assigned at petitioner corporation’s corporate
office. As Procurement Supervisor, his main task was to serve as the link
between the Materials Management Department of petitioner corporation and its
staff, and the suppliers and service contractors in order to ensure that
procurement is carried out in conformity with set policies, procedures and
practices. In addition, respondent was put incharge of ensuring the timely,
economical, safe and expeditious delivery of materials at the right quality and
quantity to petitioner corporation’s plant. Respondent was also responsible for
guiding and overseeing the welfare and training needs of the staff of the
Materials Management Department. Due to the nature of respondent’s functions,
petitioner corporation considers his position as confidential.9

The antecedent facts follow:

Respondent filed a complaint10 for illegal dismissal and money claims for 13th
and 14th month pay, bonuses and other benefits, as well as the payment of
moral and exemplary damages and attorney’s fees. Respondent posits the
following allegations in his Position Paper:11

On January 3, 1994, respondent was hired by petitioner corporation as its


Logistics Officer and was assigned at petitioner corporation’s corporate office in
Pasay City. At the time of the filing of the complaint, respondent was already a
Supervisor at the Logistics and Purchasing Department with a monthly salary of
₱39,815.00.

On November 3, 2004, petitioner corporation conducted a random drug test


where respondent was randomly chosen among its employees who would be
tested for illegal drug use. Through an Intracompany Correspondence,12 these
employees were informed that they were selected for random drug testing to be
conducted on the same day that they received the correspondence. Respondent
was duly notified that he was scheduled to be tested after lunch on that day. His
receipt of the notice was evidenced by his signature on the correspondence.

Respondent avers that at around 11:30 a.m. of the same day, he received a
phone call from his wife’s colleague who informed him that a bombing incident
occurred near his wife’s work station in Tel Aviv, Israel where his wife was then
working as a caregiver. Respondent attached to his Position Paper a Press
Release13 of the Department of Foreign Affairs (DFA) in Manila to prove the
occurrence of the bombing incident and a letter14 from the colleague of his wife
who allegedly gave him a phone call from Tel Aviv.

Respondent claims that after the said phone call, he proceeded to the Israeli
Embassy to confirm the news on the alleged bombing incident. Respondent
further claims that before he left the office on the day of the random drug test, he
first informed the secretary of his Department, Irene Torres (Torres), at around
12:30 p.m. that he will give preferential attention to the emergency phone call
that he just received. He also told Torres that he would be back at the office as
soon as he has resolved his predicament. Respondent recounts that he tried to
contact his wife by phone but he could not reach her. He then had to go to the
Israeli Embassy to confirm the bombing incident. However, he was told by Eveth
Salvador (Salvador), a lobby attendant at the Israeli Embassy, that he could not
be allowed entry due to security reasons.

On that same day, at around 6:15 p.m., respondent returned to petitioner


corporation’s office. When he was finally able to charge his cellphone at the
office, he received a text message from Tina Cecilia (Cecilia), a member of the
Drug Watch Committee that conducted the drug test, informing him to participate
in the said drug test. He immediately called up Cecilia to explain the reasons for
his failure to submit himself to the random drug test that day. He also proposed
that he would submit to a drug test the following day at his own expense.
Respondent never heard from Cecilia again.

On November 8, 2004, respondent received a Show Cause Notice15 from


petitioner corporation through Jaime Dulot (Dulot), his immediate supervisor,
requiring him to explain in writing why he should not be charged with "unjustified
refusal to submit to random drug testing." Respondent submitted his written
explanation16 on November 11, 2004. Petitioner corporation further required
respondent on December 14, 2004 to submit additional pieces of supporting
documents to prove that respondent was at the Israeli Embassy in the afternoon
of November 3, 2004 and that the said bombing incident actually occurred.
Respondent requested for a hearing to explain that he could not submit proof that
he was indeed present at the Israeli Embassy during the said day because he
was not allegedly allowed entry by the embassy due to security reasons. On
January 3, 2005, respondent submitted the required additional supporting
documents.17

On January 13, 2005, petitioner corporation’s Investigating Panel issued an


Investigating Report18 finding respondent guilty of "unjustified refusal to submit to
random drug testing" and recommended a penalty of four working weeks
suspension without pay, instead of termination, due to the presence of mitigating
circumstances. In the same Report, the Investigating Panel also recommended
that petitioner corporation should review its policy on random drug testing,
especially of the ambiguities cast by the term "unjustified refusal."

On January 19, 2005, petitioner corporation’s Asst. Vice President for Material
Management Department, George K. Lamela, Jr. (Lamela), recommended19 that
respondent be terminated from employment instead of merely being suspended.
Lamela argued that even if respondent did not outrightly refuse to take the
random drug test, he avoided the same. Lamela averred that "avoidance" was
synonymous with "refusal."

On February 14, 2005, respondent received a letter20 from petitioner


corporation’s Vice President for Operations, Tommy J. Sliman (Sliman),
terminating him on the same date. Respondent filed a Motion to Appeal21 his
termination on February 23, 2005. The motion was denied by petitioner
corporation on March 1, 2005.

It is the contention of respondent that he was illegally dismissed by petitioner


corporation due to the latter’s non-compliance with the twin requirements of
notice and hearing. He asserts that while there was a notice charging him of
"unjustified refusal to submit to random drug testing," there was no notice of
hearing and petitioner corporation’s investigation was not the equivalent of the
"hearing" required under the law which should have accorded respondent the
opportunity to be heard.

Respondent further asserts that he was illegally dismissed due to the following
circumstances:

1. He signed the notice that he was randomly selected as a participant to


the company drug testing;

2. Even the Investigating Panel was at a loss in interpreting the charge


because it believed that the term "refusal" was ambiguous, and therefore
such doubt must be construed in his favor; and

3. He agreed to take the drug test the following day at his own expense,
which he says was clearly not an indication of evasion from the drug test.

Petitioner corporation counters with the following allegations:

On November 3, 2004, a random drug test was conducted on petitioner


corporation’s employees at its Corporate Office at the CTC Bldg. in Roxas Blvd.,
Pasay City. The random drug test was conducted pursuant to Republic Act No.
9165, otherwise known as the "Comprehensive Dangerous Drugs Act of 2002."
Respondent was randomly selected among petitioner’s employees to undergo
the said drug test which was to be carried out by Drug Check Philippines, Inc.22

When respondent failed to appear at the scheduled drug test, Cecilia prepared
an incident report addressed to Dulot, the Logistics Manager of the Materials
Management Department.23 Since it was stated under petitioner corporation’s
Mirant Drugs Policy Employee Handbook to terminate an employee for
"unjustified refusal to submit to a random drug test" for the first offense, Dulot
sent respondent a Show Cause Notice24 dated November 8, 2004, requiring him
to explain why no disciplinary action should be imposed for his failure to take the
random drug test. Respondent, in a letter dated November 11, 2004, explained
that he attended to an emergency call from his wife’s colleague and apologized
for the inconvenience he had caused. He offered to submit to a drug test the next
day even at his expense.25 Finding respondent’s explanation unsatisfactory,
petitioner corporation formed a panel to investigate and recommend the penalty
to be imposed on respondent.26 The Investigating Panel found respondent’s
explanations as to his whereabouts on that day to be inconsistent, and
recommended that he be suspended for four weeks without pay. The
Investigating Panel took into account that respondent did not directly refuse to be
subjected to the drug test and that he had been serving the company for ten
years without any record of violation of its policies. The Investigating Panel
further recommended that the Mirant Drug Policy be reviewed to clearly define
the phrase "unjustified refusal to submit to random drug testing."27 Petitioner
corporation’s Vice-President for Operations, Sliman, however disagreed with the
Investigating Panel’s recommendations and terminated the services of
respondent in accordance with the subject drug policy. Sliman likewise stated
that respondent’s violation of the policy amounted to willful breach of trust and
loss of confidence.28

A cursory examination of the pleadings of petitioner corporation would show that


it concurs with the narration of facts of respondent on material events from the
time that Cecilia sent an electronic mail at about 9:23 a.m. on November 3, 2004
to all employees of petitioner corporation assigned at its Corporate Office
advising them of the details of the drug test – up to the time of respondent’s
missing his schedule to take the drug test. Petitioner corporation and
respondent’s point of disagreement, however, is whether respondent’s proffered
reasons for not being able to take the drug test on the scheduled day constituted
valid defenses that would have taken his failure to undergo the drug test out of
the category of "unjustified refusal." Petitioner corporation argues that
respondent’s omission amounted to "unjustified refusal" to submit to the random
drug test as he could not proffer a satisfactory explanation why he failed to
submit to the drug test:

1. Petitioner corporation is not convinced that there was indeed such a


phone call at noon of November 3, 2004 as respondent could not even tell
who called him up.

2. Respondent could not even tell if he received the call via the landline
telephone service at petitioner corporation’s office or at his mobile phone.

3. Petitioner corporation was also of the opinion that granting there was
such a phone call, there was no compelling reason for respondent to act
on it at the expense of his scheduled drug testing. Petitioner corporation
principally pointed out that the call merely stated that a bomb exploded
near his wife’s work station without stating that his wife was affected.
Hence, it found no point in confirming it with extraordinary haste and
forego the drug test which would have taken only a few minutes to
accomplish. If at all, respondent should have undergone the drug testing
first before proceeding to confirm the news so as to leave his mind free
from this obligation.
4. Petitioner corporation maintained that respondent could have easily
asked permission from the Drug Watch Committee that he was leaving the
office since the place where the activity was conducted was very close to
his work station.29

To the mind of petitioners, they are not liable for illegal dismissal because all of
these circumstances prove that respondent really eluded the random drug test
and was therefore validly terminated for cause after being properly accorded with
due process. Petitioners further argue that they have already fully settled the
claim of respondent as evidenced by a Quitclaim which he duly executed. Lastly,
petitioners maintain that they are not guilty of unfair labor practice as
respondent’s dismissal was not intended to curtail his right to self-organization;
that respondent is not entitled to the payment of his 13th and 14th month
bonuses and other incentives as he failed to show that he is entitled to these
amounts according to company policy; that respondent is not entitled to
reinstatement, payment of full back wages, moral and exemplary damages and
attorney’s fees due to his termination for cause.

In a decision dated August 31, 2005, Labor Arbiter Aliman D. Mangandog found
respondent to have been illegally dismissed. The Labor Arbiter also found that
the quitclaim purportedly executed by respondent was not a bona fide quitclaim
which effectively discharged petitioners of all the claims of respondent in the
case at bar. If at all, the Labor Arbiter considered the execution of the quitclaim
as a clear attempt on the part of petitioners to mislead its office into thinking that
respondent no longer had any cause of action against petitioner corporation. The
decision stated, viz.:

WHEREFORE, premises considered, this Office finds respondents GUILTY of


illegal dismissal, and hereby ordered to jointly and severally reinstate
complainant back to his former position without loss on seniority rights and
benefits and to pay him his backwages and other benefits from the date he was
illegally dismissed up to the time he is actually reinstated, partially computed as
of this date in the amount of ₱258,797.50 (₱39,815.00 x 6.5 mos.) plus his 13th
and 14th month pay in the amount of ₱43,132.91 or in the total amount of
₱301,930.41.

Respondents are also ordered to pay complainant the amount of ₱3,000,000.00


as and by way of moral and exemplary damages, and to pay complainant the
amount equivalent to ten percent (10%) of the total awards as and by way of
attorney’s fees.

SO ORDERED.30

The Labor Arbiter stated that while petitioner corporation observed the proper
procedure in the termination of an employee for a purported authorized cause,
such just cause did not exist in the case at bar. The decision did not agree with
the conclusions reached by petitioner corporation’s own Investigating Panel that
while respondent did not refuse to submit to the questioned drug test and merely
"avoided" it on the designated day, "avoidance" and "refusal" are one and the
same. It also held that the terms "avoidance" and "refusal" are separate and
distinct and that "the two words are not even synonymous with each other."31 The
Labor Arbiter considered as more tenable the stance of respondent that his
omission merely resulted to a "failure" to submit to the said drug test – and not an
"unjustified refusal." Even if respondent’s omission is to be considered as refusal,
the Labor Arbiter opined that it was not tantamount to "unjustified refusal" which
constitutes as just cause for his termination. Finally, the Labor Arbiter found that
respondent was entitled to moral and exemplary damages and attorney’s fees.

On appeal to the NLRC, petitioners alleged that the decision of the Labor Arbiter
was rendered with grave abuse of discretion for being contrary to law, rules and
established jurisprudence, and contained serious errors in the findings of facts
which, if not corrected, would cause grave and irreparable damage or injury to
petitioners. The NLRC, giving weight and emphasis to the inconsistencies in
respondent’s explanations, considered his omission as "unjustified refusal" in
violation of petitioner corporation’s drug policy. Thus, in a decision dated May 31,
2006, the NLRC ruled, viz.:

x x x [Respondent] was duly notified as shown by copy of the notice x x x which


he signed to acknowledge receipt thereof on the said date. [Respondent] did not
refute [petitioner corporation’s] allegation that he was also personally reminded of
said drug test on the same day by Ms. Cecilia of [petitioner corporation’s] drug
watch committee. However, [respondent] was nowhere to be found at [petitioner
corporation’s] premises at the time when he was supposed to be tested. Due to
his failure to take part in the random drug test, an incident report x x x was
prepared by the Drug Cause Notice x x x to explain in writing why no disciplinary
action should be taken against him for his unjustified refusal to submit to random
drug test, a type D offense punishable with termination. Pursuant to said
directive, [respondent] submitted an explanation x x x on 11 November 2004,
pertinent portions of which read:

"I was scheduled for drug test after lunch that day of November 3, 2004 as
confirmed with Tina Cecilia. I was having my lunch when a colleague of my wife
abroad called up informing me that there was something wrong [that] happened
in their neighborhood, where a bomb exploded near her workstation.
Immediately, I [left] the office to confirm said information but at around 12:30
P.M. that day, I informed MS. IRENE TORRES, our Department Secretary[,] that
I would be attending to this emergency call. Did even [inform] her that I’ll try to be
back as soon as possible but unfortunately, I was able to return at 6:15 P.M. I
didn’t know that Tina was the one calling me on my cell that day. Did only receive
her message after I charged my cell at the office that night. I was able to call
back Tina Cecilia later [that] night if it’s possible to have it (drug test) the next
day.
My apology [for] any inconvenience to the Drug Watch Committee, that I forgot
everything that day including my scheduled drug test due to confusion of what
had happened. It [was] not my intention not to undergo nor refuse to have a drug
test knowing well that it’s a company policy and it’s mandated by law."

In the course of the investigation, [respondent] was requested to present proof


pertaining to the alleged call he received on 3 November 2004 from a colleague
of his wife regarding the bomb explosion in Tel Aviv, his presence at the Israel
Embassy also on 3 November 2004. [Respondent], thereafter, submitted a
facsimile which he allegedly received from his wife's colleague confirming that
she called and informed him of the bombing incident. However, a perusal of said
facsimile x x x reveals that the same cannot be given any probative value
because, as correctly observed by [petitioners], it can barely be read and upon
inquiry with PLDT, the international area code of Israel which is 00972 should
appear on the face of the facsimile if indeed said facsimile originated from Israel.
[Respondent] also could not present proof of his presence at the Israel Embassy
on said time and date. He instead provided the name of a certain Ms. Eveth
Salvador of said embassy who could certify that he was present thereat.
Accordingly, Mr. Bailon, a member of the investigation panel, verified with Ms.
Salvador who told him that she is only the telephone operator of the Israel
Embassy and that she was not in a position to validate [respondent’s] presence
at the Embassy. Mr. Bailon was then referred to a certain Ms. Aimee Zandueta,
also of said embassy, who confirmed that based on their records, [respondent]
did not visit the embassy nor was he attended to by any member of said
embassy on 3 November 2004. Ms. Zandueta further informed Mr. Bailon that no
bombing occurred in Tel Aviv on 3 November 2004 and that the only reported
incident of such nature occurred on 1 November 2004. A letter x x x to this effect
was written by Consul Ziva Samech of the Embassy of Israel. A press release x x
x of the Department of Foreign Affairs confirm[ed] that the bombing occurred on
1 November 2004.

In his explanation, the [respondent] stated that the reason why he had to leave
the office on 3 November 2004 was to verify an information at the Israel
Embassy of the alleged bombing incident on the same day. However,
[petitioners] in their position paper alleged that Ms. Torres of [petitioner] company
received a text message from him at around 12:47 p.m. informing her that he will
try to be back since he had a lot of things to do and asking her if there was a
signatory on that day. [Respondent] did not deny sending said text messages to
Ms. Torres in his reply and rejoinder x x x. He actually confirmed that he was
involved in the CIIS registration with all companies that was involved with
[petitioner] company and worked on the registration of [petitioner] company’s
vehicles with TRO.

It is also herein noted that [respondent] had initially reported to Ms. Torres that it
was his mother in law who informed him about the problem concerning his wife.
However, in his written explanation x x x, the [respondent] stated that it was a
friend of his wife, whom he could not even identify, who informed him of the
alleged bombing incident in Tel Aviv, Israel. [Respondent] also did not deny
receiving a cellphone call from Ms. Cecilia that day. He merely stated that he did
not know that it was Ms. Cecilia calling him up in a cellphone and it was only after
he charged his cellphone at the office that night that he received her message. In
effect, [respondent] asserted that his cellphone battery was running low or
drained. [Petitioners] were able to refute [these] averments of [respondent] when
they presented [respondent’s] Smart Billing Statement

x x x showing that he was able to make a cellphone call at 5:29 p.m. to [petitioner
corporation’s] supplier, Mutico for a duration of two (2) minutes.32

Given the foregoing facts, the NLRC stated that the offer of respondent to submit
to another drug test the following day, even at his expense, cannot operate to
free him from liability. The NLRC opined that taking the drug test on the day
following the scheduled random drug test would affect both the integrity and the
accuracy of the specimen which was supposed to be taken from a randomly
selected employee who was notified of his/her selection on the same day that the
drug test was to be administered. The NLRC further asserted that a drug test,
conducted many hours or a day after the employee was notified, would
compromise its results because the employee may have possibly taken remedial
measures to metabolize or eradicate whatever drugs s/he may have ingested
prior to the drug test.

The NLRC further stated that these circumstances have clearly established the
falsity of respondent’s claims and found no justifiable reason for respondent to
refuse to submit to the petitioner corporation’s random drug test. While the NLRC
acknowledged that it was petitioner corporation’s own Investigating Panel that
considered respondent’s failure to take the required drug test as mere
"avoidance" and not "unjustified refusal," it concluded that such finding was
merely recommendatory to guide top management on what action to take.

The NLRC also found that petitioner corporation’s denial of respondent’s motion
to reconsider his termination was in order. Petitioner corporation’s reasons for
such denial are quoted in the NLRC decision, viz.:

"Your appeal is anchored on your claim that you responded to an emergency call
from someone abroad informing you that a bomb exploded near the work station
of your wife making you unable to undergo the scheduled drug testing. This claim
is groundless taking into account the following:

We are not convinced that there was indeed that call which you claim to have
received noon of November 3, 2004. On the contrary, our belief is based on the
fact that you could not tell who called you up or how the call got to you. If you
forgot to ask the name of the person who called you up, surely you would have
known how the call came to you. You said you were having lunch at the third
floor of the CTC building when you received the call. There were only two means
of communication available to you then: the land line telephone service in your
office and your mobile phone. If your claim were (sic) not fabricated, you would
be able to tell which of these two was used.

Granting that you indeed received that alleged call, from your own account, there
was no compelling reason for you to act on it at the expense of your scheduled
drug testing. The call, as it were, merely stated that ‘something wrong happened
(sic) in their neighborhood, where a bomb exploded near her workstation.’
Nothing was said if your wife was affected. There is no point in confirming it with
extraordinary haste and forego the drug test which would have taken only a few
minutes to accomplish. If at all, you should have undergone the drug testing first
before proceeding to confirm the news so as to leave your mind free from this
obligation.

Additionally, if it was indeed necessary that you skip the scheduled drug testing
to verify that call, why did you not ask permission from the Drug Watch
[C]ommittee that you were leaving? The place where the activity was being
conducted was very close to your workstation. It was absolutely within your reach
to inform any of its members that you were attending to an emergency call. Why
did you not do so?

All this undisputedly proves that you merely eluded the drug testing. Your claim
that you did not refuse to be screened carries no value. Your act was a negation
of your words."33

The NLRC found that respondent was not only validly dismissed for cause – he
was also properly accorded his constitutional right to due process as shown by
the following succession of events:

1. On November 8, 2004, respondent was given a show-cause notice


requiring him to explain in writing within three days why no disciplinary
action should be taken against him for violation of company policy on
unjustified refusal to submit to random drug testing – a type D offense
which results in termination.

2. Respondent submitted his explanation on November 11, 2004.

3. On December 9, 2004, respondent was given a notice of


investigation34 informing him of a meeting on December 13, 2004 at 9:00
a.m. In this meeting, respondent was allowed to explain his side, present
his evidences and witnesses, and confront the witnesses presented
against him.

4. On February 14, 2005, respondent was served a letter of termination


which clearly stated the reasons therefor.35
The NLRC, notwithstanding its finding that respondent was dismissed for cause
and with due process, granted financial assistance to respondent on equitable
grounds. It invoked the past decisions of this Court which allowed the award of
financial assistance due to factors such as long years of service or the Court’s
concern and compassion towards labor where the infraction was not so serious.
Thus, considering respondent’s 10 years of service with petitioner corporation
without any record of violation of company policies, the NLRC ordered petitioner
corporation to pay respondent financial assistance equivalent to one-half (1/2)
month pay for every year of service in the amount of One Hundred Ninety-Nine
Thousand Seventy-Five Pesos (₱199,075.00). The NLRC decision states thus:

WHEREFORE, the decision dated 31 August 2005 is VACATED and SET


ASIDE. The instant complaint is dismissed for lack of merit. However, respondent
Mirant [Philippines] Corp. is ordered to pay complainant financial assistance in
the amount of one hundred ninety-nine thousand seventy five pesos
(₱199,075.00).

SO ORDERED.36

Respondent filed a motion for reconsideration,37 while petitioners filed a motion


for partial reconsideration38 of the NLRC decision. In a Resolution39 dated June
30, 2006, the NLRC denied both motions.

In a petition for certiorari before the CA, respondent raised the following issues:
whether the NLRC acted without or in excess of its jurisdiction, or with grave
abuse of discretion amounting to lack or excess of its jurisdiction when it
construed that the terms "failure," "avoidance," "refusal" and "unjustified refusal"
have similar meanings; reversed the factual findings of the Labor Arbiter; and
held that respondent deliberately breached petitioner’s Anti-Drugs
Policy.40 Respondent further argued before the appellate court that his failure to
submit himself to the random drug test was justified because he merely
responded to an emergency call regarding his wife’s safety in Tel Aviv, and that
such failure cannot be considered synonymous with "avoidance" or "refusal" so
as to mean "unjustified refusal" in order to be meted the penalty of termination.41

The CA disagreed with the NLRC and ruled that it was immaterial whether
respondent failed, refused, or avoided being tested. To the appellate court, the
singular fact material to this case was that respondent did not get himself tested
in clear disobedience of company instructions and policy. Despite such
disobedience, however, the appellate court considered the penalty of dismissal to
be too harsh to be imposed on respondent, viz.:

x x x While it is a management prerogative to terminate its erring employee for


willful disobedience, the Supreme Court has recognized that such penalty is too
harsh depending on the circumstances of each case. "There must be reasonable
proportionality between, on the one hand, the willful disobedience by the
employee and, on the other hand, the penalty imposed therefor" x x x.

In this case, [petitioner corporation’s] own investigating panel has revealed that
the penalty of dismissal is too harsh to impose on [respondent], considering that
this was the first time in his 10-year employment that the latter violated its
company policies. The investigating panel even suggested that a review be had
of the company policy on the term "unjustified refusal" to clearly define what
constitutes a violation thereof. The recommendation of the investigating panel is
partially reproduced as follows:

"VII. Recommendation

However, despite having violated the company policy, the panel recommends 4
working weeks suspension without pay (twice the company policy’s maximum of
2 working weeks suspension) instead of termination due to the following
mitigating circumstances.

1. Mr. Joselito A. Caro did not directly refuse to be subjected to the


random drug test scheduled on November 3, 2004.

2. In the case of Mr. Joselito A. Caro, the two conditions for termination
(Unjustified and Refusal) were not fully met as he expressly agreed to
undergo drug test.

3. Mr. Joselito A. Caro voluntarily offered himself to undergo drug test the
following day at his own expense.

Doubling the maximum of 2 weeks suspension to 4 weeks is indicative of the


gravity of the offense committed. The panel believes that although mitigating
factors partially offset reasons for termination, the 2 weeks maximum suspension
is too lenient penalty for such an offense.

The Panel also took into consideration that Mr. Joselito A. Caro has served the
company for ten (10) years without any record of violation of the company
policies.

xxxx

The Panel also recommends that Management review the Mirant Drug Policy
specifically ‘Unjustified [R]efusal to submit to random drug testing.’ The Panel
believes that the term refusal casts certain ambiguities and should be clearly
defined."42

The CA however found that award of moral and exemplary damages is without
basis due to lack of bad faith on the part of the petitioner corporation which
merely acted within its management prerogative. In its assailed Decision dated
June 26, 2007, the CA ruled, viz.:

IN VIEW OF ALL THE FOREGOING, the instant petition is GRANTED. The


assailed Decision dated May 31, 2006 and Resolution dated June 30, 2006
rendered by the National Labor Relations Commission (NLRC) in NLRC NCR CA
No. 046551-05 (NCR-00-03-02511-05) are REVERSED and SET ASIDE. The
Labor Arbiter’s Decision dated August 31, 2005 is hereby REINSTATED with
MODIFICATION by omitting the award of moral and exemplary damages as well
as attorney’s fees, and that the petitioner’s salary equivalent to four (4) working
weeks at the time he was terminated be deducted from his backwages. No cost.

SO ORDERED.43

Petitioner moved for reconsideration. In its assailed Resolution dated January 11,
2008, the CA denied petitioners’ motion for reconsideration for lack of merit. It
ruled that the arguments in the motion for reconsideration were already raised in
their past pleadings.

In this instant Petition, petitioners raise the following grounds:

I. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR WHEN IT


FAILED TO CONSIDER THAT:

A. THE PETITION FOR CERTIORARI FILED BY RESPONDENT CARO


SHOULD HAVE BEEN SUMMARILY DISMISSED CONSIDERING THAT
IT LACKED THE REQUISITE VERIFICATION AND CERTIFICATION
AGAINST FORUM SHOPPING REQUIRED BY THE RULES OF COURT;
OR

B. AT THE VERY LEAST, THE SAID PETITION FOR CERTIORARI


FILED BY RESPONDENT CARO SHOULD HAVE BEEN CONSIDERED
MOOT SINCE RESPONDENT CARO HAD ALREADY PREVIOUSLY
EXECUTED A QUITCLAIM DISCHARGING THE PETITIONERS FROM
ALL HIS MONETARY CLAIMS.

II. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND


DECIDED QUESTIONS OF SUBSTANCE IN A WAY NOT IN ACCORDANCE
WITH LAW AND APPLICABLE DECISIONS OF THE HONORABLE COURT,
CONSIDERING THAT:

A. THE COURT OF APPEALS REVERSED THE DECISION DATED 31


MAY 2006 OF THE NLRC ON THE GROUND THAT THERE WAS
GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS
OF JURISDICTION NOTWITHSTANDING THE FACT THAT IT
AFFIRMED THE NLRC’S FINDINGS THAT RESPONDENT CARO
DELIBERATELY DISOBEYED PETITIONER MIRANT’S ANTI-DRUGS
POLICY.

B. THE PENALTY OF TERMINATION SHOULD HAVE BEEN


SUSTAINED BY THE COURT OF APPEALS GIVEN ITS POSITIVE
FINDING THAT RESPONDENT CARO DELIBERATELY AND
WILLFULLY DISOBEYED PETITIONER MIRANT’S ANTI-DRUGS
POLICY.

C. IN INVALIDATING RESPONDENT CARO’S DISMISSAL, THE COURT


OF APPEALS SUBSTITUTED WITH ITS OWN DISCRETION A CLEAR
MANAGEMENT PREROGATIVE BELONGING ONLY TO PETITIONER
MIRANT IN THE INSTANT CASE.

D. THE WILLFUL AND DELIBERATE VIOLATION OF PETITIONER


MIRANT’S ANTI-DRUGS POLICY AGGRAVATED RESPONDENT
CARO’S WRONGFUL CONDUCT WHICH JUSTIFIED HIS
TERMINATION.

E. IN INVALIDATING RESPONDENT CARO’S DISMISSAL, THE COURT


OF APPEALS, IN EFFECT, BELITTLED THE IMPORTANCE AND
SERIOUSNESS OF PETITIONER MIRANT’S ANTI-DRUGS POLICY
AND CONSEQUENTLY HAMPERED THE EFFECTIVE
IMPLEMENTATION OF THE SAME.

F. THE EXISTENCE OF OTHER GROUNDS FOR CARO’S DISMISSAL,


SUCH AS WILLFUL DISOBEDIENCE AND [LOSS] OF TRUST AND
CONFIDENCE, JUSTIFIED HIS TERMINATION FROM EMPLOYMENT.

III. NONETHELESS, THE AWARD OF FINANCIAL ASSISTANCE IN FAVOR OF


RESPONDENT CARO IS NOT WARRANTED CONSIDERING THAT
RESPONDENT CARO’S WILLFUL AND DELIBERATE REFUSAL TO SUBJECT
HIMSELF TO PETITIONER MIRANT’S DRUG TEST AND HIS SUBSEQUENT
EFFORTS TO CONCEAL THE SAME SHOWS HIS DEPRAVED MORAL
CHARACTER.

IV. THE COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT HELD


PETITIONER BAUTISTA PERSONALLY LIABLE FOR [RESPONDENT]
CARO’S UNFOUNDED CLAIMS CONSIDERING THAT, ASIDE FROM
RESPONDENT CARO’S DISMISSAL BEING LAWFUL, PETITIONER
BAUTISTA MERELY ACTED WITHIN THE SCOPE OF HIS FUNCTIONS IN
GOOD FAITH.44

We shall first rule on the issue raised by petitioners that the petition for certiorari
filed by respondent with the CA should have been summarily dismissed as it
lacked the requisite verification and certification against forum shopping under
Sections 4 and 5, Rule 7 of the Rules, viz.:

SEC. 4. Verification. – Except when otherwise specifically required by law or rule,


pleadings need not be under oath, verified or accompanied by affidavit.

A pleading is verified by an affidavit that the affiant has read the pleading and
that the allegations therein are true and correct of his knowledge and belief.

A pleading required to be verified which contains a verification based on


"information and belief," or upon "knowledge, information and belief," or lacks a
proper verification, shall be treated as an unsigned pleading.

SEC. 5. Certification against forum shopping. – The plaintiff or principal party


shall certify under oath in the complaint or other initiatory pleading asserting a
claim for relief, or in a sworn certification annexed thereto and simultaneously
filed therewith: (a) that he has not theretofore commenced any action or filed any
claim involving the same issues in any court, tribunal or quasi-judicial agency
and, to the best of his knowledge, no such other action or claim is pending
therein; (b) if there is such other pending action or claim, a complete statement of
the present status thereof; and (c) if he should thereafter learn that the same or
similar action or claim has been filed or is pending, he shall report that fact within
five (5) days therefrom to the court wherein his aforesaid complaint or initiatory
pleading has been filed.

Failure to comply with the foregoing requirements shall not be curable by mere
amendment of the complaint or other initiatory pleading but shall be cause for the
dismissal of the case without prejudice, unless otherwise provided, upon motion
and after hearing. The submission of a false certification or noncompliance with
any of the undertakings therein shall constitute indirect contempt of court, without
prejudice to the corresponding administrative and criminal actions. If the acts of
the party or his counsel clearly constitute willful and deliberate forum shopping,
the same shall be ground for summary dismissal with prejudice and shall
constitute direct contempt, as well as a cause for administrative sanctions.

It is the contention of petitioners that due to respondent’s failure to subscribe the


Verification and Certification of Non-Forum Shopping before a Notary Public, the
said verification and certification cannot be considered to have been made under
oath. Accordingly, such omission is fatal to the entire petition for not being
properly verified and certified. The CA therefore erred when it did not dismiss the
petition.

This jurisdiction has adopted in the field of labor protection a liberal stance
towards the construction of the rules of procedure in order to serve the ends of
substantial justice. This liberal construction in labor law emanates from the
mandate that the workingman’s welfare should be the primordial and paramount
consideration.45 Thus, if the rules of procedure will stunt courts from fulfilling this
mandate, the rules of procedure shall be relaxed if the circumstances of a case
warrant the exercise of such liberality. If we sustain the argument of petitioners in
the case at bar that the petition for certiorari should have been dismissed outright
by the CA, the NLRC decision would have reached finality and respondent would
have lost his remedy and denied his right to be protected against illegal dismissal
under the Labor Code, as amended.

It is beyond debate that petitioner corporation’s enforcement of its Anti-Drugs


Policy is an exercise of its management prerogative. It is also a conceded fact
that respondent "failed" to take the random drug test as scheduled, and under
the said company policy, such failure metes the penalty of termination for the first
offense. A plain, simple and literal application of the said policy to the omission of
respondent would have warranted his outright dismissal from employment – if the
facts were that simple in the case at bar. Beyond debate – the facts of this case
are not – and this disables the Court from permitting a straight application of an
otherwise prima facie straightforward rule if the ends of substantial justice have
to be served.

It is the crux of petitioners’ argument that respondent’s omission amounted to


"unjust refusal" because he could not sufficiently support with convincing proof
and evidence his defenses for failing to take the random drug test. For
petitioners, the inconsistencies in respondent’s explanations likewise operated to
cast doubt on his real reasons and motives for not submitting to the random drug
test on schedule. In recognition of these inconsistencies and the lack of
convincing proof from the point of view of petitioners, the NLRC reversed the
decision of the Labor Arbiter. The CA found the ruling of the Labor Arbiter to be
more in accord with the facts, law and existing jurisprudence.

We agree with the disposition of the appellate court that there was illegal
dismissal in the case at bar.

While the adoption and enforcement by petitioner corporation of its Anti-Drugs


Policy is recognized as a valid exercise of its management prerogative as an
employer, such exercise is not absolute and unbridled. Managerial prerogatives
are subject to limitations provided by law, collective bargaining agreements, and
the general principles of fair play and justice.46 In the exercise of its management
prerogative, an employer must therefore ensure that the policies, rules and
regulations on work-related activities of the employees must always be fair and
reasonable and the corresponding penalties, when prescribed, commensurate to
the offense involved and to the degree of the infraction.47 The Anti-Drugs Policy
of Mirant fell short of these requirements.

Petitioner corporation’s subject Anti-Drugs Policy fell short of being fair and
reasonable.
First. The policy was not clear on what constitutes "unjustified refusal" when the
subject drug policy prescribed that an employee’s "unjustified refusal" to submit
to a random drug test shall be punishable by the penalty of termination for the
first offense. To be sure, the term "unjustified refusal" could not possibly cover all
forms of "refusal" as the employee’s resistance, to be punishable by termination,
must be "unjustified." To the mind of the Court, it is on this area where petitioner
corporation had fallen short of making it clear to its employees – as well as to
management – as to what types of acts would fall under the purview of
"unjustified refusal." Even petitioner corporation’s own Investigating Panel
recognized this ambiguity, viz.:

The Panel also recommends that Management review the Mirant Drug Policy
specifically "Unjustified [R]efusal to submit to random drug testing." The Panel
believes that the term "refusal" casts certain ambiguities and should be clearly
defined.48

The fact that petitioner corporation’s own Investigating Panel and its Vice
President for Operations, Sliman, differed in their recommendations regarding
respondent’s case are first-hand proof that there, indeed, is ambiguity in the
interpretation and application of the subject drug policy. The fact that petitioner
corporation’s own personnel had to dissect the intended meaning of "unjustified
refusal" is further proof that it is not clear on what context the term "unjustified
refusal" applies to. It is therefore not a surprise that the Labor Arbiter, the NLRC
and the CA have perceived the term "unjustified refusal" on different prisms due
to the lack of parameters as to what comes under its purview. To be sure, the
fact that the courts and entities involved in this case had to engage in semantics
– and come up with different constructions – is yet another glaring proof that the
subject policy is not clear creating doubt that respondent’s dismissal was a result
of petitioner corporation’s valid exercise of its management prerogative.

It is not a mere jurisprudential principle, but an enshrined provision of law, that all
doubts shall be resolved in favor of labor. Thus, in Article 4 of the Labor Code, as
amended, "[a]ll doubts in the implementation and interpretation of the provisions
of [the Labor] Code, including its implementing rules and regulations, shall be
resolved in favor of labor." In Article 1702 of the New Civil Code, a similar
provision states that "[i]n case of doubt, all labor legislation and all labor contracts
shall be construed in favor of the safety and decent living for the laborer."
Applying these provisions of law to the circumstances in the case at bar, it is not
fair for this Court to allow an ambiguous policy to prejudice the rights of an
employee against illegal dismissal. To hold otherwise and sustain the stance of
petitioner corporation would be to adopt an interpretation that goes against the
very grain of labor protection in this jurisdiction. As correctly stated by the Labor
Arbiter, "when a conflicting interest of labor and capital are weighed on the scales
of social justice, the heavier influence of the latter must be counter-balanced by
the sympathy and compassion the law must accord the underprivileged
worker."49
Second. The penalty of termination imposed by petitioner corporation upon
respondent fell short of being reasonable. Company policies and regulations are
generally valid and binding between the employer and the employee unless
shown to be grossly oppressive or contrary to law50 – as in the case at bar.
Recognizing the ambiguity in the subject policy, the CA was more inclined to
adopt the recommendation of petitioner corporation’s own Investigating Panel
over that of Sliman and the NLRC. The appellate court succinctly but incisively
pointed out, viz.:

x x x We find, as correctly pointed out by the investigating panel, that the


[petitioner corporation’s] Anti-Drug Policy is excessive in terminating an
employee for his "unjustified refusal" to subject himself to the random drug test
on first offense, without clearly defining what amounts to an "unjustified refusal."

Thus, We find that the recommended four (4) working weeks’ suspension without
pay as the reasonable penalty to be imposed on [respondent] for his
disobedience. x x x51 (Additional emphasis supplied.)

To be sure, the unreasonableness of the penalty of termination as imposed in


this case is further highlighted by a fact admitted by petitioner corporation itself:
that for the ten-year period that respondent had been employed by petitioner
corporation, he did not have any record of a violation of its company policies.

As to the other issue relentlessly being raised by petitioner corporation that


respondent’s petition for certiorari before the CA should have been considered
moot as respondent had already previously executed a quitclaim discharging
petitioner corporation from all his monetary claims, we cannot agree. Quitclaims
executed by laborers are ineffective to bar claims for the full measure of their
legal rights,52 especially in this case where the evidence on record shows that the
amount stated in the quitclaim exactly corresponds to the amount claimed as
unpaid wages by respondent under Annex A53 of his Reply54 filed with the Labor
Arbiter. Prima facie, this creates a false impression that respondent’s claims
have already been settled by petitioner corporation – discharging the latter from
all of respondent’s monetary claims. In truth and in fact, however, the amount
paid under the subject quitclaim represented the salaries of respondent that
remained unpaid at the time of his termination – not the amounts being claimed
in the case at bar.

We believe that this issue was extensively discussed by both the Labor Arbiter
and the CA and we find no reversible error on the disposition of this issue, viz.:

A review of the records show that the alluded quitclaim, which was undated and
not even notarized although signed by the petitioner, was for the amount of
₱59,630.05. The said quitclaim was attached as Annex 26 in the [petitioners’]
Position Paper filed before the Labor Arbiter. As fully explained by [respondent]
in his Reply filed with the Labor Arbiter, the amount stated therein was his last
pay due to him when he was terminated, not the amount representing his
legitimate claims in this labor suit x x x. To bolster his defense, [respondent]
submitted the pay form issued to him by the [petitioner corporation], showing his
net pay at ₱59,630.05 exactly the amount stated in the quitclaim x x x. Then, too,
as stated on the quitclaim itself, the intention of the waiver executed by the
[respondent] was to release [petitioner corporation] from any liability only on the
said amount representing [respondent’s] "full and final payment of [his] last
salary/separation pay" x x x. It did not in any way waive [respondent’s] right to
pursue his legitimate claims regarding his dismissal in a labor suit. Thus, We
gave no credence to [petitioners’] private defense that alleged quitclaim rendered
the instant petition moot.55

Finally, the petition avers that petitioner Bautista should not be held personally
liable for respondent’s dismissal as he acted in good faith and within the scope of
his official functions as then president of petitioner corporation. We agree with
petitioners.1âwphi1 Both decisions of the Labor Arbiter and the CA did not
discuss the basis of the personal liability of petitioner Bautista, and yet the
dispositive portion of the decision of the Labor Arbiter - which was affirmed by the
appellate court - held him jointly and severally liable with petitioner corporation,
viz.:

WHEREFORE, premises considered, this Office finds respondents GUILTY of


illegal dismissal, and hereby ordered to jointly and severally reinstate
complainant back to his former position without loss on seniority rights and
benefits and to pay him his backwages and other benefits from the date he was
illegally dismissed up to the time he is actually reinstated, partially computed as
of this date in the amount of ₱258,797.50 (₱39,815.00 x 6.5 mos.) plus his 13th
and 14th month pay in the amount of ₱43,132.91 or in the total amount of
₱301,930.41. Respondents are also ordered to pay complainant the amount of
₱3,000,000.00 as and by way of moral and exemplary damages, and to pay
complainant the amount equivalent to ten percent (10%) of the total awards as
and by way of attorney's fees.

SO ORDERED.56 (Emphasis supplied.)

A corporation has a personality separate and distinct from its officers and board
of directors who may only be held personally liable for damages if it is proven
that they acted with malice or bad faith in the dismissal of an employee.57 Absent
any evidence on record that petitioner Bautista acted maliciously or in bad faith in
effecting the termination of respondent, plus the apparent lack of allegation in the
pleadings of respondent that petitioner Bautista acted in such manner, the
doctrine of corporate fiction dictates that only petitioner corporation should be
held liable for the illegal dismissal of respondent.

WHEREFORE, the petition for review on certiorari is DENIED. The assailed


Decision dated June 26, 2007 and the Resolution dated January 11, 2008 in CA-
G.R. SP No. 96153 are AFFIRMED with the MODIFICATION that only petitioner
corporation is found GUILTY of the illegal dismissal of respondent Joselito A.
Caro. Petitioner Edgardo A. Bautista is not held personally liable as then
President of petitioner corporation at the time of the illegal dismissal.

No pronouncement as to costs.

SO ORDERED.

3. LABORTE VS PAGSANJAN TOURISM CONSUMERS COOPERATIVE

RODOLFO LABORTE and PHILIPPINE TOURISM AUTHORITY, Petitioners,


vs.
PAGSANJAN TOURISM CONSUMERS COOPERATIVE and LELIZA S.
FABRICIO, WILLIAM BASCO, FELICIANO BASCO, FREDIE BASCO, ROGER
MORAL NIDA ABARQUEZ, FLORANTE MUNAR, MARY JAVIER, MARIANO
PELAGIO ALEX EQUIZ, ALEX PELAGIO ARNOLD OBIEN, EDELMIRO
ABAQUIN, ARCEDO MUNAR, LIBRADO MALIWANAG, OSCAR LIWAG,
OSCAR ABARQUEZ, JOEL BALAGUER, LIZARDO MUNAR, ARMANDO
PANCHACOLA, MANUEL SAYCO, EDWIN MATIBAG, ARNEL
VILLAGRACIA, RODOLFO LERON, ALFONSO ABANILLA, SONNY LAVA,
AND DENNIS BASCO, Respondents.

DECISION

REYES, J.:

This Petition for Review on Certiorari1 under Rule 45 of the 1997 Revised Rules
on Civil Procedure seeks to nullify and set aside:

(a) the Court of Appeals (CA) Decision2 dated May 29, 2008, affirming the
Decision3 dated May 29, 2002 of the Regional Trial Court (RTC), Branch
28, Santa Cruz, Laguna in Civil Case No. SC-3150; and

(b) the CA Resolution4 dated July 23, 2008, denying the subsequent
Motion for Reconsideration5 thereof.

The antecedent facts are as follows:

Petitioner Philippine Tourism Authority (PTA) is a government-owned and


controlled corporation that administers tourism zones as mandated by
Presidential Decree (P.D.) No. 564 and later amended by P.D. No. 1400. PTA
used to operate the Philippine Gorge Tourist Zone (PGTZ) Administration
Complex (PTA Complex), a declared tourist zone in Pagsanjan, Laguna.
Respondent Pagsanjan Tourism Consumers’ Cooperative (PTCC) is a
cooperative organized since 1988 under Republic Act No. 6938, or the
"Cooperative Code of the Philippines." The other individual respondents are
PTCC employees, consisting of restaurant staff and boatmen at the PTA
Complex.

In 1989, in order to help the PTCC as a cooperative, the PTA allowed it to


operate a restaurant business located at the main building of the PTA Complex
and the boat ride services to ferry guests and tourists to and from the Pagsanjan
Falls, paying a certain percentage of its earnings to the PTA.6

In 1993, the PTA implemented a reorganization and reshuffling in its top level
management. Herein petitioner Rodolfo Laborte (Laborte) was designated as
Area Manager, CALABARZON area with direct supervision over the PTA
Complex and other entities at the Southern Luzon.

On October 22, 1993, Laborte served a written notice upon the respondents to
cease the operations of the latter’s restaurant business and boat ride services in
view of the rehabilitation, facelifting and upgrading project of the PTA Complex.
Consequently, on November 9, 1993, the PTCC filed with the RTC, Branch 28,
Santa Cruz, Laguna a Complaint for Prohibition, Injunction and Damages with
Temporary Restraining Order (TRO) and Preliminary Injunction7 against Laborte,
docketed as Civil Case No. 3150. The PTCC also sought from the court the
award of moral and exemplary damages, attorney’s fees and costs of suit. It also
prayed for the issuance of a TRO or writ of preliminary injunction to prohibit
Laborte from causing the PTCC to cease the operations of the restaurant and
boat ride services and from evicting the PTCC’s restaurant from the main
building of the PTA Complex.8

In an Order dated November 11, 1993, the trial court issued the TRO prayed for,
prohibiting Laborte from (a) causing the PTCC to cease operations; (b) doing the
threatened act of closing the operation of the PTCC’s restaurant and other
activities; (c) evicting the PTCC’s restaurant from the main building of the PTA
Complex; and (d) demolishing the said building. In the same Order, the trial court
set the hearing on the Writ of Preliminary Injunction on November 25, 1993.9

Opposing the issuance of the TRO, Laborte averred that the PTCC does not own
the restaurant facility as it was only tolerated to operate the same by the PTA as
a matter of lending support and assistance to the cooperative in its formative
years. It has neither been granted any franchise nor concession to operate the
restaurant nor any exclusive franchise to handle the boating operations in the
complex. Since the PTCC had no contract, concession, or exclusive franchise to
operate the restaurant business and the boating services in the PTA Complex,
no existing right has been allegedly violated by the petitioners. The respondents,
therefore, had no right for the injunctive relief prayed for.10
On December 7, 1993, the PTCC filed with the trial court a Petition for Contempt
with Motion for Early Resolution. It alleged that Laborte and his lawyers defied
the TRO and proceeded to close the restaurant on December 2, 1993. The
PTCC also alleged that Laborte prohibited its own boatmen from ferrying tourists
and allowed another association of boatmen to operate.11

On December 13, 1993, Laborte filed his Answer with Counter-Claim.12 He


denied the PTCC’s allegations of harassment, threat and retaliation. He claimed
(a) that his actions were upon the mandate of his superiors and the PTA’s
rehabilitation programs in the area;13 (b) that the PTA only tolerated the PTCC’s
operations;14 and (c) that the issuance of a permanent injunction will violate the
PTA’s constitutional freedom to operate a legitimate business enterprise and the
legal requirement of a public bidding for the operation of revenue-generating
projects of government entities involving private third parties.15

On March 14, 1994, the individual respondents, Fabricio et al., who are
employees and boatmen of the PTCC, filed a Complaint-in-Intervention against
Laborte.16 They stated that they were rendered jobless and were deprived of their
livelihood because Laborte failed to heed the trial court’s TRO. Thus, they prayed
that the trial court order Laborte to pay their unearned salaries, among
others.17 Laborte opposed but the trial court in an Order dated March 25, 1994
admitted the Complaint-in-Intervention, finding the same to be well-founded.18

On April 4, 1994, the PTCC filed an Amended Complaint to include petitioner


PTA as defendant and the additional prayer for payment of Thirty Thousand
Pesos (₱30,000.00) a month, representing the PTCC’s unrealized profits from
November 1993 up to the actual resumption of its restaurant and boat ride
businesses.19 In return, the PTA filed its Answer with Counterclaim,20 alleging,
among others, that (1) the PTCC has no cause of action against it since the PTA
owned the restaurant and the boat ride facilities within the Complex and that it
never formally entered into a contract with the PTCC to operate the same; (2) the
PTA did not violate the trial court’s TRO and Writ of Preliminary Injunction since
the PTA was not yet impleaded as defendant at that time; (3) the physical
rehabilitation of the PTA Complex, including the restaurant and boat facilities
therein, was part of its new marketing strategy; and (4) the action had become
moot and academic in view of the actual closure of the PTCC’s restaurant and
boat service businesses.21

On May 29, 2002, the RTC rendered a decision finding for the respondents, the
dispositive portion of which provides:

WHEREFORE, IN THE LIGHT OF ALL THE FOREGOING CONSIDERATIONS,


Judgment is hereby rendered in favor of the plaintiff and intervenors and against
the defendants by ordering the defendants jointly and severally to pay the plaintiff
and intervenors the following sums:
FOR THE PLAINTIFF

1. The sum of ₱1,475,760 representing the income which the plaintiff


failed to receive from December 1993 up to the present, computed at
₱16,417.00 per month;

2. The sum of ₱230,000.00 as costs of restaurants (sic) facilities


unlawfully confiscated by the defendant from the plaintiff when the
restaurant was closed; and

3. The sum of ₱25,000.00 as attorney's fees.

FOR THE INTERVENORS:

The total sum of ₱3,971,760.00 representing the monthly salaries of the 8


intervenors who are employees of the restaurant business and take home pay of
20 boatmen-intervenors for a period of seven (7) years up to the present; and

Attorney’s fees in the amount of ₱992,940.00 or 25% of the total claim of the
intervenors.

SO ORDERED.22

Dissatisfied, Laborte and the PTA appealed to the CA.23 On May 29, 2008, the
CA promulgated its Decision, affirming the RTC Decision24 dated May 29, 2002.
The petitioners seasonably filed a Motion for Reconsideration,25but the said
motion was also denied for lack of merit.26

Hence, the petitioners filed the present petition, raising the following:

THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN NOT GIVING


DUE COURSE [TO] THE PETITIONERS’ APPEAL AND IN NOT SETTING
ASIDE AND REVERSING THE DECISION OF THE TRIAL COURT.

II

THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN FINDING


THAT THE CLOSURE OF PTCC'S RESTAURANT AND BOAT RIDE BUSINESS
WAS NOT A VALID AND LAWFUL EXERCISE OF PTA'S MANAGEMENT
PREROGATIVE.

III
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN FINDING
PETITIONER LABORTE LIABLE BOTH IN HIS PERSONAL AND OFFICIAL
CAPACITY NOTWITHSTANDING THE EXISTENCE OF PECULIAR AND
UNUSUAL CIRCUMSTANCES WHICH WOULD RENDER THE DECISION
UNJUST AND INEQUITABLE, IN THAT:

A) PETITIONER LABORTE, IN HIS CAPACITY AS ACTING RESIDENT


MANAGER OF PGTZ, MERELY COMPLIED IN GOOD FAITH, WITH
THE VALID AND LAWFUL ORDERS OF THE TOP MANAGEMENT OF
PTA TO NOTIFY RESPONDENT PTCC TO CEASE BUSINESS
OPERATIONS AT THE COMPLEX IN VIEW OF THE INTENDED
RENOVATION AND REPAIR OF THE RESTAURANT FACILITY AT THE
COMPLEX.

B) THE FAILURE OF ATTY. HERNANDO CABRERA, FORMER


COUNSEL OF PETITIONERS TO FILE THEIR FORMAL OFFER OF
EVIDENCE AND TO MAKE A MANIFESTATION BEFORE THE TRIAL
COURT THAT THEY WERE ADOPTING IN THE TRIAL PROPER THE
EVIDENCE THEY PRESENTED DURING THE HEARING ON THE
APPLICATION FOR WRIT OF PRELIMINARY INJUNCTION IN CIVIL
CASE NO. SC-3150 IS SO GROSS, PALPABLE AND INEXCUSABLE,
THEREBY RESULTING IN THE VIOLATION OF THE SUBSTANTIVE
RIGHTS OF [THE] PETITIONERS.27

There is merit in the petition.

Anent the procedural issue raised, both the trial court and the CA faulted the
petitioners for their failure to formally offer their evidence inspite of the ample
opportunity granted to do so.28 Thus, such lapse allegedly militated against the
petitioners whose assertions were otherwise supported by sufficient evidence on
record.

Section 34, Rule 132 of the Revised Rules on Evidence provides the general
rule, to wit:

Sec. 34. Offer of Evidence. – The Court shall consider no evidence which has not
been formally offered. The purpose for which the evidence is offered must be
specified.

From the above provision, it is clear that the court considers the evidence only
when it is formally offered. The offer of evidence is necessary because it is the
duty of the trial court to base its findings of fact and its judgment only and strictly
on the evidence offered by the parties. A piece of document will remain a scrap
of paper without probative value unless and until admitted by the court in
evidence for the purpose or purposes for which it is offered.29 The formal offer of
evidence allows the parties the chance to object to the presentation of an
evidence which may not be admissible for the purpose it is being offered.30

However, there are instances when the Court relaxed the foregoing rule and
allowed evidence not formally offered to be admitted. Citing People v. Napat-
a31 and People. v. Mate,32 the Court in Heirs of Romana Saves, et al., v. Heirs of
Escolastico Saves, et al.,33 enumerated the requirements for the evidence to be
considered despite failure to formally offer it, namely: "first, the same must have
been duly identified by testimony duly recorded and, second, the same must
have been incorporated in the records of the case."34 In People v. Vivencio De
Roxas et al.,35 the Court also considered exhibits which were not formally offered
by the prosecution but were repeatedly referred to in the course of the trial by the
counsel of the accused.36

In the instant case, the Court finds that the above requisites are attendant to
warrant the relaxation of the rule and admit the evidence of the petitioners not
formally offered. As can be seen in the records of the case, the petitioners were
able to present evidence that have been duly identified by testimony duly
recorded. To identify is to prove the identity of a person or a thing.37 Identification
means proof of identity; the proving that a person, subject or article before the
court is the very same that he or it is alleged, charged or reputed to be.38

In support of his position, Laborte in his testimony presented and identified the
following: (a) the letter informing the Chairman of PTCC about the decision of
PTA main office regarding the repair works to be conducted;39 (b) Office Order
No. 1018-93 from a person named Mr. Anota, relative to the suspension of the
boat ride services at the Complex;40 (c) a copy of the memorandum from the
Technical Evaluation Committee (TEC), referring to the conduct of the repair
works at the Complex;41 (d) the letter to PTCC informing it of the repair at the
Complex;42 (e) the certificates of availability of funds for the guesthouse of the
PTC Complex and for the repainting, repair works at the Pagsanjan
Administration Complex respectively;43 (f) the program of works dated July 22,
1993 for the renovation of the Pagsanjan Complex and of the swimming pool at
the guesthouse respectively;44 (g) the program of works referring to the
repainting and repair works at the Complex dated August 6, 1993;45 (h) a set of
plans and specification of the projects conducted at the Complex, particularly for
the repairs and repainting of the guesthouse shower room, the repair of the
Pagsanjan Administration Complex;46 (i) the office order relative to the directive
to Mr. Francisco Abalos of the PTA main office to close the restaurant
facilities;47 (j) a memorandum from Mr. Oscar Anota, Deputy General Manager
for Operation of the PTA, dated December 8, 1993 addressed to the security
office of the Pagsanjan Administration Complex, instructing the same not to allow
the entry of anything without the clearance from the main office in Manila into the
Pagsanjan Complex;48 and (k) the office order signed by Eduardo Joaquin,
General Manager of the PTA, relative to the posting of bond in favor of herein
petitioner Laborte by the PTA main office in the amount of ₱10,000.00 to be
deposited with the RTC, Branch 28, Sta. Cruz, Laguna.49

Undeniably, these pertinent evidence were also found in the records of the RTC,
i.e. : (a) the letter informing the Chairman of PTCC about the decision of PTA
main office regarding the repair works to be conducted;50 (b) Office Order No.
1018-93 from a person named Mr. Anota, relative to the suspension of the boat
ride services at the Complex;51 (c) the letter to PTCC informing it of the repair at
the Complex;52 (d) the certificates of availability of funds for the guesthouse of
the PTC Complex and for the repainting, repair works at the Pagsanjan
Administration Complex respectively;53 (e) the program of works dated July 22,
1993 for the renovation of the Pagsanjan Complex and of the swimming pool at
the guesthouse respectively;54 (f) the program of works referring to the repainting
and repair works at the Complex dated August 6, 1993;55 and (g) a memorandum
from Mr. Oscar Anota, Deputy General Manager for Operation of the PTA, dated
December 8, 1993 addressed to the security office of the Pagsanjan
Administration Complex, instructing the same not to allow the entry of anything
without clearance from the main office in Manila into the Pagsanjan
Complex.56 In all these, the respondents had all the chance to object to the
documents which Laborte properly identified and marked and which are found in
the records of the trial court. Considering that no objections were made by the
respondents to the foregoing documents, the Court sees no reason why these
documents should not be admitted.

The Court notes the CA’s ruling that the closure of the business is a factual
matter which need not be reviewed by the Court under Rule 45. The Court has
consistently held that as a general rule, a petition for review under Rule 45 of the
Rules of Court covers questions of law only. The rule, however, admits of
exceptions, subject to the following exceptions, to wit: (1) when the findings are
grounded entirely on speculations, surmises, or conjectures; (2) when the
inference made is manifestly mistaken, absurd, or impossible; (3) when there is a
grave abuse of discretion; (4) when the judgment is based on misappreciation of
facts; (5) when the findings of fact are conflicting; (6) when in making its findings,
the same are contrary to the admissions of both appellant and appellee; (7) when
the findings are contrary to those of the trial court; (8) when the findings are
conclusions without citation of specific evidence on which they are based; (9)
when the facts set forth in the petition as well as in the petitioner’s main and reply
briefs are not disputed by the respondent; and (10) when the findings of fact are
premised on the supposed absence of evidence and contradicted by the
evidence on record.57 After a careful review and based on the evidence on
record, the Court finds cogent reason to deviate from the general rule, warranting
a reversal of the decision of the CA.

In their petition, the petitioners assert that:


(1) the PTA is mandated to administer tourism zones and it has adopted a
comprehensive program and project to rehabilitate and upgrade the
facilities of the PTA Complex. To prove this, the petitioners attached
Annexes "H-2" to "H-4,"58 namely: (a) Program Work/Scope of works of
the repairs and rehabilitation project for the PGTZ dated July 22,
1993;59 (b) Certificate of Availability of Funds for the repairs and
rehabilitation project for PGTZ;60 and (c) Program of Work/Scope of Works
for the repairs and rehabilitation of the restaurant facility dated August 6,
1993;61

(2) The petitioners also claimed that bidding out to private parties of the
business operations in the PTA Complex is a legal requirement and a
mandate given to every revenue-generating government entity like the
PTA. Thus, since it is only exercising its mandate and has acted in good
faith, petitioner PTA believes that it has not incurred any liability against
respondents.62 Citing Mendoza v. Rural Bank of Lucban,63 the petitioners
argued that: "[L]abor laws discourage interference in employers’
judgments concerning the conduct of their business. The law must protect
not only the welfare of employees, but also the right of [the]
employers."64 In other words, the petitioners likened the relationship
between PTA and the respondents to that of an employer and employee;

(3) The petitioners also reiterated that the PTCC is without contract,
concession or exclusive franchise to operate the restaurant and boat ride
service at the PTA Complex. They insisted that the PTA temporarily
authorized the PTCC to operate the same in order to extend financial
assistance to its PTA employee-members who are members of the then
fledging PTCC. Thus, for the petitioners, the PTCC has no vested right to
continue operating the restaurant and boat ride services, and therefore,
not entitled to damages;65 and

(4) The petitioners also claimed to have informed the PTCC as early as
October 22, 1993 of the intention to rehabilitate and upgrade the facilities
of the PTA Complex and for the PTCC to vacate the area by November
15, 1993. In fact, the deadline was even extended for another twenty-one
(21) days or until December 6, 1993, to allow the PTCC sufficient time to
pack its goods, merchandise and appliances.66

The Court is persuaded.

The PTA is a government owned and controlled corporation which was


mandated to administer tourism zones. Based on this mandate, it was the PTA’s
obligation to adopt a comprehensive program and project to rehabilitate and
upgrade the facilities of the PTA Complex as shown in Annexes "H-2" to "H-4" of
the petition. The Court finds that there was indeed a renovation of the Pagsanjan
Administration Complex which was sanctioned by the PTA main office; and such
renovation was done in good faith in performance of its mandated duties as
tourism administrator. In the exercise of its management prerogative to
determine what is best for the said agency, the PTA had the right to terminate at
any moment the PTCC’s operations of the restaurant and the boat ride services
since the PTCC has no contract, concession or franchise from the PTA to
operate the above-mentioned businesses. As shown by the records, the
operation of the restaurant and the boat ride services was merely tolerated, in
order to extend financial assistance to its PTA employee-members who are
members of the then fledging PTCC.

Except for receipts for rents paid by the PTCC to the PTA, the respondents failed
to show any contract, concession agreement or franchise to operate the
restaurant and boat ride services.1âwphi1 In fact, the PTCC initially did not
implead the PTA in its Complaint since it was well aware that there was no
contract executed between the PTCC and the PTA. While the PTCC has been
operating the restaurant and boat ride services for almost ten (10) years until its
closure, the same was by mere tolerance of the PTA.67 In the consolidated case
of Phil. Ports Authority v. Pier 8 Arrastre & Stevedoring Services, Inc.,68 the Court
upheld the authority of government agencies to terminate at any time hold-over
permits.69 Thus, considering that the PTCC’s operation of the restaurant and the
boat ride services was by mere tolerance, the PTA can, at any time, terminate
such operation.

The CA ruled that "the closure of the restaurant and boat ride business within the
PTA Complex was tainted with bad faith on the part of [the] defendants-
appellants."70 It referred to the Sheriff’s Report dated January 19, 1994, which
stated that no such repairs and rehabilitation were actually undertaken. Further,
the petitioners engaged the services of a new restaurant operator (the New
Selecta Restaurant) after the closure of the restaurant per official receipts
showing that the new operator of the restaurant paid PTA commissions for its
catering services from March 1994 to April 1994.71

The Court disagrees. The records disclose that sufficient notice was given by the
PTA for the respondents to vacate the area. The Sheriff’s Report dated January
19, 1994, alleging that there were, in fact, no repairs and rehabilitation
undertaken in the area at the time of inspection cannot be given weight. It must
be noted that the RTC had issued on November 11, 1993 a TRO enjoining the
petitioners from pursuing its actions. Thus, the absence of any business activity
in the premises is even proof of the petitioner’s compliance to the order of the
trial court. Furthermore, the Sheriff’s Report was executed only about a month
after the announced construction or development; thus, it cannot be expected
that the petitioners would immediately go full-blast in the implementation of the
repair and renovation.

As to the alleged engagement of the services of a new restaurant operator, the


Court agrees with the petitioners that the engagement of New Selecta
Restaurant was temporary and due only to the requests of the guests who
needed catering services for the duration of their stay. The evidence offered by
the respondents which were receipts issued to New Selecta Restaurant on
different dates even emphasize this point.72 From the foregoing, the Court
concludes that the engagement of New Selecta Restaurant is not continuous but
on contingency basis only.

With respect to Laborte's liability in his official and personal capacity, the Court
finds that Laborte was simply implementing the lawful order of the PTA
Management. As a general rule the officer cannot be held personally liable with
the corporation, whether civilly or otherwise, for the consequences of his acts, if
acted for and in behalf of the corporation, within the scope of his authority and in
good faith.73 Furthermore, the Court also notes that the charges against
petitioners Laborte and the PTA for grave coercion and for the violation of R.A.
671374 have all been dismissed.75 Thus, the Court finds no basis to hold
petitioner Laborte liable.

Likewise, the award of damages to the respondents and respondents-intervenors


is without basis. Absent a contract between the PTCC and the PTA, and
considering further that the respondents were adequately notified to properly
vacate the PTA Complex, the Court finds no justifiable reason to award any
damages. Neither may the respondents-intervenors claim damages since the act
directed against the PTCC was a lawful exercise of the PTA's management
prerogative. While it is true that the exercise of management prerogative is a
recognized right of a corporate entity, it can not be gainsaid that the exercise of
such right must be tempered with justice, honesty, good faith76 and a careful
regard of other party's rights. In the instant case, there is ample evidence to show
that the petitioners were able to observe the same.

WHEREFORE, the petit10n is GRANTED. The Decision dated May 29, 2008 and
the Resolution dated July 23, 2008 of the Court of Appeals are VACATED. The
Amended Complaint and the Complaint-in-Intervention filed by the Respondents
in the Regional Trial Court, Branch 28, Sta. Cruz, Laguna in Civil Case No. SC-
3150 are DISMISSED.

SO ORDERED.

BIENVENIDO L. REYES
Associate Justice

4, BANK OF COMMERCE VS RADIO PHILS. NETWORKS, INC.

BANK OF COMMERCE, Petitioner,


vs.
RADIO PHILIPPINES NETWORK, INC., INTERCONTINENTAL
BROADCASTING CORPORATION, and BANAHA W BROADCASTING
CORPORATION, THRU BOARD OF ADMINISTRATOR, and SHERIFF
BIENVENIDO S. REYES, JR., Sheriff, Regional Trial Court of Quezon City,
Branch 98, Respondents.

DECISION

ABAD, J.:

In late 2001 the Traders Royal Bank (TRB) proposed to sell to petitioner Bank of
Commerce (Bancommerce) for ₱10.4 billion its banking business consisting of
specified assets and liabilities. Bancommerce agreed subject to prior Bangko
Sentral ng Pilipinas' (BSP's) approval of their Purchase and Assumption (P & A)
Agreement. On November 8, 2001 the BSP approved that agreement subject to
the condition that Bancommerce and TRB would set up an escrow fund of PSO
million with another bank to cover TRB liabilities for contingent claims that may
subsequently be adjudged against it, which liabilities were excluded from the
purchase.

Specifically, the BSP Monetary Board Min. No. 58 (MB Res. 58) decided as
follows:

1. To approve the revised terms sheet as finalized on September 21, 2001


granting certain incentives pursuant to Circular No. 237, series of 2000 to serve
as a basis for the final Purchase and Assumption (P & A) Agreement between
the Bank of Commerce (BOC) and Traders Royal Bank (TRB); subject to
inclusion of the following provision in the P & A:

The parties to the P & A had considered other potential liabilities against TRB,
and to address these claims, the parties have agreed to set up an escrow fund
amounting to Fifty Million Pesos (₱50,000,000.00) in cash to be invested in
government securities to answer for any such claim that shall be judicially
established, which fund shall be kept for 15 years in the trust department of any
other bank acceptable to the BSP. Any deviation therefrom shall require prior
approval from the Monetary Board.

xxxx

Following the above approval, on November 9, 2001 Bancommerce entered into


a P & A Agreement with TRB and acquired its specified assets and liabilities,
excluding liabilities arising from judicial actions which were to be covered by the
BSP-mandated escrow of ₱50 million.

To comply with the BSP mandate, on December 6, 2001 TRB placed ₱50 million
in escrow with Metropolitan Bank and Trust Co. (Metrobank) to answer for those
claims and liabilities that were excluded from the P & A Agreement and remained
with TRB. Accordingly, the BSP finally approved such agreement on July 3,
2002.

Shortly after or on October 10, 2002, acting in G.R. 138510, Traders Royal Bank
v. Radio Philippines Network (RPN), Inc., this Court ordered TRB to pay
respondents RPN, Intercontinental Broadcasting Corporation, and Banahaw
Broadcasting Corporation (collectively, RPN, et al.) actual damages of
₱9,790,716.87 plus 12% legal interest and some amounts. Based on this
decision, RPN, et al.filed a motion for execution against TRB before the Regional
Trial Court (RTC) of Quezon City. But rather than pursue a levy in execution of
the corresponding amounts on escrow with Metrobank, RPN, et al. filed a
Supplemental Motion for Execution1 where they described TRB as "now Bank of
Commerce" based on the assumption that TRB had been merged into
Bancommerce.

On February 20, 2004, having learned of the supplemental application for


execution, Bancommerce filed its Special Appearance with Opposition to the
same2 questioning the jurisdiction of the RTC over Bancommerce and denying
that there was a merger between TRB and Bancommerce. On August 15, 2005
the RTC issued an Order3 granting and issuing the writ of execution to cover any
and all assets of TRB, "including those subject of the merger/consolidation in the
guise of a Purchase and Sale Agreement with Bank of Commerce, and/or
against the Escrow Fund established by TRB and Bank of Commerce with the
Metropolitan Bank and Trust Company."

This prompted Bancommerce to file a petition for certiorari with the Court of
Appeals (CA) in CA-G.R. SP 91258 assailing the RTC’s Order. On December 8,
2009 the CA4 denied the petition. The CA pointed out that the Decision of the
RTC was clear in that Bancommerce was not being made to answer for the
liabilities of TRB, but rather the assets or properties of TRB under its possession
and custody.5

In the same Decision, the CA modified the Decision of the RTC by deleting the
phrase that the P & A Agreement between TRB and Bancommerce is a farce or
"a mere tool to effectuate a merger and/or consolidation between TRB and
BANCOM." The CA Decision partly reads:

xxxx

We are not prepared though, unlike the respondent Judge, to declare the PSA
between TRB and BANCOM as a farce or "a mere tool to effectuate a merger
and/or consolidation" of the parties to the PSA. There is just a dearth of
conclusive evidence to support such a finding, at least at this point.
Consequently, the statement in the dispositive portion of the assailed August 15,
2005 Order referring to a merger/consolidation between TRB and BANCOM is
deleted.6

xxxx

WHEREFORE, the herein consolidated Petitions are DENIED. The assailed


Orders dated August 15, 2005 and February 22, 2006 of the respondent Judge,
are AFFIRMED with the MODIFICATION that the pronouncement of respondent
Judge in the August 15, 2005 Order that the PSA between TRB and BANCOM is
a farce or "a mere tool to effectuate a merger and/or consolidation between TRB
and BANCOM" is DELETED.

SO ORDERED.7

On January 8, 2010 RPN, et al. filed with the RTC a motion to cause the
issuance of an alias writ of execution against Bancommerce based on the CA
Decision. The RTC granted8 the motion on February 19, 2010 on the premise
that the CA Decision allowed it to execute on the assets that Bancommerce
acquired from TRB under their P & A Agreement.

On March 10, 2010 Bancommerce sought reconsideration of the RTC Order


considering that the December 8,2009 CA Decision actually declared that no
merger existed between TRB and Bancommerce. But, since the RTC had
already issued the alias writ on March 9, 2010 Bancommerce filed on March 16,
2010 a motion to quash the same, followed by supplemental Motion9 on April 29,
2010.

On August 18, 2010 the RTC issued the assailed Order10 denying Bancommerce
pleas and, among others, directing the release to the Sheriff of Bancommerce’s
"garnished monies and shares of stock or their monetary equivalent" and for the
sheriff to pay 25% of the amount "to the respondents’ counsel representing his
attorney’s fees and ₱200,000.00 representing his appearance fees and litigation
expenses" and the balance to be paid to the respondents after deducting court
dues.

Aggrieved, Bancommerce immediately elevated the RTC Order to the CA via a


petition for certiorari under Rule 65 to assail the Orders dated February 19, 2010
and August 18, 2010. On November 26, 2010 the CA11 dismissed the petition
outright for the supposed failure of Bancommerce to file a motion for
reconsideration of the assailed order. The CA denied Bancommerce’s motion for
reconsideration on February 9, 2011, prompting it to come to this Court.

The issues this case presents are:


1. Whether or not the CA gravely erred in holding that Bancommerce had
no valid excuse in failing to file the required motion for reconsideration of
the assailed RTC Order before coming to the CA; and

2. Whether or not the CA gravely erred in failing to rule that the RTC’s
Order of execution against Bancommerce was a nullity because the CA
Decision of December 8, 2009 in CA-G.R. SP 91258 held that TRB had
not been merged into Bancommerce as to make the latter liable for TRB’s
judgment debts.

Direct filing of the petition for


certiorari by Bancommerce

Section 1, Rule 65 of the Rules of Court provides that a petition for certiorari may
only be filed when there is no plain, speedy, and adequate remedy in the course
of law. Since a motion for reconsideration is generally regarded as a plain,
speedy, and adequate remedy, the failure to first take recourse to is usually
regarded as fatal omission.

But Bancommerce invoked certain recognized exceptions to the rule.12 It had to


forego the filing of the required motion for reconsideration of the assailed RTC
Order because a) there was an urgent necessity for the CA to resolve the
questions it raised and any further delay would prejudice its interests; b) under
the circumstances, a motion for reconsideration would have been useless; c)
Bancommerce had been deprived of its right to due process when the RTC
issued the challenged order ex parte, depriving it of an opportunity to object; and
d) the issues raised were purely of law.

In this case, the records amply show that Bancommerce’s action fell within the
recognized exceptions to the need to file a motion for reconsideration before
filing a petition for certiorari.

First. The filing of a motion for reconsideration would be redundant since actually
the RTC’s August 18, 2010 Order amounts to a denial of Bancommerce motion
for reconsideration of the February 19, 2010 Order which granted the application
for the issuance of the alias writ.

Significantly, the alias writ of execution itself, the quashal of which was sought by
Bancommerce two times (via a motion to quash the writ and a supplemental
motion to quash the writ) derived its existence from the RTC’s February 19, 2010
Order. Another motion for reconsideration would have been superfluous. The
RTC had not budge on those issues in the preceding incidents. There was no
point in repeatedly asking it to reconsider.

Second. An urgent necessity for the immediate resolution of the case by the CA
existed because any further delay would have greatly prejudiced Bancommerce.
The Sheriff had been resolute and relentless in trying to execute the judgment
and dispose of the levied assets of Bancommerce. Indeed, on April 22, 2010 the
Sheriff started garnishing Bancommerce’s deposits in other banks, including
those in Banco de Oro-Salcedo-Legaspi Branch and in the Bank of the Philippine
Islands Ayala Paseo Branch.

Further, the Sheriff forcibly levied on Bancommerce’s Lipa Branch cash on hand
amounting to ₱1,520,000.00 and deposited the same with the Landbank. He also
seized the bank’s computers, printers, and monitors, causing the temporary
cessation of its banking operations in that branch and putting the bank in an
unwarranted danger of a run. Clearly, Bancommerce had valid justifications for
skipping the technical requirement of a motion for reconsideration.

Merger and De Facto Merger

Merger is a re-organization of two or more corporations that results in their


consolidating into a single corporation, which is one of the constituent
corporations, one disappearing or dissolving and the other surviving. To put it
another way, merger is the absorption of one or more corporations by another
existing corporation, which retains its identity and takes over the rights,
privileges, franchises, properties, claims, liabilities and obligations of the
absorbed corporation(s). The absorbing corporation continues its existence while
the life or lives of the other corporation(s) is or are terminated.13

The Corporation Code requires the following steps for merger or consolidation:

(1) The board of each corporation draws up a plan of merger or


consolidation. Such plan must include any amendment, if necessary, to
the articles of incorporation of the surviving corporation, or in case of
consolidation, all the statements required in the articles of incorporation of
a corporation.

(2) Submission of plan to stockholders or members of each corporation for


approval. A meeting must be called and at least two (2) weeks’ notice
must be sent to all stockholders or members, personally or by registered
mail. A summary of the plan must be attached to the notice. Vote of two-
thirds of the members or of stockholders representing two thirds of the
outstanding capital stock will be needed. Appraisal rights, when proper,
must be respected.

(3) Execution of the formal agreement, referred to as the articles of merger


o[r] consolidation, by the corporate officers of each constituent
corporation. These take the place of the articles of incorporation of the
consolidated corporation, or amend the articles of incorporation of the
surviving corporation.
(4) Submission of said articles of merger or consolidation to the SEC for
approval.

(5) If necessary, the SEC shall set a hearing, notifying all corporations
concerned at least two weeks before.

(6) Issuance of certificate of merger or consolidation.14

Indubitably, it is clear that no merger took place between Bancommerce and TRB
as the requirements and procedures for a merger were absent. A merger does
not become effective upon the mere agreement of the constituent
corporations.15 All the requirements specified in the law must be complied with in
order for merger to take effect. Section 79 of the Corporation Code further
provides that the merger shall be effective only upon the issuance by the
Securities and Exchange Commission (SEC) of a certificate of merger.

Here, Bancommerce and TRB remained separate corporations with distinct


corporate personalities. What happened is that TRB sold and Bancommerce
purchased identified recorded assets of TRB in consideration of Bancommerce’s
assumption of identified recorded liabilities of TRB including booked contingent
accounts. There is no law that prohibits this kind of transaction especially when it
is done openly and with appropriate government approval. Indeed, the dissenting
opinions of Justices Jose Catral Mendoza and Marvic Mario Victor F. Leonen are
of the same opinion. In strict sense, no merger or consolidation took place as the
records do not show any plan or articles of merger or consolidation. More
importantly, the SEC did not issue any certificate of merger or consolidation.

The dissenting opinion of Justice Mendoza finds, however, that a "de facto"
merger existed between TRB and Bancommerce considering that (1) the P & A
Agreement between them involved substantially all the assets and liabilities of
TRB; (2) in an Ex Parte Petition for Issuance of Writ of Possession filed in a
case, Bancommerce qualified TRB, the petitioner, with the words "now known as
Bancommerce;" and (3) the BSP issued a Circular Letter (series of 2002)
advising all banks and non-bank financial intermediaries that the banking
activities and transaction of TRB and Bancommerce were consolidated and that
the latter continued the operations of the former.

The idea of a de facto merger came about because, prior to the present
Corporation Code, no law authorized the merger or consolidation of Philippine
Corporations, except insurance companies, railway corporations, and public
utilities.16 And, except in the case of insurance corporations, no procedure
existed for bringing about a merger.17Still, the Supreme Court held in Reyes v.
Blouse,18 that authority to merge or consolidate can be derived from Section 28½
(now Section 40) of the former Corporation Law which provides, among others,
that a corporation may "sell, exchange, lease or otherwise dispose of all or
substantially all of its property and assets" if the board of directors is so
authorized by the affirmative vote of the stockholders holding at least two-thirds
of the voting power. The words "or otherwise dispose of," according to the
Supreme Court, is very broad and in a sense, covers a merger or consolidation.

But the facts in Reyes show that the Board of Directors of the Corporation being
dissolved clearly intended to be merged into the other corporations. Said this
Court:

It is apparent that the purpose of the resolution is not to dissolve the [company]
but merely to transfer its assets to a new corporation in exchange for its
corporation stock. This intent is clearly deducible from the provision that the
[company] will not be dissolved but will continue existing until its stockholders
decide to dissolve the same. This comes squarely within the purview of Section
28½ of the corporation law which provides, among others, that a corporation may
sell, exchange, lease, or otherwise dispose of all its property and assets,
including its good will, upon such terms and conditions as its Board of Directors
may deem expedient when authorized by the affirmative vote of the shareholders
holding at least 2/3 of the voting power. [The phrase] "or otherwise dispose of" is
very broad and in a sense covers a merger or consolidation."19

In his book, Philippine Corporate Law,20 Dean Cesar Villanueva explained that
under the Corporation Code, "a de facto merger can be pursued by one
corporation acquiring all or substantially all of the properties of another
corporation in exchange of shares of stock of the acquiring corporation. The
acquiring corporation would end up with the business enterprise of the target
corporation; whereas, the target corporation would end up with basically its only
remaining assets being the shares of stock of the acquiring corporation."
(Emphasis supplied)

No de facto merger took place in the present case simply because the TRB
owners did not get in exchange for the bank’s assets and liabilities an equivalent
value in Bancommerce shares of stock. Bancommerce and TRB agreed with
BSP approval to exclude from the sale the TRB’s contingent judicial liabilities,
including those owing to RPN, et al.21

The Bureau of Internal Revenue (BIR) treated the transaction between the two
banks purely as a sale of specified assets and liabilities when it rendered its
opinion22 on the tax consequences of the transaction given that there is a
difference in tax treatment between a sale and a merger or consolidation.

Indubitably, since the transaction between TRB and Bancommerce was neither a
merger nor a de facto merger but a mere "sale of assets with assumption of
liabilities," the next question before the Court is whether or not the RTC could
regard Bancommerce as RPN, et al.’s judgment debtor.
It is pointed out that under common law,23 if one corporation sells or otherwise
transfers all its assets to another corporation, the latter is not liable for the debts
and liabilities of the transferor if it has acted in good faith and has paid adequate
consideration for the assets, except: (1) where the purchaser expressly or
impliedly agrees to assume such debts; (2) where the transaction amounts to a
consolidation or merger of the corporations; (3) where the purchasing corporation
is merely a continuation of the selling corporation; and (4) where the transaction
is entered into fraudulently in order to escape liability for such debts.24

But, in the first place, common law has no application in this jurisdiction where
existing statutes governing the situation are in place. Secondly, none of the cited
exceptions apply to this case.

1. Bancommerce agreed to assume those liabilities of TRB that are specified in


their P & A Agreement. That agreement specifically excluded TRB’s contingent
liabilities that the latter might have arising from pending litigations in court,
including the claims of respondent RPN, et al.

The pertinent provision of the P & A provides:

Article II
CONSIDERATION: ASSUMPTION OF LIABILITIES

In consideration of the sale of identified recorded assets and properties covered


by this Agreement, BANCOMMERCE shall assume identified recorded TRB’s
liabilities including booked contingent liabilities as listed and referred to in its
Consolidated Statement of Condition as of August 31, 2001, in the total amount
of PESOS: TEN BILLION FOUR HUNDRED ONE MILLION FOUR HUNDRED
THIRTY SIX THOUSAND (₱10,410,436,000.00), provided that the liabilities so
assumed shall not include:

xxxx

2. Items in litigation, both actual and prospective, against TRB which include but
not limited to the following:

2.1 Claims of sugar planters for alleged under valuation of sugar export
sales x x x;

2.2 Claims of the Republic of the Philippines for peso-denominated


certificates supposed to have been placed by the Marcos family with TRB;

2.3 Other liabilities not included in said Consolidated Statement of


Condition; and
2.4 Liabilities accruing after the effectivity date of this Agreement that were
not incurred in the ordinary course of business.25 (Underscoring supplied)

2. As already pointed out above, the sale did not amount to merger or de facto
merger of Bancommerce and TRB since the elements required of both were not
present.

3. The evidence in this case fails to show that Bancommerce was a mere
continuation of TRB. TRB retained its separate and distinct identity after the
purchase. Although it subsequently changed its name to Traders Royal
Holding’s, Inc. such change did not result in its dissolution. "The changing of the
name of a corporation is no more than creation of a corporation than the
changing of the name of a natural person is the begetting of a natural person.
The act, in both cases, would seem to be what the language which we use to
designate it imports—a change of name and not a change of being."26 As such,
Bancommerce and TRB remained separate corporations.

4. To protect contingent claims, the BSP directed Bancommerce and TRB to put
up ₱50 million in escrow with another bank. It was the BSP, not Bancommerce
that fixed the amount of the escrow. Consequently, it cannot be said that the
latter bank acted in bad faith with respect to the excluded liabilities. They did not
enter into the P & A Agreement to enable TRB to escape from its liability to
creditors with pending court cases.

Further, even without the escrow, TRB continued to be liable to its creditors
although under its new name. Parenthetically, the P & A Agreement shows that
Bancommerce acquired greater amount of TRB liabilities than assets. Article II of
the P & A Agreement shows that Bancommerce assumed total liabilities of
₱10,401,436,000.00 while it received total assets of only ₱10,262,154,000.00.
This proves the arms length quality of the transaction.

The dissenting opinion of Justice Mendoza cites certain instances indicating the
existence of a de facto merger in this case. One of these is the fact that the P &
A Agreement involved substantially all the assets and liabilities of TRB. But while
this is true, such fact alone would not prove the existence of a de facto merger
because a corporation "does not really lose its juridical entity"27 on account of
such sale. Actually, the law allows a corporation to "sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or substantially all of its properties
and assets including its goodwill" to another corporation.28 This is not merger
because it recognizes the separate existence of the two corporations that
transact the sale.

The dissenting opinion of Justice Mendoza claims that another proof of a de facto
merger is that in a case, Bancommerce qualified TRB in its Ex Parte Petition for
Issuance of Writ of Possession with the words "now known as Bancommerce."
But paragraph 3 of the Ex Parte Petition shows the context in which such
qualification was made. It reads:29

3. On November 09, 2001, Bank of Commerce and Traders Royal Bank


executed and signed a Purchase and Sale Agreement. The account of the
mortgagor was among those acquired under the agreement. Photocopy of the
agreement is hereto attached as Annex "A."

It is thus clear that the phrase "now known as Bank of Commerce" used in the
petition served only to indicate that Bancommerce is now the former property
owner’s creditor that filed the petition for writ of possession as a result of the P &
A Agreement. It does not indicate a merger.

Lastly, the dissenting opinion of Justice Mendoza cited the Circular Letter (series
of 2002) issued by the BSP advising all banks and non-bank financial
intermediaries that the banking activities and transaction of TRB and
Bancommerce were consolidated and that the latter continued the operations of
the former as an indication of a de facto merger. The Circular Letter30 reads:

CIRCULAR LETTER
(series of 2002)

TO: ALL BANK AND NON-BANK


FINANCIAL INTERMEDIARIES

The Securities and Exchange Commission approved on August 15, 2002 the
Amendment of the Articles of Incorporation and By-Laws of Traders Royal Bank
on the deletion of the term "banks" and "banking" from the corporate name and
purpose, pursuant to the purchase of assets and assumption of liabilities of
Traders Royal Bank by Bank of Commerce. Accordingly, the bank franchise of
Traders Royal Bank has been automatically revoked and Traders Royal Bank
has ceased to operate as a banking entity.

Effective July 3, 2002, the banking activities and transactions of Bank of


Commerce and Traders Royal Bank have been consolidated and the former has
carried their operations since then.

For your information and guidance.

(Sgd.)

ALBERTO V. REYES
Deputy Governor

Indeed, what was "consolidated" per the above letter was the banking activities
and transactions of Bancommerce and TRB, not their corporate existence. The
BSP did not remotely suggest a merger of the two corporations. What controls
the relationship between those corporations cannot be the BSP letter circular,
which had been issued without their participation, but the terms of their P & A
Agreement that the BSP approved through its Monetary Board.

Also, in a letter dated November 2,2005 Atty. Juan De Zuñiga, Jr., Assistant
Governor and General Counsel of the BSP, clarified to the RTC the use of the
word "merger" in their January 29, 2003 letter. According to him, the word
"merger" was used "in a very loose sense x x x and merely repeated, for
convenience" the term used by the RTC.31It further stated that "Atty. Villanueva
did not issue any legal pronouncement in the said letter, which is merely
transmittal in nature. Thus it cannot, by any stretch of construction, be
considered as binding on the BSP. What is binding to the BSP is MB Res. 58
referring to the aforementioned transaction between TRB and Bancommerce as
a purchase and assumption agreement."32

Since there had been no merger, Bancommerce cannot be considered as TRB’s


successor-in-interest and against which the Court’s Decision of October 10, 2002
in G.R. 138510 may been forced. Bancommerce did not hold the former TRBs
assets in trust for it as to subject them to garnishment for the satisfaction of the
latter’s liabilities to RPN, et al. Bancommerce bought and acquired those assets
and thus, became their absolute owner.

The CA Decision in
CA-G.R. SP 91258

According to the dissenting opinion of Justice Mendoza, the CA Decision dated


December 8, 2009 did not reverse the RTC’s Order causing the issuance of a
writ of execution against Bancommerce to enforce the judgment against TRB. It
also argues that the CA did not find grave abuse of discretion on the RTC’s part
when it issued its August 15, 2005 Order granting the issuance of a writ of
execution. In fact, it affirmed that order.1âwphi1 Moreover, it argued that the
CA’s modification of the RTC Order merely deleted an opinion there expressed
and not reversed such order.

But it should be the substance of the CA’s modification of the RTC Order that
should control, not some technical flaws that are taken out of context. Clearly, the
RTC’s basis for holding Bancommerce liable to TRB was its finding that TRB had
been merged into Bancommerce, making the latter liable for TRB’s debts to
RPN, et al. The CA clearly annulled such finding in its December 8, 2009
Decision in CA-G.R. SP 91258, thus:

WHEREFORE, the herein consolidated Petitions are DENIED. The assailed


Orders dated August 15, 2005 and February 22, 2006 of the respondent Judge,
are AFFIRMED with the MODIFICATION that the pronouncement of respondent
Judge in the August 15, 2005 Order that the PSA between TRB and BANCOM is
a farce or "a mere tool to effectuate a merger and/or consolidation between TRB
and BANCOM" is DELETED.

SO ORDERED.33

Thus, the CA was careful in its decision to restrict the enforcement of the writ of
execution only to "TRB’s properties found in Bancommerce’s possession."
Indeed, the CA clearly said in its decision that it was not Bancommerce that the
RTC Order was being made to answer for TRB’s judgment credit but "the
assets/properties of TRB in the hands of BANCOM." The CA then went on to
state that it is not prepared, unlike the RTC, to declare the P & A Agreement but
a farce or a "mere tool to effectuate a merger and/or consolidation." Thus, the CA
deleted the RTC’s reliance on such supposed merger or consolidation between
the two as a basis for its questioned order.

The enforcement, therefore, of the decision in the main case should not include
the assets and properties that Bancommerce acquired from TRB. These have
ceased to be assets and properties of TRB under the terms of the BSP-approved
P & A Agreement between them. They are not TRB assets and properties in the
possession of Bancommerce. To make them so would be an unwarranted
departure from the CA’s Decision in CA-G.R. SP 91258.

WHEREFORE, the petition is GRANTED. The assailed Resolution of November


26, 2010 and the Resolution of February 9, 2011 of the Court of Appeals both in
CA-G.R. SP 116704 are REVERSED and SET ASIDE. Accordingly, the assailed
Orders dated February 19, 2010 and August 18, 2010, the Alias Writ of
Execution dated March 9, 2010, all issued by the Regional Trial Court and all
orders, notices of garnishment/levy, or notices of sale and any other action
emanating from the Orders dated February 19, 2010 and August 18, 2010 in Civil
Case Q-89-3580 are ANNULLED and SET ASIDE. The Temporary Restraining
Order issued by this Court on April 13, 2011 is hereby made PERMANENT.

SO ORDERED.

ROBERTO A. ABAD
Associate Justice

5. PAZ VS NEW INTERNATIONAL ENVIRONMENTAL UNIV., INC

PRISCILO B. PAZ,*Petitioner, v. NEW INTERNATIONAL


ENVIRONMENTAL UNIVERSALITY, INC., Respondent.
DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the


Decision2 dated January 31, 2012 and the Resolution3 dated October
2, 2012 of the Court of Appeals (CA) in CA-G.R. CV No. 00903-MIN,
which affirmed the Decision4 dated May 19, 2006 of the Regional Trial
Court of Davao City, Branch 33 (RTC) in Civil Case No. 29,292-2002,
declaring petitioner Captain Priscilo B. Paz (petitioner) liable for breach
of contract.

The Facts

On March 1, 2000, petitioner, as the officer-in-charge of the Aircraft


Hangar at the Davao International Airport, Davao City, entered into a
Memorandum of Agreement5 (MOA) with Captain Allan J. Clarke (Capt.
Clarke), President of International Environmental University, whereby
for a period of four (4) years, unless pre-terminated by both parties
with six (6) months advance notice, the former shall allow the latter to
use the aircraft hangar space at the said Airport "exclusively for
company aircraft/helicopter."6 Said hangar space was previously
leased to Liberty Aviation Corporation, which assigned the same to
petitioner.7

On August 19, 2000, petitioner complained in a letter8 addressed to


"MR. ALLAN J. CLARKE, International Environmental Universality, Inc.
x x x" that the hangar space was being used "for trucks and
equipment, vehicles maintenance and fabrication," instead of for
"company helicopter/aircraft" only, and thereby threatened to cancel
the MOA if the "welding, grinding, and fabrication jobs" were not
stopped immediately.9

On January 16, 2001, petitioner sent another letter10 to "MR. ALLAN J.


CLARKE, International Environmental Universality, Inc. x x x,"
reiterating that the hangar space "must be for aircraft use only," and
that he will terminate the MOA due to the safety of the aircrafts parked
nearby. He further offered a vacant space along the airport road that
was available and suitable for Capt. Clarke's operations.11

On July 19, 2002, petitioner sent a third letter,12 this time, addressed
to "MR. ALLAN JOSEPH CLARKE, CEO, New International
Environmental University, Inc. x x x," demanding that the latter vacate
the premises due to the damage caused by an Isuzu van driven by its
employee to the left wing of an aircraft parked inside the hangar
space, which Capt. Clarke had supposedly promised to buy, but did
not.13

On July 23, 2002, petitioner sent a final letter14 addressed to "MR.


ALLAN J. CLARKE, Chairman, CEO, New International
Environmental University, Inc. x x x," strongly demanding the latter
to immediately vacate the hangar space. He further informed Capt.
Clarke that the company will "apply for immediate electrical
disconnection with the Davao Light and Power Company (DLPC)[,] so
as to compel [the latter] to desist from continuing with [the] works"
thereon.15

On September 4, 2002, respondent New International Environmental


Universality, Inc.16 (respondent) filed a complaint17 against petitioner
for breach of contract before the RTC, docketed as Civil Case No. 29,
292-2002,18 claiming that: (a) petitioner had disconnected its electric
and telephone lines; (b) upon petitioner's instruction, security guards
prevented its employees from entering the leased premises by
blocking the hangar space with barbed wire; and (c) petitioner violated
the terms of the MOA when he took over the hangar space without
giving respondent the requisite six (6)-month advance notice of
termination.19

In his defense, petitioner alleged, among others, that: (a) respondent


had no cause of action against him as the MOA was executed between
him and Capt. Clarke in the latter's personal capacity; (b) there was
no need to wait for the expiration of the MOA because Capt. Clarke
performed highly risky works in the leased premises that endangered
other aircrafts within the vicinity; and (c) the six (6)-month advance
notice of termination was already given in the letters he sent to Capt.
Clarke.20

On March 25, 2003, the RTC issued a Writ of Preliminary


Injunction21 ordering petitioner to: (a) immediately remove all his
aircrafts parked within the leased premises; (b) allow entry of
respondent by removing the steel gate installed thereat; and (c) desist
and refrain from committing further acts of dispossession and/or
interference in respondent's occupation of the hangar space.

For failure of petitioner to comply with the foregoing writ, respondent


filed on October 24, 2003 a petition for indirect contempt22 before the
RTC, docketed as Civil Case No. 30,030-2003, which was tried jointly
with Civil Case No. 29, 292-2002.23
The RTC Ruling

After due trial, the RTC rendered a Decision24 dated May 19, 2006
finding petioner: (a) guilty of indirect contempt for contumaciously
disregarding its Order25 dated March 6, 2003, by not allowing
respondent to possess occupy the leased premises pending final
decision in the main case; and (b) liable for breach of contract for
illegally terminating the MOA even before the expiration of the term
thereof.26 He was, thus, ordered to pay a fine of P5,000.00, and to
pay respondent nominal damages of P100,000.00 and attorney's fees
of P50,000.00 with legal interest, and costs of suit.27

On the challenge to respondent's juridical personality, the RTC quoted


the Order28 dated April 11, 2005 of the SEC explaining that respondent
was issued a Certificate of Incorporation on September 3, 2001
as New International Environmental Universality, Inc. but that,
subsequently, when it amended its Articles of Incorporation on
November 14, 2001 and July 11, 2002, the SEC Extension Office in
Davao City erroneously used the name New International
Environmental University, Inc.29 The latter name was used by
respondent when it filed its amended complaint on September 11,
2002 and the petition for indirect contempt against petitioner on
October 24, 2003 believing that it was allowed to do so, as it was only
on April 11, 2005 when the SEC directed it to revert to its correct
name.30

The RTC further declared that the MOA, which was "made and
executed by and between CAPT. [PRISCILO] B. PAZ, Officer-In-Charge
of Aircraft Hangar at Davao International Airport, Davao City,
Philippines, hereinafter called as FIRST PARTY [a]nd CAPT. ALLAN J.
CLARKE[,] President of INTERNATIONAL ENVIRONMENTAL
UNIVERSITY with office address at LIBERTY AVIATION HANGAR, Davao
International Airport, Davao City, Philippines, hereinafter called as
SECOND PARTY,"31 was executed by the parties not only in their
personal capacities but also in representation of their respective
corporations or entities.32

On the issue of the violation of the terms of the MOA, the RTC found
respondent to have been effectively evicted from the leased
premises between July and August of 2002, or long before the
expiration of the term thereof in 2004, when petitioner: (a) placed a
gate/fence that prevented ingress to and egress from the leased
premises; (b) parked a plane inside and outside the leased premises;
(c) disconnected the electrical and telephone connections of
respondent; and (d) locked respondent's employees out.33 Despite the
service of the injunctive writ upon petitioner, respondent was not
allowed to possess and occupy the leased premises, as in fact, the trial
court even had to order on March 8, 2004 the inventory of the items
locked inside the bodega of said premises that was kept off-limits to
respondent. Hence, petitioner was declared guilty of indirect
contempt.34

Aggrieved, petitioner elevated his case on appeal before the CA,


arguing that the trial court should have dismissed outright the cases
against him for failure of respondent to satisfy the essential requisites
of being a party to an action, i.e., legal personality, legal capacity to
sue or be sued, and real interest in the subject matter of the action.35

The CA Ruling

Finding that the errors ascribed by petitioner to the trial court only
touched the civil action for breach of contract, the appellate court
resolved the appeal against him in a Decision36 dated January 31,
2012, and affirmed the RTC's finding of petitioner's liability for breach
of contract.37

The CA ruled that, while there was no corporate entity at the time of
the execution of the MOA on March 1, 2000 when Capt. Clarke signed
as "President of International Environmental University," petitioner is
nonetheless estopped from denying that he had contracted with
respondent as a corporation, having recognized the latter as the
"Second Party" in the MOA that "will use the hangar space exclusively
for company aircraft/helicopter."38 Petitioner was likewise found to
have issued checks to respondent from May 3, 2000 to October 13,
2000, which belied his claim of contracting with Capt. Clarke in the
latter's personal capacity.39

Petitioner moved for the reconsideration40 of the foregoing Decision,


raising as an additional issue the death41 of Capt. Clarke which
allegedly warranted the dismissal of the case.42 However, the motion
was denied in a Resolution43 dated October 2, 2012 where the CA held
that Capt. Clarke was merely an agent of respondent, who is the real
party in the case. Thus, Capt. Clarke's death extinguished only the
agency between him and respondent, not the appeal against
petitioner.44

Undaunted, petitioner is now before the Court via the instant


petition,45 claiming that: (a) the CA erred in not settling his appeal for
both the breach of contract and indirect contempt cases in a single
proceeding and, consequently, the review of said cases before the
Court should be consolidated,46 and (b) the CA should have dismissed
the cases against him for (1) lack of jurisdiction of the trial court in
view of the failure to implead Capt. Clarke as an indispensable
party;47 (2) lack of legal capacity and personality on the part of
respondent;48 and (3) lack of factual and legal bases for the assailed
RTC Decision.49

The Court's Ruling

The petition lacks merit.

First, on the matter of the consolidation50 of the instant case with G.R.
No. 202826 entitled "Priscilo B. Paz v. New International
Environmental University,'' the petition for review of the portion of the
RTC Decision finding petitioner guilty of indirect contempt,51 the Court
had earlier denied said motion in a Resolution52 dated July 24, 2013 on
the ground that G.R. No. 202826 had already been denied53 with
finality.54 Thus, any further elucidation on the issue would be a mere
superfluity.

Second, whether or not Capt. Clarke should have been impleaded as


an indispensable party was correctly resolved by the CA which held
that the former was merely an agent of respondent.55 While Capt.
Clarke's name and signature appeared on the MOA, his participation
was, nonetheless, limited to being a representative of respondent. As a
mere representative, Capt. Clarke acquired no rights whatsoever, nor
did he incur any liabilities, arising from the contract between petitioner
and respondent. Therefore, he was not an indispensable party to the
case at bar.56

It should be emphasized, as it has been time and again, that this


Court is not a trier of facts, and is thus not duty-bound to analyze
again and weigh the evidence introduced in and considered by the
tribunals.57When supported by substantial evidence, the findings of
fact by the CA are conclusive and binding on the parties and are not
reviewable by this Court, unless the case falls under any of the
exceptions,58 none of which was established herein.

The CA had correctly pointed out that, from the very language itself of
the MOA entered into by petitioner whereby he obligated himself to
allow the use of the hangar space "for company aircraft/helicopter,"
petitioner cannot deny that he contracted with respondent.59 Petitioner
further acknowledged this fact in his final letter dated July 23, 2002,
where he reiterated and strongly demanded the former to immediately
vacate the hangar space his "company is occupying/utilizing."60

Section 2161 of the Corporation Code62 explicitly provides that one who
assumes an obligation to an ostensible corporation, as such, cannot
resist performance thereof on the ground that there was in fact no
corporation. Clearly, petitioner is bound by his obligation under the
MOA not only on estoppel but by express provision of law. As aptly
raised by respondent in its Comment63 to the instant petition, it is
futile to insist that petitioner issued the receipts for rental payments in
respondent's name and not with Capt. Clarke's, whom petitioner
allegedly contracted in the latter's personal capacity, only because it
was upon the instruction of an employee.64 Indeed, it is disputably
presumed that a person takes ordinary care of his concerns,65 and that
all private transactions have been fair and regular.66 Hence, it is
assumed that petitioner, who is a pilot, knew what he was doing with
respect to his business with respondent.

Petitioner's pleadings, however, abound with clear indications of a


business relationship gone sour. In his third letter dated July 19, 2002,
petitioner lamented the fact that Capt. Clarke's alleged promise to buy
an aircraft had not materialized.67 He likewise insinuated that Capt.
Clarke's real motive in staying in the leased premises was the
acquisition of petitioner's right to possess and use the hangar
space.68 Be that as it may, it is settled that courts have no power to
relieve parties from obligations they voluntarily assumed, simply
because their contracts turn out to be disastrous deals or unwise
investments.69

The lower courts, therefore, did not err in finding petitioner liable for
breach of contract for effectively evicting respondent from the leased
premises even before the expiration of the term of the lease. The
Court reiterates with approval the ratiocination of the RTC that, if it
were true that respondent was violating the terms and conditions of
the lease, "[petitioner] should have gone to court to make the
[former] refrain from its 'illegal' activities or seek rescission of the
[MOA], rather than taking the law into his own hands."70

WHEREFORE, the petition is DENIED. The Decision dated January


31, 2012 and the Resolution dated October 2, 2012 of the Court of
Appeals in CA-G.R. CV No. 00903-MIN are hereby AFFIRMED.

SO ORDERED.
6. EYANA VS PHIL TRANSMARINE CARRIES INC.

AL O. EYANA, Petitioner,
vs.
PHILIPPINE TRANSMARINE CARRIERS, INC., ALAIN A. GARILLOS,
CELEBRITY CRUISES, INC. (U.S.A.),Respondents.

DECISION

REYES, J.:

The instant petition for review on certiorari1 assails the Decision2 dated March 22,
2010 and Resolution3 dated August 13, 2010 of the Court of Appeals (CA) in CA-
G.R. SP No. 108483. The CA affirmed the Decision4 of the National Labor
Relations Commission (NLRC) dated November 28, 2008, which declared that Al
0. Eyana (petitioner) is entitled to an award of disability compensation equivalent
to Grade Eight under the Philippine Overseas Employment Agency (POEA)
Standard Employment Contract (SEC). The NLRC reversed the labor arbiter's
(LA) earlier decision,5 which awarded to the petitioner US$80,000.00 as total and
permanent disability benefits, and US$8,000.00 as attorney’s fees.

Antecedents

Respondent Philippine Transmarine Carriers, Inc. (PTCI) is a local manning


agency, with Alain A. Garillos (Garillos) as its crewing manager and official
representative.

PTCI, for and on behalf of its foreign principal, Celebrity Cruises, Inc. (CCI), hired
the petitioner to assume the position of a utility cleaner on board M/V Century.
The petitioner then joined the ship on April 15, 2006. His contract covered a
period of eight months and his basic monthly salary was US$267.00. His tasks
were predominantly manual in nature, which involved lifting, carrying, loading,
transporting and arranging food supplies, and floor cleaning.6

On August 2, 2006, the petitioner felt a sudden pain in his back after lifting a 30-
kilo block of cheese from the freezer shelf. He was no longer able to carry the
cheese to the kitchen. He reported the incident to his superior.7

The petitioner was confined in a hospital in Oslo, Norway from August 4 to 16,
2006. He was medically repatriated to the Philippines on August 17, 2006.8

PTCI immediately referred the petitioner to Dr. Natalio G. Alegre II (Dr. Alegre)
for treatment. The initial consultation was on August 18, 2006. Dr. Alegre noted
that the petitioner was (a) suffering from severe low back pains, (b) experiencing
numbness and weakness in his right lower leg, and (c) having difficulty bending
and sitting. The former was, thus, advised to undergo physical therapy thrice a
week.9

The petitioner thereafter consulted Dr. Alegre eight more times from August 28,
2006 up to January 26, 2007.He continued with physical therapy and was
prescribed medications.10

On October 23, 2006, Dr. Alegrereported that the Magnetic Resonance Imaging
scan of the petitioner’s lumbosacral spine showed "disk desiccation L4L5 and
L5S1 with left posterolateral disk herniations and nerve root compression." Since
the petitioner was hesitant to undergo surgery, Dr. Alegre recommended the
administration of epidural steroid injection to decrease the pain and swelling, and
the continuation of physical therapy.11

On January 20, 2007, Dr. Alegre informed PTCI that the petitioner still suffered
from persistent back pains and restricted truncal mobility. Since the petitioner
was still young,"conservative management with physical therapy" was
recommended. The petitioner was then given a "Disability Grade of 8 (Chest-
Trunk-Spine # 5, moderate rigidity or 2/3 loss of motion or lifting power of the
trunk)."12

The petitioner’s last consultation with Dr. Alegre was on January 26, 2007. The
former manifested his preference for the continuation of physical therapy and
once again refused the offer of surgical intervention.13

On June 6, 2007, the petitioner sought the opinion of Dr. Venancio P. Garduce,
Jr. (Dr. Garduce), an orthopedic surgeon. The medical certificate signed by the
latter indicated that the petitioner had (a) nerve root compression at L4-L5 and
L5-S1; (b) numbness and sensory deficits of 40% with weakness of the left big
toe extension; and (c) limited range of motion of the back. Dr. Garduce
concluded that the petitioner had a Disability Grade of One and was thus unfit for
sea duty.14

On June 7, 2007, the petitioner filed before the NLRC a complaint15 for disability
benefits, medical reimbursements, damages and attorney’s fees against PTCI,
Garillos and CCI (respondents).

Ruling of the LA

On December 17, 2007, the LA rendered a Decision16 awarding to the petitioner


the amounts of US$80,000.00 astotal and permanent disability benefits, and
US$8,000.00 as attorney’s fees. The LA ruled that the provisions of the FIT-
CISL-ITF CBA (CBA) which adopted Article 12 of the ITF Cruise Ship Model
Agreement covering the petitioner’s vessel of employment were applicable.17 The
said article, in part, provides that:
Regardless of the degree of disability[,] an injury or illness which results in loss of
profession will entitle the Seafarer to the full amount of compensation, USD
eighty thousand (80,000)for ratings, (Groups B, C, & D) x x x. For the purposes
of this Article, loss of profession means when the physical condition of the
Seafarer prevents a return to sea service, under applicable national and
international standards or when it is otherwise clear that the Seafarer’s condition
will adversely prevent the Seafarer’s future of comparable employment on board
ships.18

The LA found Dr. Garduce’s opinion as credible. The LA likewise declared that
even if the Disability Grade of Eight assessed by Dr. Alegre would be considered
instead, it cannot alter the fact that the petitioner’s medical condition was
permanent thereby resulting in the loss of his profession as a seaman. Further,
the petitioner was unable to perform his customary job for more than 120 days,
hence, under the law, he should be considered as permanently and totally
disabled.19

Ruling of the NLRC

The respondents assailed the LA decision before the NLRC. The dispositive
portion of the NLRC Decision20 dated November 28, 2008 reads as follows:

WHEREFORE, premises considered, the decision under review is hereby,


REVERSED and SET ASIDE, and another entered, DISMISSING the cause of
action for payment of higher disability benefits.

According[ly], [the petitioner] is declared entitled to an award of disability


compensation equivalent to GRADE EIGHT (8) under the [POEA-SEC].

SO ORDERED.21

The NLRC explained that:

Records show that [Dr. Alegre] personally examined the [petitioner] starting
August 18, 2006. From said date until January 26, 2007, [the petitioner]
underwent medical examination for no less than eight (8) times x x x. Notably, on
two occasions, Dr. Alegre suggested that [the petitioner] undergo operation. [The
petitioner] himself refused but instead opted for epidural steroid injection and
physical therapy x x x. Having failed to receive a higher disability rating, [the
petitioner] waited [for] over four (4) months before he sought a second opinion
which was based on a mere single consultation that, in turn, produced a mere
handwritten diagnosis. From these established facts, even granting that the
disability assessment should have been as what [the petitioner’s] private
physician had determined, his conduct is considered as a supervening cause that
could account for such disability, noting further that the second medical opinion
was obtained several months after the company-designated physician had
issued a disability rating. These circumstances warrant according to the medical
opinion of [the petitioner’s] private physician with such nil significance.

Attendant facts not only render an inherent weakness in [the petitioner’s]


evidence. They fail to overcome the corresponding probative weight and
credence being ascribed to the declaration of the company-designated physician
which had been issued pursuant to the conditions stated in the [POEA SEC].
Thusly, and as ruled in the case of Cadornigara v. Amethyst Shipping Co., Inc.,
et al., G.R. No. 158073, November 23, 2007, while the certification of the
company physician may be contested, the seafarer must indicate facts or
evidence on record to contradict such finding. x x x [Thepetitioner] having entirely
missed pointing to any circumstance that would have reasonably established
fraud or misrepresentation on the part of the company-designated physician, We
are therefore without any other recoursebut to render due adherence to his
findings and conclusions.22

On February 13, 2009, the NLRC denied the respondents’ motion for
reconsideration.23 Ruling of the CA

The respondents thereafter filed a Petition for Certiorari,24 which the CA


dismissed through the herein assailed decision and resolution. The CA declared
that:

The Court notes that Section 20(B) of the employment contract states that it is
the company-designated physician who determines a seafarer’s fitness to work
or his degree of disability. Nonetheless, a claimant may dispute the company-
designated physician’s report by seasonably consulting another doctor. Insuch a
case, the medical report issued by the latter shall be evaluated by the labor
tribunal and the court, based on its inherent merit.

It is noted that petitioner took four(4) months before disputing the finding of Dr.
Alegre by consulting a second opinion of his physician of choice, whose only
consultation with him is recorded by a handwritten diagnosis dated June 6, 2007,
a day before he filed a complaint for disability benefits. x x x.

xxxx

As the Supreme Court observed in Sarocam v. Interorient Maritime Ent. Inc., it


makes no sense to compare the certification of a company-designated physician
with that of an employee-appointed physician if the former is dated seven to eight
months earlier than the latter -- there would be no basis for comparison at all.

In Maunlad Transport, Inc. vs. Manigo, where the Supreme Court took note of the
doctrines laid down in Cadornigara v. NLRC and Sarocam v. Interorient Maritime
Ent., Inc., which We hold to be the more applicable rule in the instant case,
wherein the Court held that an assessment of a private doctor consulted by the
claimant six (6) months after he was declared "fit to work" by the company-
designated physician in Cadornigaraand seven (7) to eight (8) months in
Sarocam, has no evidentiary value, for the claimant’s health condition may have
drastically changed in the interregnum.

Following the foregoing analyses in Cadornigara and Sarocam, the necessary


conclusion in this case would have to be that Dr. Alegre’s (the company
physician) diagnosis and recommendation has more evidentiary weight and
should therefore prevail over that of Dr. Garduce. In the absence of bad faith, Dr.
Alegre’s findings were binding on the petitioner, such findings being based on the
petitioner’s extensive and actual medical history and treatment.

Moreover, the records lack competent showing of the extent of the medical
treatment that the private doctor gave to the petitioner. In contrast, Dr. Alegre’s
extensive medical treatment that enabled him to make a final diagnosis on the
degree of the petitioner’s disability was amply demonstrated. Thus, betweenthe
certification issued by the company[-]designated physician and the certification
issued by the private doctor, We would lend more credence to the certification
issued by the company[-]designated physician because it was done in the regular
performance of his duties as company physician and who consistently examined
complainant’s health condition. We cannot simply brush aside said certification in
the absence of solid proof that it was issued with grave abuse of authority of the
company physician. This was what respondent NLRC precisely considered in
coming out with its reversal decision. In doing so, it may not be said that it
gravely abused its discretion.

While the Court may agree with the petitioner that the [POEA SEC] for Seamen
is designed primarilyfor the protection and benefit of Filipino seamen in the
pursuit of the employment on board ocean-going vessels and its provisions must,
therefore be construed and applied fairly, reasonably and liberally in their favor,
We must also emphasize that the constitutional policy to provide full protection to
labor is not meant to be a sword to oppress employers, nor a means to prevent
the court from sustaining the employer when it is in the right.25 (Citations omitted)

Issues

This Court is now called upon to resolve the issues of whether or not the CA and
the NLRC erred in not considering the following:

(a) provisions of the CBA which provide full compensation for loss of
profession regardless of the degree of disability;26 and

(b) settled jurisprudence on seafarers’ claims declaring that entitlement to


full disability compensation is based on the loss of earning capacity and
not on medical significance.27 The petitioner claims that while the
respondents never controverted the existence of the CBA, which was an
addendum to the POEA SEC executed between the parties in this case,
the NLRC and the CA failed to discuss the provisions therein in their
respective decisions. Further, Article 12 of the CBA provides that
regardless of the disability grading given to the petitioner, he should be
entitled to a compensation of US$80,000.00 as a result of the loss of his
profession. The petitioner also points out that from his repatriation on
August 18, 2006 up tothe time the instant petition was filed in 2009, he
had remained unfit to work as a seaman after losing two-thirds of his
trunk’s lifting power. Anent the petitioner’s alleged refusal to undergo
surgery, he asserts that he was not solely at fault as Dr. Alegre himself
had adopted the orthopedic recommendation of conservative
management with physical therapy.28

The petitioner also reiterates that permanent and total disability does not mean
absolute helplessness, but mere inability to do substantially all material acts
necessary for the pursuit of any occupation for remuneration in substantially
customary and usual manner. Because of his back injury resulting from the
accident, he is rendered permanently unfit for sea service.29

In their Comment,30 the respondents argue that Department Order No. 4 and
Memorandum Circular No. 9, series of 2000, otherwise known as the POEA
Standard Terms and Conditions Governing the Employment of Filipino Seafarers
On Board Ocean-Going Vessels, shall apply since the employment contract
executed between the parties expressly stipulated so. Under Section 32 of the
POEA SEC, Grade 8 disability entitles the seafarer to a compensation equivalent
to US$16,795.00 or 33.59% of US$50,000.00.31

Further, the petitioner belatedly sought the opinion of Dr. Garduce four months
after Dr. Alegre had made a disability assessment. The petitioner did so as a
mere afterthought.32 Besides, while the findings of Dr. Alegre may be contested,
the petitioner should have indicated facts or evidence in the records to refute the
same. The petitioner failed in this respect. Thus, Dr. Garduce’s medical opinion,
which was arrived at after a day’s observation, cannot override the careful
assessment of Dr. Alegre, who had monitored the petitioner’s condition in a span
of six months.33

Ruling of the Court

The instant petition is partially meritorious.

There is no dispute that the petitioner’s injury was work-related and that he is
entitled to disability compensation. The questions now posed before this Court
essentially relate to what are the applicable provisions to determine the (a)
petitioner’s degree of disability, and (b) amount of compensation he is entitled to.
The CBA’s existence and the
applicability of its provisions to the
instant petition have not been
established.

It has been oft-repeated that "a party alleging a critical fact must support his
allegation with substantial evidence," and "any decision based on
unsubstantiated allegation cannot stand as it will offend due process."34

In the case at bar, while the petitioner based his claims for full disability benefits
upon the CBA, he presented no more than two unauthenticated pages of the
same.35 Hence, the CBA deserves no evidentiary weight and cannot be made as
the basis for the award of disability compensation. Consequently, the first
issue36 raised herein is rendered moot, leaving the Court to resolve the petition in
the light of the provisions of the POEA SEC and relevant labor laws.

The POEA SEC governs. Under


Section 32 thereof, the petitioner is
entitled to a total and permanent
disability compensation of
US$60,000.00.

In Kestrel Shipping Co., Inc. v. Munar,37 likewise involving a seafarer who had
sustained a spinal injury and had lost two-thirds of his trunk’s lifting power, the
Court is emphatic that: Indeed, under Section 32 of the POEA-SEC, only those
injuries or disabilities that are classified as Grade 1 may be considered as total
and permanent. However, if those injuries or disabilities with a disability grading
from 2 to 14, hence, partial and permanent, would incapacitate a seafarer from
performing his usual sea duties for a period of more than 120 or 240 days,
depending on the need for further medical treatment, then he is, under legal
contemplation, totally and permanently disabled. x x x.

Moreover, the company-designated physician is expected to arrive at a definite


assessment of the seafarer’s fitness to work or permanent disability within the
period of 120 or 240 days. That should he fail to do so and the seafarer’s medical
condition remains unresolved, the seafarer shall be deemed totally and
permanently disabled.

xxxx

x x x Section 29 of the 1996 POEA SEC itself provides that "[a]ll rights and
obligations of the parties to [the] Contract, including the annexes thereof, shall be
governed by the laws of the Republic of the Philippines, international
conventions, treaties and covenants where the Philippines is a signatory." Even
without this provision, a contract of labor is so impressed with public interest that
the New Civil Code expressly subjects it to "the special laws on labor unions,
collective bargaining, strikes and lockouts, closed shop, wages, working
conditions, hours of labor and similar subjects."

Thus, the Court has applied the Labor Code concept of permanent total disability
to the case of seafarers. x x x.

In Vergara v. Hammonia Maritime Services, Inc., this Court read the POEA-SEC
in harmony with the Labor Code and the [Amended Rules on Employee
Compensation] in interpreting in holding that: (a) the 120 days provided under
Section 20-B(3) of the POEA-SEC is the period given to the employer to
determine fitness to work and when the seafarer is deemed to be in a state of
total and temporary disability; (b) the 120 days of total and temporary disability
may be extended up to a maximum of 240 days should the seafarer require
further medical treatment; and (c) a total and temporary disability becomes
permanent when so declared by the company-designated physician within 120 or
240 days, as the case may be, or upon the expiration of the said periods without
a declaration of either fitness to work or permanent disability and the seafarer is
still unable to resume his regular seafaring duties. Quoted below are the relevant
portions of this Court’s Decision dated October 6, 2008:

x x x [T]he POEA [SEC] provides its own system of disability compensation that
approximates (and even exceeds) the benefits provided under Philippine law.
The standard terms agreed upon, as above pointed out, are intended to be read
and understood in accordance with Philippine laws, particularly, Articles 191 to
193 of the Labor Code and the applicable implementing rules and regulations in
case of any dispute, claim or grievance.

xxxx

As these provisions operate, the seafarer, upon sign-off from his vessel, must
report to the company-designated physician within three (3) days from arrival for
diagnosis and treatment. For the duration of the treatment but in no case to
exceed 120 days, the seaman is on temporary total disability as he is totally
unable to work. He receives his basic wage during this period until he is declared
fit to work or his temporary disability is acknowledged by the company tobe
permanent, either partially or totally, as his condition is defined under the POEA
[SEC] and by applicable Philippine laws. If the 120 days initial period is exceeded
and no such declaration is made because the seafarer requires further medical
attention, then the temporary total disability period may be extended up to a
maximum of 240 days, subject to the right of the employer to declare within this
period that a permanent partial or total disability already exists. The seaman may
of course also be declared fit to work at any time such declaration is justified by
his medical condition.

xxxx
As we outlined above, a temporary total disability only becomes permanent when
so declared by the company physician within the periods he is allowed to do so,
or upon the expiration of the maximum 240-day medical treatment period without
a declaration of either fitness to work or the existence of a permanent disability.
In the present case, while the initial 120-day treatment or temporary total
disability period was exceeded, the company-designated doctor duly made a
declaration well within the extended 240-day period that the petitioner was fit to
work. Viewed from this perspective, both the NLRC and CA were legally correct
when they refused to recognize any disability because the petitioner had already
been declared fit to resume his duties. In the absence of any disability after his
temporary total disability was addressed, any further discussion of permanent
partial and total disability, their existence, distinctions and consequences,
becomes a surplusage that serves no useful purpose.

Consequently, if after the lapse of the stated periods, the seafarer is still
incapacitated to perform his usual sea duties and the company-designated
physician had not yet declared him fit to work or permanently disabled, whether
total or permanent, the conclusive presumption that the latter is totally and
permanently disabled arises. On the other hand, if the company-designated
physician declares the seaman fit to work within the said periods, such
declaration should be respected unless the physician chosen by the seaman and
the doctor selected by both the seaman and his employer declare otherwise. As
provided under Section 20-B(3) of the POEA-SEC, a seafarer may consult
another doctor and in case the latter’s findings differ from those of the company-
designated physician, the opinion of a third doctor chosen by both parties may be
secured and such shall be final and binding. The same procedure should be
observed in case a seafarer, believing that he is totally and permanently
disabled, disagrees with the declaration of the company-designated physician
that he is partially and permanently disabled.

In Vergara, as between the determinations made by the company-designated


physician and the doctor appointed by the seaman, the former should prevail
absent any indication that the above procedure was complied with:

The POEA [SEC] and the CBAclearly provide that when a seafarer sustains a
work-related illness or injury while on board the vessel, his fitness or unfitness for
work shall be determined by the company-designated physician. If the physician
appointed by the seafarer disagrees with the company-designated physician’s
assessment, the opinion of a third doctor may be agreed jointly between the
employer and the seafarer to be the decision final and binding on them. Thus,
while petitioner had the right to seek a second and even a third opinion, the final
determination of whose decision must prevail must be done in accordance with
an agreed procedure. Unfortunately, the petitioner did not avail of this procedure;
hence, we have no option but to declare that the company-designated doctor’s
certification is the final determination that must prevail. x x x.
In this case, the following are undisputed: (a) when Munar filed a complaint for
total and permanent disability benefits on April 17, 2007, 181 days had lapsed
from the time hesigned-off from M/V Southern Unity on October 18, 2006; (b) Dr.
Chua issued a disability grading on May 3, 2007 or after the lapse of 197 days;
and (c) Munar secured the opinion of Dr. Chiu on May 21, 2007; (d) no third
doctor was consulted by the parties; and (e) Munar did not question the
competence and skill of the company-designated physicians and their familiarity
with his medical condition.

It may be argued that these provide sufficient grounds for the dismissal of
Munar’s complaint. Considering that the 240-day period had not yet lapsed when
the NLRC was asked to intervene, Munar’s complaint is premature and no cause
of action for total and permanent disability benefits had set in. While beyond the
120-day period, Dr. Chua’s medical report dated May 3, 2007 was issued within
the 240-day period. Moreover, Munar did not contest Dr. Chua’s findings using
the procedure outlined under Section 20-B(3) of the POEA-SEC. For being
Munar’s attending physicians from the time hewas repatriated and given their
specialization in spine injuries, the findings of Dr. Periquet and Dr. Lim constitute
sufficient bases for Dr. Chua’s disability grading. As Munar did not allege, much
less, prove the contrary, there exists no reason why Dr. Chiu’s assessment
should be preferred over that of Dr. Chua.

It must be noted, however, that when Munar filed his complaint, Dr. Chua had not
yet determined the nature and extent of Munar’s disability. Also, Munar was still
undergoing physical therapy and his spine injury had yet been fully addressed.
Furthermore, when Munar filed a claim for total and permanent disability benefits,
more than 120 days had gone by and the prevailing rule then was that
enunciated by this Court in Crystal Shipping, Inc. v. Natividad that total and
permanent disability refers to the seafarer’s incapacity to perform his customary
sea duties for more than 120 days. Particularly:

Permanent disability is the inability of a worker to perform his job for more than
120 days, regardless of whether or not he loses the use of any part of his body.
As gleaned from the records, respondent was unable to work from August 18,
1998 to February 22, 1999, at the least, or more than 120 days, due to his
medical treatment. This clearly shows that his disability was permanent.

Total disability, on the other hand, means the disablement of an employee to


earn wages in the same kind of work of similar nature that he was trained for, or
accustomed to perform, or any kind of work which a person of his mentality and
attainments could do. It does not mean absolute helplessness. In disability
compensation, it is not the injury which is compensated, but rather it is the
incapacity to work resulting in the impairment of one’s earning capacity.

xxxx
Petitioners tried to contest the above findings by showing that respondent was
ableto work again as a chief mate in March 2001. Nonetheless, this information
does not alter the fact that as a result of his illness, respondent was unable to
work as a chief mate for almost three years. It is of no consequence that
respondent was cured after a couple of years. The law does not require that the
illness should be incurable. What is important is that he was unable to perform
his customary work for more than 120 days which constitutes permanent total
disability. An award of a total and permanent disability benefit would be germane
to the purpose of the benefit, which is to help the employee in making ends meet
at the time when he is unable to work.

Consequently, that after the expiration of the 120-day period, Dr. Chua had not
yet made any declaration as to Munar’s fitness to work and Munar had not yet
fully recovered and was still incapacitated to work sufficed to entitle the latter to
total and permanent disability benefits.

In addition, that it was by operation of law that brought forth the conclusive
presumption that Munar istotally and permanently disabled, there is no legal
compulsion for him to observe the procedure prescribed under Section 20-B(3) of
the POEA-SEC. A seafarer’s compliance with such procedure presupposes that
the company-designated physician came up with an assessment as to his fitness
or unfitness to work before the expiration of the 120-day or 240-day periods.
Alternatively put, absent a certification from the company-designated physician,
the seafarer had nothing to contest and the law steps into conclusively
characterize his disability as total and permanent.

This Court’s pronouncements in Vergara presented a restraint against the


indiscriminate reliance on Crystal Shipping such that a seafarer is immediately
catapulted into filing a complaint for total and permanent disability benefits after
the expiration of 120 days from the time he signed off from the vessel to which he
was assigned. Particularly, a seafarer’s inability to work and the failure of the
company-designated physician to determine fitness or unfitness to work despite
the lapse of 120 days will not automatically bring about a shift inthe seafarer’s
state from total and temporary to total and permanent, considering that the
condition of total and temporary disability may be extended up to a maximum of
240 days.

Nonetheless, Vergarawas promulgated on October 6, 2008, or more than two (2)


years from the time Munar filed his complaint and observance of the principle of
prospectivity dictates that Vergara should not operate to strip Munar of his cause
of action for total and permanent disability that had already accrued as a result of
his continued inability to perform his customary work and the failure of the
company-designated physician to issue a final assessment.38(Citations omitted,
emphases in the original and underscoring ours)
Similar to the circumstances obtained in Kestrel, the petitioner failed to assail the
competence of the company-designated physicians, and seek the opinion of a
third doctor mutually agreed upon by the parties. In Kestrel and the instant
petition too, the disability assessment was made by the company-designated
doctors after the lapse of 120 days from the seafarer’s repatriation. Likewise, in
both cases, the complaints were filed by the seafarers before October 6, 2008,
the date of the promulgation of Vergara v. Hammonia Maritime Services, Inc., et
al.39

Applying the doctrines enunciated in Kestrel, the Court finds that the petitioner is
entitled to total and permanent disability benefits under the provisions of the
POEA SEC. It bears stressing that the Court need not even delve into the merits
of the assessments made by Dr. Alegre, on one hand, and Dr. Garduce, on the
other. This proceeds from an unalterable fact that Dr. Alegre had made the
disability assessment on January 20, 2007, or over five months from the
petitioner’s repatriation on August 17, 2006. Consequently, the rule on the 120-
day period, during which the disability assessment should have been made in
accordance with Crystal Shipping, Inc. v. Natividad,40 the doctrine then prevailing
before the promulgation of Vergaraon October 6, 2008, stands. Hence, due to
the failure of Dr. Alegre to issue a disability rating within the prescribed period, a
conclusive presumption that the petitioner is totally and permanently disabled
arose. As a result thereof, the petitioner is notlegally compelled to observe the
procedure laid down in Section 20-B(3) of the POEA SEC relative to the resort to
a third doctor. As discussed earlier, the Court need not delve into the merits of
the disability assessments made by Dr. Alegre and Dr. Garduce. However, it is
worth noting that on January 20, 2007, Dr. Alegre informed PTCI that the
petitioner was still suffering from persistent back pains. Thus, the Gabapentin
dose prescribed to the petitioner was increased to 600 milligrams per day and
physical therapy was continued.41

Gabapentin tablets are used to treat long lasting pain caused by damage to the
nerves. A variety of different diseases can cause peripheral (primarily occurring
in the legs and/or arms) neuropathic pain, such as diabetes or shingles. Pain
sensations may be described as hot, burning, throbbing, shooting, stabbing,
sharp, cramping, aching, tingling, numbness, pins and needles, etc.42

In Seagull Maritime Corporation v. Dee,43 the Court declared that:

Permanent total disability means disablement of an employee to earn wages in


the same kind of work or work of a similar nature that he was trained for or
accustomed to perform, or any kind of work which a person of his mentality and
attainment can do. It does not mean state of absolute helplessness but inability
to do substantially all material acts necessary to the prosecution of a gainful
occupation without serious discomfort or pain and without material injury or
danger tolife. In disability compensation, it is not the injury perse which is
compensated but the incapacity to work.
Although private respondent’s injury was undeniably confined to his left foot only,
we cannot close our eyes, as petitioners would like us to, to the inescapable
impact of private respondent’s injury on his capacity to work as a seaman. In
their desire to escape liability from private respondent’s rightful claim, petitioners
denigrated the fact that even if private respondent insists on continuing to work
as a seaman, no profit minded employer will hire him. His injury erased all these
possibilities.44 (Citation omitted, italics in the original and underscoring ours)

Further, Wallem Maritime Services, Inc. v. Tanawan45 unequivocally reiterated


that:

What clearly determines the seafarer’s entitlement to permanent disability


benefits is his inability to work for more than 120 days. Although the company-
designated physician already declared the seafarer fit to work, the seafarer’s
disability is still considered permanent and total if such declaration is made
belatedly (that is, more than 120 days after repatriation).46 (Citations omitted)

In the instant petition, Dr. Alegre’s January 20, 2007 report47 addressed to PTCI
clearly indicated that the petitioner’s persistent back pains remained unresolved.
Hence, the continuation of physical therapy and an increased Gabapentin dose
were recommended. The Court cannot disregard the fact that the petitioner was
a utility cleaner before he was injured. His tasks in the ship were predominantly
manual in nature involving a lot of moving, lifting and bending. At the time Dr.
Alegre belatedly issued the disability assessment, the petitioner could not revert
back to his customary gainful occupation without subjecting himself to serious
discomfort and pain.

Further, the Court disagrees withthe NLRC which found fault on the part of the
petitioner in refusing to undergo surgery as recommended by Dr. Alegre.
Records show that the petitioner underwent physical therapy. At the time Dr.
Alegre made the disability assessment on January 20, 2007, he still presented
physical therapy as anoption. Again, the Court quotes:

As [the petitioner] is still young, conservative management with physical therapy


has been recommended by Orthopedics.48

The petitioner cannot thus be faulted that he opted for physical therapy instead of
surgery. If indeed surgery was the only way for the petitioner to be able to fully
recover from his injury, he should have been categorically informed of such fact
and warned of the consequences of his choice. The petitioner did not refuse
treatment. He just availed of an option presented to him. Besides, even if he
underwent surgery, there is likewise no assurance of full recovery.

The Court also notes that nowhere is it shown in the records that the petitioner
was re-employed as a utility cleaner by PTCI or by any other manning agency
from the time of his repatriation on August 17, 2006 until the filing of the instant
petition in 2009. This, to the Court, is an eloquent proof of his permanent
disability.49

In sum, the Court finds the petitioner entitled to total and permanent disability
compensation.1âwphi1 As to the amount, the Schedule of Disability Allowances
found in Section 32 of the POEA SEC is applicable. Under the said section, a
seafarer given a Grade 1 Disability assessment is entitled to US$60,000.00
(US$50,000.00 x 120%).

The petitioner is entitled to


attorney’s fees.

The petitioner is entitled to attorney’s fees pursuant to Article 2208(8)50 of the


Civil Code.51 The Court, however, notes that the respondents provided the
petitioner withmedical treatment and offered to pay him disability benefits, albeit
in the reduced amount. In other words, the acts of the respondents did not evince
bad faith. The respondents did not completely shirk from their duties tothe
petitioner. Although the petitioner was still thus compelled to litigate tobe entitled
to total and permanent disability compensation, the Court finds the award of
attorney’s fees in the amount of US$1,000.00 as reasonable.52

Respondent Garillos is not


personally liable for the monetary
awards granted to the petitioner.

As a general rule, the officers and members of a corporation are not personally
liable for acts done in the performance of their duties.53

"In the absence of malice, bad faith, or a specific provision of law making a
corporate officer liable, such corporate officer cannot be made personally liable
for corporate liabilities."54

In the instant petition, there was neither an allegation nor a proof offered to
establish that Garillos, as PTCI's crewing manager and official representative,
had acted beyond the scope of his authority or with malice. The general rule thus
applies and there is no ground to hold him personally liable for the monetary
awards granted to the petitioner.

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


Decision dated March 22, 2010 and Resolution dated August 13, 2010 of the
Court of Appeals in CA-G.R. SP No. 108483 are hereby SET ASIDE. The
respondents, Philippine Transmarine Carriers, Inc. and Celebrity Cruises, Inc.
are hereby held jointly and severally liable to the petitioner, AL O. EYANA, for the
amounts of (a) US$60,000.00 as total and permanent disability allowance, and
(b) US$1,000.00 as attorney's fees, at the prevailing rate of exchange at the time
of payment. An interest of six percent (6%) per annum is likewise imposed upon
the total monetary award reckoned from the date of finality of this Decision until
full satisfaction thereof.55

SO ORDERED.

BIENVENIDO L. REYES
Associate Justice

7. SAUDI ARABIAN AIRLINES VS REBESENCIO

SAUDI ARABIAN AIRLINES (SAUDIA) AND BRENDA J.


BETIA, Petitioners, v. MA. JOPETTE M. REBESENCIO, MONTASSAH
B. SACAR-ADIONG, ROUEN RUTH A. CRISTOBAL AND LORAINE
S. SCHNEIDER-CRUZ, Respondents.

DECISION

LEONEN, J.:

All Filipinos are entitled to the protection of the rights guaranteed in


the Constitution.

This is a Petition for Review on Certiorari with application for the


issuance of a temporary restraining order and/or writ of preliminary
injunction under Rule 45 of the 1997 Rules of Civil Procedure praying
that judgment be rendered reversing and setting aside the June 16,
2011 Decision1 and September 13, 2011 Resolution2 of the Court of
Appeals in CA-G.R. SP. No. 113006.

Petitioner Saudi Arabian Airlines (Saudia) is a foreign corporation


established and existing under the laws of Jeddah, Kingdom of Saudi
Arabia. It has a Philippine office located at 4/F, Metro House Building,
Sen. Gil J. Puyat Avenue, Makati City.3 In its Petition filed with this
court, Saudia identified itself as follows:chanroblesvirtuallawlibrary

1. Petitioner SAUDIA is a foreign corporation established and existing


under the Royal Decree No. M/24 of 18.07.1385H (10.02.1962G) in
Jeddah, Kingdom of Saudi Arabia ("KSA"). Its Philippine Office is
located at 4/F Metro House Building, Sen, Gil J. Puyat Avenue, Makati
City (Philippine Office). It may be served with orders of this Honorable
Court through undersigned counsel at 4th and 6th Floors, Citibank
Center Bldg., 8741 Paseo de Roxas, Makati City.4 (Emphasis supplied)
Respondents (complainants before the Labor Arbiter) were recruited
and hired by Saudia as Temporary Flight Attendants with the
accreditation and approval of the Philippine Overseas Employment
Administration.5 After undergoing seminars required by the Philippine
Overseas Employment Administration for deployment overseas, as well
as training modules offered by Saudia (e.g., initial flight
attendant/training course and transition training), and after working as
Temporary Flight Attendants, respondents became Permanent Flight
Attendants. They then entered into Cabin Attendant contracts with
Saudia: Ma. Jopette M. Rebesencio (Ma. Jopette) on May 16,
1990;6 Montassah B. Sacar-Adiong (Montassah) and Rouen Ruth A.
Cristobal (Rouen Ruth) on May 22, 1993;7 and Loraine Schneider-Cruz
(Loraine) on August 27, 1995.8

Respondents continued their employment with Saudia until they were


separated from service on various dates in 2006.9

Respondents contended that the termination of their employment was


illegal. They alleged that the termination was made solely because
they were pregnant.10

As respondents alleged, they had informed Saudia of their respective


pregnancies and had gone through the necessary procedures to
process their maternity leaves. Initially, Saudia had given its approval
but later on informed respondents that its management in Jeddah,
Saudi Arabia had disapproved their maternity leaves. In addition, it
required respondents to file their resignation letters.11

Respondents were told that if they did not resign, Saudia would
terminate them all the same. The threat of termination entailed the
loss of benefits, such as separation pay and ticket discount
entitlements.12

Specifically, Ma. Jopette received a call on October 16, 2006 from


Saudia's Base Manager, Abdulmalik Saddik (Abdulmalik).13 Montassah
was informed personally by Abdulmalik and a certain Faisal Hussein on
October 20, 2006 after being required to report to the office one (1)
month into her maternity leave.14Rouen Ruth was also personally
informed by Abdulmalik on October 17, 2006 after being required to
report to the office by her Group Supervisor.15 Loraine received a call
on October 12, 2006 from her Group Supervisor, Dakila Salvador.16

Saudia anchored its disapproval of respondents' maternity leaves and


demand for their resignation on its "Unified Employment Contract for
Female Cabin Attendants" (Unified Contract).17 Under the Unified
Contract, the employment of a Flight Attendant who becomes pregnant
is rendered void. It provides:chanroblesvirtuallawlibrary
(H) Due to the essential nature of the Air Hostess functions to be
physically fit on board to provide various services required in normal
or emergency cases on both domestic/international flights beside her
role in maintaining continuous safety and security of passengers, and
since she will not be able to maintain the required medical fitness
while at work in case of pregnancy, accordingly, if the Air Hostess
becomes pregnant at any time during the term of this contract,
this shall render her employment contract as void and she will
be terminated due to lack of medical fitness.18 (Emphasis
supplied)
In their Comment on the present Petition,19 respondents emphasized
that the Unified Contract took effect on September 23, 2006 (the first
day of Ramadan),20 well after they had filed and had their maternity
leaves approved. Ma. Jopette filed her maternity leave application on
September 5, 2006.21 Montassah filed her maternity leave application
on August 29, 2006, and its approval was already indicated in Saudia's
computer system by August 30, 2006.22 Rouen Ruth filed her
maternity leave application on September 13, 2006,23 and Loraine filed
her maternity leave application on August 22, 2006.24

Rather than comply and tender resignation letters, respondents filed


separate appeal letters that were all rejected.25

Despite these initial rejections, respondents each received calls on the


morning of November 6, 2006 from Saudia's office secretary informing
them that their maternity leaves had been approved. Saudia, however,
was quick to renege on its approval. On the evening of November 6,
2006, respondents again received calls informing them that it had
received notification from Jeddah, Saudi Arabia that their maternity
leaves had been disapproved.26

Faced with the dilemma of resigning or totally losing their benefits,


respondents executed handwritten resignation letters. In Montassah's
and Rouen Ruth's cases, their resignations were executed on Saudia's
blank letterheads that Saudia had provided. These letterheads already
had the word "RESIGNATION" typed on the subject portions of their
headings when these were handed to respondents.27

On November 8, 2007, respondents filed a Complaint against Saudia


and its officers for illegal dismissal and for underpayment of salary,
overtime pay, premium pay for holiday, rest day, premium, service
incentive leave pay, 13th month pay, separation pay, night shift
differentials, medical expense reimbursements, retirement benefits,
illegal deduction, lay-over expense and allowances, moral and
exemplary damages, and attorney's fees.28 The case was initially
assigned to Labor Arbiter Hermino V. Suelo and docketed as NLRC NCR
Case No. 00-11-12342-07.

Saudia assailed the jurisdiction of the Labor Arbiter.29 It claimed that


all the determining points of contact referred to foreign law and
insisted that the Complaint ought to be dismissed on the ground
of forum non conveniens.30 It added that respondents had no cause of
action as they resigned voluntarily.31

On December 12, 2008, Executive Labor Arbiter Fatima Jambaro-


Franco rendered the Decision32dismissing respondents' Complaint. The
dispositive portion of this Decision reads:chanroblesvirtuallawlibrary
WHEREFORE, premises' considered, judgment is hereby
rendered DISMISSING the instant complaint for lack of
jurisdiction/merit.33cralawlawlibrary
On respondents' appeal, the National Labor Relations Commission's
Sixth Division reversed the ruling of Executive Labor Arbiter Jambaro-
Franco. It explained that "[considering that complainants-appellants
are OFWs, the Labor Arbiters and the NLRC has [sic] jurisdiction to
hear and decide their complaint for illegal termination."34 On the
matter of forum non conveniens, it noted that there were no special
circumstances that warranted its abstention from exercising
jurisdiction.35 On the issue of whether respondents were validly
dismissed, it held that there was nothing on record to support Saudia's
claim that respondents resigned voluntarily.

The dispositive portion of the November 19, 2009 National Labor


Relations Commission Decision36reads:chanroblesvirtuallawlibrary
WHEREFORE, premises considered, judgment is hereby rendered
finding the appeal impressed with merit. The respondents-appellees
are hereby directed to pay complainants-appellants the aggregate
amount of SR614,001.24 corresponding to their backwages and
separation pay plus ten (10%) percent thereof as attorney's fees. The
decision of the Labor Arbiter dated December 12, 2008 is hereby
VACATED and SET ASIDE. Attached is the computation prepared by
this Commission and made an integral part of this
Decision.37cralawlawlibrary
In the Resolution dated February 11, 2010,38 the National Labor
Relations Commission denied petitioners' Motion for Reconsideration.
In the June 16, 2011 Decision,39 the Court of Appeals denied
petitioners' Rule 65 Petition and modified the Decision of the National
Labor Relations Commission with respect to the award of separation
pay and backwages.

The dispositive portion of the Court of Appeals Decision


reads:chanroblesvirtuallawlibrary
WHEREFORE, the instant petition is hereby DENIED. The Decision
dated November 19, 2009 issued by public respondent, Sixth Division
of the National Labor Relations Commission - National Capital Region
is MODIFIED only insofar as the computation of the award of
separation pay and backwages. For greater clarity, petitioners are
ordered to pay private respondents separation pay which shall be
computed from private respondents' first day of employment up to the
finality of this decision, at the rate of one month per year of service
and backwages which shall be computed from the date the private
respondents were illegally terminated until finality of this decision.
Consequently, the ten percent (10%) attorney's fees shall be based on
the total amount of the award. The assailed Decision is affirmed in all
other respects.

The labor arbiter is hereby DIRECTED to make a recomputation based


on the foregoing.40cralawlawlibrary
In the Resolution dated September 13, 2011,41 the Court of Appeals
denied petitioners' Motion for Reconsideration.

Hence, this Appeal was filed.

The issues for resolution are the following:

First, whether the Labor Arbiter and the National Labor Relations
Commission may exercise jurisdiction over Saudi Arabian Airlines and
apply Philippine law in adjudicating the present dispute;

Second, whether respondents' voluntarily resigned or were illegally


terminated; and

Lastly, whether Brenda J. Betia may be held personally liable along


with Saudi Arabian Airlines.chanRoblesvirtualLawlibrary

Summons were validly served on Saudia and jurisdiction over it validly


acquired.
There is no doubt that the pleadings and summons were served on
Saudia through its counsel.42 Saudia, however, claims that the Labor
Arbiter and the National Labor Relations Commission had no
jurisdiction over it because summons were never served on it but on
"Saudia Manila."43 Referring to itself as "Saudia Jeddah," it claims that
"Saudia Jeddah" and not "Saudia Manila" was the employer of
respondents because:

First, "Saudia Manila" was never a party to the Cabin Attendant


contracts entered into by respondents;

Second, it was "Saudia Jeddah" that provided the funds to pay for
respondents' salaries and benefits; and

Lastly, it was with "Saudia Jeddah" that respondents filed their


resignations.44

Saudia posits that respondents' Complaint was brought against the


wrong party because "Saudia Manila," upon which summons was
served, was never the employer of respondents.45

Saudia is vainly splitting hairs in its effort to absolve itself of liability.


Other than its bare allegation, there is no basis for concluding that
"Saudia Jeddah" is distinct from "Saudia Manila."

What is clear is Saudia's statement in its own Petition that what it has
is a "Philippine Office . . . located at 4/F Metro House Building, Sen. Gil
J. Puyat Avenue, Makati City."46 Even in the position paper that Saudia
submitted to the Labor Arbiter,47 what Saudia now refers to as "Saudia
Jeddah" was then only referred to as "Saudia Head Office at Jeddah,
KSA,"48 while what Saudia now refers to as "Saudia Manila" was then
only referred to as "Saudia's office in Manila."49

By its own admission, Saudia, while a foreign corporation, has a


Philippine office.

Section 3(d) of Republic Act No.. 7042, otherwise known as the


Foreign Investments Act of 1991, provides the
following:chanroblesvirtuallawlibrary
The phrase "doing business" shall include . . . opening offices,
whether called "liaison" offices or branches; . . . and any other
act or acts that imply a continuity of commercial dealings or
arrangements and contemplate to that extent the performance of acts
or works, or the exercise of some of the functions normally incident to,
and in progressive prosecution of commercial gain or of the purpose
and object of the business organization. (Emphasis supplied)
A plain application of Section 3(d) of the Foreign Investments Act
leads to no other conclusion than that Saudia is a foreign corporation
doing business in the Philippines. As such, Saudia may be sued in the
Philippines and is subject to the jurisdiction of Philippine tribunals.

Moreover, since there is no real distinction between "Saudia Jeddah"


and "Saudia Manila" — the latter being nothing more than Saudia's
local office — service of summons to Saudia's office in Manila sufficed
to vest jurisdiction over Saudia's person in Philippine
tribunals.chanRoblesvirtualLawlibrary

II

Saudia asserts that Philippine courts and/or tribunals are not in a


position to make an intelligent decision as to the law and the facts.
This is because respondents' Cabin Attendant contracts require the
application of the laws of Saudi Arabia, rather than those of the
Philippines.50 It claims that the difficulty of ascertaining foreign law
calls into operation the principle of forum non conveniens, thereby
rendering improper the exercise of jurisdiction by Philippine
tribunals.51

A choice of law governing the validity of contracts or the interpretation


of its provisions dees not necessarily imply forum non conveniens.
Choice of law and forum non conveniens are entirely different matters.

Choice of law provisions are an offshoot of the fundamental principle of


autonomy of contracts. Article 1306 of the Civil Code firmly ensconces
this:chanroblesvirtuallawlibrary
Article 1306. The contracting parties may establish such stipulations,
clauses, terms and conditions as they may deem convenient, provided
they are not contrary to law, morals, good customs, public order, or
public policy.
In contrast, forum non conveniens is a device akin to the rule against
forum shopping. It is designed to frustrate illicit means for securing
advantages and vexing litigants that would otherwise be possible if the
venue of litigation (or dispute resolution) were left entirely to the whim
of either party.

Contractual choice of law provisions factor into transnational litigation


and dispute resolution in one of or in a combination of four ways: (1)
procedures for settling disputes, e.g., arbitration; (2) forum, i.e.,
venue; (3) governing law; and (4) basis for interpretation. Forum non
conveniens relates to, but is not subsumed by, the second of these.

Likewise, contractual choice of law is not determinative of jurisdiction.


Stipulating on the laws of a given jurisdiction as the governing law of a
contract does not preclude the exercise of jurisdiction by tribunals
elsewhere. The reverse is equally true: The assumption of jurisdiction
by tribunals does not ipso factomean that it cannot apply and rule on
the basis of the parties' stipulation. In Hasegawa v.
Kitamura:52ChanRoblesVirtualawlibrary
Analytically, jurisdiction and choice of law are two distinct concepts.
Jurisdiction considers whether it is fair to cause a defendant to travel
to this state; choice of law asks the further question whether the
application of a substantive law V'hich will determine the merits of the
case is fair to both parties. The power to exercise jurisdiction does not
automatically give a state constitutional authority to apply forum law.
While jurisdiction and the choice of the lex fori will often, coincide, the
"minimum contacts" for one do not always provide the necessary
"significant contacts" for the other. The question of whether the law of
a state can be applied to a transaction is different from the question of
whether the courts of that state have jurisdiction to enter a
judgment.53cralawlawlibrary
As various dealings, commercial or otherwise, are facilitated by the
progressive ease of communication and travel, persons from various
jurisdictions find themselves transacting with each other. Contracts
involving foreign elements are, however, nothing new. Conflict of laws
situations precipitated by disputes and litigation anchored on these
contracts are not totally novel.

Transnational transactions entail differing laws on the requirements Q


for the validity of the formalities and substantive provisions of
contracts and their interpretation. These transactions inevitably lend
themselves to the possibility of various fora for litigation and dispute
resolution. As observed by an eminent expert on transnational
law:chanroblesvirtuallawlibrary
The more jurisdictions having an interest in, or merely even a point of
contact with, a transaction or relationship, the greater the number of
potential fora for the resolution of disputes arising out of or related to
that transaction or relationship. In a world of increased mobility, where
business and personal transactions transcend national boundaries, the
jurisdiction of a number of different fora may easily be invoked in a
single or a set of related disputes.54cralawlawlibrary
Philippine law is definite as to what governs the formal or extrinsic
validity of contracts. The first paragraph of Article 17 of the Civil Code
provides that "[t]he forms and solemnities of contracts . . . shall be
governed by the laws of the country in which they are
executed"55 (i.e., lex loci celebrationis).

In contrast, there is no statutorily established mode of settling conflict


of laws situations on matters pertaining to substantive content of
contracts. It has been noted that three (3) modes have emerged:
(1) lex loci contractus or the law of the place of the making; (2) lex
loci solutionis or the law of the place of performance; and (3) lex loci
intentionis or the law intended by the parties.56

Given Saudia's assertions, of particular relevance to resolving the


present dispute is lex loci intentionis.

An author observed that Spanish jurists and commentators "favor lex


loci intentionis."57 These jurists and commentators proceed from the
Civil Code of Spain, which, like our Civil Code, is silent on what
governs the intrinsic validity of contracts, and the same civil law
traditions from which we draw ours.

In this jurisdiction, this court, in Philippine Export and Foreign Loan


Guarantee v. V.P. Eusebio Construction, Inc.,58 manifested preference
for allowing the parties to select the law applicable to their
contract":chanroblesvirtuallawlibrary
No conflicts rule on essential validity of contracts is expressly provided
for in our laws. The rule followed by most legal systems, however, is
that the intrinsic validity of a contract must be governed by the lex
contractus or "proper law of the contract." This is the law voluntarily
agreed upon by the parties (the lex loci voluntatis) or the law intended
by them either expressly or implicitly (the lex loci intentionis). The law
selected may be implied from such factors as substantial connection
with the transaction, or the nationality or domicile of the parties.
Philippine courts would do well to adopt the first and most basic rule in
most legal systems, namely, to allow the parties to select the law
applicable to their contract, subject to the limitation that it is not
against the law, morals, or public policy of the forum and that the
chosen law must bear a substantive relationship to the
transaction.59(Emphasis in the original)
Saudia asserts that stipulations set in the Cabin Attendant contracts
require the application of the laws of Saudi Arabia. It insists that the
need to comply with these stipulations calls into operation the doctrine
of forum non conveniens and, in turn, makes it necessary for
Philippine tribunals to refrain from exercising jurisdiction.

As mentioned, contractual choice of laws factors into transnational


litigation in any or a combination of four (4) ways. Moreover, forum
non conveniens relates to one of these: choosing between multiple
possible fora.

Nevertheless, the possibility of parallel litigation in multiple fora —


along with the host of difficulties it poses — is not unique to
transnational litigation. It is a difficulty that similarly arises in disputes
well within the bounds of a singe jurisdiction.

When parallel litigation arises strictly within the context of a single


jurisdiction, such rules as those on forum shopping, litis pendentia,
and res judicata come into operation. Thus, in the Philippines, the
1997 Rules on Civil Procedure provide for willful and deliberate forum
shopping as a ground not only for summary dismissal with prejudice
but also for citing parties and counsels in direct contempt, as well as
for the imposition of administrative sanctions.60 Likewise, the same
rules expressly provide that a party may seek the dismissal of a
Complaint or another pleading asserting a claim on the ground "[t]hat
there is another action pending between the same parties for the same
cause," i.e., litis pendentia, or "[t]hat the cause of action is barred by
a prior judgment,"61 i.e., res judicata.

Forum non conveniens, like the rules of forum shopping, litis


pendentia, and res judicata, is a means of addressing the problem of
parallel litigation. While the rules of forum shopping, litis pendentia,
and res judicata are designed to address the problem of parallel
litigation within a single jurisdiction, forum non conveniens is a means
devised to address parallel litigation arising in multiple jurisdictions.

Forum non conveniens literally translates to "the forum is


inconvenient."62 It is a concept in private international law and was
devised to combat the "less than honorable" reasons and excuses that
litigants use to secure procedural advantages, annoy and harass
defendants, avoid overcrowded dockets, and select a "friendlier"
venue.63 Thus, the doctrine of forum non conveniens addresses the
same rationale that the rule against forum shopping does, albeit on a
multijurisdictional scale.

Forum non conveniens, like res judicata,64 is a concept originating in


common law.65 However, unlike the rule on res judicata, as well as
those on litis pendentia and forum shopping, forum non
conveniens finds no textual anchor, whether in statute or in procedural
rules, in our civil law system. Nevertheless, jurisprudence has
applied forum non conveniens as basis for a court to decline its
exercise of jurisdiction.66

Forum non conveniens is soundly applied not only to address parallel


litigation and undermine a litigant's capacity to vex and secure undue
advantages by engaging in forum shopping on an international scale.
It is also grounded on principles of comity and judicial efficiency.

Consistent with the principle of comity, a tribunal's desistance in


exercising jurisdiction on account of forum non conveniens is a
deferential gesture to the tribunals of another sovereign. It is a
measure that prevents the former's having to interfere in affairs which
are better and more competently addressed by the latter.
Further, forum non conveniens entails a recognition not only that
tribunals elsewhere are better suited to rule on and resolve a
controversy, but also, that these tribunals are better positioned to
enforce judgments and, ultimately, to dispense justice. Forum non
conveniens prevents the embarrassment of an awkward situation
where a tribunal is rendered incompetent in the face of the greater
capability — both analytical and practical — of a tribunal in another
jurisdiction.

The wisdom of avoiding conflicting and unenforceable judgments is as


much a matter of efficiency and economy as it is a matter of
international courtesy. A court would effectively be neutering itself if it
insists on adjudicating a controversy when it knows full well that it is
in no position to enforce its judgment. Doing so is not only an exercise
in futility; it is an act of frivolity. It clogs the dockets of a.tribunal and
leaves it to waste its efforts on affairs, which, given transnational
exigencies, will be reduced to mere academic, if not trivial, exercises.

Accordingly, under the doctrine of forum non conveniens, "a court, in


conflicts of law cases, may refuse impositions on its jurisdiction where
it is not the most 'convenient' or available forum and the parties are
not precluded from seeking remedies elsewhere."67 In Puyat v.
Zabarte,68 this court recognized the following situations as among
those that may warrant a court's desistance from exercising
jurisdiction:chanroblesvirtuallawlibrary
1) The belief that the matter can be better tried and decided
elsewhere, either because the main aspects of the case transpired
in a foreign jurisdiction or the material witnesses have their
residence there;
2) The belief that the non-resident plaintiff sought the forum[,] a
practice known as forum shopping[,] merely to secure procedural
advantages or to convey or harass the defendant;
3) The unwillingness to extend local judicial facilities to non residents
or aliens when the docket may already be overcrowded;
4) The inadequacy of the local judicial machinery for effectuating the
right sought to be maintained; and
5) The difficulty of ascertaining foreign law.69
In Bank of America, NT&SA, Bank of America International, Ltd. v.
Court of Appeals,70 this court underscored that a Philippine court may
properly assume jurisdiction over a case if it chooses to do so to the
extent: "(1) that the Philippine Court is one to which the parties may
conveniently resort to; (2) that the Philippine Court is in a position to
make an intelligent decision as to the law and the facts; and (3) that
the Philippine Court has or is likely to have power to enforce its
decision."71

The use of the word "may" (i.e., "may refuse impositions on its
jurisdiction"72) in the decisions shows that the matter of jurisdiction
rests on the sound discretion of a court. Neither the mere invocation
of forum non conveniens nor the averment of foreign elements
operates to automatically divest a court of jurisdiction. Rather, a court
should renounce jurisdiction only "after 'vital facts are established, to
determine whether special circumstances' require the court's
desistance."73 As the propriety of applying forum non conveniens is
contingent on a factual determination, it is, therefore, a matter of
defense.74

The second sentence of Rule 9, Section 1 of the 1997 Rules of Civil


Procedure is exclusive in its recital of the grounds for dismissal that
are exempt from the omnibus motion rule: (1) lack of jurisdiction over
the subject matter; (2) litis pendentia; (3) res judicata; and (4)
prescription. Moreover, dismissal on account offorum non
conveniens is a fundamentally discretionary matter. It is, therefore,
not a matter for a defendant to foist upon the court at his or her own
convenience; rather, it must be pleaded at the earliest possible
opportunity.

On the matter of pleading forum non conveniens, we state the rule,


thus: Forum non conveniens must not only be clearly pleaded as a
ground for dismissal; it must be pleaded as such at the earliest
possible opportunity. Otherwise, it shall be deemed waived.

This court notes that in Hasegawa,76 this court stated that forum non
conveniens is not a ground for a motion to dismiss. The factual
ambience of this case however does not squarely raise the viability of
this doctrine. Until the opportunity comes to review the use of motions
to dismiss for parallel litigation, Hasegawa remains existing doctrine.

Consistent with forum non conveniens as fundamentally a factual


matter, it is imperative that it proceed from & factually established
basis. It would be improper to dismiss an action pursuant to forum non
conveniens based merely on a perceived, likely, or hypothetical
multiplicity of fora. Thus, a defendant must also plead and show that a
prior suit has, in fact, been brought in another jurisdiction.

The existence of a prior suit makes real the vexation engendered by


duplicitous litigation, the embarrassment of intruding into the affairs of
another sovereign, and the squandering of judicial efforts in resolving
a dispute already lodged and better resolved elsewhere. As has been
noted:chanroblesvirtuallawlibrary
A case will not be stayed o dismissed on [forum] non
conveniens grounds unless the plaintiff is shown to have an available
alternative forum elsewhere. On this, the moving party bears the
burden of proof.

A number of factors affect the assessment of an alternative forum's


adequacy. The statute of limitations abroad may have run, of the
foreign court may lack either subject matter or personal jurisdiction
over the defendant. . . . Occasionally, doubts will be raised as to the
integrity or impartiality of the foreign court (based, for example, on
suspicions of corruption or bias in favor of local nationals), as to the
fairness of its judicial procedures, or as to is operational efficiency
(due, for example, to lack of resources, congestion and delay, or
interfering circumstances such as a civil unrest). In one noted case, [it
was found] that delays of 'up to a quarter of a century' rendered the
foreign forum... inadequate for these purposes.77cralawlawlibrary
We deem it more appropriate and in the greater interest of prudence
that a defendant not only allege supposed dangerous tendencies in
litigating in this jurisdiction; the defendant must also show that such
danger is real and present in that litigation or dispute resolution has
commenced in another jurisdiction and that a foreign tribunal has
chosen to exercise jurisdiction.

III

Forum non conveniens finds no application and does not operate to


divest Philippine tribunals of jurisdiction and to require the application
of foreign law.

Saudia invokes forum non conveniens to supposedly effectuate the


stipulations of the Cabin Attendant contracts that require the
application of the laws of Saudi Arabia.

Forum non conveniens relates to forum, not to the choice of governing


law. Thai forum non conveniensmay ultimately result in the application
of foreign law is merely an incident of its application. In this strict
sense, forum non conveniens is not applicable. It is not the primarily
pivotal consideration in this case.

In any case, even a further consideration of the applicability of forum


non conveniens on the incidental matter of the law governing
respondents' relation with Saudia leads to the conclusion that it is
improper for Philippine tribunals to divest themselves of jurisdiction.

Any evaluation of the propriety of contracting parties' choice of a


forum and'its incidents must grapple with two (2) considerations: first,
the availability and adequacy of recourse to a foreign tribunal; and
second, the question of where, as between the forum court and a
foreign court, the balance of interests inhering in a dispute weighs
more heavily.

The first is a pragmatic matter. It relates to the viability of ceding


jurisdiction to a foreign tribunal and can be resolved by juxtaposing
the competencies and practical circumstances of the tribunals in
alternative fora. Exigencies, like the statute of limitations, capacity to
enforce orders and judgments, access to records, requirements for the
acquisition of jurisdiction, and even questions relating to the integrity
of foreign courts, may render undesirable or even totally unfeasible
recourse to a foreign court. As mentioned, we consider it in the greater
interest of prudence that a defendant show, in pleading forum non
conveniens, that litigation has commenced in another jurisdiction and
that a foieign tribunal has, in fact, chosen to exercise jurisdiction.

Two (2) factors weigh into a court's appraisal of the balance of


interests inhering in a dispute: first, the vinculum which the parties
and their relation have to a given jurisdiction; and second, the public
interest that must animate a tribunal, in its capacity as an agent of the
sovereign, in choosing to assume or decline jurisdiction. The first is
more concerned with the parties, their personal circumstances, and
private interests; the second concerns itself with the state and the
greater social order.
In considering the vinculum, a court must look into the preponderance
of linkages which the parties and their transaction may have to either
jurisdiction. In this respect, factors, such as the parties' respective
nationalities and places of negotiation, execution, performance,
engagement or deployment, come into play.

In considering public interest, a court proceeds with a consciousness


that it is an organ of the state. It must, thus, determine if the interests
of the sovereign (which acts through it) are outweighed by those of
the alternative jurisdiction. In this respect, the court delves into a
consideration of public policy. Should it find that public interest weighs
more heavily in favor of its assumption of jurisdiction, it should
proceed in adjudicating the dispute, any doubt or .contrary view
arising from the preponderance of linkages notwithstanding.

Our law on contracts recognizes the validity of contractual choice of


law provisions. Where such provisions exist, Philippine tribunals, acting
as the forum court, generally defer to the parties' articulated choice.

This is consistent with the fundamental principle of autonomy of


contracts. Article 1306 of the Civ:l Code expressly provides that "[t]he
contracting parties may establish 'such stipulations, clauses, terms and
conditions as they may deem convenient."78 Nevertheless, while a
Philippine tribunal (acting as the forum court) is called upon to respect
the parties' choice of governing law, such respect must not be so
permissive as to lose sight of considerations of law, morals, good
customs, public order, or public policy that underlie the contract
central to the controversy.

Specifically with respect to public policy, in Pakistan International


Airlines Corporation v. Ople,79 this court explained
that:chanroblesvirtuallawlibrary
counter-balancing the principle of autonomy of contracting parties is
the equally general rule that provisions of applicable law,
especially provisions relating to matters affected with public policy, are
deemed written inta the contract. Put a little differently, the governing
principle is that parties may not contract away applicable provisions of
law especially peremptory provisions dealing with matters heavily
impressed with public interest.80(Emphasis supplied)
Article II, Section 14 of the 1987 Constitution provides that "[t]he
State ... shall ensure the fundamental equality before the law of
women and men." Contrasted with Article II, Section 1 of the 1987
Constitution's statement that "[n]o person shall ... be denied the equal
protection of the laws," Article II, Section 14 exhorts the State to
"ensure." This does not only mean that the Philippines shall not
countenance nor lend legal recognition and approbation to measures
that discriminate on the basis of one's being male or female. It
imposes an obligation to actively engage in securing the fundamental
equality of men and women.

The Convention on the Elimination of all Forms of Discrimination


against Women (CEDAW), signed and ratified by the Philippines on
July 15, 1980, and on August 5, 1981, respectively,81 is part of the law
of the land. In view of the widespread signing and ratification of, as
well as adherence (in practice) to it by states, it may even be said that
many provisions of the CEDAW may have become customary
international law. The CEDAW gives effect to the Constitution's policy
statement in Article II, Section 14. Article I of the CEDAW defines
"discrimination against women" as:chanroblesvirtuallawlibrary
any distinction, exclusion or restriction made on the basis of sex which
has the effect or purpose of impairing or nullifying the recognition,
enjoyment or exercise by women, irrespective of their marital status,
on a basis of equality of men and women, of human rights and
fundamental freedoms in the political, economic, social, cultural, civil
or any other field.82cralawlawlibrary
The constitutional exhortation to ensure fundamental equality, as
illumined by its enabling law, the CEDAW, must inform and animate all
the actions of all personalities acting on behalf of the State. It is,
therefore, the bounden duty of this court, in rendering judgment on
the disputes brought before it, to ensure that no discrimination is
heaped upon women on the mere basis of their being women. This is a
point so basic and central that all our discussions and pronouncements
— regardless of whatever averments there may be of foreign law —
must proceed from this premise.

So informed and animated, we emphasize the glaringly discriminatory


nature of Saudia's policy. As argued by respondents, Saudia's policy
entails the termination of employment of flight attendants who become
pregnant. At the risk of stating the obvious, pregnancy is an
occurrence that pertains specifically to women. Saudia's policy
excludes from and restricts employment on the basis of no other
consideration but sex.

We do not lose sight of the reality that pregnancy does present


physical limitations that may render difficult the performance of
functions associated with being a flight attendant. Nevertheless, it
would be the height of iniquity to view pregnancy as a disability so
permanent and immutable that, it must entail the termination of one's
employment. It is clear to us that any individual, regardless of gender,
may be subject to exigencies that limit the performance of functions.
However, we fail to appreciate how pregnancy could be such an
impairing occurrence that it leaves no other recourse but the complete
termination of the means through which a woman earns a living.

Apart from the constitutional policy on the fundamental equality before


the law of men and women, it is settled that contracts relating to labor
and employment are impressed with public interest. Article 1700 of the
Civil Code provides that "[t]he relation between capital and labor are
not merely contractual. They are so impressed with public interest that
labor contracts must yield to the common good."

Consistent with this, this court's pronouncements in Pakistan


International Airlines Corporation83 are clear and
unmistakable:chanroblesvirtuallawlibrary
Petitioner PIA cannot take refuge in paragraph 10 of its employment
agreement which specifies, firstly, the law of Pakistan as the applicable
law of the agreement, and, secondly, lays the venue for settlement of
any dispute arising out of or in connection with the agreement
"only [in] courts of Karachi, Pakistan". The first clause of paragraph 10
cannot be invoked to prevent the application of Philippine labor laws
and'regulations to the subject matter of this case, i.e., the employer-
employee relationship between petitioner PIA and private
respondents. We have already pointed out that the relationship is
much affected with public interest and that the otherwise applicable
Philippine laws and regulations cannot be rendered illusory by the
parties agreeing upon some other law to govern their relationship. . . .
Under these circumstances, paragraph 10 of the employment
agreement cannot be given effect so as to oust Philippine agencies and
courts of the jurisdiction vested upon them by Philippine
law.84 (Emphasis supplied)
As the present dispute relates to (what the respondents allege to be)
the illegal termination of respondents' employment, this case is
immutably a matter of public interest and public policy. Consistent
with clear pronouncements in law and jurisprudence, Philippine laws
properly find application in and govern this case. 'Moreover, as this
premise for Saudia's insistence on the application forum non
conveniens has been shattered, it follows that Philippine tribunals may
properly assume jurisdiction over the present controversy. Philippine
jurisprudence provides ample illustrations of when a court's
renunciation of jurisdiction on account of forum non conveniens is
proper or improper.'
In Philsec Investment Corporation v. Court of Appeals,85 this court
noted that the trial court failed to consider that one of the plaintiffs
was a domestic corporation, that one of the defendants was a Filipino,
and that it was the extinguishment of the latter's debt that was the
object of the transaction subject of the litigation. Thus, this court held,
among others, that the trial court's refusal to assume jurisdiction was
not justified by forum non conveniens and remanded the case to the
trial court.

In Raytheon International, Inc. v. Rouzie, Jr.,86 this court sustained


the trial court's assumption of jurisdiction considering that the trial
court could properly enforce judgment on the petitioner which was a
foreign corporation licensed to do business in the Philippines.

In Pioneer International, Ltd. v. Guadiz, Jr.,87 this court found no


reason to disturb the trial court's assumption of jurisdiction over a
case in which, as noted by the trial court, "it is more convenient to
hear and decide the case in the Philippines because Todaro [the
plaintiff] resides in the Philippines and the contract allegedly breached
involve[d] employment in the Philippines."88

In Pacific Consultants International Asia, Inc. v. Schonfeld,89 this court


held that the fact that the complainant in an illegal dismissal case was
a Canadian citizen and a repatriate did not warrant the application
of forum non conveniens considering that: (1) the Labor Code does not
include forum non conveniens as a ground for the dismissal of a
complaint for illegal dismissal; (2) the propriety of dismissing a case
based on forum non conveniens requires a factual determination; and
(3) the requisites for assumption of jurisdiction as laid out in Bank of
America, NT&SA90 were all satisfied.

In contrast, this court ruled in The Manila Hotel Corp. v. National Labor
Relations Commission91 that the National Labor Relations Q
Commission was a seriously inconvenient forum. In that case, private
respondent Marcelo G. Santos was working in the Sultanate of Oman
when he received a letter from Palace Hotel recruiting him for
employment in Beijing, China. Santos accepted the offer.
Subsequently, however, he was released from employment supposedly
due to business reverses arising from political upheavals in China (i.e.,
the Tiananmen Square incidents of 1989). Santos later filed a
Complaint for illegal dismissal impleading Palace Hotel's General
Manager, Mr. Gerhard Schmidt, the Manila Hotel International
Company Ltd. (which was, responsible for training Palace Hotel's
personnel and staff), and the Manila Hotel Corporation (which owned
50% of Manila Hotel International Company Ltd.'s capital stock).

In ruling against the National Labor Relations Commission's exercise of


jurisdiction, this court noted that the main aspects of the case
transpired in two (2) foreign jurisdictions, Oman and China, and that
the case involved purely foreign elements. Specifically, Santos was
directly hired by a foreign employer through correspondence sent to
Oman. Also, the proper defendants were neither Philippine nationals
nor engaged in business in the Philippines, while the main witnesses
were not residents of the Philippines. Likewise, this court noted that
the National Labor Relations Commission was in no position to conduct
the following: first, determine the law governing the employment
contract, as it was entered into in foreign soil; second, determine the
facts, as Santos' employment was terminated in Beijing; and third,
enforce its judgment, since Santos' employer, Palace Hotel, was
incorporated under the laws of China and was not even served with
summons.

Contrary to Manila Hotel, the case now before us does not entail a
preponderance of linkages that favor a foreign jurisdiction.

Here, the circumstances of the parties and their relation do not


approximate the circumstances enumerated in Puyat,92 which this
court recognized as possibly justifying the desistance of Philippine
tribunals from exercising jurisdiction.

First, there is no basis for concluding that the case can be more
conveniently tried elsewhere. As established earlier, Saudia is doing
business in the Philippines. For their part, all four (4) respondents are
Filipino citizens maintaining residence in the Philippines and, apart
from their previous employment with Saudia, have no other
connection to the Kingdom of Saudi Arabia. It would even be to
respondents' inconvenience if this case were to be tried elsewhere.

Second, the records are bereft of any indication that respondents filed
their Complaint in an effort to engage in forum shopping or to vex and
inconvenience Saudia.

Third, there is no indication of "unwillingness to extend local judicial


facilities to non-residents or aliens."93 That Saudia has managed to
bring the present controversy all the way to this court proves this.

Fourth, it cannot be said that the local judicial machinery is inadequate


for effectuating the right sought to be maintained. Summons was
properly served on Saudia and jurisdiction over its person was validly
acquired.

Lastly, there is not even room for considering foreign law. Philippine
law properly governs the present dispute.

As the question of applicable law has been settled, the supposed


difficulty of ascertaining foreign law (which requires the application
of forum non conveniens) provides no insurmountable inconvenience
or special circumstance that will justify depriving Philippine tribunals of
jurisdiction.

Even if we were to assume, for the sake of discussion, that it is the


laws of Saudi Arabia which should apply, it does not follow that
Philippine tribunals should refrain from exercising jurisdiction. To.
recall our pronouncements in Puyat,94 as well as in Bank of America,
NT&SA,95 it is not so much the mere applicability of foreign law which
calls into operation forum non conveniens. Rather, what justifies a
court's desistance from exercising jurisdiction is "[t]he difficulty of
ascertaining foreign law"96 or the inability of a "Philippine Court to
make an intelligent decision as to the law[.]"97

Consistent with lex loci intentionis, to the extent that it is proper and
practicable (i.e., "to make an intelligent decision"98), Philippine
tribunals may apply the foreign law selected by the parties. In fact,
(albeit without meaning to make a pronouncement on the accuracy
and reliability of respondents' citation) in this case, respondents
themselves have made averments as to the laws of Saudi Arabia. In
their Comment, respondents write:chanroblesvirtuallawlibrary
Under the Labor Laws of Saudi Arabia and the Philippines[,] it is illegal
and unlawful to terminate the employment of any woman by virtue of
pregnancy. The law in Saudi Arabia is even more harsh and strict [sic]
in that no employer can terminate the employment of a female worker
or give her a warning of the same while on Maternity Leave, the
specific provision of Saudi Labor Laws on the matter is hereto quoted
as follows:chanroblesvirtuallawlibrary
"An employer may not terminate the employment of a female worker
or give her a warning of the same while on maternity leave." (Article
155, Labor Law of the Kingdom of Saudi Arabia, Royal Decree No.
M/51.)99cralawlawlibrary
All told, the considerations for assumption of jurisdiction by Philippine
tribunals as outlined in Bank of America, NT&SA100 have been satisfied.
First, all the parties are based in the Philippines and all the material
incidents transpired in this jurisdiction. Thus, the parties may
conveniently seek relief from Philippine tribunals. Second, Philippine
tribunals are in a position to make an intelligent decision as to the law
and the facts. Third, Philippine tribunals are in a position to enforce
their decisions. There is no compelling basis for ceding jurisdiction to a
foreign tribunal. Quite the contrary, the immense public policy
considerations attendant to this case behoove Philippine tribunals to
not shy away from their duty to rule on the
case.chanRoblesvirtualLawlibrary

IV

Respondents were illegally terminated.

In Bilbao v. Saudi Arabian Airlines,101 this court defined voluntary


resignation as "the voluntary act of an employee who is in a situation
where one believes that personal reasons cannot be sacrificed in favor
of the exigency of the service, and one has no other choice but to
dissociate oneself from employment. It is a formal pronouncement or
relinquishment of an office, with the intention of relinquishing the
office accompanied by the act of relinquishment."102 Thus, essential to
the act of resignation is voluntariness. It must be the result of an
employee's exercise of his or her own will.

In the same case of Bilbao, this court advanced a means for


determining whether an employee resigned
voluntarily:chanroblesvirtuallawlibrary
As the intent to relinquish must concur with the overt act of
relinquishment, the acts of the employee before and after the alleged
resignation must be considered in determining whether he or she, in
fact, intended, to sever his or her employment.103 (Emphasis supplied)
On the other hand, constructive dismissal has been defined as
"cessation of work because 'continued employment is rendered
impossible, unreasonable or unlikely, as an offer involving a demotion
in rank or a diminution in pay' and other benefits."104

In Penaflor v. Outdoor Clothing Manufacturing


Corporation,105 constructive dismissal has been described as
tantamount to "involuntarily [sic] resignation due to the harsh, hostile,
and unfavorable conditions set by the employer."106 In the same case,
it was noted that "[t]he gauge for constructive dismissal is whether a
reasonable person in the employee's position would feel compelled to
give up his employment under the prevailing circumstances."107
Applying the cited standards on resignation and constructive dismissal,
it is clear that respondents were constructively dismissed. Hence, their
termination was illegal.

The termination of respondents' employment happened when they


were pregnant and expecting to incur costs on account of child delivery
and infant rearing. As noted by the Court of Appeals, pregnancy is a
time when they need employment to sustain their families.108 Indeed,
it goes against normal and reasonable human behavior to abandon
one's livelihood in a time of great financial need.

It is clear that respondents intended to remain employed with Saudia.


All they did was avail of their maternity leaves. Evidently, the very
nature of a maternity leave means that a pregnant employee will not
report for work only temporarily and that she will resume the
performance of her duties as soon as the leave allowance expires.

It is also clear that respondents exerted all efforts to' remain employed
with Saudia. Each of them repeatedly filed appeal letters (as much as
five [5] letters in the case of Rebesencio109) asking Saudia to
reconsider the ultimatum that they resign or be terminated along with
the forfeiture of their benefits. Some of them even went to Saudia's
office to personally seek reconsideration.110

Respondents also adduced a copy of the "Unified Employment Contract


for Female Cabin Attendants."111This contract deemed void the
employment of a flight attendant who becomes pregnant and
threatened termination due to lack of medical fitness.112 The threat of
termination (and the forfeiture of benefits that it entailed) is enough to
compel a reasonable person in respondents' position to give up his or
her employment.

Saudia draws attention to how respondents' resignation letters were


supposedly made in their own handwriting. This minutia fails to
surmount all the other indications negating any voluntariness on
respondents' part. If at all, these same resignation letters are proof of
how any supposed resignation did not arise from respondents' own
initiative. As earlier pointed out, respondents' resignations were
executed on Saudia's blank letterheads that Saudia had provided.
These letterheads already had the word "RESIGNATION" typed on the
subject portion of their respective headings when these were handed
to respondents.113ChanRoblesVirtualawlibrary

"In termination cases, the burden of proving just or valid cause for
dismissing an employee rests on the employer."114 In this case, Saudia
makes much of how respondents supposedly completed their exit
interviews, executed quitclaims, received their separation pay, and
took more than a year to file their Complaint.115 If at all, however,
these circumstances prove only the fact of their occurrence, nothing
more. The voluntariness of respondents' departure from Saudia is non
sequitur.

Mere compliance with standard procedures or processes, such as the


completion of their exit interviews, neither negates compulsion nor
indicates voluntariness.

As with respondent's resignation letters, their exit interview forms


even support their claim of illegal dismissal and militates against
Saudia's arguments. These exit interview forms, as reproduced by
Saudia in its own Petition, confirms the unfavorable conditions as
regards respondents' maternity leaves. Ma. Jopette's and Loraine's exit
interview forms are particularly telling:chanroblesvirtuallawlibrary
a. From Ma. Jopette's exit interview form:

3. In what respects has the job met or failed to meet your


expectations?

THE SUDDEN TWIST OF DECISION REGARDING THE MATERNITY


LEAVE.116

b. From Loraine's exit interview form:

1. What are your main reasons for leaving Saudia? What company
are you joining?

xxx xxx xxx

Others

CHANGING POLICIES REGARDING MATERNITY LEAVE (PREGNANCY)117


As to respondents' quitclaims, in Phil. Employ Services and Resources,
Inc. v. Paramio,118 this court noted that "[i]f (a) there is clear proof
that the waiver was wangled from an unsuspecting or gullible person;
or (b) the terms of the settlement are unconscionable, and on their
face invalid, such quitclaims must be struck down as invalid or
illegal."119 Respondents executed their quitclaims after having been
unfairly given an ultimatum to resign or be terminated (and forfeit
their benefits).chanRoblesvirtualLawlibrary
V

Having been illegally and unjustly dismissed, respondents are entitled


to full backwages and benefits from the time of their termination until
the finality of this Decision. They are likewise entitled to separation
pay in the amount of one (1) month's salary for every year of service
until the fmality of this Decision, with a fraction of a year of at least six
(6) months being counted as one (1) whole year.

Moreover, "[m]oral damages are awarded in termination cases where


the employee's dismissal was attended by bad faith, malice or fraud,
or where it constitutes an act oppressive to labor, or where it was
done in a manner contrary to morals, good customs or public
policy."120 In this case, Saudia terminated respondents' employment in
a manner that is patently discriminatory and running afoul of the
public interest that underlies employer-employee relationships. As
such, respondents are entitled to moral damages.

To provide an "example or correction for the public good"121 as against


such discriminatory and callous schemes, respondents are likewise
entitled to exemplary damages.

In a long line of cases, this court awarded exemplary damages to


illegally dismissed employees whose "dismissal[s were] effected in a
wanton, oppressive or malevolent manner."122 This court has awarded
exemplary damages to employees who were terminated on such
frivolous, arbitrary, and unjust grounds as membership in or
involvement with labor unions,123 injuries sustained in the course of
employment,124development of a medical condition due to the
employer's own violation of the employment contract,125and lodging of
a Complaint against the employer.126 Exemplary damages were also
awarded to employees who were deemed illegally dismissed by an
employer in an attempt to evade compliance with statutorily
established employee benefits.127 Likewise, employees dismissed for
supposedly just causes, but in violation of due process requirements,
were awarded exemplary damages.128

These examples pale in comparison to the present controversy.


Stripped of all unnecessary complexities, respondents were dismissed
for no other reason than simply that they were pregnant. This is as
wanton, oppressive, and tainted with bad faith as any reason for
termination of employment can be. This is no ordinary case of illegal
dismissal. This is a case of manifest gender discrimination. It is an
affront not only to our statutes and policies on employees' security of
tenure, but more so, to the Constitution's dictum of fundamental
equality between men and women.129

The award of exemplary damages is, therefore, warranted, not only to


remind employers of the need to adhere to the requirements of
procedural and substantive due process in termination of employment,
but more importantly, to demonstrate that gender discrimination
should in no case be countenanced.

Having been compelled to litigate to seek reliefs for their illegal and
unjust dismissal, respondents are likewise entitled to attorney's fees in
the amount of 10% of the total monetary award.130

VI

Petitioner Brenda J. Betia may not be held liable.

A corporation has a personality separate and distinct from those of the


persons composing it. Thus, as a rule, corporate directors and officers
are not liable for the illegal termination of a corporation's employees.
It is only when they acted in bad faith or with malice that they become
solidarity liable with the corporation.131

In Ever Electrical Manufacturing, Inc. (EEMI) v. Samahang


Manggagawa ng Ever Electrical,132 this court clarified that "[b]ad faith
does not connote bad judgment or negligence; it imports a dishonest
purpose or some moral obliquity and conscious doing of wrong; it
means breach of a known duty through some motive or interest or ill
will; it partakes of the nature of fraud."133

Respondents have not produced proof to show that Brenda J. Betia


acted in bad faith or with malice as regards their termination. Thus,
she may not be held solidarity liable with Saudia.cralawred

WHEREFORE, with the MODIFICATIONS that first, petitioner Brenda


J. Betia is not solidarity liable with petitioner Saudi Arabian Airlines,
and second, that petitioner Saudi Arabian Airlines is liable for moral
and exemplary damages. The June 16, 2011 Decision and the
September 13, 2011 Resolution of the Court of Appeals in CA-G.R. SP.
No. 113006 are hereby AFFIRMED in all other respects. Accordingly,
petitioner Saudi Arabian Airlines is ordered to pay respondents:

(1) Full backwages and all other benefits computed from the respective
dates in which each of the respondents were illegally terminated
until the finality of this Decision;
(2) Separation pay computed from the respective dates in which each
of the respondents commenced employment until the finality of
this Decision at the rate of one (1) month's salary for every year of
service, with a fraction of a year of at least six (6) months being
counted as one (1) whole year;
(3) Moral damages in the amount of P100,000.00 per respondent;
(4) Exemplary damages in the amount of P200,000.00 per respondent;
and
(5) Attorney's fees equivalent to 10% of the total award.

Interest of 6% per annum shall likewise be imposed on the total


judgment award from the finality of this Decision until full satisfaction
thereof.

This case is REMANDED to the Labor Arbiter to make a detailed


computation of the amounts due to respondents which petitioner Saudi
Arabian Airlines should pay without delay.

SO ORDERED.chanroblesvirtuallawlibrary

8. MANARPIIS VS TEXAS PHILS. INC

ESSENCIA Q. MANARPIIS, Petitioner, v. TEXAN PHILIPPINES,


INC., RICHARD TAN AND CATHERINE P. RIALUBIN-
TAN, Respondent.

DECISION

VILLARAMA, JR., J.:

Before us is a petition for review on certiorari under Rule 45 assailing


the Decision1 dated March 24, 2010, and Resolution2 dated May 19,
2011 of the Court of Appeals (CA) in CA-G.R. SP No. 106661. The CA
reversed and set aside the Decision3 dated January 25, 2008 and
Resolution4 dated September 22, 2008 of the First Division of the
National Labor Relations Commission (NLRC) in NLRC CA No. 029806-
01, which affirmed the Decision5 dated June 28, 2001 of the Labor
Arbiter (LA) in NLRC Case No. 00-08-04110-2000.

Texan Philippines, Inc. (TPI), which is owned and managed by


Catherine Rialubin-Tan and her Singaporean husband Richard Tan
(respondents), is a domestic corporation engaged in the importation,
distribution and marketing of imported fragrances and aroma and
other specialized products and services. In July 1999, respondents
hired Essencia Q. Manarpiis (petitioner) as Sales and Marketing
Manager of the company’s Aroma Division with a monthly salary of
P33,800.00.6chanRoblesvirtualLawlibrary

Claiming insurmountable losses, respondents served a written notice


(July 27, 2000) addressed to all their employees that TPI will cease
operations by August 31, 2000.7chanRoblesvirtualLawlibrary

On August 7, 2000, petitioner filed a complaint for illegal dismissal,


non-payment of overtime pay, holiday pay, service incentive leave
pay, unexpired vacation leave and 13th month pay and with prayer for
moral and actual damages. Subsequently, petitioner amended her
complaint to state the true date of her dismissal which is July 27, 2000
and not August 31, 2000. She averred that on the same day she was
served with notice of company closure, respondents barred her from
reporting for work and paid her last salary up to the end of July
2000.8chanRoblesvirtualLawlibrary

On September 18, 2000, petitioner received the following


memorandum9:ChanRoblesVirtualawlibrary
September 15, 2000

MEMO TO : MS. ESSENCIA MANARPIIS


Sales and Marketing Manager
Aroma Division

SUBJECT : Notice Of Investigation And Grounding

Dear Ms. Manarpiis,

You are hereby notified that an investigation will be conducted on 20


September 2000 at 2:00 p.m. in our office regarding your alleged
violation of company rules and regulations,
specifically:ChanRoblesVirtualawlibrary
I (par. B) - - Fraudulent Expense/Disbursement expenses

I (par. G) - - Collusion/Connivance with Intent to Defraud

II (Section 6) - - Sabotage

II (Section 12) - - Loss of Confidence


III (Section 2) - - Libel/Slander

III (Section 8 par. e) - - Other acts of Insubordination

V (par. C & D) - - AWOL/Abandonment

V (par. I) - - Committing other acts of gross inefficiency or


incompetence
said acts constitutive of gross misconduct, gross insubordination and
dishonesty. You may bring your witnesses and counsel if you so desire.
In the meantime, you will not be allowed to perform your usual
functions, but will instead report to the undersigned.

Additionally, you are directed to submit to the undersigned your


explanation in writing, within (72) hours from receipt hereof (but in no
case later than 20 September 2000), why no appropriate disciplinary
action and/or penalties may be imposed against you relative to the
foregoing.

Failure to submit said written explanation within the prescribed period


and/or attend the investigation hearing on 20 September 2000 shall
constitute an implied admission of the charges and waiver on your part
to due process.

For your information and compliance.

(SGD.) RICHARD TAN


(President)
Petitioner alleged that as sales and marketing manager, she received
the agreed commission based on actual sales collection on the first
quarter of 2000 and was expecting to also receive such commission on
the 2nd, 3rd and 4th quarters. However, on July 27, 2000, after
receiving a text message from respondent Richard Tan, she proceeded
to her office and learned that her table drawers were forcibly opened
and her files confiscated. She protested the company closure asserting
that the alleged business losses were belied by TPI’s financial
documents. But despite her pleas, she was asked to pack up her
things and by the end of the month her salary was discontinued. She
then received the memorandum regarding the company closure and
was required to turn over the company car, pager and cellphone. She
was told not to report for work anymore.10chanRoblesvirtualLawlibrary

After receiving the September 15, 2000 memorandum, petitioner’s


counsel sent a reply stating that there was no point in the
investigation because respondents already dismissed petitioner
purportedly on the ground of cessation of business due to
insurmountable losses, and also it was impossible for petitioner to
respond to the charges which are devoid of particulars as to the
alleged irregularities she committed. It was pointed out that
respondents should have investigated the supposed violations of
company rules and fraudulent acts earlier and not when petitioner had
filed an illegal dismissal complaint.11chanRoblesvirtualLawlibrary

Subsequently, petitioner received the following


memorandum12:ChanRoblesVirtualawlibrary
September 25, 2000

TO : MS. ESSENCIA MANARPIIS


Sales and Marketing Manager
Aroma Division

SUBJECT : NOTICE OF TERMINATION

Ms. Manarpiis,

This is to inform you that your employment with the Company is


terminated effective today, September 25, 2000, due to Dishonesty,
Loss of Confidence, and Abandonment of Work.

An internal audit of the Company shows that several obligations of the


Company were paid twice to the same supplier. Considering the level
of your position, the inescapable conclusion is that you have colluded
with the Company supplier to defraud the Company of its finances.

Moreover, you have fraudulently caused to be reimbursed


representation expenses and other expense statements purporting to
be that of your sales representatives while in truth and in fact they
were yours, and you received the corresponding payments therefor.

Also, your attendance record showed that you have been absent
without official leave (AWOL) since August 3, 2000 up to date.

A notice of AWOL dated September 14, 2000 has been sent to you but
you refused to accept the same, much less, refused to act on it.

For your information and guidance


(SGD.) RICHARD TAN
President
Believing that her dismissal was without just cause, petitioner prayed
for reinstatement if still viable, and if not, award of separation pay
with back wages from August 1, 2000, and payment of her monetary
claims for sales commissions, pro-rated 13th month pay, five days
service incentive leave pay and sick leaves, as well as moral and
exemplary damages plus attorney’s fees.13chanRoblesvirtualLawlibrary

Respondents denied the charge of illegal dismissal and explained that


TPI’s closure was averted by a new financing package obtained by
respondent Richard Tan. They asserted that the requisite notices of
business closure to government authorities and to their employees
were complied with, and notwithstanding that TPI has in fact continued
its operations, petitioner was found to have committed infractions
resulting in loss of confidence which was the ground for the
termination of her employment. They likewise averred that respondent
Rialubin-Tan gave specific instructions to petitioner for her to continue
reporting for work even after August 31, 2000 but she instead went
AWOL and subsequently abandoned her job, to the utmost prejudice of
the company.14chanRoblesvirtualLawlibrary

On June 28, 2001, LA Melquiades Sol D. Del Rosario rendered a


Decision declaring the dismissal of petitioner as
illegal:ChanRoblesVirtualawlibrary
CONFORMABLY WITH THE FOREGOING, judgment is hereby
rendered finding complainant’s dismissal to be illegal. Consequently,
she should be paid in solidum by respondents the following:
a) P304,200.00 as backwages as of May 31, 2001[;]
b) P101,400.00 as separation pay for 3 years[;]
c) 1% of the gross sales of complainant and .75% on other sales as
determined by the parties as complainant’s commissions;
d) 10% for and as attorney’s fees of the money awards.
SO ORDERED.15
Respondents appealed to the NLRC which affirmed the LA’s decision.
Their motion for reconsideration was also denied.

In a petition for certiorari filed with the CA, respondents argued that
the subsequent termination of petitioner on the grounds of dishonesty,
loss of confidence and abandonment, after TPI was able to regain
financial viability, was made in view of the fact that commission of the
said offenses surfaced only during the audit investigation conducted
after notice of cessation of business operation was sent to the
employees. Despite advice for her to continue reporting for work after
August 31, 2000, the effectivity date of the intended closure,
petitioner just stopped doing so and instead filed the complaint for
illegal dismissal and likewise failed to turn over all company
documents and records in her possession. They also discovered that
petitioner put up her own company “Vita VSI Scents,” enticing clients
to buy the same products they used to purchase from TPI.

By Decision dated March 24, 2010, the CA reversed the NLRC and
ruled that petitioner was validly dismissed:ChanRoblesVirtualawlibrary
WHEREFORE, the petition is hereby GRANTED. The assailed Decision
dated January 25, 2008 and the Resolution dated September 22, 2008
of the National Labor Relations Commission are
hereby REVERSED and SET ASIDE. Resultantly, Essencia Manarpiis’
complaint for illegal dismissal against Texan Philippines, Inc., Richard
Tan and Catherine Realubin-Tan is hereby DISMISSED for lack of
merit. No costs.

SO ORDERED.16
Petitioner filed a motion for reconsideration but it was denied by the
CA.

Hence, this petition arguing that the CA committed patent reversible


errors when it: (1) granted the unverified/unsworn certification of non-
forum shopping accompanying respondents’ petition for certiorari; (2)
granted respondents’ petition for certiorari without finding any grave
abuse of discretion on the part of NLRC; (3) disturbed the consistent
factual findings of the LA and NLRC which were duly supported by
substantial evidence and devoid of any unfairness and arbitrariness;
and (4) substituted its own findings of facts to those of the LA and
NLRC, the CA’s findings being unsupported by substantial
evidence.17chanRoblesvirtualLawlibrary

The petition is meritorious.

We first address petitioner’s contention on the alleged formal infirmity


of the petition for certiorari filed before the CA. Petitioner argued that
the same was defective as the jurat therein was based on the mere
community tax certificate of respondent Rialubin-Tan, instead of a
government-issued identification card required under the 2004 Rules
on Notarial Practice. Such ground was never raised by herein
petitioner in her comment on the CA petition, thus, it cannot be validly
raised by the petitioner at this stage.18chanRoblesvirtualLawlibrary
Furthermore, we have consistently held that verification of a pleading
is a formal, not a jurisdictional, requirement intended to secure the
assurance that the matters alleged in a pleading are true and correct.
Thus, the court may simply order the correction of unverified pleadings
or act on them and waive strict compliance with the rules. It is
deemed substantially complied with when one who has ample
knowledge to swear to the truth of the allegations in the complaint or
petition signs the verification; and when matters alleged in the petition
have been made in good faith or are true and
correct.19chanRoblesvirtualLawlibrary

Under the Rules of Court and settled doctrine, a petition for review on
certiorari under Rule 45 of the Rules of Court is limited to questions of
law. As a rule, the findings of fact of the CA are final and conclusive,
and this Court will not review them on
appeal.20chanRoblesvirtualLawlibrary

However, there are instances in which factual issues may be resolved


by this Court, to wit: (1) the conclusion is a finding grounded entirely
on speculation, surmise and conjecture; (2) the inference made is
manifestly mistaken; (3) there is grave abuse of discretion; (4) the
judgment is based on a misapprehension of facts; (5) the findings of
fact are conflicting; (6) the CA goes beyond the issues of the case and
its findings are contrary to the admissions of both appellant and
appellee; (7) the findings of fact of the CA are contrary to those of the
trial court; (8) said findings of facts are conclusions without citation of
specific evidence on which they are based; (9) the facts set forth in
the petition as well as in the petitioner’s main and reply briefs are not
disputed by the respondent; and (10) the findings of fact of the CA are
premised on the supposed absence of evidence and contradicted by
the evidence on record.21chanRoblesvirtualLawlibrary

Considering that the findings of facts and the conclusions of the CA are
contrary to those of the LA and the NLRC, we find it necessary to
evaluate such findings.

On the issue of illegal dismissal, both the LA and NLRC found no just
or authorized cause for the termination of petitioner’s employment.

LA Del Rosario observed that respondents flip-flopped on the issue of


petitioner’s termination as when they claimed she was dismissed due
to insurmountable losses so that TPI’s personnel were notified of the
company closure effective August 31, 2000, and at the same time they
accused petitioner of fraudulent acts and abandonment of work
resulting in loss of trust and confidence which caused her dismissal. He
also found there was no compliance with the legal requisites of the
said grounds for dismissal under Article 283 (business closure) such as
the lack of termination report sent to the Department of Labor and
Employment (DOLE), financial documents which are audited and
signed by an independent auditor, and the two-notice requirement
sent to the last known address of the employee alleged to have
abandoned work under Book V, Rule XIV, Section 2 of the Omnibus
Rules Implementing the Labor Code. It was noted that while TPI’s
financial documents have BIR stampmark, they were not shown to
have been prepared by an independent auditor.

The NLRC upheld the LA’s ruling that petitioner’s dismissal was not
valid, viz:ChanRoblesVirtualawlibrary
As between the above, conflicting allegations, We find the version of
the complainant more credible. Record of the instant case would
provide that other than respondents’ bare allegations that complainant
was instructed to continue working even beyond 31 August 2000, no
evidence was presented to substantiate the same. If respondents
could easily issue a notice of business closure to all its employees, and
at the same time, immediately require the complainant to surrender all
company properties assigned to her, We could not understand why
they could not easily issue another letter, this time, intended only for
the complainant informing her that her employment was still
necessary.

Relative to the company’s closure due to business losses, prevailing


jurisprudence would dictate that the same should be substantiated by
competent evidence. Financial statements audited by independent
external auditors constitute the normal method of proof of the profit
and loss performance of the company. To exempt an employer [from]
the payment of separation pay, he or she must establish by sufficient
and convincing evidence that the losses were serious, substantial and
actual x x x.

In the instant case, respondents may have presented before the Labor
Arbiter its Statement of Income for the year 1999. While its
preparation may be in compliance with the requirements of the Bureau
of Internal Revenue for taxation purposes, based on the jurisprudence
provided above, the same would not suffice for purposes of
respondents’ defense in the instant case. In their appeal, respondents
alleged that on the basis of the audited Statement of Income and
Retained Earnings For the Year Ending 31 December 2000, the
company incurred a net loss of almost half a million pesos. Assuming
the same to be true since we cannot find a copy of said statement
attached to [the] record, it would appear that the company had
attained a better position in year 2000 as compared to year 1999
when they incurred a net loss of more than Two Million Pesos.
Furthermore, said evidence is already immaterial considering that the
company’s intended closure did not actually take effect.

Upon a finding that complainant was not instructed to continue


working even beyond 31 August 2000 but was told not to report to
work upon receipt of the notice of company’s closure, it certainly
follows that respondents would no longer inform complainant of the
company’s continued operation after respondent Tan had allegedly
succeeded in searching for funds. In fact, We are not even persuaded
that the company’s closure was prevented by the new funds sought by
respondent Tan when in the first place, there was no intended closure
at all but only a decision to dismiss complainant in a manner that
would enable respondents evade liabilities under the Labor Code.

With regard to the alleged violation of company rules and regulations,


We agree with the finding that respondent[s’] acts of issuing the two
notices setting the case [for] investigation were mere afterthoughts.
As highlighted in the assailed Decision, the first notice was issued after
respondents had already received the summons in the instant case.
More importantly, the above discussion would provide that prior to
issuance of said first notice, complainant was already illegally
dismissed. Furthermore, assuming for the sake of argument that
complainant was not yet terminated, a reading of the said first notice
would show that it does not conform with the requirements of due
process. The same had failed to discuss the circumstances under which
each of the charges therein was committed by the complainant. As can
be noted from the letter dated 19 September 2000 sent by
complainant’s counsel to respondent Tan, it was impossible for his
client to submit a written explanation thereto since the notice to
explain is devoid of particulars regarding the alleged irregularities.

As a consequence of complainant[’s] double termination, initially


through the purported cessation of business operations, and
thereafter, by imputing offenses violative of company rules and
regulations, we agree with the finding [that] she was illegally
dismissed, and as such, entitled to backwages. She would have been
entitled to reinstatement but we believe that the charges lodged by
the respondents against the complainant had rendered reinstatement
non-viable. Thus, she should be granted separation pay
instead.22 (Citations omitted)
The CA, however, considered the evidence of respondents sufficient to
prove the alleged business losses and their good faith in resorting to
closure of the company. It cited the 1999 Annual Income Tax Return
showing a net loss of P2,290,580.48 and financial statement indicating
a net loss of P2,301,228.61 for the year ended December 31, 1999;
respondents’ claim that it was forced to sell six company cars; and the
DOLE termination report.

On the other grounds invoked by respondents to justify petitioner’s


termination, the CA cited the following infractions: (a) several
company obligations towards a supplier which were paid twice during
her term as Marketing and Sales Manager; (b) company funds
procured by petitioner, represented to be “under the table”
expenditures for the Bureau of Customs which she cannot explain
when queried; (c) divulging confidential company matters to the
customers; and (d) establishing her own company while still employed
with TPI.

We reverse the CA and reinstate the LA’s decision as affirmed by the


NLRC.

Closure or cessation of business is the complete or partial cessation of


the operations and/or shut-down of the establishment of the employer.
It is carried out to either stave off the financial ruin or promote the
business interest of the employer. Closure of business as an
authorized cause for termination of employment is governed by Article
28323 of the Labor Code, as amended.

If the business closure is due to serious losses or financial reverses,


the employer must present sufficient proof of its actual or imminent
losses; it must show proof that the cessation of or withdrawal from
business operations was bona fide in character.24 A written notice to
the DOLE thirty days before the intended date of closure is also
required, the purpose of which is to inform the employees of the
specific date of termination or closure of business operations, and
which must be served upon each and every employee of the company
one month before the date of effectivity to give them sufficient time to
make the necessary arrangement.25chanRoblesvirtualLawlibrary

The ultimate test of the validity of closure or cessation of


establishment or undertaking is that it must be bona fide in
character. And the burden of proving such falls upon the
employer.26chanRoblesvirtualLawlibrary
After evaluating the evidence on record, we uphold the factual findings
and conclusions of the labor tribunals that petitioner was dismissed
without just or authorized cause, and that the announced cessation of
business operations was a subterfuge for getting rid of petitioner.
While the introduction of additional evidence before the NLRC is not
proscribed, the said tribunal was still not persuaded by the company
closure purportedly averted only by the alleged fresh funding procured
by respondent Tan, for the latter claim remained unsubstantiated. The
CA’s finding of serious business losses is not borne by the evidence on
record. The financial statements supposedly bearing the stamp mark
of BIR were not signed by an independent auditor. Besides, the non-
compliance with the requirements under Article 283 of the Labor Code,
as amended, gains relevance in this case not for the purpose of
proving the illegality of the company closure or cessation of business,
which did not materialize, but as an indication of bad faith on the part
of respondents in hastily terminating petitioner’s employment. Under
the circumstances, the subsequent investigation and termination of
petitioner on grounds of dishonesty, loss of confidence and
abandonment of work, clearly appears as an afterthought as it was
done only after petitioner had filed an illegal dismissal case and
respondents have been summoned for hearing before the LA.

We have laid down the two elements which must concur for a valid
abandonment, viz: (1) the failure to report to work or absence without
valid or justifiable reason, and (2) a clear intention to sever the
employer-employee relationship, with the second element as the more
determinative factor being manifested by some overt
acts.27 Abandonment as a just ground for dismissal requires
the deliberate, unjustified refusal of the employee to perform his
employment responsibilities. Mere absence or failure to work, even
after notice to return, is not tantamount to
abandonment.28chanRoblesvirtualLawlibrary

Furthermore, it is well-settled that the filing by an employee of a


complaint for illegal dismissal with a prayer for reinstatement is proof
enough of his desire to return to work, thus, negating the employer’s
charge of abandonment.29 An employee who takes steps to protest his
dismissal cannot logically be said to have abandoned his
work.30chanRoblesvirtualLawlibrary

Abandonment in this case was a trumped up charge, apparently to


make it appear that petitioner was not yet terminated when she filed
the illegal dismissal complaint and to give a semblance of truth to the
belated investigation against the petitioner. Petitioner did not abandon
her work but was told not to report for work anymore after being
served a written notice of termination of company closure on July 27,
2000 and turning over company properties to respondent Rialubin-
Tan.

On the issue of loss of confidence, we have held that proof beyond


reasonable doubt is not needed to justify the loss as long as the
employer has reasonable ground to believe that the employee is
responsible for the misconduct and his participation therein renders
him unworthy of the trust and confidence demanded of his
position.31 Nonetheless, the right of an employer to dismiss employees
on the ground of loss of trust and confidence, however, must not be
exercised arbitrarily and without just cause. Unsupported by sufficient
proof, loss of confidence is without basis and may not be successfully
invoked as a ground for dismissal. Loss of confidence as a ground for
dismissal has never been intended to afford an occasion for abuse by
the employer of its prerogative, as it can easily be subject to abuse
because of its subjective nature, as in the case at bar, and the loss
must be founded on clearly established facts sufficient to warrant the
employee’s separation from work.32chanRoblesvirtualLawlibrary

Here, loss of confidence was belatedly raised by the respondents who


initiated an investigation on the alleged irregularities committed by
petitioner only after the latter had questioned the legality of her earlier
dismissal due to the purported company closure. As correctly observed
by the NLRC, assuming to be true that respondents had not yet
actually dismissed the petitioner, the notice of cessation of operations
(memo dated July 27, 2000) addressed to all employees never
mentioned the supposed charges against the petitioner who was also
never issued a separate memorandum to that effect. Moreover, the
turn over of company properties by petitioner on the same date as
demanded by respondent Rialubin-Tan belies the latter’s claim that
she verbally instructed the former to continue reporting for work in
view of the audit of the company’s finances. Indeed, considering the
gravity of the accusations of fraud against the petitioner, it is strange
that respondents have not at least issued her a separate memorandum
on her accountability for the alleged business losses.

To prove the dishonesty imputed to petitioner, respondents submitted


before the NLRC a letter dated August 4, 2000 from one of TPI’s
suppliers advising the company of a supposed double payment made
in February and March 2000. However, there is no showing that such
payment was made or ordered by petitioner, and neither was it shown
that this overpayment was reflected in the account books of TPI.
Respondents likewise failed to prove their accusation that petitioner
put up a competing business while she was still employed with TPI,
and their bare allegation that petitioner divulged confidential company
matters to customers. As to the supposed failure of petitioner to
account for funds intended for “under the table” transactions at the
Bureau of Customs, the same was never raised before the labor
tribunals and not a shred of evidence was presented by respondent to
prove this allegation.

Apropos we recall our pronouncement in Lima Land, Inc., et al. v.


Cuevas33:ChanRoblesVirtualawlibrary
As a final note, the Court is wont to reiterate that while an employer
has its own interest to protect, and pursuant thereto, it may terminate
a managerial employee for a just cause, such prerogative to dismiss or
lay off an employee must be exercised without abuse of discretion. Its
implementation should be tempered with compassion and
understanding. The employer should bear in mind that, in the
execution of the said prerogative, what is at stake is not only the
employee’s position, but his very livelihood, his very breadbasket.
Indeed, the consistent rule is that if doubts exist between the evidence
presented by the employer and the employee, the scales of justice
must be tilted in favor of the latter. The employer must affirmatively
show rationally adequate evidence that the dismissal was for justifiable
cause. Thus, when the breach of trust or loss of confidence
alleged is not borne by clearly established facts, as in this case,
such dismissal on the cited grounds cannot be
allowed.34 (Emphasis supplied)
The normal consequences of petitioner’s illegal dismissal are
reinstatement without loss of seniority rights, and payment of back
wages computed from the time compensation was withheld up to the
date of actual reinstatement. Where reinstatement is no longer viable
as an option, separation pay equivalent to one month salary for every
year of service should be awarded as an alternative. The payment of
separation pay is in addition to payment of back wages.35 Given the
strained relations between the parties, the award of separation pay, in
lieu of reinstatement, is in order.

Finally, on the solidary liability of respondents Richard Tan and


Catherine Rialubin-Tan for the monetary awards. It is basic that a
corporation being a juridical entity, may act only through its directors,
officers and employees. Obligations incurred by them, acting as such
corporate agents are not theirs but the direct accountabilities of the
corporation they represent. However, in certain exceptional situations,
solidary liability may be incurred by corporate officers. In labor cases
for instance, this Court has held corporate directors and officers
solidarily liable with the corporation for the termination of employment
of employees done with malice or bad
faith.36chanRoblesvirtualLawlibrary

We sustain the NLRC’s conclusion that the schemes implemented by


the respondents to justify petitioner’s baseless dismissal, and the
manner by which such schemes were effected showed malice and bad
faith on their part. Consequently, its affirmance of the order of the LA
that the amounts awarded to petitioner are “payable in solidum by
respondents” is proper. The NLRC likewise correctly upheld the award
of attorney’s fees considering that petitioner was assisted by a private
counsel to prosecute her illegal dismissal complaint and enforce her
rights under our labor laws.

WHEREFORE, the petition is GRANTED. The Decision dated March


24, 2010 and Resolution dated May 19, 2011 of the Court of Appeals
in CA-G.R. SP No. 106661 are hereby REVERSED and SET ASIDE.

The Decision dated June 28, 2001 of the Labor Arbiter in NLRC Case
No. 00-08-04110-2000, as affirmed by the Decision dated January 25,
2008 of the National Labor Relations Commission in NLRC CA No.
029806-01, is hereby REINSTATED.

No pronouncement as to costs.

9. PHIL. COMM. SATELLITE CORP. VS SANDIGANBAYAN

PHILIPPINE COMMUNICATIONS SATELLITE CORPORATION and


PHILCOMSAT HOLDINGS CORPORATION,Petitioners,
vs.
SANDIGANBAYAN 5th DIVISION and PRESIDENTIAL COMMISSION ON
GOOD GOVERNMENT, Respondents.

DECISION

CARPIO, J.:

The Case

Before the Court is a petition for review on certiorari under Rule 45 of the Rules
of Court filed by Philippine Communications Satellite Corporation
(PHILCOMSAT) and PHILCOMSAT Holdings Corporation (PHC) [petitioners]
against respondents, the Sandiganbayan and the Presidential Commission on
Good Government (PCGG). Petitioners are assailing the Sandiganbayan's
Resolution1 promulgated on 3 May 2012 dismissing their complaint in Civil Case
No. SB-12-CVL-0001, and the Resolution2 promulgated on 14 August 2012
denying their motion for reconsideration.

The Facts

PHC is a domestic corporation listed in the Philippine Stock Exchange (PSE). It


was previously known as Liberty Mines, Inc. (LMI) and had been previously
engaged in the discovery, exploitation, development and exploration of oils.3

On 13 September 1995, Oliverio G.Laperal (Laperal), then Chairman of the


Board and President of LMI, and Honorio Poblador III, then President of
PHILCOMSAT, signed a Memorandum of Agreement4 for the latter to gain
controlling interest in LMI through an increase in its authorized capital stock.5

On 24 June 1996, Laperal and PHILCOMSAT executed a Supplemental


Memorandum of Agreement6 reiterating the increase in capital stock of LMI from
six billion shares to100 billion shares with par value of P0.01 per share
equivalent to ₱1 billion. As part of its implementation of the Supplemental MOA,
PHILCOMSAT subscribed to ₱79,050,000,000 shares of LMI.7 Sometime in
1997, LMI changed its name to PHC. It declassified its shares and amended its
primary purpose to become a holding company. PHC then filed its application
with the PSE for listing the shares representing the increase in its capital stock.
Included in this application were the PHC shares owned by PHILCOMSAT.8

Pending the PSE’s final approval of PHC’s application for listing of the shares,
the PCGG on 1 March 2005, through its then Chairman Camilo L. Sabio
(Chairman Sabio), made a written request to suspend the listing of the increase
in PHC’s capital stock citing as reason the need to settle the conflicting claims of
the two sets of board of directors of the Philippine Overseas Telecommunication
Corporation (POTC) and PHILCOMSAT.9

In a letter10 dated 22 March 2005, the PSE informed the PCGG that the PSE
Listing Committee deferred action on the company’s listing application and
instead referred the matter to the PSE General Counsel to ascertain the
applicability of the provisions on disqualifications for listing as provided under the
PSE Revised Listing Rules.

On 7 June 2005, the PCGG sent another letter11 to the PSE reiterating its
request to defer the listing of PHC shares.

In November 2007, then President Gloria Macapagal-Arroyo appointed new


government nominees to the POTC and PHILCOMSAT boards to replace
Enrique Locsin, Manuel Andal, Julio Jalandoni and Guy de Leon. POTC owns
100% of PHILCOMSAT.

On 19 November 2007, in a special stockholders’ meeting attended by POTC’s


private stockholders and Presidential Management Staff Undersecretary Enrique
D. Perez, as representative and proxy of the Republic of the Philippines, and
observed by Securities and Exchange Commission (SEC) representatives, the
following were elected directors:

Daniel C. Gutierrez (government)

Santiago J. Ranada (government)

Erlinda I. Bildner (private)

Katrina C. Ponce-Enrile (private)

Marietta K. Ilusorio (private)

Pablo L. Lobregat (private)

Honorio A. Poblador III (private)

Allan S. Montaño (government)

Francisca Benedicto-Paulino (private)

Immediately thereafter, the new directors elected POTC’s new set of officers:

Daniel C. Gutierrez – Chairman

Erlinda I. Bildner – Vice-Chairman

Katrina C. Ponce-Enrile – President

Marietta K. Ilusorio – Treasurer

Rafael A. Poblador – Asst. Treasurer

Victoria C. delos Reyes – Secretary

On the same day, PHILCOMSAT held a special stockholders’ meeting attended


by Erlinda I. Bildner as proxy for POTC. At the request of the Republic of the
Philippines, the three government representatives were nominated to the
PHILCOMSAT Board of Directors. The following were elected:
Abraham R. Abesamis (government)

Ramon P. Jacinto (government)

Rodolfo G. Serrano, Jr. (government)

Erlinda I. Bildner (private)

Katrina C. Ponce-Enrile (private)

Pablo L. Lobregat (private)

Honorio A. Poblador III (private)

Marietta K. Ilusorio (private)

Lorna P. Kapunan (private)

Immediately after, at the meeting of the new and unified Board of Directors of
PHILCOMSAT, the following were elected officers:

Abraham R. Abesamis – Chairman

Pablo L. Lobregat – Vice-Chairman

Erlinda I. Bildner – President

Marietta K. Ilusorio – Vice-President

Katrina C. Ponce-Enrile – Treasurer

Rafael A. Poblador – Asst. Treasurer

John Benedict B. Sioson – Secretary

On 7 May 2008, the PCGG issued En Banc Resolution No. 2008-


00912 recognizing the validity of the POTC’s and PHILCOMSAT’s respective
stockholders’ meetings and elections, both held on 19 November 2007:

NOW, THEREFORE, be it RESOLVED, as it is hereby RESOLVED, that:

1. The PCGG recognize[s] the validity of the 19 November 2007,


POTC/PHILCOMSAT stockholders’ meeting and confirm[s] as valid the election
of the following government nominees: Atty. Daniel C. Gutierrez, Justice
Santiago J. Ranada and Atty. Allan S. Montano to the Board of Directors of
POTC and Radm. Abraham R. Abesamis, Mr. Ramon P. Jacinto and Mr. Rodolfo
G. Serrano,Jr. to the Board of Directors of PHILCOMSAT;

x x x x13

In a letter14 dated 25 July 2011, Katrina C. Ponce-Enrile (Ponce-Enrile), then


President of POTC, wrote to then PCGG Chairman Andres D. Bautista
(Chairman Bautista) demanding that the PCGG rescind its objection to the listing
of the increase in PHC’s capital stock.

When PCGG failed to reply, PHILCOMSAT sent a final demand


Letter15 reiterating its demand for PCGG to withdraw its objection to the listing of
the increase in PHC’s capital stock.

On 11 January 2012, Ponce-Enrile received a letter16 from Chairman Bautista,


informing her that, among others, the agency was discussing the matter with the
Department of Finance and that the two would give a joint recommendation
thereafter. However, the PCGG never communicated said recommendation to
PHILCOMSAT.

On 1 February 2012, PHILCOMSAT filed a complaint17 before the


Sandiganbayan against PCGGto compel the latter to withdraw its opposition to
the listing of the increase in PHC’s capital stock. PHILCOMSAT argued that
PCGG had already recognized the validity of the stockholders’ meetings in the
two corporations, which "practically erased" the alleged conflict between the two
sets of directors.18

The PCGG filed a motion to dismiss the complaint, which PHILCOMSAT


subsequently opposed. The Sandiganbayan’s Ruling

On 3 May 2012, the Sandiganbayan issued the assailed Resolution, the


dispositive portion of which reads:

WHEREFORE, premises considered, defendant Presidential Commission on


Good Government (PCGG)’s Motion to Dismiss dated 8 March 2012 is hereby
GRANTED for lack of jurisdiction over the subject matter.

SO ORDERED.19

The Sandiganbayan held that, based on the allegations in the complaint, the
action was one for specific performance since it sought to have PCGG withdraw
its objection to the listing of the increase in PHC’s capital stock at the PSE.
Following Section 1920 of Batas Pambansa Blg.129 (B.P. 129), as amended by
Republic Act No. 7691 (R.A. 7691), the Regional Trial Court (RTC) has exclusive
jurisdiction over the case. It said:
In our considered view, the allegations in the complaint show that it is primarily
one for specific performance as it prays that the PCGG be directed to withdraw
its objection to the listing of PHILCOMSAT’s shares in PHC, hence, incapable of
pecuniary estimation and within the RTC’s jurisdiction.21

The Sandiganbayan also ruled that the case was a "dispute among its directors,"
and thus, was an intra-corporate dispute, viz:22

The determination of whether or not the PCGG should withdraw its request to
defer the listing of the PHILCOMSAT shares until the conflicting claims between
the two sets of board of directors of POTC and PHILCOMSAT is settled, is an
intra-corporate controversy. (Emphasis in the original) On 14 August 2012, the
Sandiganbayan denied petitioners’ motion for reconsideration. It reiterated its
earlier ruling that it did not have jurisdiction over the controversy since it was an
intra-corporate dispute.

In plaintiffs’ complaint, it was stated that: "The Republic of the Philippines is the
34.9% owner of POTC, which wholly owns PHILCOMSAT, which in turn, owns
81% of PHC. As such, the Republic of the Philippines, with 28.7% indirect
ownership in PHC, also its largest single beneficial owner, continues to sustain
the incalculable loss of holding illiquid or unmarketable shares in a publicly listed
company." Evidently, while the PCGG may not be a stockholder, director, officer,
member or even associate of the plaintiff corporations, it bears emphasis that the
Commission has an interest in the PHC shares prompting the PCGG to request
the PSE to suspend the listing of the SEC approved increase in capital stock of
PHC. The Commission’s interest in the aforesaid shares determines the "nature
of the question under controversy" in the instant case and consequently, the
reiteration of this Court’s pronouncement in the assailed Resolution of having no
jurisdiction over the subject matter of the instant case.23

The Issue

Petitioners are now before the Court on a petition for review on certiorari under
Rule 45 raising this sole assignment of error:

The Sandiganbayan erred in dismissing the case a quo for lack of jurisdiction on
[the] ground that the action allegedly involves an intra-corporate controversy.24

Petitioners’ arguments

Petitioners argue that the allegations in the complaint do not qualify as an intra-
corporate controversy because "not a single element of an intra-corporate
controversy exists in this case."25

Petitioners claim that, first, the cause of action in this case – to compel PCGG to
withdraw its objection to the listing of PHILCOMSAT’s shares in PHC – is not an
intra-corporate dispute,26 since PCGG is not a stockholder, director, officer,
member or even associate of the plaintiff corporation.27

Second, petitioners insist that the "subject matter of the case a quo, that is, to
have respondent PCGG withdraw its objections to the listing of [PHILCOMSAT’s]
shares in PHC, does not fall in any of the cases that may be considered intra-
corporate controversy, as enumerated in Section 5 of PD 902-A."28 It argues that
"the issue in this case does not even involve POTC and/or the shares that the
Republic owns therein to the extent of thirty five percent (35%). The issue
specifically pertains to petitioner [PHILCOMSAT’s] shares in petitioner PHC
where the respondent PCGG, through abuse of authority, objected to the listing
in the Philippine Stock Exchange. While the government (Republic of the
Philippines) owns 35% of POTC, the latter has a separate and distinct legal
personality with petitioner PHILCOMSAT and PHC. x x x. Respondent PCGG,
which is not even the registered owner of a single PHILCOMSAT share has no
personality to meddle in PHC’s affairs and block the listing of PHILCOMSAT’s
share in the stock exchange. The twin element of corporate relationship and
intra-corporate issues were never met in the complaint."29

Third, petitioners state that PCGG has ceased to have a valid and justifiable
reason for blocking the listing of the increase in PHC’s capital stock because "the
appointment of new government nominees and the stockholders’ meetings of
POTC, PHILCOMSAT and PHC in 2007 paved the way for unified boards and
erased whatever alleged uncertainty that existed previously on who has control
over these corporations."30

More importantly, with its 7 May 2008 En Banc Resolution No. 2008-009, the
PCGG itself has recognized the valid election of the POTC, PHILCOMSAT and
PHC boards and, therefore, the basis for its objection is no longer obtaining.31

Lastly, petitioners argue that the PCGGis a co-equal body with the RTC and
since co-equal bodies have no power to control the other, the RTC cannot
compel the PCGG to follow its order.32

The PCGG’s arguments

On the other hand, the PCGG, through the Office of the Solicitor General, raised
the following arguments in its Comment:33

I. THE RESPONDENT COURT IS BEREFT OF JURISDICTION OVER


PETITIONERS’ COMPLAINT.

II. PETITIONERS’ PROTESTATIONS NOTWITHSTANDING, THE


COMPLAINT DESERVES OUTRIGHT DISMISSAL BECAUSE:
A. PETITIONERS HAVE NOT ALLEGED ANY CAUSE OF ACTION
TO ENTITLE THEM TO THE RELIEF DEMANDED.

B. PETITIONERS FAILED TO IMPLEAD THE REPUBLIC AS


INDISPENSABLE PARTY.

C. ASSUMING THAT THE STATE HAS BEEN IMPLEADED


THROUGH THE PCGG, THIS CASE SHOULD NONETHELESS
BE DISMISSED ON THE GROUND THAT THE STATE MAY NOT
BE SUED WITHOUT ITS CONSENT.

D. THE PRESENT SUIT IS BARRED BY LITIS PENDENTIA.

E. PETITIONERS’ COUNSEL FAILED TO COMPLY WITH BAR


MATTER NO. 1922 DATED JUNE 3, 2008.

The PCGG contends that "the controversy does not emanate from, nor does it
relate to any functions of the PCGG of recovering ill-gotten wealth, or any
incident arising from, or incidental to such duty."34 Rather, the PCGG posits that
the acts complained of are in the nature of an intra-corporate controversy. It
avers that "the nature of petitioners’ claim refers to the enforcement of the
parties’ rights under the Corporation Code and internal rules of the corporation,
particularly affecting the propriety of publicly listing in the Philippine Stock
Exchange (PSE) of the 790 million shares of PHILCOMSAT with PHC."35 The
PCGG emphasized that "the matter of compelling the PCGG x x x to withdraw its
objection regarding the listing of shares in PHC, which objection is an exercise of
ownership rights, is an intra-corporate controversy and outside the jurisdiction of
the respondent court."36

The Court's Ruling

The petition has no merit and is, therefore, denied.

The Complaint involves an Intra-corporate Controversy

Intra-corporate controversy

To determine if a case involves an intra-corporate controversy, the courts have


applied two tests: the relationship test and the nature of the controversy test.

Under the relationship test, the existence of any of the following relationships
makes the conflict intra-corporate: (1) between the corporation, partnership or
association and the public; (2) between the corporation, partnership or
association and the State insofar as its franchise, permit or license to operate is
concerned; (3) between the corporation, partnership or association and its
stockholders, partners, members or officers; and (4) among the stockholders,
partners or associates themselves.37

On the other hand, the nature of the controversy test dictates that "the
controversy must not only be rooted in the existence of an intra-corporate
relationship, but must as well pertain to the enforcement of the parties’ correlative
rights and obligations under the Corporation Code and the internal and intra-
corporate regulatory rules of the corporation."38

A combined application of the relationship test and the nature of the controversy
test has become the norm in determining whether a case is an intra-corporate
controversy,39 to be "heard and decided by the [b]ranches of the RTC specifically
designated by the Court to try and decide such cases."40

Relationship test

Under the relationship test, an intra-corporate controversy arises when the


conflict is "between the corporation, partnership or association and its
stockholders, partners, members or officers." Petitioners insist that the PCGG is
not a stockholder, partner, member or officer of the corporation. This is
misleading and inaccurate.

The PCGG was created under Executive Order No. 1 (E.O. 1) to assist the
President in:

(a) The recovery of all ill-gotten wealth accumulated by former President


Ferdinand E. Marcos, his immediate family, relatives, subordinates and
close associates, whether located in the Philippines or abroad, including
the takeover or sequestration of all business enterprises and entities
owned or controlled by them, during his administration, directly or through
nominees, by taking undue advantage of their public office and/or using
their powers, authority, influence, connections or relationship.

(b) The investigation of such cases of graft and corruption as the


President may assign to the Commission from time to time.

(c) The adoption of safeguards to ensure that the above practices shall not
be repeated in any manner under the new government, and the institution
of adequate measures to prevent the occurrence of corruption.41

This Court, in PCGG v. Peña,42 further explained:

In the discharge of its vital task "to recover the tremendous wealth plundered
from the people by the past regime in the most execrable thievery perpetrated in
all history," or "organized pillage" (to borrow a phrase from the articulate Mr. Blas
Ople), the Commission was vested with the ample power and authority
(a) x x x

(b) to sequester or place or cause to be placed under its control or


possession any building or office wherein any ill-gotten wealth or
properties may be found, and any records pertaining thereto, in order to
prevent their destruction, concealment or disappearance which would
frustrate or hamper the investigation or otherwise prevent the Commission
from accomplishing its task.

(c) to provisionally takeover in the public interest or to prevent the disposal


or dissipation of business enterprises and properties taken over by the
government of the Marcos Administration or by entities or persons close to
former President Marcos, until the transactions leading to such acquisition
by the latter can be disposed of by the appropriate authorities.

(d) to enjoin or restrain any actual or threatened commission of acts by


any person or entity that may render moot and academic, or frustrate or
otherwise make ineffectual the efforts of the Commission to carry out its
task under this Order. x x x.43

In Republic v. Sandiganbayan,44 the Court settled that, due to the Compromise


Agreement validly entered into by the Republic through the PCGG, the Republic
of the Philippines now owns 4,727 shares of POTC.

As it stands today, the Republic of the Philippines owns 34.9% of POTC, which
wholly owns PHILCOMSAT, which in turn owns 81% of PHC.45 The Republic,
then, has an interest in the proper operations of the PHC, however indirect this
interest may seem to be.

Chairman Sabio, while himself not a stockholder of the subject corporations, was
acting as head of the PCGG, which is the agency tasked to adopt safeguards so
that incidents of graft and corruption, as well as cases of abuse of "powers,
authority, influence, connections or relationship" in these corporations are
eliminated.46

The Republic acts through its lawfully designated representatives or nominees.


Thus, PCGG nominees and directors sit in the boards of directors of sequestered
corporations not for themselves but on behalf of the Republic. It is their duty to
protect and advance the interests of the Republic of the Philippines.

Nature of the controversy test

The nature of the controversy test examines the controversy in relation to the
"enforcement of the parties’ correlative rights and obligations under the
Corporation Code and the internal and intra-corporate regulatory rules of the
corporation."47
The controversy in the present case stems from the act of Chairman Sabio in
requesting the PSE to suspend the listing of PHC’s increase in capital stock
because of still unresolved issues on the election of the POTC’s and
PHILCOMSAT’s respective boards of directors.1âwphi1

The act of Chairman Sabio in asking the SEC to suspend the listing of PHC’s
shares was done in pursuit of protecting the interest of the Republic of the
Philippines, a legitimate stockholder in PHC’s controlling parent company, POTC.
The character of the shares held by the PCGG/Republic, on whose behalf the
PCGG Chairman is presumed to be acting, is irrelevant to Chairman Sabio’s
actions. Any shareholder, harboring any apprehensions or concerns, could have
done the same or posed the same objection. It was an act that had no relation to
any proceeding or question of ill-gotten wealth or sequestration. The PCGG was
merely protecting the rights and interest of the Republic of the Philippines.

From the foregoing, it is clear that the dispute in the present case is an intra-
corporate controversy.

The Sandiganbayan has no Jurisdiction

As such, it is clear that the jurisdiction lies with the regular courts and not with the
Sandiganbayan.

Section 5 of Presidential Decree No. 902-A conferred original and exclusive


jurisdiction over intra-corporate disputes on the SEC. However, Section 5.2of
R.A. 8799, transferred the jurisdiction over such cases to courts of general
jurisdiction, or the appropriate RTC.48

Petitioners, however, further argue that the case must be decided by the
Sandiganbayan because the RTC is co-equal to the PCGG and therefore would
have no authority to issue an order to the latter.49

The following pronouncements of this Court are instructive:

Under Section 2 of Executive Order No. 14, the Sandiganbayan has exclusive
and original jurisdiction over all cases regarding "the funds, moneys, assets and
properties illegally acquired by Former President Ferdinand E. Marcos, Mrs.
Imelda Romualdez Marcos, their close relatives, subordinates, business
associates, dummies, agents, or nominees," civil or criminal, including incidents
arising from such cases. The Decision of the Sandiganbayan is subject to review
on certiorari exclusively by the Supreme Court.

In the exercise of its functions, the PCGG is a co-equal body with the regional
trial courts and co-equal bodies have no power to control the other. The regional
trial courts and the Court of Appeals have no jurisdiction over the PCGG in the
exercise of its powers under the applicable Executive Orders and Section 26,
Article XVIII of the 1987 Constitution and, therefore, may not interfere with and
restrain or set aside the orders and actions of the PCGG.50

Further:

The issue of whether or not the Regional Trial Courts have jurisdiction over the
Presidential Commission on Good Government in the exercise of the latter’s
powers and functions under the applicable Executive Orders and Section 26,
Article XVIII of the 1987 Constitution has been laid to rest in PCGG vs. Hon.
Emmanuel G. Peña, et al., G.R. No. 77663, April 12, 1988 where Mr. Chief
Justice Claudio Teehankee articulated the opinion of an almost unanimous court
as follows:

On the issue of jurisdiction squarely raised, as above indicated, the Court


sustains petitioner’s stand and holds that regional trial courts and the Court of
Appears for that matter have no jurisdiction over the Presidential Commission on
Good Government in the exercise of its powers under the applicable Executive
Orders and Article XVIII, Section 26 of the Constitution and therefore may not
interfere with and restrain or set aside the orders and actions of the Commission.
Under Section 2 of the President’s Executive Order No. 14 issued on May 7,
1986, all cases of the Commission regarding "the Funds, Moneys, Assets and
Properties Illegally Acquired or Misappropriated by Former President Ferdinand
Marcos, Mrs. Imelda Romualdez Marcos, their Close Relatives, Subordinates,
Business Associates, Dummies, Agents or Nominees" whether civil or criminal,
are lodged within the "exclusive and original jurisdiction of the Sandiganbayan"
and all incidents arising from, incidental to, or related to, such cases necessarily
fall likewise under the Sandiganbayan’s exclusive and original jurisdiction subject
to review on certiorari exclusively by the Supreme Court.51 (Emphasis supplied)

As the Court has already conclusively ruled, the RTC is co-equal to the PCGG
only in relation to cases falling under the latter’s function under the applicable
Executive Orders, specifically Section 2 of E.O. 14, and Section 26, Article XVIII
of the 1987 Constitution.

Note that in this case, the acts complained of do not pertain to the PCGG’s
function under the aforementioned provisions of law and the Constitution, i.e., it
is not a case involving "the Funds, Moneys, Assets and Properties Illegally
Acquired or Misappropriated by Former President Ferdinand Marcos, Mrs.
Imelda Romualdez Marcos, their Close Relatives, Subordinates, Business
Associates, Dummies, Agents or Nominees, whether civil or criminal, x x x" nor
can it be considered an "[incident] arising from, incidental to, or related to"52 such
cases.

Rather, the PCGG, acting as representative of the Republic, was exercising a


duty of a stockholder to ensure the proper and lawful exercise of corporate acts.
Based on the foregoing, the Sandiganbayan correctly dismissed the complaint for
lack of jurisdiction.

WHEREFORE, the petition is DENIED. The Resolutions of the Sandiganbayan in


Civil Case No. SB-12-CVL-0001 promulgated on 3 May 2012 and 14 August
2012 are AFFIRMED. Costs against petitioners.

SO ORDERED.

10. HOME GUARANTY CORP VS SANDIGANBAYAN

HOME GUARANTY CORPORATION, Petitioner, v. LA SAVOIE


DEVELOPMENT CORPORATION, Respondent.

DECISION

LEONEN, J.:

This is a Petition for Review on Certiorari praying that the assailed


Decision1 dated June 21, 2005 of the Court of Appeals in CA G.R. CV
No. 80241 be reversed and set aside. In the alternative, it prays that
certain properties supposedly conveyed by respondent La Savoie
Development Corporation to petitioner Home Guaranty Corporation2 be
excluded from the rehabilitation plan of La Savoie Development
Corporation, should its Petition for Corporate Rehabilitation be given
due course.

The assailed Decision of the Court of Appeals reversed and set aside
the Order3 dated October 1, 2003 of the Regional Trial Court, Makati
City, reinstated the Stay Order issued by the Regional Trial Court on
June 4, 2003, gave due course to La Savoie's Petition for Corporate
Rehabilitation, and remanded the case to the Regional Trial Court for
further proceedings.4 The Regional Trial Court's June 4, 2003 Stay
Order stayed the enforcement of all claims, monetary or otherwise,
and whether in court or otherwise, against La Savoie Development
Corporation.

La Savoie Development Corporation (La Savoie) is a domestic


corporation incorporated on April 2, 1990. It is engaged in the
business of "real estate development, subdivision and brokering."5
With the onset of the Asian financial crisis in 1997, the devaluation of
the Philippine peso and due to other factors such as lack of working
capital; high interest rates, penalties, and charges; low demand for
real estate properties; and poor peace and order situations in some of
its project sites, La Savoie found itself unable to pay its obligations to
its creditors. Thus, on April 25, 2003, La Savoie filed before the
Regional Trial Court, Makati City6 a "petition for the declaration of
state of suspension of payments with approval of proposed
rehabilitation plan"7 under the Interim Rules of Procedure on Corporate
Rehabilitation8 (Interim Rules).

The proceedings before the Regional Trial Court were initially held in
abeyance as La Savoie failed to attach to its Petition some of the
requirements under Rule 4, Section 2 of the Interim Rules.9 With La
Savoie's compliance and finding its "petition to be sufficient in form
and substance,"10 then Regional Trial Court Judge Estela Perlas-
Bernabe issued the Stay Order dated June 4, 2003 staying the
enforcement of all claims against La Savoie. The entirety of this Order
reads:chanroblesvirtuallawlibrary

ORDER

Finding the petition to be sufficient in form and substance, the


enforcement of all claims, whether for money or otherwise, and
whether such enforcement is by court action or otherwise, against
petitioner La Savoie Development Corporation, its guarantors and
sureties not solidarily liable with it, is stayed.

As a consequence of the stay order, petitioner is prohibited from


selling, encumbering, transferring, or disposing in any manner any of
its properties except in the ordinary course of business. It is further
prohibited from making any payment of its liabilities outstanding as of
the date of the filing of the petition on April 25, 2003. Its suppliers of
goods or services are likewise prohibited from withholding supply of
goods and services in the ordinary course of business for as long as it
makes payments for the services and goods supplied after the
issuance of the stay order.

Petitioner is directed to pay in full all administrative expenses incurred


after the issuance of the stay order.

The initial hearing on the petition is set on July 22, 2003 at 8:30
o'clock in the morning at the 3rd Floor, Gusali ng Katarungan, F. Zobel
St., Makati City.
All creditors and interested parties including the Securities and
Exchange Commission are directed to file and serve on petitioner a
verified comment on or opposition to the petition with supporting
affidavits and documents, not later than ten (10) days before the date
of the initial hearing. Failure to do so will bar them from participating
in the proceedings. Copies of the petition and its annexes may be
secured from the court within such time as to enable them to file their
comment on or opposition to the petition and to prepare for its initial
hearing.

Petitioner is directed to publish this Order in a newspaper of general


circulation in the Philippines once'a week for two (2) consecutive
weeks and to file to this Court within five (5) days before the initial
hearing the publisher's affidavit shewing compliance with the
publication requirements.

Mr. Rito C. Manzana with address at 26B One Lafayette Condominium


cor. Leviste and Cedeno Manor St., Salcedo Village, Makati City is
appointed Rehabilitation Receiver of Petitioner. He may discharge his
duties and functions as such after taking his oath to perform his duties
and functions faithfully and posting a bond in the amount of
P100,000.00 to guarantee the faithful discharge of his duties and
obedience to the orders of the court.

Petitioner is directed to immediately serve a copy of this Order to Mr.


Manzana who is directed to manifest his acceptance or non-acceptance
of his appointment not later than ten (10) days from receipt of this
order.

SO ORDERED.

Given this 4th day of June, 2003 at Makati City.

ESTELA PERLAS-BERNABE
[sgd.]
Judge11
Following the issuance of the June 4, 2003 Stay Order, La Savoie's
creditors — Planters Development Bank, Philippine Veterans Bank, and
Robinsons Savings Bank — filed their Comments and/or Oppositions.12

Home Guaranty Corporation filed an Opposition13 even though "it


[was] not a creditor of Petitioner."14 It asserted that it had a "material
and beneficial interest in the . . . Petition, in relation to the interest of
Philippine Veterans Bank (PVB), Planters Development Bank (PDB),
and Land Bank of the Philippines (LBP), which are listed as creditors of
Petitioner vis-a-vis certain properties or assets that might have been
taken cognizance of, and placed under the custody of the [Regional
Trial] Court and[/]or the appointed Rehabilitation Receiver."15

Home Guaranty Corporation noted that through the "La Savoie Asset
Pool Formation and Trust Agreement"16 (Trust Agreement), La Savoie
obtained financing for some of its projects through a securitization
process in which Planters Development Bank as nominal issuer issued
PI50 million in asset participation certificates dubbed as the "La Savoie
Development Certificates"17 (LSDC certificates) to be sold to investors.
The projects financed by these certificates consisted of the
development of real properties in General Trias, Cavite; Sto. Tomas,
Batangas; Los Banos, Laguna; and Quezon City. The same properties
were conveyed in trust by La Savoie, as trustor, to Planters
Development Bank, as trustee, and constituted into the La Savoie
Asset Pool (Asset Pool).18

The redemption of the LSDC certificates upon maturity and the interest
payments on them were "backed/collateralized by the assets that were
conveyed by [La Savoie] to the Trust."19 Moreover, the LSDC
certificates were covered by a guaranty extended by Home Guaranty
Corporation through a "Contract of Guaranty"20 entered into by Home
Guaranty Corporation with La Savoie and Planters Development Bank.

Section 17 of the Contract of Guaranty designates Home Guaranty


Corporation to "undertake financial controllerships of the
Projects."21 Thus, in its Opposition, Home Guaranty Corporation noted
that it was "charged with the duty of ensuring that all funds due to the
Asset Pool are collected, and that funds are disbursed for the purposes
they were intended for."22

Home Guaranty Corporation added that in the course of its business,


La Savoie collected a total amount of P60,569,134.30 from the buyers
of some of the properties covered by the Asset Pool. This amount,
however, was not remitted by La Savoie to the trust. With La Savoie's
failure to complete some of its projects and failure to remit sales
collections, the Asset Pool defaulted in redeeming and paying interest
on the LSDC certificates. Thus, La Savoie's investors placed a call on
the guaranty.23 With La Savoie's failure to remit collections, however,
Home Guaranty Corporation held in abeyance the settlement of the
investors' call. This settlement was then overtaken by the filing of La
Savoie's Petition for Rehabilitation.24
Home Guaranty Corporation argued that it and the investors on the
LSDC certificates had "preferential rights"25 over the properties making
up the Asset Pool as these "were conveyed as security or collaterals
for the redemption of the [LSDC certificates]."26 Thus, they should be
excluded from the coverage of La Savoie's Petition for Rehabilitation.

On September 1, 2003, La Savoie filed a Consolidated Answer27 to the


Comments/Oppositions. It argued that the assignment of assets to the
Asset Pool was not absolute and subject to certain conditions.
Specifically, it asserted that for the assignment to take effect, Home
Guaranty Corporation had to first pay the holders of the LSDC
certificates. Thus, La Savoie claimed that the properties comprising the
Asset Pool remained to be its assets.28

In the interim, a Verification Report on Accuracy of Petition was filed


by the Rehabilitation Receiver.29

On October 1, 2003, the Regional Trial Court issued an


Order30 denying due course to La Savoie's Petition for Rehabilitation
and lifting the June 4, 2003 Stay Order. The trial court reasoned that
the "findings of sufficiency in the form and substance of the petition
for which a stay order was issued has been flawed"31and that "[i]t
cannot countenance a situation such as this where the petitioner files a
petition on the basis of inaccurate or unverifiable allegations and false
representations."32 It noted that per the Rehabilitation Receiver's
Report, there were "various inaccuracies in the material allegations of
the petition and its annexes."33 Several documents "to verify other
material statements made therein" were also lacking.34 It added that
La Savoie "has not presented any concrete and feasible plan on how it
will be able to secure additional funds to continue with the
development of its raw land and on-going joint-venture projects."35

Aggrieved, La Savoie filed an Appeal before the Court of Appeals. It


filed its Appellant's Brief on May 5, 2004.36

In the meantime, Home Guaranty Corporation approved and processed


the call on the guaranty for the redemption of the LSDC certificates.
Thus, Home Guaranty Corporation, through Planters Development
Bank, paid a total of P128.5 million as redemption value to certificate
holders. Acting on this, Planters Development Bank executed a "Deed
of Assignment and Conveyance"37 in favor of Home Guaranty
Corporation through which, in the words of Home Guaranty
Corporation, Planters Development Bank "absolutely conveyed and
assigned to [Home Guaranty Corporation] the ownership and
possession of the entire assets that formed part of the La Savoie Asset
Pool."38 Home Guaranty Corporation claims, in addition, that, through
the same Deed, Planters Development Bank "absolutely conveyed and
assigned to [Home Guaranty Corporation] the right to collect from [La
Savoie] cash receivables . . . representing the amount collected by [La
Savoie] from sales in the course of the development of the projects
which it failed to remit to the Trust."39

On August 18, 2004, Home Guaranty Corporation filed its Appellee's


Brief.40 It argued that all of the properties comprising the Asset Pool
should be excluded from the rehabilitation proceedings in view of the
Deed of Assignment and Conveyance executed in its favor by Planters
Development Bank.41 Attached to this Brief was a copy of the Deed of
Assignment and Conveyance.42

In the Decision43 dated June 21, 2005, the Court of Appeals Special
Twelfth Division reversed and set aside the Regional Trial Court's
October 1, 2003 Order, reinstated the Stay Order, gave due course to
the Petition for Rehabilitation, and remanded the case to the trial court
for further proceedings.

The Court of Appeals characterized the inaccuracies noted by the trial


court as "minor" and "trivial,"44 as well as insufficient to render as
"false" the allegations made by La Savoie in its Petition for
Rehabilitation. It added that La Savoie "convincingly showed that it
could undertake to market its projects through [the] Pag-Ibig
Overseas Program, sell the existing inventories of unsold subdivision
lots and use the un-remitted collections due to HGC which will be
converted as additional loan to fund its on-going projects."45Regarding
Home Guaranty Corporation's payment of the guaranty call, the Court
of Appeals noted that it was made after the Petition for Rehabilitation
had been brought by La Savoie and after the issuance of the Stay
Order; thus, Home Guaranty Corporation had no right to make such
payment.

On August 12, 2005, Home Guaranty Corporation filed before this


court the present Petition for Review on Certiorari under Rule 45 of the
1997 Rules of Civil Procedure.46

Home Guaranty Corporation asserts 'that the properties comprising the


Asset Pool should be excluded from the rehabilitation proceedings as
these have now been "removed from the oominion"47 of La Savoie and
have been conveyed and assigned to it. It underscores that the
transfer made to it by Planters Development Bank was made after the
Stay Order had been lifted, per the Regional Trial Court's October 1,
2003 Order.

On October 28, 2005, La Savoie filed its Comment.48 It claimed that


the supposed assignment and conveyance to Home Guaranty
Corporation was ineffectual considering that "at the time of the
guaranty call, the Stay Order dated 04 June 2003 was admittedly in
effect."49 La Savoie faulted Home Guaranty Corporation for supposedly
not adducing proof of the transfer effected to it by Planters
Development Bank on the strength of its payment on the guaranty. It
added that, even assuming there was full payment and that the Deed
of Assignment and Conveyance was executed, "the Subject Properties
remained within the jurisdiction of the [Regional Trial Court] even after
the lifting of the Stay Order dated 04 June 2003"50 and that, as a
result, "any contract or document affecting title to the Subject
Properties is also subject to the rehabilitation proceedings pending
with the [trial court]."51 It also asserted that by paying the guaranty,
Home Guaranty Corporation effectively became its creditor. Excluding
the properties comprising the Asset Pool from the rehabilitation
proceedings would then be tantamount to giving preference to one
creditor, something which is prohibited in rehabilitation proceedings.

Apart from these, La Savoie ascribes procedural infirmities against


Home Guaranty Corporation's Petition. First, it claimed that Atty.
Danilo C. Javier, the officer who signed the Petition's verification and
certification of non-forum shopping was not authorized to do so.
Second, it claimed that Home Guaranty Corporation engaged in forum
shopping.

On February 6, 2006, Home Guaranty Corporation filed its Reply to La


Savoie's Comment.52 In response to La Savoie's allegation that there
was no proof of its payment of the redemption value of the LSDC
certificates and the resultant transfer to it of the Asset Pool, Home
Guaranty Corporation noted that the following documents were already
attached to its Appellee's Brief and were re-attached to its Reply: the
Deed of Assignment and Conveyance; the Trust Agreement; the
Contract of Guaranty; and certificates of title covering each of the
properties comprising the Asset Pool.

For resolution is the central issue of whether the properties comprising


the Asset Pool should be excluded from the proceedings on La Savoie
Development Corporation's Petition for Rehabilitation. The resolution of
this issue hinges on whether the conveyance to Home Guaranty
Corporation of the properties comprising the Asset Pool was valid and
effectual. The resolution of this is, in turn, contingent on the following:

First, whether following the issuance of the Regional Trial Court's


October 1, 2003 Order and pending La Savoie's Appeal, Home
Guaranty Corporation was barred from making payment on the
guaranty call, and Planters Development Bank, concomitantly barred
from conveying the properties comprising the Asset Pool to Home
Guaranty Corporation; and

Second, whether the payment by Home Guaranty Corporation and the


conveyance of the properties by Planters Development Bank made
Home Guaranty Corporation a creditor of La Savoie and whether
recognizing the validity of the transfer made to Home Guaranty
Corporation was tantamount to giving it inordinate preference as a
creditor.

Apart from these are the procedural errors ascribed by La Savoie to


Home Guaranty Corporation and thus the following issues:

First, whether Atty. Danilo C. Javier was authorized to sign the


verification and certificate of non-forum shopping of Home Guaranty
Corporation's Petition; and

Second, whether Home Guaranty Corporation engaged in forum


shopping.chanRoblesvirtualLawlibrary

Atty. Danilo C. Javier was authorized to sign the verification and


certificate of non-forum shopping on behalf of Home Guaranty
Corporation.

As pointed out by Home Guaranty Corporation, its board of directors


issued Board Resolution No. 30, Series of 2001, "specifically
authorizing the President of petitioner to designate the officer to
institute the appropriate legal actions[.]"53 It was pursuant to this
resolution that Atty. Danilo C. Javier, Home Guaranty Corporation's
then Officer-in-Charge and Vice President for Legal, was made
signatory to the present Petition's verification and Certification of non-
forum shopping.

The relevant portion of this Resolution


reads:chanroblesvirtuallawlibrary
The request for authority for the HGC President, Executive Vice-
President and Vice Presidents as the President may designate or
authorize, to institute appropriate legal actions as the President may
deem proper or necessary to protect the interest of the corporation be,
as it is hereby approved.

Resolved Further That, the said authority shall include but not be
limited to, the verification of Complaints, Petitions, Answer, Reply and
other initiatory or responsive pleadings as the circumstances may
warrant. . . .54cralawlawlibrary
II

La Savoie pointed out that (as of the time of the filing of its Comment)
another case between Home Guaranty Corporation and La Savoie,
docketed as Civil Case No. 05314, was pending before the Makati City
Regional Trial Court.55

In its reply, Home Guaranty Corporation acknowledged the pendency


of Civil Case No. 05314. It, however, pointed out that it could not have
been guilty of forum shopping as the present case is an offshoot of a
Petition for Corporate Rehabilitation while Civil Case No. 05314 is an
action for injunction, mandamus, specific performance, and sum of
money with application for temporary restraining order and/or
preliminary prohibitory and mandatory injunction.56 Home Guaranty
Corporation claimed that it had to file Civil Case No. 05314 to compel
La Savoie to remit to. it payments collected from the buyers of La
Savoie's real estate development projects and which La Savoie was
supposedly wrongly withholding from it considering that Home
Guaranty Corporation was now the owner of the properties comprising
the Asset Pool.

Aboitiz Equity Ventures v. Chiongbian57 discussed forum


shopping:chanroblesvirtuallawlibrary
The concept of and rationale against forum shopping were explained
by this court in Top Rate Construction & General Services, Inc. v.
Paxton Development Corporation:58ChanRoblesVirtualawlibrary
FORUM SHOPPING is committed by a party who institutes two or more
suits in different courts, either simultaneously or successively, in order
to ask the courts to rule on the same or related causes or to grant the
same or substantially the same reliefs, on the supposition that one or
the other court would make a favorable disposition or increase a
party's chances of obtaining a favorable decision or action. It is an act
of malpractice for it trifles with the courts, abuses their processes,
degrades the administration of justice and adds to the already
congested court dockets. What is critical is the vexation brought upon
the courts and the litigants by a party who asks different courts to rule
on the same or related causes an.d grant the same or substantially the
same reliefs and in the process creates the possibility of conflicting
decisions being rendered by the different fora upon the same issues,
regardless of whether the court in which one of the suits was brought
has no jurisdiction over the action.59cralawlawlibrary
Equally settled is the test for determining forum shopping. As this
court explained in Yap v. Chua:60ChanRoblesVirtualawlibrary
To determine whether a party violated the rule against forum
shopping, the most important factor to ask is whether the elements
of litis pendentia are present, or whether a final judgment in one case
will amount to res judicatain another; otherwise stated, the test for
determining forum shopping is whether in the two (or more) cases
pending, there is identity of parties, rights or causes of action, and
reliefs sought.61cralawlawlibrary
Litis pendentia "refers to that situation wherein another action is
pending between the same parties for the same cause of action, such
that the second action becomes unnecessary and vexatious."62 It
requires the concurrence of three (3) requisites; "(1) the identity of
parties, or at least such as representing the same interests in both
actions; (2) the identity of rights asserted and relief prayed for, the
relief being founded on the same facts; and (3) the identity of the two
cases such that judgment in one, regardless of which party is
successful, would amount to res judicata in the other."63

In turn, prior judgment or res judicata bars a subsequent case when


the following requisites concur: "(1) the former judgment is final; (2)
it is rendered by a court having jurisdiction over the subject matter
and the parties; (3) it is a judgment or an order on the merits; (4)
there is — between the first and the second actions — identity of
parties, of subject matter, and of causes of action."64cralawlawlibrary
It is not disputed that there is identity of parties in the present Petition
and in Civil Case No. 05314. Home Guaranty Corporation, however,
argues that it could not have been guilty of forum shopping as the
relief it sought via Civil Case No. 05314 (i.e., the restraining of
collections and remission to it of funds collected by La Savoie) is
different from the relief it is seeking in the present Appeal from the
Court of Appeals' Decision giving due course to La Savoie's Petition for
Corporate Rehabilitation.

The divergence in specific reliefs sought notwithstanding, Home


Guaranty Corporation's bases for these reliefs are the same. In Civil
Case No. 05314, Home Guaranty Corporation asked that La Savoie
cease collecting payments and that collected payments be remitted to
it because it supposedly now owns the real estate development
projects of La Savoie that form part of the Asset Pool. In the present
Appeal, Home Guaranty Corporation asks that the properties forming
part of the Asset Pool be excluded from corporate rehabilitation
proceedings because it, and no longer La Savoie, is the owner of these
properties.

Thus, in both cases, Home Guaranty Corporation is invoking the same


right and is proceeding from the same cause of action, i.e., its
supposed ownership. True, there is divergence in the details of the
specific reliefs it is seeking, but Home Guaranty Corporation is seeking
the same basic relief, i.e., the recognition of its alleged ownership. The
exclusion of the properties from corporate rehabilitation proceedings
and the remittance to it of payments are mere incidents of this basic
relief. Accordingly, in simultaneously pursuing the present case and
Civil Case No. 05314, Home Guaranty Corporation engaged in forum
shopping.

It is worth emphasizing that the present Petition or Appeal, being a


mere offshoot of La Savoie's original Petition for Rehabilitation, is not
the act constitutive of forum shopping. Forum shopping was
committed not through the filing of this Appeal but through the filing
of Civil Case No. 05314 before the Regional Trial Court. In any case,
apart from this procedural lapse, we find the transfer of the Asset Pool
to Home Guaranty Corporation, without going through foreclosure
proceedings, to be in violation of the rule against pactum
commissorium. It is ineffectual and does not divest La Savoie of
ownership. Thus, even if valid payment was made by Home Guaranty
Corporation on its guaranty, ownership of the properties comprising
the Asset Pool was not vested in it. Accordingly, Home Guaranty
Corporation must await the disposition of La Savoie's Petition for
Rehabilitation in order that a resolution may be had on how La
Savoie's obligations to it shall be settled.chanRoblesvirtualLawlibrary

III

A necessary step in resolving this Petition is a consideration of the


parties and the rights and obligations they have as against each other,
as borne by the agreements they entered into and which now bind
them.

The Trust Agreement65 stated that La Savoie, as


"landowner/developer," had subdivision and housing projects in
several areas that were collectively referred to as the "La Savoie
Project" or simply as the "Project." Its first preambular clause
reads:chanroblesvirtuallawlibrary
WHEREAS, the LANDOWNER/DEVELOPER, has subdivision and housing
projects located in San Rafael, Bulacan; Banlat, Quezon City; Gen.
Trias, Cavite[;] Sto. Tomas, Batangas; and Los Bailos, Laguna,
totalling 37 hectares, more or less, collectively called the La Savoie
Project (the PROJECT)[.]66cralawlawlibrary
On how the project was to be financed, the Trust Agreement added
that "the development and implementation of the PROJECT [was to be]
funded through the issuance and sale of asset participation certificates
known as La Savoie Development Certificates." Planters Development
Bank was specified to be the "nominal issuer" of these certificates. The
Trust Agreement's second and fourth preambular clauses as well as its
Section 4.5 read:chanroblesvirtuallawlibrary
WHEREAS, the development and implementation of the PROJECT will
be funded through the issuance and sale of asset participation
certificates known as La Savoie Development Certificates (the LSDCs)
backed by the asset pool consisting of said real estate properties and
the products and results of their planned development;67

....

WHEREAS, the LANDOWNER/DEVELOPER has appointed the Planters


Development Bank as TRUSTEE and nominal issuer and Planters
Development Bank through its Trust Department has agreed to
perform the functions and responsibilities of a TRUSTEE as defined
hereunder;68

....

Section 4.5. Nominal Issuer. The TRUSTEE shall act as nominal issuer
only of all LSDCs. In no case shall the TRUSTEE be liable for the
payment of any amount due to the holder of the LSDC. The TRUSTEE
shall be free from any liability in the event that the Asset Pool is not
sufficient for the redemption of all the LSDCs. In the event of the non-
payment of the LSDC, the LSDC holder's exclusive recourse shall be to
claim against the HIGC guarantee. The TRUSTEE shall not be
responsible for the failure of HIGC to pay any amount due to any
holder of the LSDC.69cralawlawlibrary
These LSDC certificates were "backed" or secured by "real estate
properties and the products and results of their planned development."
More specifically, Section 3.1 of the Trust Agreement provides for the
establishment of the Asset Pool in which La Savoie "convey[ed],
assign[ed], delivered] all its rights and interests in the real estate
properties ... to the TRUSTEE for the present and future holders of
LSDCs." The third preambular clause and Section 3.1 of the Trust
Agreement read:chanroblesvirtuallawlibrary
WHEREAS, the LANDOWNER/DEVELOPER has agreed to convey the
real estate properties of the PROJECT to a TRUSTEE to form the La
Savoie Project (LSP) Asset Pool which shall be held by the TRUSTEE for
the pro rata and pro indiviso benefit of the holders of the LSDCs to the
extent defined in this Agreement and, residually for the benefit of the
LANDOWNER/DEVELOPER;70

....

Section 3.1. Establishment of Starting Asset Pool. The LANDOWNER/


DEVELOPER hereby establishes a trust, for purposes of this
securitization and formation of the corresponding Asset pool, out of
the properties pertaining to the PROJECT development and operation,
and accordingly does hereby convey, assign and deliver all its rights
and interests in the real estate properties identified and described
through their respective transfer certificates of title (TCTs) listed in
Annex B through B-1covering properties for Las Palmas Village in Sto.
Tomas, Batangas[;] Buenavista Park in San Rafael, Bulacan; Gen.
Trias Homes in Gen. Trias, Cavite; and La Chesa Heights in Tandang
Sora, Q.C.; Annex C through C-2 covering properties for La Chesa
Valley Estate owned by MHC Realty under a Joint-Venture Agreement
with [La Savoie Development Corporation]; Annex D covering
properties owned by Lenard Lopez under a Joint Venture Agreement
with [La Savoie Development Corporation]; together with Annexes E
and F the Joint Venture Agreements with MHC Realty Corporation and
Lenard Lopez together with the Supplemental Agreements, attached as
integral parts hereof, together with all present and future
improvements thereon and the corresponding muniments of ownership
of the properties, subject to the reservations concerning the interests
of joint-venturers defined hereunder, to the TRUSTEE for the benefit of
the present and future holders of the LSDCs, in accordance with the
terms and conditions provided herein. The reservations above-stated
refer to the interests of the joint-venturers of the
LANDOWNER/DEVELOPER as follows:....71cralawlawlibrary
Per the Trust Agreement's fourth preambular clause, Planters
Development Bank was named trustee of the Asset Pool. The same
clause specified that it held the Asset Pool "for the pro rata and pro
indiviso benefit of the holders of the LSDCs . . . and, residually for the
benefit of the [landowner/developer, i.e., La Savoie]." Moreover, in
Section 3.2 of the Trust Agreement:chanroblesvirtuallawlibrary
Section 3.2. Acceptance by the TRUSTEE. The TRUSTEE hereby
acknowledges and accepts the documents delivered by the
LANDOWNER/DEVELOPER and signed for by the TRUSTEE and the
property interests and rights conveyed in Section 3.1, as well as those
which may from time to time be conveyed and intended to form part
of the Asset Pool, and declares that the said TRUSTEE holds and will
hold the said documents and assets, including properties and values
yet to be received by it as TRUSTEE under this Agreement, for the
benefit of all present and future holders of the LSDCs, as well as the
ultimate owner(s) of the residual assets and values of the Asset Pool,
all in accordance with the terms and conditions of this Trust
Agreement.72cralawlawlibrary
Apart from the Asset Pool, the LSDC certificates were also secured by
a guaranty. The guaranty was referenced in the Trust Agreement in
the following provisions:chanroblesvirtuallawlibrary
ARTICLE I
DEFINITION OF TERMS

The following words and phrases used in this Agreement shall have the
respective meanings hereunder indicated unless the contrary clearly
appears from the context:chanroblesvirtuallawlibrary
....

4. Contract of Guaranty - shall refer to the Contract of Guaranty


executed by and among the TRUSTEE, HIGC and the
LANDOWNER/DEVELOPER dated, a copy of which is hereto attached as
Annex A including any amendment/revision and modification, thereof.

....

6. Guarantor - shall refer to the Home Insurance and Guaranty


Corporation (HIGC).73cralawlawlibrary
....

Section 2.4. The Home Insurance and Guaranty Corporation. The roles
and responsibilities of the HIGC shall be as
follows:chanroblesvirtuallawlibrary
2.4.1Provide guaranty coverage for the LSDCs in accordance with its
policies and as provided for in its Contract of Guaranty executed
by the parties.
2.4.2Act as the Financial Controller in the implementation of the
PROJECTS involved in accordance with the Operations and
Accounting Manual as approved by the Governing Board.
2.4.3Designate its representative in the Governing Board who shall act
as the Chairman thereof.74
Section 3.4 of the Trust Agreement provides that in the event that a
call is made on Home Guaranty Corporation for its guaranty, Planters
Development Bank shall convey to the former the Asset
Pool:chanroblesvirtuallawlibrary
Section 3.4. Conveyance to HIGC. Express authority is hereby granted
by the LANDOWNER/DEVELOPER to the TRUSTEE that in the event of
call upon the HIGC guaranty for unredeemed LSDCs and in order to
effect the redemption of the same by the latter, to make the absolute
conveyance to HIGC of the entire Asset Pool, subject to the
reservations regarding joint-venturers [sic] interests as defined in
Section 3.1, a and b above and subject further to the provision of the
aforementioned Contract of Guaranty.75cralawlawlibrary
This conveyance shall be on the strength of the special power of
attorney executed by La Savoie in favor of Planters Development
Bank, in accordance with Section 2.1.6 of the Trust
Agreement:chanroblesvirtuallawlibrary
Section 2.1. - The LANDOWNER/DEVELOPER shall:
2.1.6 Execute and deliver to the TRUSTEE an irrevocable Special Power
of Attorney a Secretary's Certificate per enclosed Annex G giving the
TRUSTEE the full power and authority to make the absolute
conveyance of the entire LSP Asset Pool in favor of the HIGC in the
event of call upon the HIGC guaranty for unredeemed LSDCs and in
order to effect the redemption of the same by the HIGC in accordance
with the provisions of the Contract of Guaranty.76cralawlawlibrary
In sum, these contractual provisions evince the following relations

1. A trust relation, with respect to the Asset Pool, in which La


Savoie is the trustor, Planters Development Bank is the trustee,
and the holders of the LSDC certificates are the beneficiaries;

2. A credit relation, with respect to the LSDC certificates, in which


La Savoie is the debtor (Planters Development Bank being a
mere nominal issuer), the holders of the LSDC certificates are
the creditors, and Home Guaranty Corporation is the guarantor.
(It will be recalled that Home Guaranty Corporation itself
acknowledged, in the Opposition it filed before the Regional Trial
Court, that it was not a creditor of La Savoie.); and

3. An agency relation, with respect to the transfer of the real


properties in the Asset Pool should the guarantor pay for the
LSDC certificates, in which La Savoie is the principal and Planters
Development Bank is the agent. In this event, Home Guaranty
Corporation is the transferee.
On Home Guaranty Corporation's guaranty, Section 12 of the Contract
of Guaranty entered into by Home Guaranty Corporation, La Savoie
and Planters Development Bank provide for the events in which Home
Guaranty Corporation may be called to pay for the LSDC
certificates:chanroblesvirtuallawlibrary
12. Events guaranteed against - For the purpose of enforcing the
benefit of guaranty herein provided[,] any of the following events
must occur:
12.1.Failure to pay the interest due on the LSDCs on their payment
dates from the Asset Pool; or
12.2 Failure to redeem or pay all or some of the LSDCs upon maturity
from the Asset Pool; or
12.3 Declaration of an off-mark liquidation of the Asset Pool. An off-
mark liquidation shall be declared by the Trustee upon written
advice of HIGC that there is:
(a) a twenty-five percent (25%) slippage on each of the following:
1. construction time table/cost/quality;
2. marketing m terms of units sold;
3. cash inflows of equity payments and/or buyers' take-outs;
or
(b)if the slippage items above reach a total of fifty percent (50%)
whichever comes first.77
Section 13 of the Contract of Guaranty provides for how guaranty
claims are to be processed and paid by Home Guaranty Corporation.
Likewise, it echoes Section 3.4 of the Trust Agreement in providing for
transfer of the Asset Pool in the event of a call on the
guaranty:chanroblesvirtuallawlibrary
13. Payment of Guaranty Claim - Should any of the events
mentioned in Sec. 12 hereof occur, the Trustee, on behalf of the
Certificate holders, shall file its guaranty claim with HIGC within
sixty (60) working days from the occurrence of the event.
13.1. Upon receipt of the guaranty claim filed by the Trustee, HIGC
shall have thirty (30) working days to evaluate the guaranty
claim. Within such period, HIGC shall acknowledge the guaranty
claim and require from the Trustee submission of the required
documents, as follows:
a. Deed of Assignment and Conveyance to HIGC of the entire
Asset Pool pursuant to the Trust Agreement;
b. All tax declarations, transfer certificates of title, original
certificates of title and official receipts of payments of real
estate taxes covering properties comprising the Asset Pool;
and,
c. All other documents and papers in the Asset Pool, as defined
in the Trust Agreement.
13.2 Upon receipt of the acknowledgment by HIGC of the guaranty
claim, the Trustee shall submit the documents and make a
prompt assignment and conveyance to- HIGC of all the
corresponding properties in the Asset Pool pursuant to the Trust
Agreement.
13.[3]Within fifteen (15) calendar days from receipt of the conveyance
of the entire Asset Pool from the Trustee, HIGC shall release on
behalf of the Certificate Holders the payment of the guaranty
claim.78
As against these contractual delimitations were the contingencies that
arose in the course of the rehabilitation proceedings. These, along with
the bounds set by law and established by the parties' contractual
relations, defined the competencies of the parties and determined the
validity of their actions.

It is not disputed that La Savoie defaulted in the redemption and in the


payment of interest on the LSDC certificates. It is also settled that a
call was made on Home Guaranty Corporation to pay for the LSDC
certificates, pursuant to the provisions of the Trust Agreement and the
Contract of Guaranty. However, as acknowledged by Home Guaranty
Corporation, any payment that it could have made was
"overtaken"79by the filing of La Savoie's Petition for Rehabilitation.

Thereafter, the Regional Trial Court issued its June 4, 2003 Stay Order
staying "the enforcement of all claims, whether for money or
otherwise, and whether such enforcement is by court action or
otherwise, against [La Savoie], its guarantors and sureties not
solidarity liable with it."80 It also "prohibited [La Savoie] from making
any payment of its liabilities outstanding as of the date of the filing of
the petition on April 25, 2003."81

The issuance of the June 4, 2003 Stay Order was in accordance with
Rule 4, Section 6 of this court's November 21, 2000 Resolution in A.M.
No. 00-8-10-SC, otherwise known as the Interim Rules of Procedure
on Corporate Rehabilitation (Interim Rules). Though subsequently
replaced in 2013 by the Financial Rehabilitation Rules of
Procedure,82 the Interim Rules was in effect at the time of the
incidents relevant to this case and which then governed "petitions for
rehabilitation filed by corporations, partnerships, and associations
pursuant to Presidential Decree No. 902-A, as.amended."

Rule 4, Section 6 of the Interim Rules


reads:chanroblesvirtuallawlibrary
Sec. 6. Stay Order. - If the court finds the petition to be sufficient in
form and substance, it shall, not later than five (5) days from the filing
of the petition, issue an Order (a) appointing a Rehabilitation Receiver
and fixing his bond; (b) staying enforcement of all claims, whether for
money or otherwise and whether such enforcement is by court action
or otherwise, against the debtor, its guarantors and sureties not
solidarity liable with the debtor, (c) prohibiting the debtor from selling,
encumbering, transferring, or disposing in any manner any of its
properties except in the ordinary course of business; (d) prohibiting
the debtor.from making any payment of its liabilities outstanding as at
the date of filing of the petition; (e) prohibiting the debtor's suppliers
of goods or services from withholding supply of goods and services in
the ordinary course of business for as long as the debtor makes
payments for the services and goods supplied after the issuance of the
stay order; (f) directing the payment in full of all administrative
expenses incurred- after the issuance of the stay order; (g) fixing the
initial hearing on the petition not earlier than forty five (45) days but
not later than sixty (60) days from the filing thereof; (h) directing the
petitioner to publish the Order in a newspaper of general circulation in
the Philippines once a week for two (2) consecutive weeks; (i)
directing all creditors and all interested parties (including the
Securities and Exchange Commission) to file and serve on the debtor a
verified comment on or opposition to the petition, with supporting
affidavits and documents, not later than ten (10) days before the date
of the initial hearing and putting them on notice that their failure to do
so will bar them from participating in the proceedings; and (j)
directing the creditors and interested parties to secure from the court
copies of the petition and its annexes within such time as to enable
themselves to file their comment on or opposition to the petition and
to prepare for the initial hearing of the petition. (Emphasis supplied)
With the issuance of this Stay Order, the claims of La Savoie's
creditors, including, those of the holders of the LSDC certificates, were
barred from being enforced. From the point of view of La Savoie and
"its guarantors and sureties not solidarity liable with it,"83 no payment
could have been made by them. Thus, for as long as the Stay Order
was in effect, certificate holders were barred from insisting on and
receiving payment, whether from the principal debtor, La Savoie, or
from the guarantor, Home Guaranty Corporation. Conversely, La
Savoie and Home Guaranty Corporation were barred from paying
certificate holders for as long as the Stay Order was in effect.

On October 1, 2003, the Regional Trial Court issued another Order


denying due course to La Savoie's Petition for Rehabilitation and lifting
the June 4, 2003 Stay Order. Aggrieved, La Savoie filed a Notice of
Appeal and thereafter filed before the Court of Appeals its Appellant's
Brief on May 5, 2004. Home Guaranty Corporation filed its Appellee's
Brief on August 18, 2004. On June 21, 2005, the Court of Appeals
rendered a Decision reversing and setting aside the Regional Trial
Court's October 1, 2003 Order and reinstating the June 4, 2003 Stay
Order.

What is notable, however, is what transpired in the interim. Sometime


between La Savoie's filing of its Appellant's Brief and Home Guaranty
Corporation's filing of its Appellee's Brief, Home Guaranty Corporation
approved and processed the call that was made, prior to the
commencement of rehabilitation proceedings, on its guaranty and
proceeded to pay the holders of LSDC certificates a total amount of
P128.5 million as redemption value. In consideration of this and
pursuant to Section 13.2 of the Contract of Guaranty, Planters
Development Bank executed in favor of Home Guaranty Corporation a
Deed of Assignment and Conveyance84 in which Planters Development
Bank "absolutely assign[ed], transferred[ed], convey[ed] and
deliver[ed] to the HGC, its successor and assigns the possession and
ownership over the entire Asset Pool Project."85

Home Guaranty Corporation asserts that the execution of this Deed


effectively removed the properties comprising the Asset Pool from the
dominion of La Savoie and, thus, beyond the reach of La Savoie's
rehabilitation proceedings. La Savoie contends that this transfer was
ineffectual as the Stay Order was in effect at the time of the execution
of the Deed and as affirming Home Guaranty Corporation's ownership
is supposedly tantamount to giving it undue preference as a creditor.

Rule 3, Section 5 of the Interim Rules governs the effectivity of orders


issued in proceedings relating to the rehabilitation of corporations,
partnerships, and associations under Presidential Decree No. 902-A, as
amended.
Sec. 5. Executory Nature of Orders. - Any order issued by the court
under these Rules is immediately executory. A petition for review
or an appeal therefrom shall not stay the execution of the order
unless restrained or enjoined by the appellate court. The review
of any order or decision of the court or an appeal therefrom shall be in
accordance with the Rules of Court: Provided, however, that the reliefs
ordered by the trial or appellate courts shall take into account the
need for resolution of proceedings in a just, equitable, and speedy
manner. (Emphasis supplied)
Rule 3, Section 5 is definite and unambiguous: Any order issued by the
trial court in rehabilitation proceedings is immediately executory. Rule
3, Section 5 makes no distinction as to the kinds of orders (e.g., final
or interlocutory and stay orders) that may be issued by a trial court.
Nowhere from its text can it be gleaned that it does not cover orders
such as those issued by the trial court on October 1, 2003. If at all, its
second sentence, which explicitly makes reference to orders on appeal,
affirms that it is equally applicable to final orders. We entertain no
doubt that Rule 3, Section 5 of the Interim Rules covered the trial
court's October 1, 2003 Order dismissing the Petition for Rehabilitation
and lifting the Stay Order The same Order was thus immediately
executory.

The filing of La Savoie's Appeal did not restrain the effectivity of the
October 1, 2003 Order. It is true thai generally, an appeal stays the
judgment or final order appealed from.86 Rehabilitation proceedings,
however, are not bound by procedural rules spelled out in the Rules of
Court. The Interim Rules, not the Rules of Court, was the procedural
law, which (at the time of the pivotal incidents in this case) governed
rehabilitation proceedings. In Rule 3, Section 5, the Interim Rules
explicitly carved an exception to the general principle that an appeal
stays the judgment or final order appealed from. It explicitly requires
the issuance by the appellate court of an order enjoining or restraining
the order appealed from.

Per the records, the Court of Appeals did not issue an injunctive writ or
a temporary restraining order. Neither did La Savoie specifically pray
for its issuance in the Appellant's Brief it filed before the Court of
Appeals. The prayer of this Brief reads:chanroblesvirtuallawlibrary
WHEREFORE, Petitioner-Appellant most respectfully pray [sic] that the
Order dated October 1, 2003, dismissing the Petition BE SET ASIDE
and after due consideration a judgment be rendered giving due course
to the Petition for rehabilitation and declaring the herein petitioner-
appellant in a state of suspension of payments, and reinstating the
Stay Order and finally, approving the Proposed Rehabilitation Plan.

Other relief and remedies are deemed just and equitable under the
premises are likewise prayed for.

RESPECTFULLY SUBMITTED.87cralawlawlibrary
Thus, the October 1, 2003 Order, lifting the restrictions on the
payment of claims against La Savoie, remained in effect. La Savoie's
creditors were then free to enforce their claims. Conversely, La Savoie
and "its guarantors and sureties not solidarity liable with it"88 were no
longer restrained from effecting payment.
Specifically, Home Guaranty Corporation as guarantor was
capacitated, in accordance with Sections 12 and 13 of the Contract of
Guaranty to effect payment to the holders of the LSDC certificates.

Per Sections 13.1 and 13.2 of the Contract of Guaranty, the


consequence of this payment was the execution by Planters
Development Bank, as trustee of the Asset Pool, of a Deed of
Conveyance in favor of Home Guaranty Corporation. Ostensibly, all
formal and substantive requisites for the execution of this Deed, as per
the Trust Agreement and the Contract of Guaranty, were fulfilled.
Notably, La Savoie failed to intimate that any such condition or
requisite was not satisfied. It assails the conveyance on only these
points: first, the supposed continuing effectivity of the June 4, 2003
Stay Order; second, that the Asset Pool remained under the
jurisdiction of the Makati City Regional Trial Court; and third, the
supposed violation of the rule against preference among creditors.

Having established that the Stay Order was lifted and that this lifting
remained in force and was not restrained, we turn to La Savoie's
contention that the conveyance to Home Guaranty Corporation of the
Asset Pool is in violation of the rule against preference of creditors.

La Savoie cites Article 206789 of the Civil Code and argues that with
Home Guaranty Corporation's payment of the LSDC certificates'
redemption value, Home Guaranty Corporation was subrogated into
the rights of La Savoie's creditors (i.e., the certificate holders). It
asserts that "effectively, petitioner HGC is already the creditor of
respondent La Savoie"90 and that as creditor, it cannot be given a
preference over the assets of La Savoie, something that is "prohibited,
in rehabilitation proceedings."91

In support of its contentions, La Savoie cites the following portion of


this court's discussion in Araneta v. Court of
Appeals:92ChanRoblesVirtualawlibrary
This Court in Alemar's Sibal & Sons, Inc. vs. Elbinias explained the
rationale behind a SEC order for suspension of payments and of
placing a corporation under receivership
thus:chanroblesvirtuallawlibrary
It must be stressed that the SEC had earlier ordered the suspension of
all actions for claims against Alemar's in order that all the assets of
said petitioner could be inventoried and kept intact for the purpose of
ascertaining an equitable scheme of distribution among its creditors.

During rehabilitation receivership, the assets are held in trust for the
equal benefit of all creditors to preclude one from obtaining an
advantage or preference over another by the expediency of an
attachment, execution or otherwise. For what would prevent an alert
creditor, upon learning of the receivership, from rushing posthaste to
the courts to secure judgments for the satisfaction of its claims to the
prejudice of the less alert creditors.

As between creditors, the key phrase is "equality is equity (Central


Bank vs. Morfe, 63 SCRA 114, citing Ramisch vs. Fulton, 41 Ohio App.
443, 180 N.E. 735)." When a corporation threatened by bankruptcy is
taken over by a receiver, all the creditors should stand on an equal
footing. Not anyone of them should be given any preference by paying
one or some of them ahead of the others. This is precisely the reason
for the suspension of all pending claims against the corporation under
receivership. Instead of creditors vexing the courts with suits against
the distressed firm, they are directed to file their claims with the
receiver who is a duly appointed officer of the SEC.93cralawlawlibrary
It is true, as La Savoie asserts, that the suspension of the enforcement
of claims against corporations under receivership is intended "to
prevent a creditor from obtaining an advantage or preference over
another."94 This is "intended to give enough breathing space for the
management committee or rehabilitation receiver to make the
business viable again, without having to divert attention and resources
to litigations in various fora."95 In Spouses Sobrejuanite v. ASB
Development Corporation:96ChanRoblesVirtualawlibrary
The suspension would enable the management committee or
rehabilitation receiver to effectively exercise its/his powers free from
any judicial or extra-judicial interference that might unduly hinder or
prevent the "rescue" of the debtor company. To allow such other
action to continue would only add to the burden of the management
committee or rehabilitation receiver, whose time, effort and resources
would be wasted in defending claims against the corporation instead of
being directed toward its restructuring and
rehabilitation.97cralawlawlibrary
As is evident from these discussions, however, the intention of
"prevent[ing] a creditor from obtaining an advantage" is applicable in
the context of an ongoing receivership. The prevention of a creditor's
obtaining an advantage is not an end in itself but further serves the
purpose of "giv[ing] enough breathing space for the ... rehabilitation
receiver." Thus, it applies only to corporations under receivership.
Plainly, it does not apply to corporations who have sought to put
themselves under receivership but, for lack of judicial sanction, have
not been put under or are no longer under receivership.
The trial court's October 1, 2003 Order denied due course to and
dismissed La Savoie's Petition for Rehabilitation. It superseded the trial
court's June 4, 2003 Stay Order appointing Rito C. Manzana as
rehabilitation receiver and thereby relieving him of his duties and
removing La Savoie from receivership.

Apart from these, the trial court's October 1, 2003 Order lifted the
June 4, 2003 Stay Order. This was significant not only with respect to
the freedom it afforded to La Savoie's creditors to (in the meantime
that the lifting of the Stay Order was not restrained) enforce their
claims but similarly because it established a context that removed this
case from the strict applicability of the rule being cited by La Savoie.

The portions cited by La Savoie in Araneta and Alemar's Sibal &


Sons referred to a specific context:chanroblesvirtuallawlibrary
It must be stressed that the SEC had earlier ordered the
suspension of all actions for claims against Alemar's in order that all
the assets of said petitioner could be inventoried and kept intact for
the purpose of ascertaining an equitable scheme of distribution among
its creditors.98 (Emphasis supplied)
The pronouncements in Araneta and Alemar's Sibal & Sons thus
pertained to instances in which there was an outstanding order
suspending the enforcement of creditors' claims. Here, the Stay Order
was lifted, and its lifting was not enjoined or otherwise restrained.
There was thus no Stay Order to speak of in those critical intervening
moments when Home Guaranty Corporation acted pursuant to the
guaranty call and paid the holders of the LSDC certificates.

If, following this payment and while La Savoie remained to be not


under receivership, a valid transfer of the properties comprising the
Asset Pool was made in favor of Home Guaranty Corporation, the
properties would then no longer be under the dominion of La Savoie.
They would thus be beyond the reach of rehabilitation proceedings and
no longer susceptible to the rule against preference of creditors.
However, we find that the transfer made to Home Guaranty
Corporation was ineffectual.

Viewed solely through the lens of the Trust Agreement and the
Contract of Guaranty, the transfer made to Home Guaranty
Corporation on the strength of the Deed of Conveyance appears valid
and binding. However, we find that its execution is in violation of a
fundamental principle in the law governing credit transactions. We find
the execution of a Deed of Conveyance without resorting to foreclosure
to be indicative of pactum commissorium. Hence, it is void and
ineffectual and does not serve to vest ownership in Home Guaranty
Corporation.

Articles 2088 and 2137 of the Civil Code


provide:chanroblesvirtuallawlibrary
Art. 2088. The creditor cannot appropriate the things given by way of
pledge or mortgage, or dispose of them. Any stipulation to the
contrary is null and void.

Art. 2137. The creditor does not acquire the ownership of the real
estate for non-payment of the debt within the period agreed upon.

Every stipulation to the contrary shall be void. But the creditor may
petition the court for the payment of the debt or the sale of the real
property. In this case, the Rules of Court on the foreclosure of
mortgages shall apply.
In Garcia v. Villar,99 this court discussed the elements of pactum
commissorium:chanroblesvirtuallawlibrary
The following are the elements of pactum commissorium:

(1) There should be a property mortgaged by way of security for the


payment of the principal obligation; and
(2) There should be a stipulation for automatic appropriation by the
creditor of the thing mortgaged in case of non-payment of the
principal obligation within the stipulated period.100
Nakpil v. Intermediate Appellate Court101 discussed a similar situation
where there was automatic appropriation on account of failure to
pay:chanroblesvirtuallawlibrary
The arrangement entered into between the parties, whereby Pulong
Maulap was to be considered sold to him (respondent) ... in case
petitioner fails to reimburse Valdes, must then be construed as
tantamount to a pactum commissorium which is expressly prohibited
by Art. 2088 of the Civil Code. For, there was to be automatic
appropriation of the property by Valdes in the event of failure of
petitioner to pay the value of the advances. Thus, contrary to
respondent's manifestations, all the elements of a pactum
commissorium were present: there was a creditor-debtor relationship
between the parties; the property was used as security for the loan;
and, there was automatic appropriation by respondent of Pulong
Maulap in case of default of petitioner.102cralawlawlibrary
In this case, Sections 13.1 and 13.2 of the Contract of Guaranty call
for the "prompt assignment and conveyance to [Home Guaranty
Corporation] of all the corresponding properties in the Asset Pool" that
are held as security in favor of the guarantor. Moreover, Sections 13.1
and 13.2 dispense with the need of conducting foreclosure
proceedings, judicial or otherwise. Albeit requiring the intervention of
the trustee of the Asset Pool, Sections 13.1 and 13.2 spell out what is,
for all intents and purposes, the automatic appropriation by the paying
guarantor of the properties held as security. This is thus a clear case
of pactum commissorium. It is null and void. Accordingly, whatever
conveyance was made by Planters Development Bank to Home
Guaranty Corporation in view of this illicit stipulation is ineffectual. It
did not vest ownership in Home Guaranty Corporation.

Air that this transfer engendered is a constructive trust in which the


properties comprising the Asset Pool are held in trust by Home
Guaranty Corporation, as trustee, for the trustor, La Savoie.

Buan Vda. De Esconde v. Court of Appeals103 exhaustively discussed


the concept of a trust and its classification into express and implied
trusts, as well as resulting and constructive
trusts:chanroblesvirtuallawlibrary
Trust is the legal relationship between one person having an equitable
ownership in property and another person owning the legal title to
such property, the equitable ownership of the former entitling him to
the performance of certain duties and the exercise of certain powers
by the latter. Trusts are either express or implied. An express trust is
created by the direct and positive acts of the parties, by some writing
or deed or will or by words evidencing an intention to create a trust.
No particular words are required for the creation of an express trust, it
being sufficient that a trust is clearly intended.

On the other hand, implied trusts are those which, without being
expressed, are deducible from the nature of the transaction as matters
of intent or which are superinduced on the transaction by operation of
law as matters of equity, independently of the particular.intention of
the parties. In turn, implied trusts are either resulting or constructive
trusts. These two are differentiated from each other as
follows:chanroblesvirtuallawlibrary
Resulting trusts are based on the equitable doctrine that valuable
consideration and not legal title determines the equitable title or
interest and are presumed always to have been contemplated by the
parties. They arise from the nature or circumstances of the
consideration involved in a transaction whereby one person thereby
becomes invested with legal title but is obligated in equity to hold his
legal title for the benefit of another. On the other hand, constructive
trusts are created by the construction of equity in order to satisfy the
demands of justice and prevent unjust enrichment. They arise contrary
to intention against one who, by fraud, duress or abuse of confidence,
obtains or holds the legal right to property which he ought not, in
equity and good conscience, to hold.104 (Emphasis supplied)
Articles 1450, 1454, 1455, and 1456 of the Civil Code provide
examples of constructive trusts:chanroblesvirtuallawlibrary
Art. 1450. If the price of a sale of property is loaned or paid by one
person for the benefit of another and the conveyance is made to the
lender or payor to secure the payment of the debt, a trust arises by
operation of law in favor of the person to whom the money is loaned
or for whom it is paid. The latter may redeem the property and compel
a conveyance thereof to him.

Art. 1454. If an absolute conveyance of property is made in order to


secure the performance of an obligation of the grantor toward the
grantee, a trust by virtue of law is established. If the fulfillment of the
obligation is offered by the grantor when it becomes due, he may
demand the reconveyance of the property to him.

Art. 1455. When any trustee, guardian or other person holding a


fiduciary relationship uses trust funds for the purchase of property and
causes the conveyance to be made to him or to a third person, a trust
is established by operation Of law in favor of the person to whom the
funds belong.

Art. 1456. If property is acquired through mistake or fraud, the person


obtaining it is, by force of law, considered a trustee of an implied trust
for the benefit of the person from whom the property comes.
In Rodrigo v. Arcilla,105 this court held that a constructive trust was
created when petitioners' predecessor-in-interest, Vicente Sauza, got
respondent's parents, Ramon Daomilas and Lucia Nagac, "to sign a
document which he represented to them as a deed 'evidencing their
status as adjoining landowners' but was actually a document
disclaiming their ownership over [the subject lot] and transferring the
same to [Sauza]."106

In Lopez v. Court of Appeals,107 properties intended to be for the


benefit of "a trust fund for [the testatrix's] paraphernal properties,
denominated as Fideicomiso de Juliana Lopez
Manzano(Fideicomiso),"108 were mistakenly adjudicated by a probate
court in favor of respondents' predecessor-in-interest, Jose Lopez
Manzano. These properties were then registered by him, and transfer
certificates of title were issued in his name. This court held that "[t]he
apparent mistake in the adjudication of the disputed properties to Jose
created a mere implied trust of the constructive variety in favor of the
beneficiaries of the Fideicomiso."109

In Lopez, this court held that the factual milieu of that case placed it
within the contemplation of Article 1456 of the Civil Code:

The provision on implied trust governing the factual milieu of this case
is provided in Article 1456 of the Civil Code, which states:

ART. 1456. If property is acquired through mistake or fraud, the


person obtaining it is, by force of law, considered a trustee of an
implied trust for the benefit of the person from whom the property
comes.

The disputed properties were excluded from the Fideicomiso at the


outset. Jose registered the disputed properties in his name partly as
his conjugal share and partly as his inheritance from his wife Juliana,
which is the complete reverse of the claim of the petitioner, as the new
trustee, that the properties are intended for the beneficiaries of
the Fideicomiso. Furthermore, the exclusion of the disputed properties
from the Fideicomiso was approved by the probate court and,
subsequently, by the trial court having jurisdiction over
the Fideicomiso. The registration of the disputed properties in the
name of Jose was actually pursuant to a court order. The apparent
mistake in the adjudication of the disputed properties to Jose created a
mere implied trust of. the constructive variety in favor of the
beneficiaries of the Fideicomiso.110

So, too, this case falls squarely under Article 1456 of the Civil Code.
Home Guaranty Corporation acquired the properties comprising the
Asset Pool by mistake or through the ineffectual transfer (i.e., for
being pactum commissorium) made by the original trustee, Planters
Development Bank.

Two key points are established from the preceding discussions. First,
the Court of Appeals' June 21, 2005 Decision restored La Savoie's
status as a corporation under receivership. Second, with all but a
constructive trust created between Home Guaranty Corporation and La
Savoie, the properties comprising the Asset Pool remain within the
dominion of La Savoie.

On the first point, the restoration of La Savoie's status as a corporation


under receivership brings into operation the rule against preference of
creditors. On the second point, La Savoie's continuing ownership
entails the continuing competence of the court having jurisdiction over
the rehabilitation proceedings to rule on how the properties comprising
the Asset Pool shall be disposed, managed, or administered in order to
satisfy La Savoie's obligations and/or effect its rehabilitation.

The cumulative effect of these is that Home Guaranty Corporation


must submit itself, like La Savoie's other creditors, to how La Savoie's
Petition for Rehabilitation shall be resolved. As a paying guarantor,
Home Guaranty Corporation was subrogated into the rights of La
Savoie's creditors and now stands as the latter's own creditor. It
remains so pending the satisfaction of La Savoie's obligation and as
the void conveyance made to it by Planters Development Bank failed
to terminate in the creditor-debtor relationship with La
Savoie.cralawred

WHEREFORE, the Petition is DENIED. The Regional. Trial Court,


Branch 142, Makati City is directed to proceed with dispatch in
resolving the Petition for Rehabilitation filed by respondent La Savoie
Development Corporation.

SO ORDERED.chanroblesvirtuallawlibrary

11. SEC VS SUBIC BAY GOLF CLUB, INC

SECURITIES AND EXCHANGE COMMISSION, Petitioner, v. SUBIC


BAY GOLF AND COUNTRY CLUB, INC. AND UNIVERSAL
INTERNATIONAL GROUP DEVELOPMENT
CORPORATION, Respondents.

DECISION

LEONEN, J.:

Intra-corporate controversies, previously under the Securities and


Exchange Commission's jurisdiction, are now under the jurisdiction of
Regional Trial Courts designated as commercial courts. However, the
transfer of jurisdiction to the trial courts does not oust the Securities
and Exchange Commission of its jurisdiction to determine if
administrative rules and regulations were violated.

In this Petition for Review1 on Certiorari under Rule 45 of the Rules of


Court, petitioner Securities and Exchange Commission prays for the
reversal of the Court of Appeals' July 31, 2007 Decision.2 The Court of
Appeals declared void the Securities and Exchange Commission's
February 10, 2004 Decision affirming its Corporation Finance
Department's Order3 to refund payments for Subic Bay Golf and
Country Club, Inc.'s shares of stock.4cralawrednad

Subic Bay Golf Course, also known as Binictican Valley Golf Course,
was operated by Subic Bay Metropolitan Authority (SBMA) under the
Bases Conversion Development Authority (BCDA).5 Universal
International Group of Taiwan (UIG), a Taiwanese corporation, was
chosen to implement the plan to privatize the golf
course.6cralawrednad

On May 25, 1995, SBMA and UIG entered into a Lease and
Development Agreement. Under the agreement, SBMA agreed to lease
the golf course to UIG for 50 years, renewable for another 25
years.7UIG agreed to "develop, manage and maintain the golf course
and other related facilities within the complex[.]"8 Later, Universal
International Group Development Corporation (UIGDC) succeeded to
the interests of UIG on the golf course development.9cralawrednad

On April 1, 1996, UIGDC executed a Deed of Assignment in favor of


Subic Bay Golf and Country Club, Inc. (SBGCCI). Under the Deed of
Assignment, UIGDC assigned all its rights and interests in the golf
course's development, operations, and marketing to
SBGCCI.10cralawrednad

On April 25, 1996, SBGCCI and UIGDC entered into a Development


Agreement.11 UIGDC agreed to "finance, construct and develop the
[golf course], for and in consideration of the payment by [SBGCCI] of
its 1,530 (SBGCCI) shares of stock."12cralawrednad

Upon SBGCCI's application, the Securities and Exchange Commission


issued an Order for the Registration of 3,000 no par value shares of
SBGCCI on July 8, 1996. SBGCCI was issued a Certificate of Permit to
Offer Securities for Sale to the Public of its 1,530 no par value
proprietary shares on August 9, 1996. The shares were sold at
P425,000.00 per share. SBGCCI would use the proceeds of the sale of
securities to pay UIGDC for the development of the golf
course.13cralawrednad

In the letter14 dated November 4, 2002 addressed to Atty. Justina


Callangan, Director of Securities and Exchange Commission's
Corporation Finance Department, complainants Regina Filart (Filart)
and Margarita Villareal (Villareal) informed the Securities and
Exchange Commission that they had been asking UIGDC for the refund
of their payment for their SBGCCI shares. UIGDC did not act on their
requests.15 They alleged that they purchased the shares in 1996 based
on the promise of SBGCCI and UIGDC to deliver the
following:cralawlawlibrary

a. an 18 hole golf course that would meet the highest USGA


and PGA standards.

b. A 9 hole executive course which would be completely


illuminated to allow members to play after dark

c. A swimming pool and tennis courts

d. Golf Villas and Residential Condominium-Hotel

e. Driving range of 30 berths provided with a roof and


illuminated to afford nighttime driving.

f. Club facilities with a restaurant which will offer French,


Filipino and Chinese cuisine and 7 well-furnished VIP
rooms which are equipped with the latest toilet and bath
facilities and are available for private meetings and
conferences.16

However, these promises were not delivered.17cralawrednad

Villareal and Filart also claimed that despite SBGCCI's and UIGDC's
failure to deliver the promised amenities, they started to charge them
monthly dues. They also never received any billing statement from
them until they were sent a demand notice to pay the alleged back
dues of P39,000.00 within five (5) days. They were threatened that
their shares amounting to P740,000.00 and paid off in December 1996
would be auctioned off if their alleged back dues would not be
paid.18 Villareal and Filart prayed for relief from the "terrible situation
[they found themselves] in."19 They also prayed that their letter be
accepted "as a formal complaint against Universal International Group
Development Corporation for breach of promise/contract with its
investors who put in hard-earned money believing that they would
deliver what their brochures promised to deliver."20cralawrednad

In their Comment,21 SBGCCI and UIGDC averred that they had already
substantially complied with their commitment to provide the members
a world-class golf and country club.22 The construction of the golf
course substantially met international standards.23 Other proposed
project developments such as the construction of villas and residential
condominium-hotels were not included in the rights purchased with
member shares.24 They also denied that they failed to send monthly
billing statements to Filart and Villareal.25cralawredcralawrednad

SBGCCI and UIGDC also stressed that SBMA, under its Contract of
Lease, was the one duty-bound to complete the golf course and
amenities. It would be in breach of contract if it failed to complete the
golf course and the amenities. Insofar as SBGCCI's commitments were
concerned, it was able to fully comply with its
obligations.26cralawrednad

In January 2003, the Securities and Exchange Commission's


Corporation Finance Department conducted an ocular inspection of the
project. Based on the Memorandum Report prepared by Julius H.
Baltazar, Specialist I, SBGCCI and UIGDC failed to comply
substantially with their commitment to complete the
project.27 According to the Report:cralawlawlibrary
Findings per
Completion
Project Description based on ocular inspection
date/cost per
Work Program as of January 3,
Prospectus
2003
Reconstruction/rehabilitation of The 18-hole golf
the 18-hole golf course. This course is already
includes the construction of the existing and
following: Before November playable. It was
1996 observed that the
1. greens P301,600[,]000. grass in some parts
2. fairways of the 18-hole
3. road/cart paths course is dry and
4. bridges withered
5. drainage & irrigation system
6. driving range The road/cart paths
7. tee houses are fully concrete
and passable,
Construction of additional 9-hole After November bridges, drainage
course. 1996 and irrigation
P156,000,000 systems are in
place.

There is a driving
range with roof and
7 berths and one
(1) tee house in
hole # 3.

The construction of
the additional 9-
hole course has not
yet started.
Construction/renovation of Before November The clubhouse has
Clubhouse with the following 1996 a dining area,
facilities: P192,400,000 function room, 6
VIP rooms, sport
1. dining areas shop, one (1)
2. function rooms restaurant and men
3. indoor and outdoor tennis & ladies locker
courts rooms. It has no
4. 25-meter swimming pool sauna and massage
5. gyms rooms.
6. saunas and massage room
7. sport shops Beside the
clubhouse is a
Condominiums, Residential swimming pool with
Villas, 250-bedroom hotel and a no water and one
conference center (1) tennis court,
[sic] that are both
poorly maintained.

There is [sic]
none.28
In the July 1, 2003 Order, the Securities and Exchange Commission's
Corporation Finance Department gave due course to Villareal and
Filart's letter-complaint:29
WHEREFORE, upon consideration of the foregoing, the complaint of
REGINA S. FILART and MARGARITA G. VILLAREAL is hereby given DUE
COURSE.

Respondents SUBIC BAY GOLF AND COUNTRY CLUB, INC. and


UNIVERSAL INTERNATIONAL GROUP DEVELOPMENT CORPORATION,
are hereby ordered to refund to REGINA S. FILART and MARGARITA G.
VILLAREAL, within ten (10) days from receipt of this Order, the total
purchase price of their shares of stock issued by Subic Bay Golf and
Country Club, Inc., in the amount of P740,000.00 each, or a total of
P1,480,000.00.
SUBIC BAY GOLF and COUNTRY CLUB, INC. is likewise hereby ordered
to amend its Prospectus, reflecting therein the actual status of the
facilities of the club, and to comply with the requirements of SRC Rule
14.

Furthermore, due to its failure to comply with its undertakings in its


Registration Statement and Prospectus, tantamount to
misrepresentation, and in violation of the provisions of the Securities
Regulation Code, and its implementing rules and regulation, the
Certificate of Registration and Permit to Sell Securities to the Public
issued to respondent Subic Bay Golf and Country Club, Inc., are
hereby SUSPENDED until the aforementioned misrepresentations are
rectified and the requirements of this Order are complied with. The
Commission shall make a determination, within thirty (30) days,
whether or not such registration should be revoked.

And, pursuant to Section 54 of the Code, respondent corporations,


SUBIC BAY GOLF AND COUNTRY CLUB, INC. and UNIVERSAL
INTERNATIONAL GROUP DEVELOPMENT CORPORATION, are hereby
fined the amount of P100,000.00.

SO ORDERED.30 (Emphasis in the original)


The Corporation Finance Department found that Filart and Villareal
invested in the golf course because of SBGCCI and UIGDC's
representation that a 27-hole, world-class golf course would be
developed.31 It also found that SBGCCI and UIGDC failed to comply
with their commitments and representations as stated in their
prospectus.32cralawrednad

The Corporation Finance Department ordered the return of the


purchase price of shares pursuant to Rule 1433 of the Implementing
Rules and Regulations of Republic Act No. 8799 or the Securities
Regulation Code. It explained that the non-completion of the golf
course constituted a material amendment in the prospectus. The
prospectus had become misleading, tending to work a fraud. This gave
the purchasers the right to a refund of their
contributions.34cralawrednad

SBGCCI and UIGDC filed a Petition for Review35 of the Corporation


Finance Department's Order before the Securities and Exchange
Commission. SBGCCI and UIGDC assailed the Corporation Finance
Department's and the Securities and Exchange Commission's authority
to order a refund of investments. They also assailed its jurisdiction
over the case, which according to SBGCCI and UIGDC involved an
intra-corporate dispute. They argued that the Corporation Finance
Department's Order was issued without due process.36cralawrednad

On February 10, 2004, the Securities and Exchange Commission


rendered the Decision37 affirming the July 1, 2003 Order of the
Corporation Finance Department:cralawlawlibrary
WHEREFORE, in view of the foregoing, the PETITION is
hereby DENIED. The July 1, 2003 ORDER of the Corporate Finance
Department is hereby AFFIRMED.

SO ORDERED.38
The Securities and Exchange Commission ruled that the Corporation
Finance Department's proceedings were administrative in nature. It
was only conducted to determine if SBGCCI and UIGDC violated the
Securities and Exchange Commission's rules and regulations. While
Villareal and Filart's letter-complaint alleged intra-corporate matters, it
also alleged matters pertaining to SBGCCI and UIGDC's compliance
with the prospectus and registration statements. The Securities and
Exchange Commission has the authority to investigate possible acts of
abuse of franchise and violations of its rules and regulations. It also
has the power to impose appropriate administrative sanctions. The
Corporation Finance Department only exercised these
powers.39cralawrednad

The Corporation Finance Department, tasked to oversee securities


registration, has the implied power to suspend or revoke registration
upon showing of violations of the Securities and Exchange
Commission's rules and regulations. Based on Section 4.6 of the
Securities Regulation Code, the Securities and Exchange Commission
has the power to delegate some of its functions to any of its
departments.40cralawrednad

On SBGCCI and UIGDC's allegation that they were not given due
process, the Securities and Exchange Commission ruled that
suspension of permit to sell securities does not require a full-blown
hearing. In any case, SBGCCI and UIGDC were served notice and
given an opportunity to present their case. They were even able to file
their Comment on the letter-complaint on January 6,
2003.41cralawrednad

The Securities and Exchange Commission added that the Corporation


Finance Department's directive to return the purchasers' investments
was in accordance with the rules. Rule 14 of the Securities Regulation
Code allows purchasers to renounce their securities.42cralawrednad
SBGCCI and UIGDC filed a Motion for Reconsideration of the February
10, 2004 Securities and Exchange Commission Decision, but this was
denied in the Order43 dated April 6, 2004.44cralawrednad

SBGCCI and UIGDC filed a Petition for Review45 of the Securities and
Exchange Commission's February 10, 2004 Decision before the Court
of Appeals.46 They argued that the letter-complaint filed by Villareal
and Filart involved an intra-corporate dispute that was under the
jurisdiction of the Regional Trial Court and not the Securities and
Exchange Commission.47 They also argued that the Securities
Regulation Code does not grant the Securities and Exchange
Commission the power to order the refund of payment for shares of
stock.48cralawrednad

On July 31, 2007, the Court of Appeals declared void the February 10,
2004 Decision of the Securities and Exchange Commission insofar as it
ordered the refund of the purchase price of Filart's and Villareal's
investments.49 Thus:cralawlawlibrary
WHEREFORE, the February 10, 2004 Decision of the Securities and
Exchange Commission in CFD-AA-Case No. 08-03-36, affirming the
July 1, 2003 Order of the Corporate Finance Department, insofar as it
ordered the refund of the purchase price of the shares of stock of
petitioner SBGCCI, is hereby declared NULL and VOID for lack of
jurisdiction.

SO ORDERED.50
The Court of Appeals found that the case involved an intra-corporate
controversy. The Securities and Exchange Commission acted in excess
of its jurisdiction when it ordered UIGDC and SBGCCI to refund
Villareal and Filart the amount they paid for SBGCCI shares of stock.
The authority to exercise powers necessary to carry out the objectives
of the Securities and Exchange Commission does not include the
authority to refund investments. This power has been transferred to
the Regional Trial Court. The Securities and Exchange Commission
should have limited its exercise of power to issuing an order imposing
a fine, to amend the prospectus, and to suspend the Certificate of
Registration and Permit to Sell Securities to the Public.51cralawrednad

Hence, this petition was filed.

The Securities and Exchange Commission argues that Villareal and


Filart's letter-complaint of November 4, 2002 did not only raise
matters involving intra-corporate relations. Their letter-complaint also
stated serious violations of the Securities Regulation Code, which may
require the Securities and Exchange Commission's intervention.52 The
Commission did not adjudicate private rights or awarded damages.53 It
only determined whether SBGCCI and UIGDC committed
misrepresentations,54 in violation of the Securities Regulation Code
and its implementing rules.55cralawrednad

The Securities and Exchange Commission contends that its Order to


return the stock purchasers' contributions is in accordance with Rule
14, Section 1(c)56 of the Implementing Ru|es and Regulations of the
Securities Regulation Code.57 This provision is within the Securities and
Exchange Commission's rule-making power under Section 14358 of the
Corporation Code and Section 5(g) and (n)59 of the Securities
Regulation Code.60 Section l(c) is necessary to implement the
Securities Regulation Code's mandate "to protect the investing public
from unscrupulous corporations taking advantage of every
situation[.]"61cralawrednad

The Securities and Exchange Commission points out that Villareal and
Filart had been demanding from SBGCCI and UIGDC the return of their
investments. Its Corporation Finance Department already directed
SBGCCI and UIGDC to amend their prospectus and registration
statements to comply with the Securities Regulation Code. However,
SBGCCI and UIGDC failed to comply.62cralawrednad

In their Comment,63 SBGDCC and UIGDC insist that the case involved
an intra-corporate dispute over which only the Regional Trial Court has
jurisdiction.64 The Securities and Exchange Commission has no
authority to order the return of payments made by Villareal and
Filart.65 Even assuming that the Securities and Exchange Commission
has jurisdiction over intra-corporate cases, there should first be a
disagreement over prospectus amendments before paid contributions
can be refunded.66cralawrednad

We determine which between the Securities and Exchange Commission


and the Regional Trial Court has jurisdiction over this case. We also
determine whether the Securities and Exchange Commission has the
authority to order the return of purchase price of securities upon
finding that there were fraudulent representations in the prospectus.

We rule for SBGCCI and UIGDC.

Under Presidential Decree No. 902-A,67 the Securities and Exchange


Commission has jurisdiction over acts amounting to fraud and
misrepresentation by a corporation's board of directors, business
associates, and officers. It also provides that it has jurisdiction over
intra-corporate disputes. Thus:cralawlawlibrary
WHEREAS, in line with the government's policy of encouraging
investments, both domestic and foreign, and more active public
participation in the affairs of private corporations and enterprises
through which desirable activities may be pursued for the promotion of
economic development; and, to promote a wider and more meaningful
equitable distribution of wealth, there is a need for an agency of the
government to be invested with ample powers to protect such
investment and the public;

....

SEC. 5. In addition to the regulatory and adjudicative functions of the


Securities and Exchange Commission over corporations, partnerships
and other forms of associations registered with it as expressly granted
under existing laws and decrees, it shall have original and exclusive
jurisdiction to hear and decide cases involving:

a. Devices or schemes employed by or any acts, of the board of


directors, business associates, its officers or partners, amounting
to fraud and misrepresentation which may be detrimental to the
interest of the public and/or of the stockholder, partners,
members of associations or organizations registered with the
Commission;

b. Controversies arising out of intra-corporate or partnership


relations, between and among stockholders, members, or
associates; between any or all of them and the corporation,
partnership or association of which they are stockholders,
members or associates, respectively; and between such
corporation, partnership or association and the state insofar as it
concerns their individual franchise or right to exist as such
entity;

c. Controversies in the election or appointments of directors,


trustees, officers or managers of such corporations, partnerships
or associations.

However, jurisdiction over intra-corporate disputes and all other cases


enumerated in Section 5 of Presidential Decree No. 902-A had already
been transferred to designated Regional Trial Courts. Section 5.2 of
Republic Act No. 8799 provides:cralawlawlibrary
5.2.The Commission's jurisdiction over all cases enumerated under
Section 5 of Presidential Decree No. 902-A is hereby transferred to
the Courts of general jurisdiction or the appropriate Regional Trial
Court: Provided, that the Supreme Court in the exercise of its
authority may designate the Regional Trial Court branches that
shall exercise jurisdiction over these cases. The Commission shall
retain jurisdiction over pending cases involving intra-corporate
disputes submitted for final resolution which should be resolved
within one (1) year from the enactment of this Code. The
Commission shall retain jurisdiction over pending suspension of
payments/rehabilitation cases filed as of 30 June 2000 until fully
disposed.
Hence, actions pertaining to intra-corporate disputes should be filed
directly before designated Regional Trial Courts. Intra-corporate
disputes brought before other courts or tribunals are dismissible for
lack of jurisdiction.68cralawrednad

For a dispute to be "intra-corporate," it must satisfy the relationship


and nature of controversy tests.69cralawrednad

The relationship test requires that the dispute be between a


corporation/partnership/association and the public; a
corporation/partnership/association and the state regarding the
entity's franchise, permit, or license to operate; a
corporation/partnership/association and its stockholders, partners,
members, or officers; and among stockholders, partners, or associates
of the entity.70cralawrednad

The nature of the controversy test requires that the action involves the
enforcement of corporate rights and obligations.

Courts and tribunals must consider both the parties' relationship and
the nature of the controversy to determine whether they should
assume jurisdiction over a case. In Medical Plaza Makati Condominium
Corporation v. Cullen:71
[T]he controversy must not only be rooted in the existence of an intra-
corporate relationship, but must as well pertain to the enforcement of
the parties' correlative rights and obligations under the Corporation
Code and the internal and intra-corporate regulatory rules of the
corporation. In other words, jurisdiction should be determined by
considering both the relationship of the parties as well as the nature of
the question involved.72(Citations omitted)
This case is an intra-corporate dispute, over which the Regional Trial
Court has jurisdiction. It involves a dispute between the corporation,
SBGCCI, and its shareholders, Villareal and Filart.

This case also involves corporate rights and obligations. The nature of
the action — whether it involves corporate rights and obligations — is
determined by the allegations and reliefs in the
complaint.73cralawrednad

Villareal and Filart's right to a refund of the value of their shares was
based on SBGCCI and UIGDC's alleged failure to abide by their
representations in their prospectus. Specifically, Villareal and Filart
alleged in their letter-complaint that the world-class golf course that
was promised to them when they purchased shares did not
materialize. This is an intra-corporate matter that is under the
designated Regional Trial Court's jurisdiction. It involves the
determination of a shareholder's rights under the Corporation Code or
other intra-corporate rules when the corporation or association fails to
fulfill its obligations.

However, even though the Complaint filed before the Securities and
Exchange Commission contains allegations that are intra-corporate in
nature, it does not necessarily oust the Securities and Exchange
Commission of its regulatory and administrative jurisdiction to
determine and act if there were administrative violations committed.

The Securities and Exchange Commission is organized in line with the


policy of encouraging and protecting investments.74 It also administers
the Securities Regulation Code,75 which was enacted to "promote the
development of the capital market, protect investors, ensure full and
fair disclosure about securities, [and] minimize if not totally eliminate
insider trading and other fraudulent or manipulative devices and
practices which create distortions in the free market."76 Pursuant to
these policies, the Securities and Exchange Commission is given
regulatory powers77 and "absolute jurisdiction, supervision and control
over all corporations, partnerships' or associations. . . ."78cralawrednad

In relation to securities, the Securities and Exchange Commission's


regulatory power pertains to the approval and rejection, and
suspension or revocation, of applications for registration of
securities79 for, among others, violations of the law, fraud, and
misrepresentations. Thus:cralawlawlibrary
SEC. 13. Rejection and Revocation of Registration of Securities. - 13.1.
The Commission may reject a registration statement and refuse
registration of the security thereunder, or revoke the effectivity of a
registration statement and the registration of the security thereunder
after due notice and hearing by issuing an order to such effect, setting
forth its findings in respect thereto, if it finds that:

a. The issuer:
i. Has been judicially declared insolvent;

ii. Has violated any of the provisions of this Code, the rules
promulgated pursuant thereto, or any order of the
Commission of which the issuer has notice in connection
with the offering for which a registration statement has
been filed;

iii. Has been engaged or is about to engage in fraudulent


transactions;

iv. Has made any false or misleading representation of


material facts in any prospectus concerning the issuer or
its securities;

v. Has failed to comply with any requirement that the


Commission may impose as a condition for registration of
the security for which the registration statement has been
filed; or

b. The registration statement is on its face incomplete or inaccurate


in any material respect or includes any untrue statement of a
material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading; or

c. The issuer, any officer, director or controlling person of the


issuer, or person performing similar functions, or any
underwriter has been convicted, by a competent judicial or
administrative body, upon plea of guilty, or otherwise, of an
offense involving moral turpitude and/or fraud or is enjoined or
restrained by the Commission or other competent judicial or
administrative body for violations of securities, commodities, and
other related laws.

....

13.4. If the Commission deems it necessary, it may issue an order


suspending the offer and sale of the securities pending any
investigation. The order shall state the grounds for taking such action,
but such order of suspension although binding upon the persons
notified thereof, shall be deemed confidential, and shall not be
published. Upon the issuance of the suspension order, no further offer
or sale of such security shall be made until the same is lifted or set
aside by the Commission. Otherwise, such sale shall be void.

....

SEC. 15. Suspension of Registration. - 15.1. If, at any time, the


information contained in the registration statement filed is or has
become misleading, incorrect, inadequate or incomplete in any
material respect, or the sale or offering for sale of the security
registered thereunder may work or tend to work a fraud, the
Commission may require from the issuer such further information as
may In its judgment be necessary to enable the Commission to
ascertain whether the registration of such security should be revoked
on any ground specified in this Code. The Commission may also
suspend the right to sell and offer for sale such security pending
further investigation, by entering an order specifying the grounds for
such action, and by notifying the issuer, underwriter, dealer or broker
known as participating in such offering.80
To ensure compliance with the law and the rules, the Securities and
Exchange Commission is also given the power to impose fines and
penalties. It may also investigate motu proprio whether corporations
comply with the Corporation Code, Securities Regulation Code, and
rules implemented by the Securities and Exchange
Commission.chanrobleslaw
SEC. 5. Powers and Functions of the Commission. - 5.1. The
Commission shall act with transparency and shall have the powers and
functions provided by this Code, Presidential Decree No. 902-A, the
Corporation Code, the Investment Houses Law, the Financing
Company Act and other existing laws. Pursuant thereto the
Commission shall have, among others, the following powers and
functions:ChanRoblesvirtualLawlibrary

..
.
d. Regulate, investigate or supervise the activities of persons to
ensure compliance;
..
.
f. Impose sanctions for the violation of laws and the rules, regulations
and orders issued pursuant thereto;
..
.
i. Issue cease and desist orders to prevent fraud or injury to the
investing public;
..
.
m. Suspend, or revoke, after proper notice and hearing the franchise
or certificate of registration of corporations, partnerships or
associations, upon any of the grounds provided by law; and
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.81
The Securities and Exchange Commission's approval of securities
registrations signals to the public that the securities are valid. It
provides the public with basis for relying on the representations of
corporations that issue securities or financial instruments.

Any fraud or misrepresentation in the issuance of securities injures the


public. The Securities and Exchange Commission's power to suspend
or revoke registrations and to impose fines and other penalties
provides the public with a certain level of assurance that the securities
contain representations that are true, and that misrepresentations if
later found, would be detrimental to the erring corporation. It creates
risks to corporations that issue securities and adds cost to errors,
misrepresentations, and violations related to the issuance of those
securities. This protects the public who will rely on representations of
corporations and partnerships regarding financial instruments that
they issue. The Securities and Exchange Commission's regulatory
power over securities-related activities is tied to the government's
duty to protect the investing public from illegal and fraudulent
instruments.

Thus, when Villareal and Filart alleged in their letter-complaint that


SBGCCI and UIGDC committed misrepresentations in the sale of their
shares, nothing prevented the Securities and Exchange Commission
from taking cognizance of it to determine if SBGCCI and UIGDC
committed administrative violations and were liable under the
Securities Regulation Code. The Securities and Exchange Commission
may investigate activities of corporations under its jurisdiction to
ensure compliance with the law.

However, the Securities and Exchange Commission's regulatory power


does not include the authority to order the refund of the purchase
price of Villareal's and Filart's shares in the golf club. The issue of
refund is intra-corporate or civil in nature. Similar to issues such as
the existence or inexistence of appraisal rights, pre-emptive rights,
and the right to inspect books and corporate records, the issue of
refund is an intra-corporate dispute that requires the court to
determine and adjudicate the parties' rights based on law or contract.
Injuries, rights, and obligations involved in intra-corporate disputes
are specific to the parties involved. They do not affect the Securities
and Exchange Commission or the public directly.

The Securities and Exchange Commission argues that the power to


order a refund is in accordance with the implementing rules of the
Securities Regulation Code. Despite orders from the Securities and
Exchange Commission to amend their prospectus, SBGCCI and UIGDC
failed to comply. Thus, Villareal and Filart were entitled to the refund
of the purchase price of their shares. They cite Section 14 of the
Implementing Rules and Regulations of the Securities Regulation
Code:ChanRoblesvirtualLawlibrary

SRC Rule 14 - Amendments to the Registration Statement

1. If a prospectus filed with the Commission under the Code becomes


incomplete or inaccurate in any material respect or if the issuer
wants to change any material information therein, the issuer shall:
a. file an amendment to the registration statement with the
Commission explaining all proposed changes which shall be
reviewed by the Commission in accordance with Section 14 of the
Code;
..
..
c. where material amendments have been made to the prospectus
after the effective date thereof, purchasers may, within thirty (30)
days from the date of such notification, renounce their purchase of
securities, whereupon the issuer, or any person acting on behalf of
the issuer in connection with the distribution of said securities, shall,
within ten (10) days from receipt of notification of such election,
return the contributions paid by such purchasers without making
any deductions. Purchasers who decide not to renounce their
purchase of securities shall be subject to the terms of the amended
offering. (Emphasis supplied)

Based on these provisions, Villareal and Filart may be entitled to a


refund of the purchase price of their shares. Provisions giving
shareholders rights, however, are not to be interpreted as sources of
authority or jurisdiction when there is none. The provisions in the law
or in the rules giving Villareal and Filart the right to be refunded the
value of their shares are not equivalent to authority for the Securities
and Exchange Commission to issue an order for the refund. Such order
may not come from the Securities and Exchange Commission.

Neither the provisions of the implementing rules nor the provisions of


the Securities Regulation Code,82the law being implemented, give the
Securities and Exchange Commission the power to order a refund. The
Securities and Exchange Commission's power when violations of the
Securities Regulation Code are found is limited to issuing regulatory
orders such as suspending or revoking registration statements,
providing for the terms and conditions for registration, and imposing
fines and penalties.

The implementing rules cannot be interpreted to give the Securities


and Exchange Commission the power that is more than what is
provided under the Securities Regulation Code. Implementing rules are
limited by the laws they implement. The rules cannot be used to
amend, expand, or modify the law being implemented. The law shall
prevail in case of inconsistency between the law and the rules.

In United BF Homeowner's Association v. BF Homes, Inc.:83


As early as 1970, in the case of Teoxon vs. Members of the Board of
Administrators (PVA), we ruled that the power to promulgate rules in
the implementation of a statute is necessarily limited to what is
provided for in the legislative enactment. Its terms must be followed
for an administrative agency cannot amend an Act of Congress. "The
rule-making power must be confined to details for regulating the mode
or proceedings to carry into effect the law as it has been enacted, and
it cannot be extended to amend or expand the statutory requirements
or to embrace matters not covered by the statute." If a discrepancy
occurs between the basic law and an implementing rule or regulation,
it is the former that prevails.

....

. . . The rule-making power of a public administrative body is a


delegated legislative power, which it may not use either to abridge the
authority given it by Congress or the Constitution or to enlarge its
power beyond the scope intended. Constitutional and statutory
provisions control what rules and regulations may be promulgated by
such a body, as well as with respect to what fields are subject to
regulation by it. It may not make rules and regulations which are
inconsistent with the provisions of the Constitution or a statute,
particularly the statute it is administering or which created it, or which
are in derogation of, or defeat, the purpose of a statute.

Moreover, where the legislature has delegated to an executive or


administrative officers and boards authority to promulgate rules to
carry out an express legislative purpose, the rules of administrative
officers and boards, which have the effect of extending, or which
conflict with the authority-granting statute, do not represent a valid
exercise of the rule-nrnking power but constitute an attempt by an
administrative body to legislate. "A statutory grant of powers should
not be extended by implication beyond what may be necessary for
their just and reasonable execution." It is axiomatic that a rule or
regulation must bear upon, and be consistent with, the provisions of
the enabling statute if such rule or regulation is to be
valid.84 (Citations omitted)
Hence, the issue of refund should be litigated in the appropriate
Regional Trial Court. This issue is both intra-corporate and civil in
nature, which is under the jurisdiction of the designated Regional Trial
Courts.

WHEREFORE, the Court of Appeals Decision dated July 31, 2007


is AFFIRMED.

SO ORDERED.chanrobles virtuallawlibrary

12. FONG VS DUENAS

GEORGE C. FONG, Petitioner, v. JOSE V. DUEÑAS, Respondent.

DECISION

BRION, J.:

We resolve in this petition for review on certiorari1 the challenge to the


September 16, 2008 decision2 and the December 8, 2008
resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 88396.

These assailed CA rulings annulled the June 27, 2006 decision4 and
October 30, 2006 order5 of the Regional Trial Court of Makati, Branch
64 (trial court), which directed respondent Jose V. Dueñas (Dueñas) to
pay Five Million Pesos (P5 Million) to petitioner George C. Fong (Fong),
and imposed a six percent (6%) annual interest on this amount.

Factual Antecedents

Dueñas is engaged in the bakery, food manufacturing, and retailing


business, which are all operated under his two companies, D.C.
DANTON, Inc. (Danton) and Bakcom Food Industries, Inc. (Bakcom).
He was an old acquaintance of Fong as they were former schoolmates
at the De La Salle University.6chanrobleslaw

Sometime in November 1996, Dueñas and Fong entered into


a verbal joint venture contract where they agreed to engage in the
food business and to incorporate a holding company under the name
Alliance Holdings, Inc. (Alliance or the proposed corporation). Its
capitalization would be Sixty Five Million Pesos (P65 Million), to which
they would contribute in equal parts.7chanrobleslaw

The parties agreed that Fong would contribute Thirty Two Million and
Five Hundred Thousand Pesos (P32.5 Million) in cash while Dueñas
would contribute all his Danton and Bakcom shares which he valued at
P32.5 Million.8 Fong required Dueñas to submit the financial
documents supporting the valuation of these shares.

On November 25, 1996, Fong started remitting in tranches his share in


the proposed corporation’s capital. He made the remittances under the
impression that his contribution would be applied as his subscription to
fifty percent (50%) of Alliance’s total shareholdings. On the other
hand, Dueñas started processing the Boboli9international license that
they would use in their food business. Fong’s cash contributions are
summarized below.10cralawred
Date Amount
November 25, 1996 P1,980,475.20
January 14, 1997 P1,000,000.00
February 8, 1997 P500,000.00
March 7, 1997 P100,000.00
April 28, 1997 P500,000.00
June 13, 1997 P919,524.80
Total P5,000,000.00
On June 13, 1997, Fong sent a letter to Dueñas informing him
of his decision to limit his total contribution from P32.5 Million
to P5 Million. This letter reads:chanRoblesvirtualLawlibrary
June 13, 1997

Mr. Jose Dueñas


c/o Camira Industries

Re: Proposed JV in Bakcom, D.C. Danton and Boboli

Dear Jojit,

Enclosed is our check for P919,534.80 representing our additional


advances to subject company in process of incorporation. This
will make our total advances to date amounting to P5 million.

Since we agreed in principal late last year to pursue subject matter,


the delays in implementing the joint venture have caused us to rethink
our position. First, we were faced with the ‘personal’ factor which was
explained to you one time. This has caused us to turn down a number
of business opportunities. Secondly, since last year, the operation of
Century 21 has been taking more time from us than anticipated. That
is why we decided to relinquish our original plan to manage and
operate ‘Boboli’ knowing this limitation. For us, it does not make sense
anymore to go for a significant shareholding when we cannot be hands
on and participate actively as originally planned. For your information,
we will probably be giving up our subway franchise too.

Together with our business advisers and legal counsel, we came to a


decision to hold our commitment (from advances to
investment) at P5 million only for now from the original plan of
P32.5 million, if this is acceptable to you.

We know that our decision will somewhat upset the overall plans. But
it will probably be more problematic for us in the long run if we
continue full speed. We have put our money down in trust and
good faith despite the much delayed financials. We continue to
believe in your game plan and capabilities to achieve the desired goals
for subject undertaking. Please permit us instead to be just a modest
silent investor now with a take out plan when time and price is right.

Thank you for your kind understanding and consideration.

With best regards.

(Signed) George Fong11


Fong observed that despite his P5 Million contribution, Dueñas still
failed to give him the financial documents on the valuation of
the Danton and Bakcom shares. Thus, except for Dueñas’
representations, Fong had nothing to rely on to ensure that these
shares were really valued at P32.5 Million. Moreover, Dueñas failed
to incorporate and register Alliance with the Securities and
Exchange Commission (SEC).12chanrobleslaw

These circumstances convinced Fong that Dueñas would no longer


honor his obligations in their joint venture agreement.13 Thus, on
October 30, 1997, Fong wrote Dueñas informing him of his decision to
cancel the joint venture agreement. He also asked for the refund of
the P5 Million that he advanced.14In response, Dueñas admitted
that he could not immediately return the money since he used
it to defray the business expenses of Danton and
Bakcom.15chanrobleslaw

To meet Fong’s demand, Dueñas proposed several schemes for


payment of the P5 Million.16 However, Fong did not accept any of these
proposed schemes. On March 25, 1998, Fong wrote a final letter of
demand17informing Dueñas that he would file a judicial action against
him should he still fail to pay after receipt of this written demand.

Since Dueñas did not pay, Fong filed a complaint against him for
collection of a sum of money and damages18on April 24, 1998.

The Trial Court’s Ruling

In its June 27, 2006 decision, the trial court ruled in favor of Fong and
held that a careful examination of the complaint shows that although it
was labeled as an action for collection of a sum of money, it was
actually an action for rescission.19chanrobleslaw

The trial court noted that Dueñas’ failure to furnish Fong with the
financial documents on the valuation of the Danton and Bakcom
shares, as well as the almost one year delay in the incorporation of
Alliance, caused Fong to rescind the joint venture
agreement.20 According to the trial court, these are adequate and
acceptable reasons for rescission.

The trial court also held that Dueñas erroneously invested Fong’s cash
contributions in his two companies, Danton and Bakcom. The signed
receipts,21 presented as evidence, expressly provided that each
remittance should be applied as advance subscription to Fong’s
shareholding in Alliance. Thus, Dueñas’ investment of the money in
Danton and Bakcom was clearly unauthorized and contrary to the
parties’ agreement.

Since Dueñas was unjustly enriched by Fong’s advance capital


contributions, the trial court ordered him to return the money
amounting to P5 Million and to pay ten percent (10%) of this amount
in attorney’s fees, as well as the cost of the suit.22chanrobleslaw

Fong filed a partial motion for reconsideration from the trial court’s
June 27, 2006 decision and asked for the imposition of a six percent
(6%) annual interest, computed from the date of extrajudicial demand
until full payment of the award. The trial court granted this prayer in
its October 30, 2006 order.23chanrobleslaw

The CA’s Ruling

Dueñas responded to the trial court’s ruling through an appeal with the
CA, which granted the appeal and annulled the trial court’s ruling.

The CA ruled that Fong’s June 13, 1997 letter evidenced his intention
to convert his cash contributions from “advances” to the proposed
corporation’s shares, to mere “investments.” Thus, contrary to the trial
court’s ruling, Dueñas correctly invested Fong’s P5 Million contribution
to Bakcom and Danton. This did not deviate from the parties’ original
agreement as eventually, the shares of these two companies would
form part of Alliance’s capital.24chanrobleslaw

Lastly, the CA held that the June 13, 1997 letter showed that Fong
knew all along that he could not immediately ask for the return of his
P5 Million investment. Thus, whether the action filed was a complaint
for collection of a sum of money, or rescission, it must still
fail.25chanrobleslaw

The Petition

Fong submits that the CA erred when it ruled that his June 13, 1997
letter showed his intent to convert his contributions from advance
subscriptions to Alliance’s shares, to investments in Dueñas’ two
companies. Contrary to the CA’s findings, the receipts and the letter
expressly mentioned that his contributions should all be treated as his
share subscription to Alliance.26chanrobleslaw

Also, Fong argues that Dueñas’ unjustified retention of the P5 Million


and its appropriation to his (Dueñas’) own business, amounted to
unjust enrichment; and that he contributed to fund Alliance’s capital
and incorporation, not to pay for Danton and Bakcom’s business
expenses.27chanrobleslaw

The Case for Dueñas

Dueñas contends that he could no longer refund the P5 Million since he


had already applied it to his two companies; that this is proper since
Danton and Bakcom’s shares would also form part of his capital
contribution to Alliance.28chanrobleslaw

Moreover, the incorporation did not push through because Fong


unilaterally rescinded the joint venture agreement by limiting his
investment from P32.5 Million to P5 Million.29 Thus, it was Fong who
first breached the contract, not he. Consequently, Fong’s failure to
comply with his undertaking disqualified him from seeking the
agreement’s rescission.30chanrobleslaw

The Court’s Ruling

We resolve to GRANT the petition.

At the outset, the Court notes that the parties’ joint venture
agreement to incorporate a company that would hold the shares of
Danton and Bakcom and that would serve as the business vehicle for
their food enterprise, is a valid agreement. The failure to reduce the
agreement to writing does not affect its validity or enforceability as
there is no law or regulation which provides that an agreement to
incorporate must be in writing.

With this as premise, we now address the related issues raised by the
parties.

The body rather than the title of the complaint determines the
nature of the action.

A well-settled rule in procedural law is that the allegations in the body


of the pleading or the complaint, and not its title, determine the nature
of an action.31chanrobleslaw

An examination of Fong’s complaint shows that although it was


labeled as an action for a sum of money and damages, it was
actually a complaint for rescission. The following allegations in the
complaint support this finding:chanRoblesvirtualLawlibrary
9. Notwithstanding the aforesaid remittances, defendant failed
for an unreasonable length of time to submit a valuation of the
equipment of D.C. Danton and Bakcom x x x.

10. Worse, despite repeated reminders from plaintiff, defendant


failed to accomplish the organization and incorporation of the
proposed holding company, contrary to his representation to
promptly do so.

xxxx

17. Considering that the incorporation of the proposed holding


company failed to materialize, despite the lapse of one year
and four months from the time of subscription, plaintiff has
the right to revoke his pre-incorporation subscription. Such
revocation entitles plaintiff to a refund of the amount of
P5,000,000.00 he remitted to defendant, representing advances
made in favor of defendant to be considered as payment on plaintiff’s
subscription to the proposed holding company upon its incorporation,
plus interest from receipt by defendant of said amount until fully paid.
[Emphasis supplied.]
Fong’s allegations primarily pertained to his cancellation of
their verbal agreement because Dueñas failed to perform his
obligations to provide verifiable documents on the valuation of
the Danton’s and Bakcom’s shares, and to incorporate the
proposed corporation. These allegations clearly show that what
Fong sought was the joint venture agreement’s rescission.

As a contractual remedy, rescission is available when one of the


parties substantially fails to do what he has obligated himself to
perform.32 It aims to address the breach of faith and the violation of
reciprocity between two parties in a contract.33 Under Article 1191 of
the Civil Code, the right of rescission is inherent in reciprocal
obligations, viz:chanRoblesvirtualLawlibrary
The power to rescind obligations is implied in reciprocal ones, in
case one of the obligors should not comply with what is incumbent
upon him. [Emphasis supplied.]
Dueñas submits that Fong’s prayer for the return of his cash
contribution supports his claim that Fong’s complaint is an action for
collection of a sum of money. However, Dueñas failed to appreciate
that the ultimate effect of rescission is to restore the parties to
their original status before they entered in a contract. As the
Court ruled in Unlad Resources v. Dragon:34cralawred
Rescission has the effect of “unmaking a contract, or its undoing from
the beginning, and not merely its termination.” Hence, rescission
creates the obligation to return the object of the contract. It can
be carried out only when the one who demands rescission can return
whatever he may be obliged to restore. To rescind is to declare a
contract void at its inception and to put an end to it as though it never
was. It is not merely to terminate it and release the parties from
further obligations to each other, but to abrogate it from the beginning
and restore the parties to their relative positions as if no contract has
been made.

Accordingly, when a decree for rescission is handed down, it is


the duty of the court to require both parties to surrender that
which they have respectively received and to place each other
as far as practicable in his original situation.35 [Emphasis
supplied.]
In this light, we rule that Fong’s prayer for the return of his
contribution did not automatically convert the action to a complaint for
a sum of money. The mutual restitution of the parties’ original
contributions is only a necessary consequence of their
agreement’s rescission.

Rescission under Art. 1191 is applicable in the present case

Reciprocal obligations are those which arise from the same cause, in
which each party is a debtor and a creditor of the other, such that the
obligation of one is dependent on the obligation of the
other.36chanrobleslaw

Fong and Dueñas’ execution of a joint venture agreement created


between them reciprocal obligations that must be performed in order
to fully consummate the contract and achieve the purpose for which it
was entered into.

Both parties verbally agreed to incorporate a company that would hold


the shares of Danton and Bakcom and which, in turn, would be the
platform for their food business. Fong obligated himself to contribute
half of the capital or P32.5 Million in cash. On the other hand, Dueñas
bound himself to shoulder the other half by contributing his Danton
and Bakcom shares, which were allegedly also valued at P32.5 Million.
Aside from this, Dueñas undertook to process Alliance’s incorporation
and registration with the SEC.
When the proposed company remained unincorporated by October 30,
1997, Fong cancelled the joint venture agreement and demanded the
return of his P5 Million contribution.

For his part, Dueñas explained that he could not immediately return
the P5 Million since he had invested it in his two companies. He found
nothing irregular in this as eventually, the Danton and Bakcom shares
would form part of Alliance’s capital.

Dueñas’ assertion is erroneous.

The parties never agreed that Fong would invest his money in Danton
and Bakcom. Contrary to Dueñas’ submission, Fong’s understanding
was that his money would be applied to his shareholdings in Alliance.
As shown in Fong’s June 13, 1997 letter, this fact remained to be true
even after he limited his contribution to P5
Million, viz:chanRoblesvirtualLawlibrary
Dear Jojit,

Enclosed is our check for P919,534.80 representing our additional


advances to subject company in process of incorporation. This
will make our total advances to date amounting to P5
million.37 [Emphasis supplied.]
Moreover, under the Corporation Code, before a stock corporation may
be incorporated and registered, it is required that at least twenty five
percent (25%) of its authorized capital stock as stated in the articles of
incorporation, be first subscribed at the time of incorporation, and at
least twenty five percent (25%) of the total subscription, be paid upon
subscription.38chanrobleslaw

To prove compliance with this requirement, the SEC requires the


incorporators to submit a treasurer’s affidavit and a certificate of bank
deposit, showing the existence of an amount compliant with the
prescribed capital subscription.39chanrobleslaw

In this light, we conclude that Fong’s cash contributions play an


indispensable part in Alliance’s incorporation. The process
necessarily requires the money not only to fund Alliance’s registration
with the SEC but also its initial capital subscription. This is evident in
the receipts which Dueñas himself executed, one of which
provides:chanRoblesvirtualLawlibrary
I, JOSE V. DUEÑAS, hereby acknowledge the receipt on January 14,
1997 of the amount of One Million Pesos (Php 1,000,000.00) Check
No. 118 118 7014 Metro Bank, Pasong Tamo branch dated January 13,
1997 from Mr. George Fong, which amount shall constitute an
advance of the contribution or investment of Mr. Fong in the
joint venture which he and I are in the process of organizing.
Specifically, this amount will be considered as part of Mr. Fong’s
subscription to the shares of stock of the joint venture company which
we will incorporate to embody and carry out our joint
venture.40 [Emphasis supplied.]
Thus, Dueñas erred when he invested Fong’s contributions in his two
companies. This money should have been used in processing Alliance’s
registration. Its incorporation would not materialize if there would be
no funds for its initial capital. Moreover, Dueñas represented that
Danton and Bakcom’s shares were valued at P32.5 Million. If this was
true, then there was no need for Fong’s additional P5 Million
investment, which may possibly increase the value of the Danton and
Bakcom shares.

Under these circumstances, the Court agrees with the trial court that
Dueñas violated his agreement with Fong. Aside from unilaterally
applying Fong’s contributions to his two companies, Dueñas
also failed to deliver the valuation documents of the Danton
and Bakcom shares to prove that the combined values of their
capital contributions actually amounted to P32.5 Million.

These acts led to Dueñas’ delay in incorporating the planned


holding company, thus resulting in his breach of the contract.

On this basis, Dueñas’ breach justified Fong’s rescission of the joint


venture agreement under Article 1191. As the Court ruled in Velarde v.
Court of Appeals:41cralawred
The right of rescission of a party to an obligation under Article 1191
of the Civil Code is predicated on a breach of faith by the other
party who violates the reciprocity between them. The breach
contemplated in the said provision is the obligor’s failure to comply
with an existing obligation. When the obligor cannot comply with
what is incumbent upon it, the obligee may seek rescission and
in the absence of any just cause for the court to determine the period
of compliance, the court shall decree the rescission.

In the present case, private respondents validly exercised their


right to rescind the contract, because of the failure of
petitioners to comply with their obligation to pay the balance of
the purchase price. Indubitably, the latter violated the very essence of
reciprocity in the contract of sale, a violation that consequently gave
rise to private respondents’ right to rescind the same in accordance
with law.42 [Emphasis supplied.]
However, the Court notes that Fong also breached his
obligation in the joint venture agreement.

In his June 13, 1997 letter, Fong expressly informed Dueñas that he
would be limiting his cash contribution from P32.5 Million to P5 Million
because of the following reasons which we quote
verbatim:chanRoblesvirtualLawlibrary

1. First, we were faced with the ‘personal’ factor which was


explained to you one time. This has caused us to turn down a
number of business opportunities;

2. Secondly, since last year, the operation of Century 21 has been


taking more time from us than anticipated. That is why we
decided to relinquish our original plan to manage and operate
‘Boboli’ knowing this limitation. For us, it does not make sense
anymore to go for a significant shareholding when we cannot be
hands on and participate actively as originally planned.43 x x x.

Although these reasons appear to be valid, they do not erase


the fact that Fong still reneged on his original promise to
contribute P32.5 Million. The joint venture agreement was not
reduced to writing and the evidence does not show if the parties
agreed on valid causes that would justify the limitation of the parties’
capital contributions. Their only admission was that they obligated
themselves to contribute P32.5 Million each.

Hence, Fong’s diminution of his capital share to P5 Million also


amounted to a substantial breach of the joint venture
agreement, which breach occurred before Fong decided to
rescind his agreement with Dueñas. Thus, Fong also contributed to
the non-incorporation of Alliance that needed P65 Million as capital to
operate.

Fong cannot entirely blame Dueñas since the substantial reduction of


his capital contribution also greatly impeded the implementation of
their agreement to engage in the food business and to incorporate a
holding company for it.

As both parties failed to comply with their respective reciprocal


obligations, we apply Article 1192 of the Civil Code, which
provides:chanRoblesvirtualLawlibrary
Art. 1192. In case both parties have committed a breach of the
obligation, the liability of the first infractor shall be equitably tempered
by the courts. If it cannot be determined which of the parties
first violated the contract, the same shall be deemed
extinguished, and each shall bear his own damages. [Emphasis
supplied.]
Notably, the Court is not aware of the schedule of performance of the
parties’ obligations since the joint venture agreement was never
reduced to writing. The facts, however, show that both parties began
performing their obligations after executing the joint venture
agreement. Fong started remitting his share while Dueñas started
processing the Boboli international license for the proposed
corporation’s food business.

The absence of a written contract renders the Court unsure as to


whose obligation must be performed first. It is possible that the parties
agreed that Fong would infuse capital first and Dueñas’ submission of
the documents on the Danton and Bakcom shares would just follow. It
could also be the other way around. Further, the parties could have
even agreed to simultaneously perform their respective obligations.

Despite these gray areas, the fact that both Fong and Dueñas
substantially contributed to the non-incorporation of Alliance
and to the failure of their food business plans remains certain.

As the Court cannot precisely determine who between the parties first
violated the agreement, we apply the second part of Article 1192
which states: “if it cannot be determined which of the parties first
violated the contract, the same shall be deemed extinguished, and
each shall bear his own damages.”

In these lights, the Court holds that the joint venture agreement
between Fong and Dueñas is deemed extinguished through
rescission under Article 1192 in relation with Article 1191 of
the Civil Code. Dueñas must therefore return the P5 Million that Fong
initially contributed since rescission requires mutual restitution.44After
rescission, the parties must go back to their original status
before they entered into the agreement. Dueñas cannot keep
Fong’s contribution as this would constitute unjust enrichment.

No damages shall be awarded to any party in accordance with the rule


under Article 1192 of the Civil Code that in case of mutual breach and
the first infractor of the contract cannot exactly be determined, each
party shall bear his own damages.
WHEREFORE, premises considered, we hereby GRANT the petition
and reverse the September 16, 2008 decision and December 8, 2008
resolution of the Court of Appeals in CA-G.R. CV No. 88396.
Respondent Jose V. Dueñas is ordered to RETURN Five Million Pesos
to petitioner George C. Fong. This amount shall incur an interest of six
percent (6%) per annum from the date of finality of this judgment
until fully paid.45 The parties’ respective claims for damages are
deemed EXTINGUISHED and each of them shall bear his own
damages.

SO ORDERED.cralawlawlibrary

13. WELLEX GROUP INC VS U-LAND AIRLINES

THE WELLEX GROUP, INC., Petitioner, v. U-LAND AIRLINES, CO.,


LTD., Respondent.

DECISION

LEONEN, J.:

This is a Petition1 for Review on Certiorari under Rule 45 of the Rules


of Court. The Wellex Group, Inc. (Wellex) prays that the
Decision2 dated July 30, 2004 of the Court of Appeals in CA-G.R. CV
No. 74850 be reversed and set aside.3

The Court of Appeals affirmed the Decision4 of the Regional Trial Court,
Branch 62 of Makati City in Civil Case No. 99-1407. The Regional Trial
Court rendered judgment in favor of U-Land Airlines, Co., Ltd. (U-
Land) and ordered the rescission of the Memorandum of
Agreement5 between Wellex and U-Land.6

Wellex is a corporation established under Philippine law and it


maintains airline operations in the Philippines.7 It owns shares of stock
in several corporations including Air Philippines International
Corporation (APIC), Philippine Estates Corporation (PEC), and Express
Savings Bank (ESB).8 Wellex alleges that it owns all shares of stock of
Air Philippines Corporation (APC).9

U-Land Airlines Co. Ltd. (U-Land) “is a corporation duly organized and
existing under the laws of Taiwan, registered to do business . . . in the
Philippines.”10 It is engaged in the business of air transportation in
Taiwan and in other Asian countries.11

On May 16, 1998, Wellex and U-Land entered into a Memorandum of


Agreement12 (First Memorandum of Agreement) to expand their
respective airline operations in Asia.13

Terms of the First Memorandum of Agreement

The preambular clauses of the First Memorandum of Agreement state:

WHEREAS, U-LAND is engaged in the business of airline transportation


in Taiwan, Philippines and/or in other countries in the Asian region,
and desires to expand its operation and increase its market share by,
among others, pursuing a long-term involvement in the growing
Philippine airline industry;

WHEREAS, WELLEX, on the other hand, has current airline operation in


the Philippines through its majority-owned subsidiary Air Philippines
International Corporation and the latter’s subsidiary, Air Philippines
Corporation, and in like manner also desires to expand its operation in
the Asian regional markets, a Memorandum of Agreement on ______,
a certified copy of which is attached hereto as Annex “A” and is hereby
made an integral part hereof, which sets forth, among others, the
basis for WELLEX’s present ownership of shares in Air Philippines
International Corporation.

WHEREAS, the parties recognize the opportunity to develop a long-


term profitable relationship by combining such of their respective
resources in an expanded airline operation as well as in property
development and in other allied business activities in the Philippines,
and desire to set forth herein the basic premises and their
understanding with respect to their joint cooperation and
undertakings.14

In the First Memorandum of Agreement, Wellex and U-Land agreed to


develop a long-term business relationship through the creation of joint
interest in airline operations and property development projects in the
Philippines.15 This long-term business relationship would be
implemented through the following transactions, stated in Section 1 of
the First Memorandum of Agreement:
(a) U-LAND shall acquire from WELLEX, shares of stock of AIR
PHILIPPINES INTERNATIONAL CORPORATION (“APIC”) equivalent to at
least 35% of the outstanding capital stock of APIC, but in any case,
not less than 1,050,000,000 shares . . . [;]

(b) U-LAND shall acquire from WELLEX, shares of stock of PHILIPPINE


ESTATES CORPORATION (“PEC”) equivalent to at least 35% of the
outstanding capital stock of PEC, but in any case, not less than
490,000,000 shares . . . [;]

(c) U-LAND shall enter into a joint development agreement with PEC .
. . [; and]

(d) U-LAND shall be given the option to acquire from WELLEX shares
of stock of EXPRESS SAVINGS BANK (“ESB”) up to 40% of the
outstanding capital stock of ESB . . . under terms to be mutually
agreed.16

I. Acquisition of APIC and PEC shares

The First Memorandum of Agreement stated that within 40 days from


its execution date, Wellex and U-Land would execute a share purchase
agreement covering U-Land’s acquisition of the shares of stock of both
APIC (APIC shares) and PEC (PEC shares).17 In this share purchase
agreement, U-Land would purchase from Wellex its APIC shares and
PEC shares.18

Wellex and U-Land agreed to an initial purchase price of P0.30 per


share of APIC and P0.65 per share of PEC. However, they likewise
agreed that the final price of the shares of stock would be reflected in
the actual share purchase agreement.19

Both parties agreed that the purchase price of APIC shares and PEC
shares would be paid upon the execution of the share purchase
agreement and Wellex’s delivery of the stock certificates covering the
shares of stock. The transfer of APIC shares and PEC shares to U-Land
was conditioned on the full remittance of the final purchase price as
reflected in the share purchase agreement. Further, the transfer was
conditioned on the approval of the Securities and Exchange
Commission of the issuance of the shares of stock and the approval by
the Taiwanese government of U-Land’s acquisition of these shares of
stock.20

Thus, Section 2 of the First Memorandum of Agreement reads:


2. Acquisition of APIC and PEC Shares. - Within forty (40) days from
date hereof (unless extended by mutual agreement), U-LAND and
WELLEX shall execute a Share Purchase Agreement (“SHPA”) covering
the acquisition by U-LAND of the APIC Shares and PEC Shares
(collectively, the “Subject Shares”). Without prejudice to any
subsequent agreement between the parties, the purchase price for the
APIC Shares to be reflected in the SHPA shall be THIRTY CENTAVOS
(P0.30) per share and that for the PEC Shares at SIXTY FIVE
CENTAVOS (P0.65) per share.

The purchase price for the Subject Shares as reflected in the SHPA
shall be paid in full upon execution of the SHPA against delivery of the
Subject Shares. The parties may agree on such other terms and
conditions governing the acquisition of the Subject Shares to be
provided in a separate instrument.

The transfer of the Subject Shares shall be effected to U-LAND


provided that: (i) the purchase price reflected in the SHPA has been
fully paid; (ii) the Philippine Securities & Exchange Commission (SEC)
shall have approved the issuance of the Subject Shares; and (iii) any
required approval by the Taiwanese government of the acquisition by
U-LAND of the Subject Shares shall likewise have been obtained.21

II. Operation and management of APIC/PEC/APC

U-Land was “entitled to a proportionate representation in the Board of


Directors of APIC and PEC in accordance with Philippine
law.”22 Operational control of APIC and APC would be exercised jointly
by Wellex and U-Land “on the basis of mutual agreement and
consultations.”23 The parties intended that U-Land would gain primary
control and responsibility for the international operations of
APC.24 Wellex manifested that APC is a subsidiary of APIC in the
second preambular clause of the First Memorandum of Agreement.25

Section 3 of the First Memorandum of Agreement reads:

3. Operation/Management of APIC/APC. - U-LAND shall be entitled to a


proportionate representation in the Board of Directors of APIC and PEC
in accordance with Philippine law. For this purpose, WELLEX shall
cause the resignation of its nominated Directors in APIC and PEC to
accommodate U-LAND’s pro rata number of Directors. Subject to
applicable Philippine law and regulations, operational control of APIC
and Air Philippines Corporation (“APC”) shall be lodged jointly to
WELLEX and U-LAND on the basis of mutual agreement and
consultations. Further, U-LAND may second technical and other
consultants into APIC and/or APC with the view to increasing service,
productivity and efficiency, identifying and implementing profit-service
opportunities, developing technical capability and resources, and
installing adequate safety systems and procedures. In addition, U-
LAND shall arrange for the lease by APC of at least three (3) aircrafts
owned by U-LAND under such terms as the parties shall mutually
agree upon. It is the intent of the parties that U-LAND shall have
primary control and responsibility for APC’s international operations.26

III. Entering into and funding a joint development agreement

Wellex and U-Land also agreed to enter into a joint development


agreement simultaneous with the execution of the share purchase
agreement. The joint development agreement shall cover housing and
other real estate development projects.27

U-Land agreed to remit the sum of US$3 million not later than May 22,
1998. This sum was to serve as initial funding for the development
projects that Wellex and U-Land were to undertake pursuant to the
joint development agreement. In exchange for the US$3 million,
Wellex would deliver stock certificates covering 57,000,000 PEC shares
to U-Land.28

The execution of a joint development agreement was also conditioned


on the execution of a share purchase agreement.29

Section 4 of the First Memorandum of Agreement reads:

4. Joint Development Agreement with PEC. – Simultaneous with the


execution of the SHPA, U-LAND and PEC shall execute a joint
development agreement (“JDA”) to pursue property development
projects in the Philippines. The JDA shall cover specific housing and
other real estate development projects as the parties shall agree. All
profits derived from the projects covered by the JDA shall be shared
equally between U-LAND and PEC. U-LAND shall, not later than May
22, 1998, remit the sum of US$3.0 million as initial funding for the
aforesaid development projects against delivery by WELLEX of
57,000,000 shares of PEC as security for said amount in accordance
with Section 9 below.30
In case of conflict between the provisions of the First Memorandum of
Agreement and the provisions of the share purchase agreement or its
implementing agreements, the terms of the First Memorandum of
Agreement would prevail, unless the parties specifically stated
otherwise or the context of any agreement between the parties would
reveal a different intent.31 Thus, in Section 6 of the First Memorandum
of Agreement:

6. Primacy of Agreement. – It is agreed that in case of conflict


between the provisions of this Agreement and those of the SHPA and
the implementing agreements of the SHPA, the provisions of this
Agreement shall prevail, unless the parties specifically state otherwise,
or the context clearly reveal a contrary intent.32

Finally, Wellex and U-Land agreed that if they were unable to agree on
the terms of the share purchase agreement and the joint development
agreement within 40 days from signing, then the First Memorandum of
Agreement would cease to be effective.33

In case no agreements were executed, the parties would be released


from their respective undertakings, except that Wellex would be
required to refund within three (3) days the US$3 million given as
initial funding by U-Land for the development projects. If Wellex was
unable to refund the US$3 million to U-Land, U-Land would have the
right to recover on the 57,000,000 PEC shares that would be delivered
to it.34 Section 9 of the First Memorandum of Agreement reads:

9. Validity. - In the event the parties are unable to agree on the terms
of the SHPA and/or the JDA within forty (40) days from date hereof (or
such period as the parties shall mutually agree), this Memorandum of
Agreement shall cease to be effective and the parties released from
their respective undertakings herein, except that WELLEX shall refund
the US$3.0 million provided under Section 4 within three (3) days
therefrom, otherwise U-LAND shall have the right to recover on the
57,000,000 PEC shares delivered to U-LAND under Section 4.35

The First Memorandum of Agreement was signed by Wellex Chairman


and President William T. Gatchalian (Mr. Gatchalian) and U-Land
Chairman Ker Gee Wang (Mr. Wang) on May 16, 1998.36
Annex “A” or the Second Memorandum of Agreement

Attached and made an integral part of the First Memorandum of


Agreement was Annex “A,” as stated in the second preambular clause.
It is a document denoted as a “Memorandum of Agreement” entered
into by Wellex, APIC, and APC.37

The Second Memorandum of Agreement states:

This Memorandum of Agreement, made and executed this ___th day


of ______ at Makati City, by and between:

THE WELLEX GROUP, INC., a corporation duly organized and


existing under the laws of the Philippines, with offices at 22F Citibank
Tower, 8741 Paseo de Roxas, Makati City (hereinafter referred to as
“TWGI”),

AIR PHILIPPINES INTERNATIONAL


CORPORATION (formerly FORUM PACIFIC, INC.), likewise a
corporation duly organized and existing under the laws of the
Philippines, with offices at 8F Rufino Towers, Ayala Avenue, Makati
City (hereinafter referred to as “APIC”),

- and -

AIR PHILIPPINES CORPORATION, corporation duly organized and


existing under the laws of the Philippines, with offices at Multinational
Building, Ayala Avenue, Makati City (hereinafter referred to as “APC”).

W I T N E S S E T H: That -

WHEREAS, TWGI is the registered and beneficial owner, or has


otherwise acquired _____ (illegible in rollo) rights to the entire issued
and outstanding capital stock (the “APC SHARES”) of AIR PHILIPPINES
CORPORATION (“APC”) and has made stockholder advances to APC for
the _____ (illegible in rollo) of aircraft, equipment and for working
capital used in the latter’s operations (the “_____ (illegible
in rollo) ADVANCES”).

WHEREAS, APIC desires to obtain full ownership and control of APC,


including all of _____ (illegible in rollo) assets, franchise, goodwill and
operations, and for this purpose has offered to acquire the _____
(illegible in rollo) SHARES of TWGI in APC, including the APC
ADVANCES due to TWGI from APC, with _____ (illegible in rollo) of
acquiring all the assets, franchise, goodwill and operations of APC; and
TWGI has _____ (illegible in rollo) to the same in consideration of the
conveyance by APIC to TWGI of certain investments, _____ (illegible
in rollo) issuance of TWGI of shares of stock of APIC in exchange for
said APC SHARES and the _____ (illegible in rollo) ADVANCES, as
more particularly described hereunder.

NOW, THEREFORE, the parties agree as follows:

1. TWGI agrees to transfer the APC ADVANCES in APIC in exchange


for the _____ (illegible in rollo) by APIC to TWGI of investment shares
of APIC in Express Bank, PetroChemical _____ (illegible in rollo) of
Asia Pacific, Republic Resources & Development Corporation and
Philippine _____ (illegible in rollo) Corporation (the “APIC
INVESTMENTS”).

2. TWGI likewise agrees to transfer the APC SHARES to APIC in


exchange solely _____ (illegible in rollo) the issuance by APIC of One
Billion Seven Hundred Ninety Seven Million Eight Hundred Fifty Seven
Thousand Three Hundred Sixty Four (1,797,857,364) shares of its
capital stock of a _____ (illegible in rollo) value of P1.00 per share
(the “APIC SHARES”), taken from the currently authorized but _____
(illegible in rollo) shares of the capital stock of APIC, as well as from
the increase in the authorized capital _____ (illegible in rollo) of APIC
from P2.0 billion to P3.5 billion.

3. It is the basic understanding of the parties hereto that the transfer


of the APC _____ (illegible in rollo) as well as the APC ADVANCES to
APIC shall be intended to enable APIC to obtain _____ (illegible
in rollo) and control of APC, including all of APC’s assets, franchise,
goodwill and _____ (illegible in rollo).

4. Unless the parties agree otherwise, the effectivity of this


Agreement and transfers _____ (illegible in rollo) APC ADVANCES in
exchange for the APIC INVESTMENTS, and the transfer of the _____
(illegible in rollo) SHARES in exchange for the issuance of new APIC
SHARES, shall be subject to _____ (illegible in rollo) due diligence as
the parties shall see fit, and the condition subsequent that the _____
(illegible in rollo) for increase in the authorized capital stock of the
APIC from P2.0 billion to P3.5 _____ (illegible in rollo) shall have been
approved by the Securities and Exchange Commission.

IN WITNESS WHEREOF, the parties have caused these presents to be


signed on the date _____ (illegible in rollo) first above
written.38 (Emphasis supplied)

This Second Memorandum of Agreement was allegedly incorporated


into the First Memorandum of Agreement as a “disclosure to [U-Land]
[that] . . . [Wellex] was still in the process of acquiring and
consolidating its title to shares of stock of APIC.”39 It “included the
terms of a share swap whereby [Wellex] agreed to transfer to APIC its
shareholdings and advances to APC in exchange for the issuance by
APIC of shares of stock to [Wellex].”40

The Second Memorandum of Agreement was signed by Mr. Gatchalian,


APIC President Salud,41 and APC President Augustus C. Paiso.42 It was
not dated, and no place was indicated as the place of signing.43 It was
not notarized either, and no other witnesses signed the document.44

The 40-day period lapsed on June 25, 1998.45 Wellex and U-Land were
not able to enter into any share purchase agreement although drafts
were exchanged between the two.

Despite the absence of a share purchase agreement, U-Land remitted


to Wellex a total of US$7,499,945.00.46 These were made in varying
amounts and through the issuance of post-dated checks.47 The dates
of remittances were the following:

Date Amount (in US$)


June 30, 1998 990,000.00
July 2, 1998 990,000.00
20,000.00
July 30, 1998 990,000.00
490,000.00
490,000.00
August 1, 1998 990,000.00
490,000.00
490,000.00
August 3, 1998 990,000.00
70,000.00
September 25, 1998 399,972.50
99, 972.50
Total US$7,499,945.0048
Wellex acknowledged the receipt of these remittances in a
confirmation letter addressed to U-Land dated September 30, 1998.49

According to Wellex, the parties agreed to enter into a security


arrangement. If the sale of the shares of stock failed to push through,
the partial payments or remittances U-Land made were to be secured
by these shares of stock and parcels of land.50 This meant that U-Land
could recover the amount it paid to Wellex by selling these shares of
stock and land titles or using them to generate income.

Thus, after the receipt of US$7,499,945.00, Wellex delivered to U-


Land stock certificates representing 60,770,000 PEC shares and
72,601,000 APIC shares.51 These were delivered to U-Land on July 1,
1998, September 1, 1998, and October 1, 1998.52

In addition, Wellex delivered to U-Land Transfer Certificates of Title


(TCT) Nos. T-216769, T-216771, T-228231, T-228227, T-211250, and
T-216775 covering properties owned by Westland Pacific Properties
Corporation in Bulacan; and TCT Nos. T-107306, T-115667, T-105910,
T-120250, T-1114398, and T-120772 covering properties owned by
Rexlon Realty Group, Inc.53 On October 1, 1998,54 U-Land received a
letter from Wellex, indicating a list of stock certificates that the latter
was giving to the former by way of “security.”55

Despite these transactions, Wellex and U-Land still failed to enter into
the share purchase agreement and the joint development agreement.

In the letter56 dated July 22, 1999, 10 months57 after the last formal
communication between the two parties, U-Land, through counsel,
demanded the return of the US$7,499,945.00.58 This letter was sent
14 months after the signing of the First Memorandum of Agreement.

Counsel for U-Land claimed that “[Wellex] ha[d] unjustifiably refused


to enter into the. . . Share Purchase Agreement.”59 As far as U-Land
was concerned, the First Memorandum of Agreement was no longer in
effect, pursuant to Section 9.60 As such, U-Land offered to return all
the stock certificates covering APIC shares and PEC shares as well as
the titles to real property given by Wellex as security for the amount
remitted by U-Land.61

Wellex sent U-Land a letter62 dated August 2, 1999, which refuted U-


Land’s claims. Counsel for Wellex stated that the two parties carried
out several negotiations that included finalizing the terms of the share
purchase agreement and the terms of the joint development
agreement. Wellex asserted that under the joint development
agreement, U-Land agreed to remit the sum of US$3 million by May
22, 1998 as initial funding for the development projects.63

Wellex further asserted that it conducted extended discussions with U-


Land in the hope of arriving at the final terms of the agreement
despite the failure of the remittance of the US$3 million on May 22,
1998.64That remittance pursuant to the joint development agreement
“would have demonstrated [U-Land’s] good faith in finalizing the
agreements.”65

Wellex averred that, “[s]ave for a few items, [Wellex and U-Land]
virtually agreed on the terms of both [the share purchase agreement
and the joint development agreement.]”66 Wellex believed that the
parties had already “gone beyond the ‘intent’ stage of the [First
Memorandum of Agreement] and [had already] effected partial
implementation of an over-all agreement.”67 U-Land even delivered a
total of 12 post-dated checks to Wellex as payment for the APIC
shares and PEC shares.68 “[Wellex] on the other hand, had [already]
delivered to [U-Land] certificates of stock of APEC [sic] and PEC as
well as various land titles to cover actual remittances.”69 Wellex
alleged that the agreements were not finalized because U-Land was
“forced to suspend operations because of financial problems spawned
by the regional economic turmoil.”70

Thus, Wellex maintained that “the inability of the parties to execute


the [share purchase agreement] and the [joint development
agreement] principally arose from problems at [U-Land’s] side, and
not due to [Wellex’s] ‘unjustified refusal to enter into [the] [share
purchase agreement][.]’”71

On July 30, 1999, U-Land filed a Complaint72 praying for rescission of


the First Memorandum of Agreement and damages against Wellex and
for the issuance of a Writ of Preliminary Attachment.73 From U-Land’s
point of view, its primary reason for purchasing APIC shares from
Wellex was APIC’s majority ownership of shares of stock in APC (APC
shares).74 After verification with the Securities and Exchange
Commission, U-Land discovered that “APIC did not own a single share
of stock in APC.”75 U-Land alleged that it repeatedly requested that the
parties enter into the share purchase agreement.76 U-Land attached
the demand letter dated July 22, 1999 to the Complaint.77 However,
the 40-day period lapsed, and no share purchase agreement was
finalized.78
U-Land alleged that, as of the date of filing of the Complaint, Wellex
still refused to return the amount of US$7,499,945.00 while refusing
to enter into the share purchase agreement.79 U-Land stated that it
was induced by Wellex to enter into and execute the First
Memorandum of Agreement, as well as release the amount of
US$7,499,945.00.80

In its Answer with Compulsory Counterclaim,81 Wellex countered that


U-Land had no cause of action.82Wellex maintained that under the First
Memorandum of Agreement, the parties agreed to enter into a share
purchase agreement and a joint development agreement.83 Wellex
alleged that to bring the share purchase agreement to fruition, it
would have to acquire the corresponding shares in APIC.84 It claimed
that U-Land was fully aware that the former “still ha[d] to consolidate
its title over these shares.”85 This was the reason for Wellex’s
attachment of the Second Memorandum of Agreement to the First
Memorandum of Agreement. Wellex attached the Second
Memorandum of Agreement as evidence to refute U-Land’s claim of
misrepresentation.86

Wellex further alleged that U-Land breached the First Memorandum of


Agreement since the payment for the shares was to begin during the
40-day period, which began on May 16, 1998.87 In addition, U-Land
failed to remit the US$3 million by May 22, 1998 that would serve as
initial funding for the development projects.88 Wellex claimed that the
remittance of the US$3 million on May 22, 1998 was a mandatory
obligation on the part of U-Land.89

Wellex averred that it presented draft versions of the share purchase


agreement, which were never finalized.90 Thus, it believed that there
was an implied extension of the 40-day period within which to enter
into the share purchase agreement and the joint development
agreement since U-Land began remitting sums of money in partial
payment for the purchase of the shares of stock.91

In its counterclaim against U-Land, Wellex alleged that it had already


set in motion building and development of real estate projects on four
(4) major sites in Cavite, Iloilo, and Davao. It started initial
construction on the basis of its agreement with U-Land to pursue real
estate development projects.92

Wellex claims that, had the development projects pushed through, the
parties would have shared equally in the profits of these
projects.93 These projects would have yielded an income of
P2,404,948,000.00, as per the study Wellex conducted, which was
duly recognized by U-Land.94 Half of that amount, P1,202,474,000.00,
would have redounded to Wellex.95 Wellex, thus, prayed for the
rescission of the First Memorandum of Agreement and the payment of
P1,202,474,000 in damages for loss of profit.96 It prayed for the
payment of moral damages, exemplary damages, attorney’s fees, and
costs of suit.97

In its Reply,98 U-Land denied that there was an extension of the 40-
day period within which to enter into the share purchase agreement
and the joint development agreement. It also denied requesting for an
extension of the 40-day period. It further raised that there was no
provision in the First Memorandum of Agreement that required it to
remit payments for Wellex’s shares of stock in APIC and PEC within the
40-day period. Rather, the remittances were supposed to begin upon
the execution of the share purchase agreement.99

As for the remittance of the US$3 million, U-Land stated that the
issuance of this amount on May 22, 1998 was supposed to be
simultaneously made with Wellex’s delivery of the stock certificates for
57,000,000 PEC shares. These stock certificates were not delivered on
that date.100

With regard to the drafting of the share purchase agreement, U-Land


denied that it was Wellex that presented versions of the agreement. U-
Land averred that it was its own counsel who drafted versions of the
share purchase agreement and the joint development agreement,
which Wellex refused to sign.101

U-Land specifically denied that it had any knowledge prior to or during


the execution of the First Memorandum of Agreement that Wellex still
had to “consolidate its title over” its shares in APIC. U-Land averred
that it relied on Wellex’s representation that it was a majority owner of
APIC shares and that APIC owned a majority of APC shares.102

Moreover, U-Land denied any knowledge of the initial steps that


Wellex undertook to pursue the development projects and denied any
awareness of a study conducted by Wellex regarding the potential
profit of these projects.103

The case proceeded to trial.

U-Land presented Mr. David Tseng (Mr. Tseng), its President and Chief
Executive Officer, as its sole witness.104 Mr. Tseng testified that
“[s]ometime in 1997, Mr. William Gatchalian who was in Taiwan
invited [U-Land] to join in the operation of his airline
company[.]”105 U-Land did not accept the offer at that time.106 During
the first quarter of 1998, Mr. Gatchalian “went to Taiwan and invited
[U-Land] to invest in Air Philippines[.]”107 This time, U-Land alleged
that subsequent meetings were held where Mr. Gatchalian,
representing Wellex, “claimed ownership of a majority of the shares of
APIC and ownership by APIC of a majority of the shares of [APC,] a
domestic carrier in the Philippines.”108 Wellex, through Mr. Gatchalian,
offered to sell to U-Land PEC shares as well.109

According to Mr. Tseng, the parties agreed to enter into the First
Memorandum of Agreement after their second meeting.110 Mr. Tseng
testified that under this memorandum of agreement, the parties would
enter into a share purchase agreement “within forty (40) days from its
execution which [would] put into effect the sale of the shares [of
stock] of APIC and PEC[.]”111 However, the “[s]hare [p]urchase
[a]greement was not executed within the forty-day period despite the
draft . . . given [by U-Land to Wellex].”112

Mr. Tseng further testified that it was only after the lapse of the 40-
day period that U-Land discovered that Wellex needed money for the
transfer of APC shares to APIC. This allegedly shocked U-Land since
under the First Memorandum of Agreement, APIC was supposed to
own a majority of APC shares. Thus, U-Land remitted to Wellex a total
of US$7,499,945.00 because of its intent to become involved in the
aviation business in the Philippines. These remittances were confirmed
by Wellex through a confirmation letter. Despite the remittance of this
amount, no share purchase agreement was entered into by the
parties.113

Wellex presented its sole witness, Ms. Elvira Ting (Ms. Ting), Vice
President of Wellex. She admitted her knowledge of the First
Memorandum of Agreement as she was involved in its drafting. She
testified that the First Memorandum of Agreement made reference,
under its second preambular clause, to the Second Memorandum of
Agreement entered into by Wellex, APIC, and APC. She testified that
under the First Memorandum of Agreement, U-Land’s purchase of APIC
shares and PEC shares from Wellex would take place within 40 days,
with the execution of a share purchase agreement.114

According to Ms. Ting, after the 40-day period lapsed, U-Land


Chairman Mr. Wang requested sometime in June of 1998 for an
extension for the execution of the share purchase agreement and the
remittance of the US$3 million. As proof that Mr. Wang made this
request, Ms. Ting testified that Mr. Wang sent several post-dated
checks to cover the payment of the APIC shares and PEC shares and
the initial funding of US$3 million for the joint development
agreement. She testified that Mr. Wang presented a draft of the share
purchase agreement, which Wellex rejected. Wellex drafted a new
version of the share purchase agreement.115 However, the share
purchase agreement was not executed because during the period of
negotiation, Wellex learned from other sources that U-Land
“encountered difficulties starting October of 1998.”116 Ms. Ting
admitted that U-Land made the remittances to Wellex in the amount of
US$7,499,945.00.117

Ms. Ting testified that U-Land was supposed to make an initial


payment of US$19 million under the First Memorandum of Agreement.
However, U-Land only paid US$7,499,945.00. The total payments
should have amounted to US$41 million.118

Finally, Ms. Ting testified that Wellex tried to contact U-Land to have a
meeting to thresh out the problems of the First Memorandum of
Agreement, but U-Land did not reply. Instead, Wellex only received
communication from U-Land regarding their subsequent negotiations
through the latter’s demand letter dated July 22, 1999. In response,
Wellex wrote to U-Land requesting another meeting to discuss the
demands. However, U-Land already filed the Complaint for rescission
and caused the attachment against the properties of Wellex, causing
embarrassment to Wellex.119

In the Decision dated April 10, 2001, the Regional Trial Court of Makati
City held that rescission of the First Memorandum of Agreement was
proper:

The first issue must be resolved in the negative. Preponderance of


evidence leans in favor of plaintiff that it is entitled to the issuance of
the writ of preliminary attachment. Plaintiff’s evidence establishes the
facts that it is engaged in the airline business in Taiwan, was
approached by defendant, through its Chairman William Gatchalian,
and was invited by the latter to invest in an airline business in the
Philippines, Air Philippines Corporation (APC); that plaintiff became
interested in the invitation of defendant; that during the negotiations
between plaintiff and defendant, defendant induced plaintiff to buy
shares in Air Philippines International Corporation (APIC) since it owns
majority of the shares of APC; that defendant also induced plaintiff to
buy shares of APIC in Philippine Estates Corporation (PEC); that the
negotiations between plaintiff and defendant culminated into the
parties executing a MOA (Exhs. “C” to “C-3”, also Exh. “1”); that in the
second “Whereas” clause of the MOA, defendant represented that it
has a current airline operation through its majority-owned subsidiary
APIC, that under the MOA, the parties were supposed to enter into a
Share Purchase Agreement (SPA) within forty (40) days from May 16,
1998, the date the MOA in order to effect the transfer of APIC and PEC
shares of defendant to plaintiff; that plaintiff learned from defendant
that APIC does not actually own a single share in APC; that plaintiff
verified with the Securities and Exchange Commission (SEC), by
obtaining a General Information Sheet therefrom (Exh. “C-
Attachment”); that APIC does not in fact own APC; that defendant
induced plaintiff to still remit its investment to defendant, which
plaintiff did as admitted by defendant per its Confirmation Letter (Exh.
“D”) in order that APC shares could be transferred to APIC; that
plaintiff remitted a total of US$7,499,945.00 to defendant; and that
during the forty-day period stipulated in the MOA and even after the
lapse of the said period, defendant has not entered into the SPA, nor
has defendant caused the transfer of APC shares to APIC.

In the second “Whereas” clause of the MOA (Exh. “C”), defendant’s


misrepresentation that APIC owns APC is made clear, as follows:
“WHEREAS, WELLEX, on the other hand, has current airline operation
in the Philippines through its majority-owned subsidiary Air Philippines
International Corporation (Exh. “C”) and the latter’s subsidiary, Air
Philippines Corporation, and in like manner also desires to expand its
operation in the Asian regional markets; x x x” (Second Whereas of
Exh. “C”)
On the other hand, defendant’s evidence failed to disprove plaintiff’s
evidence. The testimony of defendant’s sole witness Elvira Ting, that
plaintiff knew at the time of the signing of the MOA that APIC does not
own a majority of the shares of APC because another Memorandum of
Agreement was attached to the MOA (Exh “1”) pertaining to the
purchase of APC shares by APIC is unavailing. The second “Whereas”
clause of the MOA leaves no room for interpretation. . . . The second
MOA purportedly attached as Annex “A” of this MOA merely enlightens
the parties on the manner by which APIC acquired the shares of APC.
Besides, . . . the second MOA was not a certified copy and did not
contain a marking that it is an Annex “A” when it was supposed to be
an Annex “A” and a certified copy per the MOA between plaintiff and
defendant. As can be also gathered from her testimony, Ms. Ting does
not have personal knowledge that plaintiff was not informed that APIC
did not own shares of APC during the negotiations as she was not
present during the negotiations between plaintiff and defendant’s
William Gatchalian. Her participation in the agreement between the
parties [was] merely limited to the preparation of the documents to be
signed. Ms. Ting testified, as follows:
“Q During the negotiation, you did not know anything about that?”

A I was not involved in the negotiation, sir.

Q And you are just making your statement that U-Land knew about
the intended transfer of shares from APC to APIC because of this
WHEREAS CLAUSE and the Annex to this Memorandum of Agreement?

A Yes, it was part of the contract.”


(TSN, Elvira Ting, June 6, 2000, pp. 8-10)
Defendant’s fraud in the performance of its obligation under the MOA
is further revealed when Ms. Ting testified on cross-examination that
notwithstanding the remittances made by plaintiff in the total amountn
[sic] of US$7,499, 945.00 to partially defray the cost of transferring
APC shares to APIC even as of the year 2000, as follows:

“Q Ms. Ting, can you please tell the Court if you know who owns
shares of Air Philippines Corporation at this time?

A Air Philippines Corporation right now is own [sic] by Wellex Group


and certain individual.

Q How much shares of Air Philippines Corporation is owned by Wellex


Group?

A Around twenty...at this moment around twenty five percent (25%).

Q Can you tell us if you know who are the other owners of the shares
of Air Philippines?

A There are several individual owners, I cannot recall the names.

Q Could [sic] you know if Air Philippines Int’l. Corporation is one of


the owners?

A As of this moment, no sir.”

(lbid, p. 16)
That defendant represented to plaintiff that it needed the remittances
of plaintiff, even if no SPA was executed yet between the parties, to
effect the transfer of APC shares to APIC is admitted by its same
witness also in this wise:

“Q You said that remittances were made to the Wellex Group,


Incorporated by plaintiff for the period from June 1998 to September
1998[,] is that correct?

A Yes, Sir.

Q During all these times, that remittances were made in the total
amount of more than seven million dollars, did you ever know if
plaintiff asked for evidence from your company that AIR PHILIPPINES
INTERNATIONAL CORPORATION has already acquired shares of AIR
PHILIPPINES CORPORATION?

A There were queries on the matter.

Q And what was your answer to those queries, Madam Witness?

A We informed them that the decision was still in the process.

Q Even up to the time that plaintiff U-Land stopped the remittances


sometime in September 1998 you have not effected the transfer of
shares of AIR PHILIPPINES CORPORATION to AIR PHILIPPINES
INTERNATIONCAL [sic] CORPORATION[,] am I correct?

A APC to APIC, well at that time it’s still in the process.

Q In fact, Madam Witness, is it not correct for me to say that one of


the reasons why U-Land Incorporated was convinced to remit the
amounts of money totalling seven million dollars plus, was that your
company said that it needed funds to effect these transfers, is that
correct?

A Yes, sir.”

(lbid, pp. 25-29)

As the evidence adduced by the parties stand, plaintiff has established


the fact that it had made remittances in the total amount of
US$7,499,945.00 to defendant in order that defendant will make good
its representation that APC is a subsidiary of APIC. The said
remittances are admitted by defendant.

Notwithstanding the said remittances, APIC does not own a single


share of APC. On the other hand, defendant could not even
satisfactorily substantiate its claim that at least it had the intention to
cause the transfer of APC shares to APIC. [D]efendant obviously did
not enter into the stipulated SPA because it did not have the shares of
APC transferred to APIC despite its representations. Under the
circumstances, it is clear that defendant fraudulently violated the
provisions of the MOA.120 (Emphasis supplied)

On appeal, the Court of Appeals affirmed the ruling of the Regional


Trial Court.121 In its July 30, 2004 Decision, the Court of Appeals held
that the Regional Trial Court did not err in granting the rescission:

Records show that in the answer filed by defendant-appellant, the


latter itself asked for the rescission of the MOA. Thus, in effect, it
prays for the return of what has been given or paid under the MOA, as
the law creates said obligation to return the things which were the
object of the contract, and the same could be carried out only when he
who demands rescission can return whatever he may be obliged to
restore. The law says:
“Rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its
interest; consequently, it can be carried out only when he who
demands rescission can return whatever he may be obliged to
restore.”
Appellant, therefore, cannot ask for rescission of the MOA and yet
refuse to return what has been paid to it. Further, appellant’s claim
that the lower court erred in ruling for the rescission of the MOA is
absurd and ridiculous because rescission thereof is prayed for by the
former. . . .

This Court agrees with the lower court that appellee is the injured
party in this case, and therefore is entitled to rescission, because the
rescission referred to here is predicated on the breach of faith by the
appellant which breach is violative of the reciprocity between the
parties. It is noted that appellee has partly complied with its own
obligation, while the appellant has not. It is, therefore, the right of the
injured party to ask for rescission because the guilty party cannot ask
for rescission.
The lower court . . . correctly ruled that:
“. . . This Court agrees with plaintiff that defendant’s
misrepresentations regarding APIC’s not owning shares in APC vitiates
its consent to the MOA. Defendant’s continued misrepresentation that
it will cause the transfer of APC shares in APIC inducing plaintiff to
remit money despite the lapse of the stipulated forty day period,
further establishes plaintiff’s right to have the MOA rescinded.

Section 9 of the MOA itself provides that in the event of the non-
execution of an SPA within the 40 day period, or within the extensions
thereof, the payments made by plaintiff shall be returned to it, to wit:

“9 Validity.- In the event that the parties are unable to agree on the
terms of the SHPA and/or JDA within forty (40) days from the date
hereof (or such period as the parties shall mutually agree), this
Memorandum of Agreement shall cease to be effective and the parties
released from their respective undertakings herein, except that
WELLEX shall refund the US$3.0 million under Section 4 within three
(3) days therefrom, otherwise U-LAND shall have the right to recover
the 57,000,000 PEC shares delivered to U-LAND under Section 4.”

Clearly, the parties were not able to agree on the terms of the SPA
within and even after the lapse of the stipulated 40 day period. There
being no SPA entered into by and between the plaintiff and defendant,
defendant’s return of the remittances [of] plaintiff in the total amount
of US$7,499,945 is only proper, in the same vein, plaintiff should
return to defendant the titles and certificates of stock given to it by
defendant.122 (Citations omitted)

Hence, this Petition was filed.

Petitioner’s Arguments

Petitioner Wellex argues that contrary to the finding of the Court of


Appeals, respondent U-Land was not entitled to rescission because the
latter itself violated the First Memorandum of Agreement. Petitioner
Wellex states that respondent U-Land was actually bound to pay
US$17.5 million for all of APIC shares and PEC shares under the First
Memorandum of Agreement and the US$3 million to pursue the
development projects under the joint development agreement. In sum,
respondent U-Land was liable to petitioner Wellex for the total amount
of US$20.5 million. Neither the Court of Appeals nor the Regional Trial
Court made any mention of the legal effect of respondent U-Land’s
failure to pay the full purchase price.123

On the share purchase agreement, petitioner Wellex asserts that its


obligation to deliver the totality of the shares of stock would become
demandable only upon remittance of the full purchase price of
US$17.5 million.124 The full remittance of the purchase price of the
shares of stock was a suspensive condition for the execution of the
share purchase agreement and delivery of the shares of stock.
Petitioner Wellex argues that the use of the term “upon” in Section 2
of the First Memorandum of Agreement clearly provides that the full
payment of the purchase price must be given “simultaneously” or
“concurrent” with the execution of the share purchase agreement.125

Petitioner Wellex raises that the Court of Appeals erred in saying that
the rescission of the First Memorandum of Agreement was proper
because petitioner Wellex itself asked for this in its Answer before the
trial court.126 It asserts that “there can be no rescission of a non-
existent obligation, such as [one] whose suspensive condition has not
yet happened[,]”127 as held in Padilla v. Spouses
Paredes.128 CitingVillaflor v. Court of Appeals129 and Spouses Agustin
v. Court of Appeals,130 it argues that “the vendor. . . has no obligation
to deliver the thing sold. . . if the buyer. . . fails to fully pay the price
as required by the contract.”131 In this case, petitioner Wellex
maintains that respondent U-Land’s remittance of US$7,499,945.00
constituted mere partial performance of a reciprocal
obligation.132 Thus, respondent U-Land was not entitled to rescission.
The nature of this reciprocal obligation requires both parties’
simultaneous fulfillment of the totality of their reciprocal obligations
and not only partial performance on the part of the allegedly injured
party.

As to the finding of misrepresentations, petitioner Wellex raises that a


seller may sell a thing not yet belonging to him at the time of the
transaction, provided that he will become the owner at the time of
delivery so that he can transfer ownership to the buyer. Contrary to
the finding of the lower courts, petitioner Wellex was obliged to be the
owner of the shares only when the time came to deliver these to
respondent U-Land and not during the perfection of the contract
itself.133

Finally, petitioner Wellex argues that respondent U-Land could have


recovered through the securities given to the latter.134 Petitioner
Wellex invokes Suria v. Intermediate Appellate Court,135 which held
that an “action for rescission is not a principal action that is retaliatory
in character [under Article 1191 of the Civil Code, but] a subsidiary
one which. . . is available only in the absence of any other legal
remedy [under Article 1384 of the Civil Code].”136

Respondent’s Arguments

Respondent U-Land argues that it was the execution of the share


purchase agreement that would result in its purchase of the APIC
shares and PEC shares.137 It was not the full remittance of the
purchase price of the shares of stock as indicated in the First
Memorandum of Agreement, as alleged by petitioner
Wellex.138 Respondent U-Land asserts that the First Memorandum of
Agreement provides that the exact number of APIC shares and PEC
shares to be purchased under the share purchase agreement and the
final price of these shares were not yet determined by the parties.139

Respondent U-Land reiterates that it was petitioner Wellex that


requested for the remittances amounting to US$7,499,945.00 to
facilitate APIC’s purchase of APC shares.140 Thus, it was petitioner
Wellex’s refusal to enter into the share purchase agreement that led to
respondent U-Land demanding rescission of the First Memorandum of
Agreement and the return of the US$7,499,945.00.141 Respondent U-
Land further argues before this court that petitioner Wellex failed to
present evidence as to how the money was spent, stating that Ms.
Ting admitted that the Second Memorandum of Agreement “was not
consummated at any time.”142

Respondent U-Land raises that petitioner Wellex was guilty of fraud by


making it appear that APC was a subsidiary of APIC.143 It reiterates
that, as an airline company, its primary reason for entering into the
First Memorandum of Agreement was to acquire management of APC,
another airline company.144 Under Article 1191 of the Civil Code,
respondent U-Land, as the injured party, was entitled to rescission due
to the fatal misrepresentations committed by petitioner Wellex.145

Respondent U-Land further asserts that the “shareholdings in APIC and


APC were never in question.”146Rather, it was petitioner Wellex’s
misrepresentation that APIC was a majority shareholder of APC that
compelled it to enter into the agreement.147

As for Suria, respondent U-land avers that this case was inapplicable
because the pertinent provision in Suria was not Article 1191 but
rescission under Article 1383 of the Civil Code.148 The “rescission”
referred to in Article 1191 referred to “resolution” of a contract due to
a breach of a mutual obligation, while Article 1384 spoke of
“rescission” because of lesion and damage.149 Thus, the rescission that
is relevant to the present case is that of Article 1191, which involves
breach in a reciprocal obligation. It is, in fact, resolution, and not
rescission as a result of fraud or lesion, as found in Articles 1381,
1383, and 1384 of the Civil Code.150

The Issue

The question presented in this case is whether the Court of Appeals


erred in affirming the Decision of the Regional Trial Court that granted
the rescission of the First Memorandum of Agreement prayed for by U-
Land.

The Petition must be denied.

The requirement of a share purchase agreement

The Civil Code provisions on the interpretation of contracts are

controlling to this case, particularly Article 1370, which reads:

ART. 1370. If the terms of a contract are clear and leave no doubt
upon the intention of the contracting parties, the literal meaning of its
stipulations shall control.

If the words appear to be contrary to the evident intention of the


parties, the latter shall prevail over the former.

In Norton Resources and Development Corporation v. All Asia Bank


Corporation:151

The cardinal rule in the interpretation of contracts is embodied in the


first paragraph of Article 1370 of the Civil Code: “[i]f the terms of a
contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control.”
This provision is akin to the “plain meaning rule” applied by
Pennsylvania courts, which assumes that the intent of the parties to an
instrument is “embodied in the writing itself, and when the words are
clear and unambiguous the intent is to be discovered only from the
express language of the agreement.” It also resembles the “four
corners” rule, a principle which allows courts in some cases to search
beneath the semantic surface for clues to meaning. A court's purpose
in examining a contract is to interpret the intent of the contracting
parties, as objectively manifested by them. The process of interpreting
a contract requires the court to make a preliminary inquiry as to
whether the contract before it is ambiguous. A contract provision is
ambiguous if it is susceptible of two reasonable alternative
interpretations. Where the written terms of the contract are not
ambiguous and can only be read one way, the court will interpret the
contract as a matter of law. If the contract is determined to be
ambiguous, then the interpretation of the contract is left to the court,
to resolve the ambiguity in the light of the intrinsic
152
evidence. (Emphasis supplied)

As held in Norton, this court must first determine whether a provision


or stipulation contained in a contract is ambiguous. Absent any
ambiguity, the provision on its face will be read as it is written and
treated as the binding law of the parties to the contract.

The parties have differing interpretations of the terms of the First


Memorandum of Agreement. Petitioner Wellex even admits that “the
facts of the case are fairly undisputed [and that] [i]t is only the
parties’ respective [understanding] of these facts that are not in
harmony.”153

The second preambular clause of the First Memorandum of Agreement


reads:

WHEREAS, WELLEX, on the other hand, has current airline operation in


the Philippines through its majority-owned subsidiary Air Philippines
International Corporation and the latter’s subsidiary, Air Philippines
Corporation, and in like manner also desires to expand its operation in
the Asian regional markets; a Memorandum of Agreement on ______,
a certified copy of which is attached hereto as Annex “A” and is hereby
made an integral part hereof, which sets forth, among others, the
basis for WELLEX’s present ownership of shares in Air Philippines
International Corporation.154 (Emphasis supplied)
Section 1 of the First Memorandum of Agreement reads:

I. Basic Agreement. - The parties agree to develop a long-term


business relationship initially through the creation of joint interest in
airline operations as well as in property development projects in the
Philippines to be implemented as follows:

(a) U-LAND shall acquire from WELLEX, shares of stock of AIR


PHILIPPINES INTERNATIONAL CORPORATION (“APIC”) equivalent to at
least 35% of the outstanding capital stock of APIC, but in any case,
not less than 1,050,000,000 shares (the “APIC Shares”).

(b) U-LAND shall acquire from WELLEX, shares of stock of PHILIPPINE


ESTATES CORPORATION (“PEC”) equivalent to at least 35% of the
outstanding capital stock of PEC, but in any case, not less than
490,000,000 shares (the “PEC Shares”).

(c) U-LAND shall enter into a joint development agreement with PEC to
jointly pursue property development projects in the Philippines.

(d) U-LAND shall be given the option to acquire from WELLEX shares
of stock of EXPRESS SAVINGS BANK (“ESB”) up to 40% of the
outstanding capital stock of ESB (the “ESB Shares”) under terms to be
mutually agreed.155

The First Memorandum of Agreement contained the following


stipulations regarding the share purchase agreement:

2. Acquisition of APIC and PEC Shares. - Within forty (40) days from
date hereof (unless extended by mutual agreement), U-LAND and
WELLEX shall execute a Share Purchase Agreement (“SHPA”) covering
the acquisition by U-LAND of the APIC Shares and PEC Shares
(collectively, the “Subject Shares”). Without prejudice to any
subsequent agreement between the parties, the purchase price for the
APIC Shares to be reflected in the SHPA shall be THIRTY CENTAVOS
(P0.30) per share and that for the PEC Shares at SIXTY FIVE
CENTAVOS (P0.65) per share.

The purchase price for the Subject Shares as reflected in the SHPA
shall be paid in full upon execution of the SHPA against delivery of the
Subject Shares. The parties may agree on such other terms and
conditions governing the acquisition of the Subject Shares to be
provided in a separate instrument.

The transfer of the Subject Shares shall be effected to U-LAND


provided that: (i) the purchase price reflected in the SHPA has been
fully paid; (ii) the Philippine Securities & Exchange Commission (SEC)
shall have approved the issuance of the Subject Shares; and (iii) any
required approval by the Taiwanese government of the acquisition by
U-LAND of the Subject Shares shall likewise have been
obtained.156 (Emphasis supplied)

As for the joint development agreement, the First Memorandum of


Agreement contained the following stipulation:

4. Joint Development Agreement with PEC. – Simultaneous with the


execution of the SHPA, U-LAND and PEC shall execute a joint
development agreement (“JDA”) to pursue property development
projects in the Philippines. The JDA shall cover specific housing and
other real estate development projects as the parties shall agree. All
profits derived from the projects covered by the JDA shall be shared
equally between U-LAND and PEC. U-LAND shall, not later than May
22, 1998, remit the sum of US$3.0 million as initial funding for the
aforesaid development projects against delivery by WELLEX of
57,000,000 shares of PEC as security for said amount in accordance
with Section 9 below.157 (Emphasis provided)

Finally, the parties included the following stipulation in case of a failure


to agree on the terms of the share purchase agreement or the joint
development agreement:

9. Validity. - In the event the parties are unable to agree on the terms
of the SHPA and/or the JDA within forty (40) days from date hereof (or
such period as the parties shall mutually agree), this Memorandum of
Agreement shall cease to be effective and the parties released from
their respective undertakings herein, except that WELLEX shall refund
the US$3.0 million provided under Section 4 within three (3) days
therefrom, otherwise U-LAND shall have the right to recover on the
57,000,000 PEC shares delivered to U-LAND under Section 4.158

Section 2 of the First Memorandum of Agreement clearly provides that


the execution of a share purchase agreement containing mutually
agreeable terms and conditions must first be accomplished by the
parties before respondent U-Land purchases any of the shares owned
by petitioner Wellex. A perusal of the stipulation on its face allows for
no other interpretation.

The need for a share purchase agreement to be entered into before


payment of the full purchase price can further be discerned from the
other stipulations of the First Memorandum of Agreement.

In Section 1, the parties agreed to enter into a joint business venture,


through entering into two (2) agreements: a share purchase
agreement and a joint development agreement. However, Section 1
provides that in the share purchase agreement, “U-LAND shall acquire
from WELLEX, shares of stock of AIR PHILIPPINES INTERNATIONAL
CORPORATION (‘APIC’) equivalent to at least 35% of the outstanding
capital stock of APIC, but in any case, not less than 1,050,000,000
shares (the ‘APIC Shares’).”159

As for the PEC shares, Section 1 provides that respondent U-Land shall
purchase from petitioner Wellex “shares of stock of PHILIPPINE
ESTATES CORPORATION (‘PEC’) equivalent to at least 35% of the
outstanding capital stock of PEC, but in any case, not less than
490,000,000 shares (the ‘PEC Shares’).”160

The use of the terms “at least 35% of the outstanding capital stock of
APIC, but in any case, not less than 1,050,000,000 shares” and “at
least 35% of the outstanding capital stock of PEC, but in any case, not
less than 490,000,000 shares” means that the parties had yet to agree
on the number of shares of stock to be purchased.

The need to execute a share purchase agreement before payment of


the purchase price of the shares is further shown by the clause,
“[w]ithout prejudice to any subsequent agreement between the
parties, the purchase price for the APIC Shares to be reflected in the
[share purchase agreement] shall be... P0.30 per share and that for
the PEC Shares at... P0.65 per share.”161 This phrase clearly shows
that the final price of the shares of stock was to be reflected in the
share purchase agreement. There being no share purchase agreement
executed, respondent U-Land was under no obligation to begin
payment or remittance of the purchase price of the shares of stock.

Petitioner Wellex argues that the use of “upon” in Section 2162 of the
First Memorandum of Agreement means that respondent U-Land must
pay the purchase price of the shares of stock in its entirety when they
are transferred. This argument has no merit.
Article 1373 of the Civil Code provides:

ART. 1373. If some stipulation of any contract should admit of several


meanings, it shall be understood as bearing that import which is most
adequate to render it effectual.

It is necessary for the parties to first agree on the final purchase price
and the number of shares of stock to be purchased before respondent
U-Land is obligated to pay or remit the entirety of the purchase
price.Thus, petitioner Wellex’s argument cannot be sustained since the
parties to the First Memorandum of Agreement were clearly unable to
agree on all the terms concerning the share purchase agreement. It
would be absurd for petitioner Wellex to expect payment when
respondent U-Land did not yet agree to the final amount to be paid for
the totality of an indeterminate number of shares of stock.

The third paragraph of Section 2163 provides that the “transfer of the
Subject Shares” shall take place upon the fulfillment of certain
conditions, such as full payment of the purchase price “as reflected in
the [share purchase agreement].” The transfer of the shares of stock
is different from the execution of the share purchase agreement.
The transfer of the shares of stock requires full payment of the final
purchase price. However, that final purchase price must be reflected in
the share purchase agreement. The execution of the share purchase
agreement will require the existence of a final agreement.

In its Answer with counterclaim before the trial court, petitioner Wellex
argued that the payment of the shares of stock was to begin within the
40-day period. Petitioner Wellex’s claim is not in any of the stipulations
of the contract. Its subsequent claim that respondent U-Land was
actually required to remit a total of US$20.5 million is likewise bereft
of basis since there was no final purchase price of the shares of stock
that was agreed upon, due to the failure of the parties to execute a
share purchase agreement. In addition, the parties had yet to agree
on the final number of APIC shares and PEC shares that respondent U-
Land would acquire from petitioner Wellex.

Therefore, the understanding of the parties captured in the First


Memorandum of Agreement was to continue their negotiation to
determine the price and number of the shares to be purchased. Had it
been otherwise, the specific number or percentage of shares and its
price should already have been provided clearly and unambiguously.
Thus, they agreed to a 40-day period of negotiation.

Section 9 of the First Memorandum of Agreement explicitly provides


that:

In the event the parties are unable to agree on the terms of the SHPA
and/or the JDA within forty (40) days from date hereof (or such period
as the parties shall mutually agree), this Memorandum of Agreement
shall cease to be effective and the parties released from their
respective undertakings herein . . .164

The First Memorandum of Agreement was, thus, an agreement to


enter into a share purchase agreement. The share purchase
agreement should have been executed by the parties within 40 days
from May 16, 1998, the date of the signing of the First Memorandum
of Agreement.

When the 40-day period provided for in Section 9 lapsed, the efficacy
of the First Memorandum of Agreement ceased. The parties were
“released from their respective undertakings.” Thus, from June 25,
1998, the date when the 40-day period lapsed, the parties were no
longer obliged to negotiate with each other in order to enter into a
share purchase agreement.

However, Section 9 provides for another period within which the


parties could still be required to negotiate. The clause “or such period
as the parties shall mutually agree” means that the parties should
agree on a period within which to continue negotiations for the
execution of an agreement. This means that after the 40-day period,
the parties were still allowed to negotiate, provided that they could
mutually agree on a new period of negotiation.

Based on the records and the findings of the lower courts, the parties
were never able to arrive at a specific period within which they would
bind themselves to enter into an agreement. There being no other
period specified, the parties were no longer under any obligation to
negotiate and enter into a share purchase agreement. Section 9
clearly freed them from this undertaking.

II

There was no express or implied


novation of the First Memorandum
of Agreement

The subsequent acts of the parties after the 40-day period were,
therefore, independent of the First Memorandum of Agreement.

In its Appellant’s Brief before the Court of Appeals, petitioner Wellex


mentioned that there was an “implied partial objective or real
novation”165 of the First Memorandum of Agreement. Petititoner did
not raise this argument of novation before this court. In Gayos v.
Gayos,166 this court held that “it is a cherished rule of procedure that a
court should always strive to settle the entire controversy in a single
proceeding leaving no root or branch to bear the seeds of future
litigation[.]”167

Articles 1291 and 1292 of the Civil Code provides how obligations may
be modified:

Article 1291. Obligations may be modified by:

(1) Changing their object or principal conditions;

(2) Substituting the person of the debtor;

(3) Subrogating a third person in the rights of the creditor.

Article 1292. In order that an obligation may be extinguished by


another which substitute the same, it is imperative that it be so
declared in unequivocal terms, or that the old and the new obligations
be on every point incompatible with each other.

In Arco Pulp and Paper Co. v. Lim,168 this court discussed the concept
of novation:

Novation extinguishes an obligation between two parties when there is


a substitution of objects or debtors or when there is subrogation of the
creditor. It occurs only when the new contract declares so “in
unequivocal terms” or that “the old and the new obligations be on
every point incompatible with each other.”
. . . .

For novation to take place, the following requisites must concur:


1) There must be a previous valid obligation.

2) The parties concerned must agree to a new contract.

3) The old contract must be extinguished.

4) There must be a valid new contract.

Novation may also be express or implied. It is express when the new


obligation declares in unequivocal terms that the old obligation is
extinguished. It is implied when the new obligation is incompatible
with the old one on every point. The test of incompatibility is whether
the two obligations can stand together, each one with its own
independent existence. (Emphasis from the original omitted)
Because novation requires that it be clear and unequivocal, it is never
presumed, thus:

I
n the civil law setting, novatio is literally construed as to make new.
So it is deeply rooted in the Roman Law jurisprudence, the principle —
novatio non praesumitur — that novation is never presumed. At
bottom, for novation to be a jural reality, its animus must be ever
present, debitum pro debito — basically extinguishing the old
obligation for the new one.169 (Emphasis from the original omitted,
citations omitted)

Applying Arco, it is clear that there was no novation of the original


obligation.

After the 40-day period, the parties did not enter into any subsequent
written agreement that was couched in unequivocal terms. The
transaction of the First Memorandum of Agreement involved large
amounts of money from both parties. The parties sought to participate
in the air travel industry, which has always been highly regulated and
subject to the strictest commercial scrutiny. Both parties admitted that
their counsels participated in the crafting and execution of the First
Memorandum of Agreement as well as in the efforts to enter into the
share purchase agreement. Any subsequent agreement would be
expected to be clearly agreed upon with their counsels’ assistance and
in writing, as well.

Given these circumstances, there was no express novation.


There was also no implied novation of the original obligation. In Quinto
v. People:170

[N]o specific form is required for an implied novation, and all that is
prescribed by law would be an incompatibility between the two
contracts. While there is really no hard and fast rule to determine what
might constitute to be a sufficient change that can bring about
novation, the touchstone for contrariety, however, would be an
irreconcilable incompatibility between the old and the new obligations.

. . . .

. . . The test of incompatibility is whether or not the two obligations


can stand together, each one having its independent existence. If they
cannot, they are incompatible and the latter obligation novates the
first. Corollarily, changes that breed incompatibility must be essential
in nature and not merely accidental. The incompatibility must take
place in any of the essential elements of the obligation, such as its
object, cause or principal conditions thereof; otherwise, the change
would be merely modificatory in nature and insufficient to extinguish
the original obligation.171 (Citations omitted)

There was no incompatibility between the original terms of the First


Memorandum of Agreement and the remittances made by respondent
U-Land for the shares of stock. These remittances were actually made
with the view that both parties would subsequently enter into a share
purchase agreement. It is clear that there was no subsequent
agreement inconsistent with the provisions of the First Memorandum
of Agreement.

Thus, no implied novation took place. In previous cases,172 this court


has consistently ruled that presumed novation or implied novation is
not deemed favorable. In United Pulp and Paper Co., Inc. v. Acropolis
Central Guaranty Corporation:173

Neither can novation be presumed in this case. As explained in Duñgo


v. Lopena:

“Novation by presumption has never been favored. To be sustained, it


need be established that the old and new contracts are incompatible in
all points, or that the will to novate appears by express agreement of
the parties or in acts of similar import.”174 (Emphasis supplied)
There being no novation of the First Memorandum of Agreement,
respondent U-Land is entitled to the return of the amount it remitted
to petitioner Wellex. Petitioner Wellex is likewise entitled to the return
of the certificates of shares of stock and titles of land it delivered to
respondent U-Land. This is simply an enforcement of Section 9 of the
First Memorandum of Agreement. Pursuant to Section 9, only the
execution of a final share purchase agreement within either of the
periods contemplated by this stipulation will justify the parties’
retention of what they received or would receive from each other.

III

Applying Article 1185 of the Civil


Code, the parties are obligated to
return to each other all they have
received

Article 1185 of the Civil Code provides that:

ART. 1185. The condition that some event will not happen at a
determinate time shall render the obligation effective from the
moment the time indicated has elapsed, or if it has become evident
that the event cannot occur.

If no time has been fixed, the condition shall be deemed fulfilled at


such time as may have probably been contemplated, bearing in mind
the nature of the obligation.

Article 1185 provides that if an obligation is conditioned on the non-


occurrence of a particular event at a determinate time, that obligation
arises (a) at the lapse of the indicated time, or (b) if it has become
evident that the event cannot occur.

Petitioner Wellex and respondent U-Land bound themselves to


negotiate with each other within a 40-day period to enter into a share
purchase agreement. If no share purchase agreement was entered
into, both parties would be freed from their respective undertakings.

It is the non-occurrence or non-execution of the share purchase


agreement that would give rise to the obligation to both parties to free
each other from their respective undertakings. This includes returning
to each other all that they received in pursuit of entering into the
share purchase agreement.

At the lapse of the 40-day period, the parties failed to enter into a
share purchase agreement. This lapse is the first circumstance
provided for in Article 1185 that gives rise to the obligation. Applying
Article 1185, the parties were then obligated to return to each other all
that they had received in order to be freed from their respective
undertakings.

However, the parties continued their negotiations after the lapse of the
40-day period. They made subsequent transactions with the intention
to enter into the share purchase agreement. Despite that, they still
failed to enter into a share purchase agreement. Communication
between the parties ceased, and no further transactions took place.

It became evident that, once again, the parties would not enter into
the share purchase agreement. This is the second circumstance
provided for in Article 1185. Thus, the obligation to free each other
from their respective undertakings remained.

As such, petitioner Wellex is obligated to return the remittances made


by respondent U-Land, in the same way that respondent U-Land is
obligated to return the certificates of shares of stock and the land titles
to petitioner Wellex.

IV

Respondent U-Land is praying for


rescission or resolution under Article
1191, and not rescission under Article
1381

The arguments of the parties generally rest on the propriety of the


rescission of the First Memorandum of Agreement. This requires a
clarification of rescission under Article 1191, and rescission under
Article 1381 of the Civil Code.

Article 1191 of the Civil Code provides:


ART. 1191. The power to rescind obligations is implied in reciprocal
ones, in case one of the obligors should not comply with what is
incumbent upon him.

The injured party may choose between the fulfillment and the
rescission of the obligation, with the payment of damages in either
case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just
cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third


persons who have acquired the thing, in accordance with articles 1385
and 1388 and the Mortgage Law.

Articles 1380 and 1381, on the other hand, provide an enumeration of


rescissible contracts:

ART. 1380. Contracts validly agreed upon may be rescinded in the


cases established by law.

ART. 1381. The following contracts are rescissible:

(1) Those which are entered into by guardians whenever the wards
whom they represent suffer lesion by more than one-fourth of the
value of the things which are the object thereof;

(2) Those agreed upon in representation of absentees, if the latter


suffer the lesion stated in the preceding number;

(3) Those undertaken in fraud of creditors when the latter cannot in


any other manner collect the claims due them;

(4) Those which refer to things under litigation if they have been
entered into by the defendant without the knowledge and approval of
the litigants or of competent judicial authority;

(5) All other contracts specially declared by law to be subject to


rescission.

Article 1383 expressly provides for the subsidiary nature of rescission:


ART. 1383. The action for rescission is subsidiary; it cannot be
instituted except when the party suffering damage has no other legal
means to obtain reparation for the same.

Rescission itself, however, is defined by Article 1385:

ART. 1385. Rescission creates the obligation to return the things which
were the object of the contract, together with their fruits, and the
price with its interest; consequently, it can be carried out only when
he who demands rescission can return whatever he may be obliged to
restore.

Neither shall rescission take place when the things which are the
object of the contract are legally in the possession of third persons
who did not act in bad faith.

In this case, indemnity for damages may be demanded from the


person causing the loss.

Gotesco Properties v. Fajardo175 categorically stated that Article 1385


is applicable to Article 1191:

At this juncture, it is noteworthy to point out that rescission does not


merely terminate the contract and release the parties from further
obligations to each other, but abrogates the contract from its inception
and restores the parties to their original positions as if no contract has
been made. Consequently, mutual restitution, which entails the return
of the benefits that each party may have received as a result of the
contract, is thus required. To be sure, it has been settled that the
effects of rescission as provided for in Article 1385 of the Code are
equally applicable to cases under Article 1191, to wit:

x x x x

Mutual restitution is required in cases involving rescission


under Article 1191. This means bringing the parties back to their
original status prior to the inception of the contract. Article 1385 of the
Civil Code provides, thus:
ART. 1385. Rescission creates the obligation to return the things
which were the object of the contract, together with their
fruits, and the price with its interest; consequently, it can be
carried out only when he who demands rescission can return
whatever he may be obligated to restore.

Neither shall rescission take place when the things which are the
object of the contract are legally in the possession of third persons
who did not act in bad faith.

In this case, indemnity for damages may be demanded from the


person causing the loss.

This Court has consistently ruled that this provision applies to


rescission under Article 1191:

[S]ince Article 1385 of the Civil Code expressly and clearly states that
“rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its
interest,” the Court finds no justification to sustain petitioners’ position
that said Article 1385 does not apply to rescission under Article 1191.
x x x176 (Emphasis from the original, citations omitted)

Rescission, as defined by Article 1385, mandates that the parties must


return to each other everything that they may have received as a
result of the contract. This pertains to rescission or resolution under
Article 1191, as well as the provisions governing all forms of rescissible
contracts.

For Article 1191 to be applicable, however, there must


be reciprocal prestations as distinguished from mutual obligations
between or among the parties. A prestation is the object of an
obligation, and it is the conduct required by the parties to do or not to
do, or to give.177 Parties may be mutually obligated to each other, but
the prestations of these obligations are not necessarily reciprocal. The
reciprocal prestations must necessarily emanate from the same cause
that gave rise to the existence of the contract. This distinction is best
illustrated by an established authority in civil law, the late Arturo
Tolentino:

This article applies only to reciprocal obligations. It has no application


to every case where two persons are mutually debtor and creditor of
each other. There must be reciprocity between them. Both relations
must arise from the same cause, such that one obligation is correlative
to the other. Thus, a person may be the debtor of another by reason
of an agency, and his creditor by reason of a loan. They are mutually
obligated, but the obligations are not reciprocal. Reciprocity arises
from identity of cause, and necessarily the two obligations are created
at the same time.178 (Citation omitted)

Ang Yu Asuncion v. Court of Appeals179 provides a clear necessity of


the cause in perfecting the existence of an obligation:

An obligation is a juridical necessity to give, to do or not to do (Art.


1156, Civil Code). The obligation is constituted upon the concurrence
of the essential elements thereof, viz: (a) The vinculum
juris or juridical tie which is the efficient cause established by the
various sources of obligations (law, contracts, quasi-contracts, delicts
and quasi-delicts); (b) the object which is the prestation or conduct,
required to be observed (to give, to do or not to do); and (c)
the subject-persons who, viewed from the demandability of the
obligation, are the active (obligee) and the passive (obligor)
subjects.180

The cause is the vinculum juris or juridical tie that essentially binds the
parties to the obligation. This linkage between the parties is a binding
relation that is the result of their bilateral actions, which gave rise to
the existence of the contract.

The failure of one of the parties to comply with its reciprocal prestation
allows the wronged party to seek the remedy of Article 1191. The
wronged party is entitled to rescission or resolution under Article 1191,
and even the payment of damages. It is a principal action precisely
because it is a violation of the original reciprocal prestation.

Article 1381 and Article 1383, on the other hand, pertain to rescission
where creditors or even third persons not privy to the contract can file
an action due to lesion or damage as a result of the contract. In Ong
v. Court of Appeals,181 this court defined rescission:

Rescission, as contemplated in Articles 1380, et seq., of the New Civil


Code, is a remedy granted by law to the contracting parties and even
to third persons, to secure the reparation of damages caused to them
by a contract, even if this should be valid, by restoration of things to
their condition at the moment prior to the celebration of the contract.
It implies a contract, which even if initially valid, produces a lesion or a
pecuniary damage to someone.182 (Citations omitted)
Ong elaborated on the confusion between “rescission” or resolution
under Article 1191 and rescission under Article 1381:

On the other hand, Article 1191 of the New Civil Code refers to
rescission applicable to reciprocal obligations. Reciprocal obligations
are those which arise from the same cause, and in which each party is
a debtor and a creditor of the other, such that the obligation of one is
dependent upon the obligation of the other. They are to be performed
simultaneously such that the performance of one is conditioned upon
the simultaneous fulfillment of the other. Rescission of reciprocal
obligations under Article 1191 of the New Civil Code should be
distinguished from rescission of contracts under Article 1383. Although
both presuppose contracts validly entered into and subsisting and both
require mutual restitution when proper, they are not entirely identical.

While Article 1191 uses the term “rescission,” the original term which
was used in the old Civil Code, from which the article was based, was
“resolution.” Resolution is a principal action which is based on breach
of a party, while rescission under Article 1383 is a subsidiary action
limited to cases of rescission for lesion under Article 1381 of the New
Civil Code, which expressly enumerates the following rescissible
contracts:

1. Those which are entered into by guardians whenever the wards


whom they represent suffer lesion by more than one fourth of
the value of the things which are the object thereof;

2. Those agreed upon in representation of absentees, if the latter


suffer the lesion stated in the preceding number;

3. Those undertaken in fraud of creditors when the latter cannot in


any manner collect the claims due them;

4. Those which refer to things under litigation if they have been


entered into by the defendant without the knowledge and
approval of the litigants or of competent judicial authority; [and]

5. All other contracts specially declared by law to be subject to


rescission.183 (Citations omitted)

When a party seeks the relief of rescission as provided in Article 1381,


there is no need for reciprocal prestations to exist between or among
the parties. All that is required is that the contract should be among
those enumerated in Article 1381 for the contract to be considered
rescissible. Unlike Article 1191, rescission under Article 1381 must be
a subsidiary action because of Article 1383.

Contrary to petitioner Wellex’s argument, this is not rescission under


Article 1381 of the Civil Code. This case does not involve prejudicial
transactions affecting guardians, absentees, or fraud of creditors.
Article 1381(3) pertains in particular to a series of fraudulent actions
on the part of the debtor who is in the process of transferring or
alienating property that can be used to satisfy the obligation of the
debtor to the creditor. There is no allegation of fraud for purposes of
evading obligations to other creditors. The actions of the parties
involving the terms of the First Memorandum of Agreement do not fall
under any of the enumerated contracts that may be subject of
rescission.

Further, respondent U-Land is pursuing rescission or resolution under


Article 1191, which is a principal action. Justice J.B.L. Reyes’
concurring opinion in the landmark case of Universal Food Corporation
v. Court of Appeals184 gave a definitive explanation on the principal
character of resolution under Article 1191 and the subsidiary nature of
actions under Article 1381:

The rescission on account of breach of stipulations is not predicated on


injury to economic interests of the party plaintiff but on the breach of
faith by the defendant, that violates the reciprocity between the
parties. It is not a subsidiary action, and Article 1191 may be scanned
without disclosing anywhere that the action for rescission thereunder is
subordinated to anything other than the culpable breach of his
obligations by the defendant. This rescission is a principal action
retaliatory in character, it being unjust that a party be held bound to
fulfill his promises when the other violates his. As expressed in the old
Latin aphorism: “Non servanti fidem, non est fides servanda.” Hence,
the reparation of damages for the breach is purely secondary.

On the contrary, in the rescission by reason of lesion or economic


prejudice, the cause of action is subordinated to the existence of that
prejudice, because it is the raison detre as well as the measure of the
right to rescind. Hence, where the defendant makes good the damages
caused, the action cannot be maintained or continued, as expressly
provided in Articles 1383 and 1384. But the operation of these two
articles is limited to the cases of rescission for lesión enumerated in
Article 1381 of the Civil Code of the Philippines, and does not apply to
cases under Article 1191.185

Rescission or resolution under Article 1191, therefore, is a principal


action that is immediately available to the party at the time that the
reciprocal prestation was breached. Article 1383 mandating that
rescission be deemed a subsidiary action cannot be applicable to
rescission or resolution under Article 1191.

Thus, respondent U-Land correctly sought the principal relief of


rescission or resolution under Article 1191. The obligations of the
parties gave rise to reciprocal prestations, which arose from the same
cause: the desire of both parties to enter into a share purchase
agreement that would allow both parties to expand their respective
airline operations in the Philippines and other neighboring countries.

The jurisprudence relied upon by


petitioner Wellex is not applicable

The cases that petitioner Wellex cited to advance its arguments


against respondent U-Land’s right to rescission are not in point.

Suria v. Intermediate Appellate Court is not applicable. In that case,


this court specifically stated that the parties entered into a contract of
sale, and their reciprocal obligations had already been fulfilled:186

There is no dispute that the parties entered into a contract of sale as


distinguished from a contract to sell.

By the contract of sale, the vendor obligates himself to transfer the


ownership of and to deliver a determinate thing to the buyer, who in
turn, is obligated to pay a price certain in money or its equivalent (Art.
1458, Civil Code). From the respondents’ own arguments, we
note that they have fully complied with their part of the
reciprocal obligation. As a matter of fact, they have already
parted with the title as evidenced by the transfer certificate of
title in the petitioners’ name as of June 27, 1975.

The buyer, in turn, fulfilled his end of the bargain when he executed
the deed of mortgage. The payments on an installment basis secured
by the execution of a mortgage took the place of a cash payment. In
other words, the relationship between the parties is no longer one of
buyer and seller because the contract of sale has been perfected and
consummated. It is already one of a mortgagor and a mortgagee. In
consideration of the petitioners’ promise to pay on installment basis
the sum they owe the respondents, the latter have accepted the
mortgage as security for the obligation.

The situation in this case is, therefore, different from that envisioned
in the cited opinion of Justice J.B.L. Reyes. The petitioners’ breach of
obligations is not with respect to the perfected contract of sale but in
the obligations created by the mortgage contract. The remedy of
rescission is not a principal action retaliatory in character but becomes
a subsidiary one which by law is available only in the absence of any
other legal remedy. (Art. 1384, Civil Code).

Foreclosure here is not only a remedy accorded by law but, as earlier


stated, is a specific provision found in the contract between the
parties.187 (Emphasis supplied)

In Suria, this court clearly applied rescission under Article 1384


and not rescission or resolution under Article 1191. In addition, the
First Memorandum of Agreement is not a contract to sell shares of
stock. It is an agreement to negotiate with the view of entering into a
share purchase agreement.

Villaflor v. Court of Appeals is not applicable either. In Villaflor, this


court held that non-payment of consideration of contracts only gave
rise to the right to sue for collection, but this non-payment cannot
serve as proof of a simulated contract.188 The case did not rule that
the vendor has no obligation to deliver the thing sold if the buyer fails
to fully pay the price required by the contract. In Villaflor:

Petitioner insists that nonpayment of the consideration in the contracts


proves their simulation. We disagree. Nonpayment, at most, gives him
only the right to sue for collection. Generally, in a contract of sale,
payment of the price is a resolutory condition and the remedy of the
seller is to exact fulfillment or, in case of a substantial breach, to
rescind the contract under Article 1191 of the Civil Code. However,
failure to pay is not even a breach, but merely an event which
prevents the vendor’s obligation to convey title from acquiring binding
force.189 (Citations omitted)
This court’s statement in Villaflor regarding rescission under Article
1191 was a mere obiter dictum. In Land Bank of the Philippines v.
Suntay,190 this court discussed the nature of an obiter dictum:

An obiter dictum has been defined as an opinion expressed by a court


upon some question of law that is not necessary in the determination
of the case before the court. It is a remark made, or opinion
expressed, by a judge, in his decision upon a cause by the way, that
is, incidentally or collaterally, and not directly upon the question before
him, or upon a point not necessarily involved in the determination of
the cause, or introduced by way of illustration, or analogy or
argument. It does not embody the resolution or determination of the
court, and is made without argument, or full consideration of the
point. It lacks the force of an adjudication, being a mere expression of
an opinion with no binding force for purposes of res
judicata.191 (Citations omitted)

Petitioner Wellex’s reliance on Padilla v. Spouses Paredes and Spouses


Agustin v. Court of Appeals is also misplaced. In these cases, this
court held that there can be no rescission for an obligation that is non-
existent, considering that the suspensive condition that will give rise to
the obligation has not yet happened. This is based on an allegation
that the contract involved is a contract to sell. In a contract to sell, the
failure of the buyer to pay renders the contract without effect. A
suspensive condition is one whose non-fulfillment prevents the
existence of the obligation.192 Payment of the purchase price,
therefore, constitutes a suspensive condition in a contract to sell.
Thus, this court held that non-remittance of the full price allowed the
seller to withhold the transfer of the thing to be sold.

In this case, the First Memorandum of Agreement is not a contract to


sell. Entering into the share purchase agreement or the joint
development agreement remained a stipulation that the parties
themselves agreed to pursue in the First Memorandum of Agreement.

Based on the First Memorandum of Agreement, the execution of the


share purchase agreement was necessary to put into effect respondent
U-Land’s purchase of the shares of stock. This is the stipulation
indicated in this memorandum of agreement. There was no suspensive
condition of full payment of the purchase price needed to execute
either the share purchase agreement or the joint development
agreement. Upon the execution of the share purchase, the obligation
of petitioner Wellex to transfer the shares of stock and of respondent
U-Land to pay the price of these shares would have arisen.

Enforcement of Section 9 of the First Memorandum of Agreement has


the same effect as rescission or resolution under Article 1191 of the
Civil Code. The parties are obligated to return to each other all that
they may have received as a result of the breach by petitioner Wellex
of the reciprocal obligation. Therefore, the Court of Appeals did not err
in affirming the rescission granted by the trial court.

VI

Petitioner Wellex was not guilty of


fraud but of violating Article 1159
of the Civil Code

In the issuance of the Writ of Preliminary Attachment, the lower court


found that petitioner Wellex committed fraud by inducing respondent
U-Land to purchase APIC shares and PEC shares and by leading the
latter to believe that APC was a subsidiary of APIC.

Determining the existence of fraud is not necessary in an action for


rescission or resolution under Article 1191. The existence of fraud
must be established if the rescission prayed for is the rescission under
Article 1381.

However, the existence of fraud is a question that the parties have


raised before this court. To settle this question with finality, this court
will examine the established facts and determine whether petitioner
Wellex indeed defrauded respondent U-Land.

In Tankeh v. Development Bank of the Philippines,193 this court


enumerated the relevant provisions of the Civil Code on fraud:

Fraud is defined in Article 1338 of the Civil Code as:


x x x fraud when, through insidious words or machinations of one of
the contracting parties, the other is induced to enter into a contract
which, without them, he would not have agreed to.
This is followed by the articles which provide legal examples and
illustrations of fraud.
. . . .
Art. 1340. The usual exaggerations in trade, when the other party had
an opportunity to know the facts, are not in themselves fraudulent. (n)

Art. 1341. A mere expression of an opinion does not signify fraud,


unless made by an expert and the other party has relied on the
former’s special knowledge. (n)

Art. 1342. Misrepresentation by a third person does not vitiate


consent, unless such misrepresentation has created substantial
mistake and the same is mutual. (n)

Art. 1343. Misrepresentation made in good faith is not fraudulent but


may constitute error. (n)

The distinction between fraud as a ground for rendering a contract


voidable or as basis for an award of damages is provided in Article
1344:

In order that fraud may make a contract voidable, it should be serious


and should not have been employed by both contracting parties.

Incidental fraud only obliges the person employing it to pay damages.


(1270)194

Tankeh further discussed the degree of evidence needed to prove the


existence of fraud:

[T]he standard of proof required is clear and convincing evidence. This


standard of proof is derived from American common law. It is less than
proof beyond reasonable doubt (for criminal cases) but greater than
preponderance of evidence (for civil cases). The degree of believability
is higher than that of an ordinary civil case. Civil cases only require a
preponderance of evidence to meet the required burden of proof.
However, when fraud is alleged in an ordinary civil case involving
contractual relations, an entirely different standard of proof needs to
be satisfied. The imputation of fraud in a civil case requires the
presentation of clear and convincing evidence. Mere allegations will not
suffice to sustain the existence of fraud. The burden of evidence rests
on the part of the plaintiff or the party alleging fraud. The quantum of
evidence is such that fraud must be clearly and convincingly shown.195

To support its allegation of fraud, Mr. Tseng, respondent U-Land’s


witness before the trial court, testified that Mr. Gatchalian approached
respondent U-Land on two (2) separate meetings to propose entering
into an agreement for joint airline operations in the Philippines. Thus,
the parties entered into the First Memorandum of Agreement.
Respondent U-Land primarily anchors its allegation of fraud against
petitioner Wellex on the existence of the second preambular clause of
the First Memorandum of Agreement.

In its Appellant’s Brief before the Court of Appeals, petitioner Wellex


admitted that “[t]he amount of US$7,499,945.00 was remitted for the
purchase of APIC and PEC shares.”196 In that brief, it argued that the
parties were already in the process of partially executing the First
Memorandum of Agreement.

As held in Tankeh, there must be clear and convincing evidence of


fraud. Based on the established facts, respondent U-Land was unable
to clearly convince this court of the existence of fraud.

Respondent U-Land had every reasonable opportunity to ascertain


whether APC was indeed a subsidiary of APIC. This is a multimillion
dollar transaction, and both parties admitted that the share purchase
agreement underwent several draft creations. Both parties admitted
the participation of their respective counsels in the drafting of the First
Memorandum of Agreement. Respondent U-Land had every
opportunity to ascertain the ownership of the shares of stock.

Respondent U-Land itself admitted that it was not contesting petitioner


Wellex’s ownership of the APIC shares or APC shares; hence, it was
not contesting the existence of the Second Memorandum of
Agreement. Upon becoming aware of petitioner Wellex’s
representations concerning APIC’s ownership or control of APC as a
subsidiary, respondent U-Land continued to make remittances totalling
the amount sought to be rescinded. It had the option to opt out of
negotiations after the lapse of the 40-day period. However, it
proceeded to make the remittances to petitioner Wellex and proceed
with negotiations.

Respondent U-Land was not defrauded by petitioner Wellex to agree to


the First Memorandum of Agreement. To constitute fraud under Article
1338, the words and machinations must have been so insidious or
deceptive that the party induced to enter into the contract would not
have agreed to be bound by its terms if that party had an opportunity
to be aware of the truth.197

Respondent U-Land was already aware that APC was not a subsidiary
of APIC after the 40-day period. Still, it agreed to be bound by the
First Memorandum of Agreement by making the remittances from June
30 to September 25, 1998.198 Thus, petitioner Wellex’s failure to
inform respondent U-Land that APC was not a subsidiary of APIC when
the First Memorandum of Agreement was being executed did not
constitute fraud.

However, the absence of fraud does not mean that petitioner Wellex is
free of culpability. By failing to inform respondent U-Land that APC
was not yet a subsidiary of APIC at the time of the execution of the
First Memorandum of Agreement, petitioner Wellex violated Article
1159 of the Civil Code. Article 1159 reads:

ART. 1159. Obligations arising from contracts have the force of law
between the contracting parties and should be complied with in good
faith.

In Ochoa v. Apeta,199 this court defined good faith:

Good faith is an intangible and abstract quality with no technical


meaning or statutory definition, and it encompasses, among other
things, an honest belief, the absence of malice and the absence of
design to defraud or to seek an unconscionable advantage. It implies
honesty of intention, and freedom from knowledge of circumstances
which ought to put the holder upon inquiry. The essence of good faith
lies in an honest belief in the validity of one’s right, ignorance of a
superior claim and absence of intention to overreach
200
another. (Citations omitted)

It was incumbent upon petitioner Wellex to negotiate the terms of the


pending share purchase agreement in good faith. This duty included
providing a full disclosure of the nature of the ownership of APIC in
APC. Unilaterally compelling respondent U-Land to remit money to
finalize the transactions indicated in the Second Memorandum of
Agreement cannot constitute good faith.

The absence of fraud in a transaction does not mean that rescission


under Article 1191 is not proper. This case is not an action to declare
the First Memorandum of Agreement null and void due to fraud at the
inception of the contract or dolo causante. This case is not an action
for fraud based on Article 1381 of the Civil Code. Rescission or
resolution under Article 1191 is predicated on the failure of one of the
parties in a reciprocal obligation to fulfill the prestation as required by
that obligation. It is not based on vitiation of consent through
fraudulent misrepresentations.

VII

Respondent U-Land was not bound


to pay the US$3 million under the
joint development agreement

The alleged failure of respondent U-Land to pay the amount of US$3


million to petitioner Wellex does not justify the actions of the latter in
refusing to return the US$7,499,945.00.

Article 1374 of the Civil Code provides that:

ART. 1374. The various stipulations of a contract shall be interpreted


together, attributing to the doubtful ones that sense which may result
from all of them taken jointly.

The execution of the joint development agreement was contingent on


the execution of the share purchase agreement. This is provided for in
Section 4 of the First Memorandum of Agreement, which stated that
the execution of the two agreements is “[s]imultaneous.”201 Thus, the
failure of the share purchase agreement’s execution would necessarily
mean the failure of the joint development agreement’s execution.

Section 9 of the First Memorandum of Agreement provides that should


the parties fail to execute the agreement, they would be released from
their mutual obligations. Had respondent U-Land paid the US$3 million
and petitioner Wellex delivered the 57,000,000 PEC shares for the
purpose of the joint development agreement, they would have been
obligated to return these to each other.

Section 4 and Section 9 of the First Memorandum of Agreement must


be interpreted together. Since the parties were unable to agree on a
final share purchase agreement and there was no exchange of money
or shares of stock due to the continuing negotiations, respondent U-
Land was no longer obliged to provide the money for the real estate
development projects. The payment of the US$3 million was for
pursuing the real estate development projects under the joint
development agreement. There being no joint development
agreement, the obligation to deliver the US$3 million and the delivery
of the PEC shares for that purpose were no longer incumbent upon the
parties.

VIII

Respondent U-Land was not


obligated to exhaust the “securities”
given by petitioner Wellex

Contrary to petitioner Wellex’s assertion, there is no obligation on the


part of respondent U-Land to exhaust the “securities” given by
petitioner Wellex. No such meeting of the minds to create a guarantee
or surety or any other form of security exists. The principal obligation
is not a loan or an obligation subject to the conditions of sureties or
guarantors under the Civil Code. Thus, there is no need to exhaust the
securities given to respondent U-Land, and there is no need for a legal
condition where respondent U-Land should pursue other remedies.

Neither petitioner Wellex nor respondent U-Land stated that there was
already a transfer of ownership of the shares of stock or the land titles.
Respondent U-Land itself maintained that the delivery of the shares of
stock and the land titles were not in the nature of a pledge or
mortgage.202 It received the certificates of shares of stock and the land
titles with an understanding that the parties would subsequently enter
a share purchase agreement. There being no share purchase
agreement, respondent U-Land is obligated to return the certificates of
shares of stock and the land titles to petitioner Wellex.

The parties are bound by the 40-day period provided for in the First
Memorandum of Agreement. Adherence by the parties to Section 9 of
the First Memorandum of Agreement has the same effect as the
rescission or resolution prayed for and granted by the trial court.

Informal acts are prone to ambiguous legal interpretation. This will be


based on the say-so of each party and is a fragile setting for good
business transactions. It will contribute to the unpredictability of the
market as it would provide courts with extraordinary expectations to
determine the business actor’s intentions. The parties appear to be
responsible businessmen who know that their expectations and
obligations should be clearly articulated between them. They have the
resources to engage legal representation. Indeed, they have reduced
their agreement in writing.
Petitioner Wellex now wants this court to define obligations that do not
appear in these instruments. We cannot do so. This court cannot
interfere in the bargains, good or bad, entered into by the parties. Our
duty is to affirm legal expectations, not to guarantee good business
judgments.

WHEREFORE, the petition is DENIED. The Decision of the Regional


Trial Court in Civil Case No. 99-1407 and the Decision of the Court of
Appeals in CA-G.R. CV No. 74850 are AFFIRMED. Costs against
petitioner The Wellex Group, Inc.

SO ORDERED.

Carpio, (Chairperson), Velasco, Jr.,* Del Castillo, and Mendoza, JJ.,


concur.

14. PRYCE CORP VS. CHINA BANKING CORPORATION

PRYCE CORPORATION, Petitioner, v. CHINA BANKING


CORPORATION, Respondent.

RESOLUTION

LEONEN, J.:

This case resolves conflicting decisions between two divisions. Only


one may serve as res judicata or a bar for the other to proceed. This
case also settles the doctrine as to whether a hearing is needed prior
to the issuance of a stay order in corporate rehabilitation proceedings.

The present case originated from a petition for corporate rehabilitation


filed by petitioner Pryce Corporation on July 9, 2004 with the Regional
Trial Court of Makati, Branch 138.1

The rehabilitation court found the petition sufficient in form and


substance and issued a stay order on July 13, 2004 appointing Gener
T. Mendoza as rehabilitation receiver.2

On September 13, 2004, the rehabilitation court gave due course to


the petition and directed the rehabilitation receiver to evaluate and
give recommendations on petitioner Pryce Corporation’s proposed
rehabilitation plan attached to its petition.3

The rehabilitation receiver did not approve this plan and submitted
instead an amended rehabilitation plan, which the rehabilitation court
approved by order dated January 17, 2005.4 In its disposition, the
court found petitioner Pryce Corporation “eligible to be placed in a
state of corporate rehabilitation.”5 The disposition likewise identified
the assets to be held and disposed of by petitioner Pryce Corporation
and the manner by which its liabilities shall be paid and liquidated.6

On February 23, 2005, respondent China Banking Corporation elevated


the case to the Court of Appeals. Its petition questioned the January
17, 2005 order that included the following
terms:chanRoblesvirtualLawlibrary
1. The indebtedness to China Banking Corporation and Bank of the
Philippine Islands as well as the long term commercial papers will
be paid through a dacion en pago of developed real estate assets
of the petitioner.

xxx

4. All accrued penalties are waived[.]

5. Interests shall accrue only up to July 13, 2004, the date of


issuance of the stay order[.]

6. No interest will accrue during the pendency of petitioner’s


corporate rehabilitation[.]

7. Dollar–denominated loans will be converted to Philippine Pesos on


the date of the issuance of this Order using the reference rate of
the Philippine Dealing System as of this date.7
Respondent China Banking Corporation contended that the
rehabilitation plan’s approval impaired the obligations of contracts. It
argued that neither the provisions of Presidential Decree No. 902–A
nor the Interim Rules of Procedure on Corporate Rehabilitation
(Interim Rules) empowered commercial courts “to render without force
and effect valid contractual stipulations.”8 Moreover, the plan’s
approval authorizing dacion en pago of petitioner Pryce Corporation’s
properties without respondent China Banking Corporation’s consent
not only violated “mutuality of contract and due process, but [was]
also antithetical to the avowed policies of the state to maintain a
competitive financial system.”9
The Bank of the Philippine Islands (BPI), another creditor of petitioner
Pryce Corporation, filed a separate petition with the Court of Appeals
assailing the same order by the rehabilitation court. BPI called the
attention of the court “to the non–impairment clause and the mutuality
of contracts purportedly ran roughshod by the [approved rehabilitation
plan].”10

On July 28, 2005, the Court of Appeals Seventh (7th )


Division11 granted respondent China Banking Corporation’s petition,
and reversed and set aside the rehabilitation court’s: (1) July 13, 2004
stay order that also appointed Gener T. Mendoza as rehabilitation
receiver; (2) September 13, 2004 order giving due course to the
petition and directing the rehabilitation receiver to evaluate and give
recommendations on petitioner Pryce Corporation’s proposed
rehabilitation plan; and (3) January 17, 2005 order finding petitioner
Pryce Corporation eligible to be placed in a state of corporate
rehabilitation, identifying assets to be disposed of, and determining
the manner of liquidation to pay the liabilities.12

With respect to BPI’s separate appeal, the Court of Appeals First (1st )
Division13 granted its petition initially and set aside the January 17,
2005 order of the rehabilitation court in its decision dated May 3,
2006.14 On reconsideration, the court issued a resolution dated May
23, 2007 setting aside its original decision and dismissing the
petition.15 BPI elevated the case to this court, docketed as G.R. No.
180316. By resolution dated January 30, 2008, the First (1st ) Division
of this court denied the petition.16 By resolution dated April 28, 2008,
this court denied reconsideration with finality.17

Meanwhile, petitioner Pryce Corporation also appealed to this court


assailing the July 28, 2005 decision of the Court of Appeals Seventh
(7th ) Division granting respondent China Banking Corporation’s
petition as well as the resolution denying its motion for
reconsideration.

In the decision dated February 4, 2008,18 the First (1st ) Division of


this court denied its petition with the dispositive portion as
follows:chanRoblesvirtualLawlibrary
WHEREFORE, we DENY the petition. The assailed Decision of the Court
of Appeals in CA–G.R. SP No. 88479 is AFFIRMED with the
modification discussed above. Let the records of this case
be REMANDED to the RTC, Branch 138, Makati City, sitting as
Commercial Court, for further proceedings with dispatch to determine
the merits of the petition for rehabilitation. No
costs.19ChanRoblesVirtualawlibrary
Petitioner Pryce Corporation filed an omnibus motion for (1)
reconsideration or (2) partial reconsideration and (3) referral to the
court En Banc dated February 29, 2008. Respondent China Banking
Corporation also filed a motion for reconsideration on even date,
praying that the February 4, 2008 decision be set aside and
reconsidered only insofar as it ordered the remand of the case for
further proceedings “to determine whether petitioner’s financial
condition is serious and whether there is clear and imminent danger
that it will lose its corporate assets.”20

By resolution dated June 16, 2008, this court denied with finality the
separate motions for reconsideration filed by the parties.

On September 10, 2008, petitioner Pryce Corporation filed a second


motion for reconsideration praying that the Court of Appeals’ decision
dated February 4, 2008 be set aside.

The First Division of this court referred this case to the En Banc en
consulta by resolution dated June 22, 2009.21 The court En Banc, in its
resolution dated April 13, 2010, resolved to accept this case.22

On July 30, 2013, petitioner Pryce Corporation and respondent China


Banking Corporation, through their respective counsel, filed a joint
manifestation and motion to suspend proceedings. The parties
requested this court to defer its ruling on petitioner Pryce
Corporation’s second motion for reconsideration “so as to enable the
parties to work out a mutually acceptable arrangement.”23

By resolution dated August 6, 2013, this court granted the motion but
only for two (2) months. The registry receipts showed that counsel for
respondent China Banking Corporation and counsel for petitioner Pryce
Corporation received their copies of this resolution on September 5,
2013.24

More than two months had lapsed since September 5, 2013, but no
agreement was filed by the parties. Thus, we proceed to rule on
petitioner Pryce Corporation’s second motion for reconsideration.

This motion raises two grounds.

First, petitioner Pryce Corporation argues that the issue on the validity
of the rehabilitation court orders is now res judicata. Petitioner Pryce
Corporation submits that the ruling in BPI v. Pryce
Corporationdocketed as G.R. No. 180316 contradicts the present case,
and it has rendered the issue on the validity and regularity of the
rehabilitation court orders as res judicata.25cralawred

Second, petitioner Pryce Corporation contends that Rule 4, Section 6


of the Interim Rules of Procedure on Corporate Rehabilitation26 does
not require the rehabilitation court to hold a hearing before issuing a
stay order. Considering that the Interim Rules was promulgated later
than Rizal Commercial Banking Corp. v. IAC27 that enunciated the
“serious situations” test,28 petitioner Pryce Corporation argues that the
test has effectively been abandoned by the “sufficiency in form and
substance test” under the Interim Rules.29

The present second motion for reconsideration involves the following


issues:

I. Whether the issue on the validity of the rehabilitation order


dated January 17, 2005 is now res judicata in light of BPI v.
Pryce Corporation docketed as G.R. No. 180316;

II. Whether the rehabilitation court is required to hold a hearing to


comply with the “serious situations” test laid down in the case
of Rizal Commercial Banking Corp. v. IAC before issuing a stay
order.

We proceed to discuss the first issue.

BPI v. Pryce Corporation docketed as G.R. No. 180316 rendered the


issue on the validity of the rehabilitation court’s January 17, 2005
order approving the amended rehabilitation plan as res judicata.

In BPI v. Pryce Corporation, the Court of Appeals set aside initially the
January 17, 2005 order of the rehabilitation court.30 On
reconsideration, the court set aside its original decision and dismissed
the petition.31 On appeal, this court denied the petition filed by BPI
with finality. An entry of judgment was made for BPI v. Pryce
Corporation on June 2, 2008.32 In effect, this court upheld the January
17, 2005 order of the rehabilitation court.

According to the doctrine of res judicata, “a final judgment or decree


on the merits by a court of competent jurisdiction is conclusive of the
rights of the parties or their privies in all later suits on all points and
matters determined in the former suit.”33
The elements for res judicata to apply are as follows: (a) the former
judgment was final; (b) the court that rendered it had jurisdiction over
the subject matter and the parties; (c) the judgment was based on the
merits; and (d) between the first and the second actions, there was an
identity of parties, subject matters, and causes of action.34

Res judicata embraces two concepts: (1) bar by prior judgment35 and
(2) conclusiveness of judgment.36

Bar by prior judgment exists “when, as between the first case where
the judgment was rendered and the second case that is sought to be
barred, there is identity of parties, subject matter, and causes of
action.”37

On the other hand, the concept of conclusiveness of judgment finds


application “when a fact or question has been squarely put in issue,
judicially passed upon, and adjudged in a former suit by a court of
competent jurisdiction.”38 This principle only needs identity of parties
and issues to apply.39

The elements of res judicata through bar by prior judgment are


present in this case.

On the element of identity of parties, res judicata does not require


absolute identity of parties as substantial identity is
enough.40 Substantial identity of parties exists “when there is a
community of interest between a party in the first case and a party in
the second case, even if the latter was not impleaded in the first
case.”41 Parties that represent the same interests in two petitions are,
thus, considered substantial identity of parties for purposes of res
judicata.42 Definitely, one test to determine substantial identity of
interest would be to see whether the success or failure of one party
materially affects the other.

In the present case, respondent China Banking Corporation and BPI


are creditors of petitioner Pryce Corporation and are both questioning
the rehabilitation court’s approval of the amended rehabilitation plan.
Thus, there is substantial identity of parties since they are litigating for
the same matter and in the same capacity as creditors of petitioner
Pryce Corporation.

There is no question that both cases deal with the subject matter of
petitioner Pryce Corporation’s rehabilitation. The element of identity of
causes of action also exists.

In separate appeals, respondent China Banking Corporation and BPI


questioned the same January 17, 2005 order of the rehabilitation court
before the Court of Appeals.

Since the January 17, 2005 order approving the amended


rehabilitation plan was affirmed and made final in G.R. No. 180316,
this plan binds all creditors, including respondent China Banking
Corporation.

In any case, the Interim Rules or the rules in effect at the time the
petition for corporate rehabilitation was filed in 2004 adopts the cram–
down principle which “consists of two things: (i) approval despite
opposition and (ii) binding effect of the approved plan x x x.”43

First, the Interim Rules allows the rehabilitation court44 to “approve a


rehabilitation plan even over the opposition of creditors holding a
majority of the total liabilities of the debtor if, in its judgment, the
rehabilitation of the debtor is feasible and the opposition of the
creditors is manifestly unreasonable.”45

Second, it also provides that upon approval by the court, the


rehabilitation plan and its provisions “shall be binding upon the debtor
and all persons who may be affected by it, including the creditors,
whether or not such persons have participated in the proceedings or
opposed the plan or whether or not their claims have been
scheduled.”46

Thus, the January 17, 2005 order approving the amended


rehabilitation plan, now final and executory resulting from the
resolution of BPI v. Pryce Corporation docketed as G.R. No. 180316,
binds all creditors including respondent China Banking Corporation.

This judgment in BPI v. Pryce Corporation covers necessarily the


rehabilitation court’s September 13, 2004 order giving due course to
the petition. The general rule precluding relitigation of issues extends
to questions implied necessarily in the final
judgment, viz:chanRoblesvirtualLawlibrary
The general rule precluding the relitigation of material facts or
questions which were in issue and adjudicated in former action are
commonly applied to all matters essentially connected with the subject
matter of the litigation. Thus, it extends to questions necessarily
implied in the final judgment, although no specific finding may have
been made in reference thereto and although such matters were
directly referred to in the pleadings and were not actually or formally
presented. x x x.47ChanRoblesVirtualawlibrary
The dispositive portion of the Court of Appeals’ decision in BPI v. Pryce
Corporation, reversed on reconsideration, only mentioned the January
17, 2005 order of the rehabilitation court approving the amended
rehabilitation plan. Nevertheless, the affirmation of its validity
necessarily included the September 13, 2004 order as this earlier
order gave due course to the petition and directed the rehabilitation
receiver to evaluate and give recommendations on the rehabilitation
plan proposed by petitioner.48

In res judicata, the primacy given to the first case is related to the
principle of immutability of final judgments essential to an effective
and efficient administration of justice, viz:chanRoblesvirtualLawlibrary
x x x [W]ell–settled is the principle that a decision that has
acquired finality becomes immutable and unalterable and may
no longer be modified in any respect even if the modification is meant
to correct erroneous conclusions of fact or law and whether it will be
made by the court that rendered it or by the highest court of the land.

The reason for this is that litigation must end and terminate sometime
and somewhere, and it is essential to an effective and efficient
administration of justice that, once a judgment has become final,
the winning party be not deprived of the fruits of the verdict. Courts
must guard against any scheme calculated to bring about that result
and must frown upon any attempt to prolong the controversies.

The only exceptions to the general rule are the correction of clerical
errors, the so–called nunc pro tunc entries which cause no prejudice to
any party, void judgments, and whenever circumstances
transpire after the finality of the decision rendering its execution
unjust and inequitable.49 (Emphasis
provided)chanroblesvirtualawlibrary
Generally, the later case is the one abated applying the maxim qui
prior est tempore, potior est jure (he who is before in time is the
better in right; priority in time gives preference in law).50 However,
there are limitations to this rule as discussed in Victronics Computers,
Inc. v. Regional Trial Court, Branch 63, Makati:51
In our jurisdiction, the law itself does not specifically require that the
pending action which would hold in abatement the other must be a
pending prior action. Thus, in Teodoro vs. Mirasol, this Court
observed:chanRoblesvirtualLawlibrary
It is to be noted that the Rules do not require as a ground for dismissal
of a complaint that there is a prior pending action. They provide that
there is a pending action, not a pending prior action. The fact
that the unlawful detainer suit was of a later date is no bar to the
dismissal of the present action. We find, therefore, no error in the
ruling of the court a quo that plaintiff’s action should be dismissed on
the ground of the pendency of another more appropriate action
between the same parties and for the same cause.
In Roa–Magsaysay vs. Magsaysay, wherein it was the first case which
was abated, this Court ruled:chanRoblesvirtualLawlibrary
In any event, since We are not really dealing with jurisdiction but
mainly with venue, considering both courts concerned do have
jurisdiction over the causes of action of the parties herein against each
other, the better rule in the event of conflict between two
courts of concurrent jurisdiction as in the present case, is to
allow the litigation to be tried and decided by the court which,
under the circumstances obtaining in the controversy, would, in
the mind of this Court, be in a better position to serve the
interests of justice, considering the nature of the controversy,
the comparative accessibility of the court to the parties, having
in view their peculiar positions and capabilities, and other
similar factors. Without in any manner casting doubt as to the
capacity of the Court of First Instance of Zambales to adjudicate
properly cases involving domestic relations, it is easy to see that the
Juvenile and Domestic Relations Court of Quezon City which was
created in order to give specialized attention to family problems,
armed as it is with adequate and corresponding facilities not available
to ordinary courts of first instance, would be able to attend to the
matters here in dispute with a little more degree of expertise and
experience, resulting in better service to the interests of justice. A
reading of the causes of action alleged by the contending spouses and
a consideration of their nature, cannot but convince Us that, since
anyway, there is an available Domestic Court that can legally take
cognizance of such family issues, it is better that said Domestic Court
be the one chosen to settle the same as the facts and the law may
warrant.
We made the same pronouncement in Ramos vs.
Peralta:chanRoblesvirtualLawlibrary
Finally, the rule on litis pendentia does not require that the later
case should yield to the earlier case. What is required merely is
that there be another pending action, not a prior pending action.
Considering the broader scope of inquiry involved in Civil Case No.
4102 and the location of the property involved, no error was
committed by the lower court in deferring to the Bataan court’s
jurisdiction.
An analysis of these cases unravels the ratio for the rejection of the
priority–in–time rule and establishes the criteria to determine which
action should be upheld and which is to be abated. In Teodoro, this
Court used the criterion of the more appropriate action.We ruled
therein that the unlawful detainer case, which was filed later, was the
more appropriate action because the earlier case — for specific
performance or declaratory relief — filed by the lessee (Teodoro) in
the Court of First Instance (CFI) to seek the extension of the lease for
another two (2) years or the fixing of a longer term for it, was
“prompted by a desire on plaintiff’s part to anticipate the action for
unlawful detainer, the probability of which was apparent from the
letter of the defendant to the plaintiff advising the latter that the
contract of lease expired on October 1, 1954.” The real issue between
the parties therein was whether or not the lessee should be allowed to
continue occupying the leased premises under a contract the terms of
which were also the subject matter of the unlawful detainer case.
Consonant with the doctrine laid down in Pue vs. Gonzales and Lim Si
vs. Lim, the right of the lessee to occupy the land leased against the
lessor should be decided under Rule 70 of the Rules of Court; the fact
that the unlawful detainer case was filed later then of no moment.
Thus, the latter was the more appropriate action.

xxx

In Roa–Magsaysay[,] the criterion used was the consideration


of the interest of justice. In applying this standard, what was asked
was which court would be “in a better position to serve the interests of
justice,” taking into account (a) the nature of the controversy, (b) the
comparative accessibility of the court to the parties and (c) other
similar factors. While such a test was enunciated therein, this Court
relied on its constitutional authority to change venue to avoid a
miscarriage of justice.

It is interesting to note that in common law, as earlier adverted to,


and pursuant to the Teodoro vs. Mirasol case, the bona fides or
good faith of the parties is a crucial element. In the former, the
second case shall not be abated if not brought to harass or vex; in the
latter, the first case shall be abated if it is merely an anticipatory
action or, more appropriately, an anticipatory defense against an
expected suit — a clever move to steal the march from the aggrieved
party.52 (Emphasis provided and citations
omitted)chanroblesvirtualawlibrary
None of these situations are present in the facts of this instant suit. In
any case, it is the better part of wisdom in protecting the creditors if
the corporation is rehabilitated.

We now proceed to the second issue on whether the rehabilitation


court is required to hold a hearing to comply with the “serious
situations” test laid down in Rizal Commercial Banking Corp. v.
IAC before issuing a stay order.

The rehabilitation court complied with the Interim Rules in its order
dated July 13, 2004 on the issuance of a stay order and appointment
of Gener T. Mendoza as rehabilitation receiver.53

The 1999 Rizal Commercial Banking Corp. v. IAC54 case provides for
the “serious situations” test in that the suspension of claims is counted
only upon the appointment of a rehabilitation receiver,55 and certain
situations serious in nature must be shown to exist before one is
appointed, viz:chanRoblesvirtualLawlibrary
Furthermore, as relevantly pointed out in the dissenting opinion, a
petition for rehabilitation does not always result in the appointment of
a receiver or the creation of a management committee. The SEC has
to initially determine whether such appointment is appropriate and
necessary under the circumstances. Under Paragraph (d), Section 6 of
Presidential Decree No. 902–A, certain situations must be shown to
exist before a management committee may be created or appointed,
such as:

1. when there is imminent danger of dissipation, loss, wastage or


destruction of assets or other properties; or

2. when there is paralization of business operations of such


corporations or entities which may be prejudicial to the interest of
minority stockholders, parties–litigants or to the general public.

On the other hand, receivers may be appointed whenever:

1. necessary in order to preserve the rights of the parties–litigants;


and/or

2. protect the interest of the investing public and creditors. (Section 6


[c], P.D. 902–A.)

These situations are rather serious in nature, requiring the


appointment of a management committee or a receiver to preserve
the existing assets and property of the corporation in order to protect
the interests of its investors and creditors. Thus, in such situations,
suspension of actions for claims against a corporation as provided in
Paragraph (c) of Section 6, of Presidential Decree No. 902–A is
necessary, and here we borrow the words of the late Justice
Medialdea, “so as not to render the SEC management Committee
irrelevant and inutile and to give it unhampered ‘rescue efforts’ over
the distressed firm” (Rollo, p. 265).”

Otherwise, when such circumstances are not obtaining or when the


SEC finds no such imminent danger of losing the corporate assets, a
management committee or rehabilitation receiver need not be
appointed and suspension of actions for claims may not be ordered by
the SEC. When the SEC does not deem it necessary to appoint a
receiver or to create a management committee, it may be assumed,
that there are sufficient assets to sustain the rehabilitation plan, and
that the creditors and investors are amply
protected.56ChanRoblesVirtualawlibrary
However, this case had been promulgated prior to the effectivity of the
Interim Rules that took effect on December 15, 2000.

Section 6 of the Interim Rules states explicitly that “[i]f the court finds
the petition to be sufficient in form and substance, it shall, not later
than five (5) days from the filing of the petition, issue an Order (a)
appointing a Rehabilitation Receiver and fixing his bond; (b) staying
enforcement of all claims x x x.”57

Compliant with the rules, the July 13, 2004 stay order was issued not
later than five (5) days from the filing of the petition on July 9, 2004
after the rehabilitation court found the petition sufficient in form and
substance.

We agree that when a petition filed by a debtor “alleges all the


material facts and includes all the documents required by Rule 4–2 [of
the Interim Rules],”58 it is sufficient in form and substance.

Nowhere in the Interim Rules does it require a comprehensive


discussion in the stay order on the court’s findings of sufficiency in
form and substance.

The stay order and appointment of a rehabilitation receiver dated July


13, 2004 is an “extraordinary, preliminary, ex parte remed[y].”59 The
effectivity period of a stay order is only “from the date of its issuance
until dismissal of the petition or termination of the rehabilitation
proceedings.”60 It is not a final disposition of the case. It is an
interlocutory order defined as one that “does not finally dispose of the
case, and does not end the Court’s task of adjudicating the parties’
contentions and determining their rights and liabilities as regards each
other, but obviously indicates that other things remain to be done by
the Court.”61

Thus, it is not covered by the requirement under the Constitution that


a decision must include a discussion of the facts and laws on which it is
based.62

Neither does the Interim Rules require a hearing before the issuance of
a stay order. What it requires is an initial hearing before it can give
due course to63 or dismiss64 a petition.

Nevertheless, while the Interim Rules does not require the holding of a
hearing before the issuance of a stay order, neither does it prohibit the
holding of one. Thus, the trial court has ample discretion to call a
hearing when it is not confident that the allegations in the petition are
sufficient in form and substance, for so long as this hearing is held
within the five (5)–day period from the filing of the petition — the
period within which a stay order may issue as provided in the Interim
Rules.

One of the important objectives of the Interim Rules is “to promote a


speedy disposition of corporate rehabilitation cases[,] x x x apparent
from the strict time frames, the non–adversarial nature of the
proceedings, and the prohibition of certain kinds of pleadings.”65 It is
in light of this objective that a court with basis to issue a stay order
must do so not later than five (5) days from the date the petition was
filed.66

Moreover, according to the November 17, 2000 memorandum


submitted by the Supreme Court Committee on the Interim Rules of
Procedure on Corporate Rehabilitation:chanRoblesvirtualLawlibrary
The Proposed Rules remove the concept of the Interim Receiver and
replace it with a rehabilitation receiver. This is to justify
the immediate issuance of the stay order because under Presidential
Decree No. 902–A, as amended, the suspension of actions takes effect
only upon appointment of the rehabilitation receiver.67 (Emphasis
provided)chanroblesvirtualawlibrary
Even without this court going into the procedural issues, addressing
the substantive merits of the case will yield the same result.
Respondent China Banking Corporation mainly argues the violation of
the constitutional proscription against impairment of contractual
obligations68 in that neither the provisions of Pres. Dec. No. 902–A as
amended nor the Interim Rules empower commercial courts “to render
without force and effect valid contractual stipulations.”69

The non–impairment clause first appeared in the United States


Constitution as a safeguard against the issuance of worthless paper
money that disturbed economic stability after the American
Revolution.70This constitutional provision was designed to promote
commercial stability.71 At its core is “a prohibition of state interference
with debtor–creditor relationships.”72

This clause first became operative in the Philippines through the


Philippine Bill of 1902, the fifth paragraph of Section 5 which states
“[t]hat no law impairing the obligation of contracts shall be enacted.”
It was consistently adopted in subsequent Philippine fundamental laws,
namely, the Jones Law of 1916,73the 1935 Constitution,74 the 1973
Constitution,75 and the present Constitution.76

Nevertheless, this court has brushed aside invocations of the non–


impairment clause to give way to a valid exercise of police power77 and
afford protection to labor.78

In Pacific Wide Realty and Development Corporation v. Puerto Azul


Land, Inc.79 which similarly involved corporate rehabilitation, this court
found no merit in Pacific Wide’s invocation of the non–impairment
clause, explaining as follows:chanRoblesvirtualLawlibrary
We also find no merit in PWRDC’s contention that there is a violation of
the impairment clause. Section 10, Article III of the Constitution
mandates that no law impairing the obligations of contract shall be
passed. This case does not involve a law or an executive issuance
declaring the modification of the contract among debtor PALI, its
creditors and its accommodation mortgagors. Thus, the non–
impairment clause may not be invoked. Furthermore, as held in Oposa
v. Factoran, Jr. even assuming that the same may be invoked, the
non–impairment clause must yield to the police power of the State.
Property rights and contractual rights are not absolute. The
constitutional guaranty of non–impairment of obligations is limited by
the exercise of the police power of the State for the common good of
the general public.

Successful rehabilitation of a distressed corporation will benefit its


debtors, creditors, employees, and the economy in general. The court
may approve a rehabilitation plan even over the opposition of creditors
holding a majority of the total liabilities of the debtor if, in its
judgment, the rehabilitation of the debtor is feasible and the
opposition of the creditors is manifestly unreasonable. The
rehabilitation plan, once approved, is binding upon the debtor and all
persons who may be affected by it, including the creditors, whether or
not such persons have participated in the proceedings or have opposed
the plan or whether or not their claims have been
scheduled.80ChanRoblesVirtualawlibrary
Corporate rehabilitation is one of many statutorily provided remedies
for businesses that experience a downturn. Rather than leave the
various creditors unprotected, legislation now provides for an orderly
procedure of equitably and fairly addressing their concerns. Corporate
rehabilitation allows a court–supervised process to rejuvenate a
corporation. Its twin, insolvency, provides for a system of liquidation
and a procedure of equitably settling various debts owed by an
individual or a business. It provides a corporation’s owners a sound
chance to re–engage the market, hopefully with more vigor and
enlightened services, having learned from a painful experience.

Necessarily, a business in the red and about to incur tremendous


losses may not be able to pay all its creditors. Rather than leave it to
the strongest or most resourceful amongst all of them, the state steps
in to equitably distribute the corporation’s limited resources.

The cram–down principle adopted by the Interim Rules does, in effect,


dilute contracts. When it permits the approval of a rehabilitation plan
even over the opposition of creditors,81 or when it imposes a binding
effect of the approved plan on all parties including those who did not
participate in the proceedings,82 the burden of loss is shifted to the
creditors to allow the corporation to rehabilitate itself from insolvency.

Rather than let struggling corporations slip and vanish, the better
option is to allow commercial courts to come in and apply the process
for corporate rehabilitation.

This option is preferred so as to avoid what Garrett Hardin called the


Tragedy of Commons. Here, Hardin submits that “coercive government
regulation is necessary to prevent the degradation of common–pool
resources [since] individual resource appropriators receive the full
benefit of their use and bear only a share of their cost.”83 By analogy
to the game theory, this is the prisoner’s dilemma: “Since no
individual has the right to control or exclude others, each appropriator
has a very high discount rate [with] little incentive to efficiently
manage the resource in order to guarantee future use.”84 Thus, the
cure is an exogenous policy to equitably distribute scarce resources.
This will incentivize future creditors to continue lending, resulting in
something productive rather than resulting in nothing.

In fact, these corporations exist within a market. The General Theory


of Second Best holds that “correction for one market imperfection will
not necessarily be efficiency–enhancing unless [there is also]
simultaneous [correction] for all other market imperfections.”85 The
correction of one market imperfection may adversely affect market
efficiency elsewhere, for instance, “a contract rule that corrects for an
imperfection in the market for consensual agreements may [at the
same time] induce welfare losses elsewhere.”86 This theory is one
justification for the passing of corporate rehabilitation laws allowing
the suspension of payments so that corporations can get back on their
feet.

As in all markets, the environment is never guaranteed. There are


always risks. Contracts are indeed sacred as the law between the
parties. However, these contracts exist within a society where nothing
is risk–free, and the government is constantly being called to attend to
the realities of the times.

Corporate rehabilitation is preferred for addressing social costs.


Allowing the corporation room to get back on its feet will retain if not
increase employment opportunities for the market as a whole.
Indirectly, the services offered by the corporation will also benefit the
market as “[t]he fundamental impulse that sets and keeps the
capitalist engine in motion comes from [the constant entry of] new
consumers’ goods, the new methods of production or transportation,
the new markets, [and] the new forms of industrial organization that
capitalist enterprise creates.”87

As a final note, this is not the first time this court was made to review
two separate petitions appealed from two conflicting decisions,
rendered by two divisions of the Court of Appeals, and originating from
the same case. In Serrano v. Ambassador Hotel, Inc.,88 we ordered
the Court of Appeals to adopt immediately a more efficient system in
its Internal Rules to avoid situations as this.

In this instance, it is fortunate that this court had the opportunity to


correct the situation and prevent conflicting judgments from reaching
impending finality with the referral to the En Banc.
We reiterate the need for our courts to be “constantly vigilant in
extending their judicial gaze to cases related to the matters submitted
for their resolution”89 as to “ensure against judicial confusion and
[any] seeming conflict in the judiciary’s decisions.”90

WHEREFORE, petitioner Pryce Corporation’s motion is GRANTED.


This court’s February 4, 2008 decision is RECONSIDERED and SET
ASIDE.

SO ORDERED.

Sereno, C.J., Carpio, Velasco, Jr., Leonardo–De Castro, Peralta,


Bersamin, Del Castillo, Abad, Villarama, Jr., Perez, Mendoza,
and Reyes, JJ., concur.
Brion, J., on leave.
Perlas–Bernabe, J., no part.

15. FOREST HILLS GOLF CLUB, INC. VS GARDPRO, INC

FOREST HILLS GOLF AND COUNTRY CLUB,


INC., Petitioner, v. GARDPRO, INC., Respondent.

DECISION

BERSAMIN, J.:

The articles of incorporation and the by-laws of a corporation define


and regulate the relations between the corporation and the
stockholders. In interpreting them, the literal meaning of their
provisions shall control, and such provisions should be construed as a
whole and not in isolation.

The Case

This appeal by the corporation seeks to overturn the ruling


promulgated on September 26, 2003 by the Court of Appeals (CA)
denying its appeal by petition for review, thereby affirming the
adverse ruling of the Securities and Exchange Commission (SEC)
regarding the refund of membership fees.1

Antecedents

Petitioner Forest Hills Golf and Country Club, Inc. (interchangeably


Forest Hills or Club), a non-profit stock corporation, was established to
promote social, recreational and athletic activities among its members.
It constructed and maintained golf courses, tennis courts, swimming
pools, and other indoor and outdoor sports and recreational facilities.
It was an exclusive and private club organized for the sole benefit of
its members. In March 1993, Fil-Estate Properties, Inc., a party to a
Project Agreement to develop the Forest Hills Residential Estates and
the Forest Hills Golf and Country Club, undertook to market the golf
club shares of Forest Hills for a fee. In July 1995, Fil-Estate Properties,
Inc. (FEPI) assigned its rights and obligations under the Project
Agreement to Fil- Estate Golf and Development, Inc. (FEGDI).2

In 1995, FEPI and FEGDI engaged Fil-Estate Marketing Associates Inc.,


(FEMAI) to market and offer for sale the shares of stocks of Forest
Hills. Leandro de Mesa, the President of FEMAI, oriented the sales staff
on the information that would usually be inquired about by prospective
buyers. He made it clear that membership in the Club was a privilege,
such that purchasers of shares of stock would not automatically
become members of the Club, but must apply for and comply with all
the requirements in order to qualify them for membership, subject to
the approval of the Board of Directors.3

In 1996, Gardpro, Inc. (Gardpro) bought class “C” common shares of


stock, which were special corporate shares that entitled the registered
owner to designate two nominees or representatives for membership
in the Club.4

In October 1997, Ramon Albert, the General Manager of the Club,


notified the shareholders that it was already accepting applications for
membership. In that regard, Gardpro designated Fernando R. Martin
and Rolando N. Reyes to be its corporate nominees; hence, the two
applied for membership in the Club. Forest Hills charged them
membership fees of P50,000.00 each, prompting Martin to
immediately call up Albert and complain about being thus charged
despite having been assured that no such fees would be collected from
them. With Albert assuring that the fees were temporary,5 both
nominees of Gardpro paid the fees. At that time, the P45,000.00
membership fees of corporate members were increased to P75,000.00
per nominee by virtue of the August 26, 1997 resolution of the Board
of Directors. Any nominee who paid the fees within a specified period
was entitled to a discount of P25,000.00. Both nominees of Gardpro
were then admitted as members upon approval of their applications by
the Board of Directors. Later, Gardpro decided to change its
designated nominees, and Forest Hills charged Gardpro new
membership fees of P75,000.00 per nominee. When Gardpro refused
to pay, the replacement did not take place.

On July 7, 1999, Gardpro filed a complaint in the SEC,6 which Forest


Hills duly answered.7 Martin and Reyes testified that when the shares
of stock were being marketed, nothing about payment of membership
fees was explained to them; that upon his inquiry, a certain Ms.
Cacho, an agent of FEMAI, had told Martin that if a corporation bought
class “C” common shares, its nominees would be automatically entitled
to become members of the Club; that all that the corporation would
have to do thereafter was to pay the monthly dues;8 that Albert had
assured Martin that the membership fees he had paid would be
refunded; and that Martin was not furnished copies of the by-laws of
Forest Hills.

On June 30, 2000, SEC Hearing Officer Natividad T. Querijero rendered


her decision, disposing as follows:9

WHEREFORE, judgment is hereby rendered (1) restraining defendant


from collecting membership fees for the two (2) replacement
members;(2) the membership fees already paid shall be applied as
membership fees for the two (2) replacement members; and (3) to
pay complainant attorney’s fees in the amount of Fifty Thousand
(P50,000.00) Pesos.

SO ORDERED.

Judgment of the SEC En Banc

On June 28, 2001, the SEC En Banc affirmed the findings of Hearing
Officer Querijero, except the granting of attorney’s fees to
Gardpro,10viz:

The main issue to be resolved in this appeal, therefore, is whether or


not under the by-laws of the club, it is authorized to collect new
membership fees for replacement nominees of Class “C” members.
Nowhere in the by-laws of respondent-appellant is there a provision
that authorizes the collection of membership fees every time a
nominee of corporate shareholder is to be replaced. What the by-laws
authorizes is the collection of a “transfer fee,” in such amount as may
be prescribed by the Board, for every change in the designated
nominees of a juridical entity (Art. II, Sec. 2.2 Subsection 2.2.2). This
should be differentiated from the provision of Art. III, Sec. 13.6 of the
By-laws, which authorizes the collection of “transfer fee” of P60,000
for corporate members for each transfer of stock in the club's books.
The transfer fee under the former provision refers to the one imposed
on the change in the corporate member's designated nominee only
while the transfer fee under the latter provision refers to the a transfer
of the stock itself from one corporate member to another which
necessitates entry in the club's books. As correctly pointed out in the
appealed decision, the corporation is the real club member (corporate)
although its designated representative can also be a regular member
of the Club. Therefore, it should not be assessed membership fees
everytime it changes its nominees but only transfer fees as earlier
pointed out. While we agree with respondent-appellant that any
replacement of a nominee of a corporate shareholder/member must
apply for membership and qualify, the By-laws does not require
another payment for membership fee.11

Decision of the CA

On October 10, 2001, Forest Hills appealed to the CA,12 which


ultimately promulgated its assailed decision on September 26, 2003,
denying the petition for review, and affirming the ruling of the
SEC,13viz:

x x x What is at issue is the interpretation of a By-law provision


regarding membership in the Club.

The procedure for acquiring membership is outlined in the provisions


of the By-laws, where the end result is the approval of the Board of
Directors of the application for membership submitted both by the
juridical entity holding shares in the Club, and the designated nominee
or representative.

Contrary to the claim of the petitioner, the payment of membership


fee is not a part of the procedure for the approval of the application for
membership. The matter of membership fees is provided under section
13.7 of the By-Laws, and reads as follows:

Section 13.7 MEMBERSHIP FEES. Unless otherwise determined by the


Board of Directors, a membership fee of Thirty Thousand Pesos
(P30,000.00) for individual and Forty Five Thousand Pesos (45,000.00)
for corporate members must be paid the applicant within 30 days
from the approval of his application before his share can be
register[ed] in the Stock and Transfer Books of the Club as
provided in Section 2.2.6 of these By-laws. Non-payment of the
membership fee within the 30 day period shall be deemed a
withdrawal of the application. These amount maybe waived, increased
or decreased from time to time by a resolution of the Board of
Directors. (Emphasis supplied)

From the foregoing, it is clear that the membership is required to be


paid within 30 days from approval of the application, and is for the
purpose of registering the share of the aspiring member in the Stock
and Transfer books of the Club.

We agree with the ruling of the SEC and the Hearing Officer that the
real club member is Gardpro, and not its designated nominees/
representatives, considering the following:

1. The corporation (Gardpro) owns the Class “C” share as the by-
laws itself provides, the nominees are merely nominees or
representatives of the corporation, the latter being the real
member. (Section 2.2.2, Section 2.2.4)

2. A regular individual member is entitled to vote; however, in the


case of a regular corporate member, only one of the nominees
may vote for the corporation they represent. (Section 2.2.2)

3. The corporation, besides the nominees, has to submit its


application for membership and has to be screened vis-à-vis the
nominees. [Section 2.2.7 par (d)]

4. The corporation is primarily liable for the obligations of the


nominees. (Section 13.1)

5. The nature of membership of nominees may rightfully (be)


compared to that of an assignee- member. (Section 2.2.8)

When respondent Gardpro decided to replace its designated nominees,


it should not be required to pay membership fees again as it has
already paid such fees for the original designated nominees. As the
real Club members, respondent should not be assessed membership
fees every time it changes its nominees. Nowhere in the By-Laws of
the petitioner is it provided that it is authorized to collect membership
fees every time a nominee of a corporate shareholder is to be
replaced.

As correctly held by the Hearing Officer and the SEC, the applicable
provision on the matter is section 2.2.2 of the By-Laws, the relevant
portion of which states:
“A juridical entity owning a Class “C” Common Share may, by
resolution of its board of directors or trustees, designate two (2)
nominees for regular membership to the club for each Class “C” Share
registered in its name; provided, however, that only one (1) nominee
for each Class “C” Share, as designated in the aforesaid resolution
may vote and hold office as such. The said nominee(s) or
representative(s), upon approval of the Board of Directors, may be
admitted as Regular Member(s). A transfer fee in such amount as
may be prescribed by the Board of Directors, shall be charged
for every change in the designated nominee of juridical entity.”
(Emphasis supplied)

If at all, respondent Gardpro should only be made to pay the transfer


fee mentioned in the aforequoted provision. It should, however, be
noted that said transfer fee is different from that provided in section
13.6 of the By-laws, which authorizes the collection of ‘transfer fee’ of
P60,000.00 for corporate members for each transfer of stock in the
Club's Books. In this case, there is no transfer of share of ownership to
be effected in the Book of the Club. As aptly ruled by the SEC, the
transfer fee under the former provision refers to the one imposed on
the change in the corporate member's designated nominee only, while
the transfer fee under the latter provision refers to a transfer of the
stock itself from one corporate member to another which necessitates
entry in the Club's Books.

Petitioner’s contention that section 2.2.2 is inapplicable because the


former nominees had already qualified and were accepted is likewise
untenable. It is clear from the provision that the transfer fee is
imposable “for every change in the designated nominee of the juridical
entity, making no distinction between a nominee who has already
qualified and was already accepted and one who is yet to qualify or be
accepted. Petitioner contends that had the change occurred before the
nominees became members, then section 2.2.2 may apply, and only a
transfer fee is chargeable. This, We hold, is hair splitting. By becoming
members through the favorable action of the Board of Directors on the
(sic) their application for membership, the former nominees did not
cease to be the “designated nominees” of the respondent. Therefore,
the matter of replacing the designated nominees of the respondent
falls squarely under the provision of section 2.2.2, such that only a
transfer fee is required to be paid. However, We agree with the
petitioner that any replacement of a nominee of a corporate
shareholder/member must apply for membership and qualify.

WHEREFORE, premises considered, the instant petition is hereby


DENIED. The Order of the Securities and Exchange Commission, dated
June 28, 2001, is AFFIRMED in toto.

SO ORDERED.14

Forest Hills moved to reconsider the decision on October 17, 2003.

On November 28, 2003, the Federation of Golf Clubs (Phil.), Inc.


(Federation) sought leave to intervene as amicus curiae,15 but the CA
denied the motion to intervene on March 1, 2004 because it doubted
the Federation’s impartiality due to Forest Hills being one of its
members; and because the issues did not concern matters of broad
public interest to make it necessary to invite amicus curiae.16

On July 27, 2004, the CA denied the motion for reconsideration of


Forest Hills.17

Issues

On September 17, 2004, Forest Hills tendered the following issues in


its petition for review on certiorari, to wit:

I.

The Court of Appeals committed an error of law in not holding that,


under the applicable provisions of law on the interpretation of
contracts, the replacement nominees of Gardpro, Inc., who were
applying for membership in Forest Hills, should pay the required
membership fees.

II.

The Court of Appeals committed an error of law in encroaching upon


the prerogative of Forest Hills to determine its own rules and
procedure governing membership as well as in infringing on the power
of its Board of Directors to decide upon all questions on the
construction of Articles of Incorporation, By-Laws and rules and
regulations of the Club.

III.

The Court of Appeals committed an error of law in not allowing the


intervention of the Federation of Golf Club of the Philippines, Inc.
as amicus curiae.18
Ruling of the Court

The appeal lacks merit. The CA did not err in rendering its assailed
decision against the petitioner.

1.
Replacement nominees of Gardpro
were not required to pay membership fees

Forest Hills was not authorized under its articles of incorporation and
by-laws to collect new membership fees for the replacement nominees
of Gardpro.

There is no question that Gardpro held class “C” common stocks that
entitled it to two memberships in the Club. Its nominees could be
admitted as regular members upon approval of the Board of Directors
but only one nominee for each class “C” share as designated in the
resolution could vote as such. A regular member was then entitled to
use all the facilities and privileges of the Club. In that regard, Gardpro
could only designate as its nominees/representatives its officers whose
functions and office were defined by its own by-laws.

The membership in the Club was a privilege, it being clear that the
mere purchase of a share in the Club did not immediately qualify a
juridical entity for membership. Admission for membership was still
upon the favorable action of the Board of Directors of the Club. Under
Section 2.2.7 of its by-laws, the application form was accomplished by
the chairman of the board, president or chief executive officer of the
applicant juridical entity. The designated nominees also accomplished
their respective application forms, duly proposed and seconded, and
the nominees were evaluated as to their qualifications. The nominees
automatically became ineligible for membership once they ceased to
be officers of the corporate member under its by-laws upon
certification of such loss of tenure by a responsible officer of the
corporate member.

Under Section 2.2.6 of the Club’s by-laws, membership fees of


P45,000.00 must be paid by the applicant within 30 days from the
approval of the application before the share could be registered in the
Stock and Transfer Books of the Club. Non-payment of the
membership fees within the 30-day period would be deemed a
withdrawal of the application. The amount of the fees could be waived,
increased or decreased by the Board of Directors. Pursuant to the
Club’s articles of incorporation and by-laws, the membership fees
should be paid by the corporate member. Based on the procedure set
forth in Section 2.2.7 of the by-laws, the applicant was the juridical
entity, not its nominee or nominees. Although the nominee or
nominees also accomplished their application forms for membership in
the Club, it was the corporate member that was obliged to pay the
membership fees in its own capacity because the share was registered
in its name in the Stock and Transfer Book.

Corporations buy shares in clubs in order to invest for earnings. Their


purchases may also be to reward their corporate executives by having
them enjoy the facilities and perks concomitant to the club
memberships. When Gardpro purchased and registered its ownership
of the class “C” common shares, it did not only invest for earnings
because it also became entitled to nominate two of its officers in the
Club as set forth in its seventh purpose of the articles of incorporation
and Section 2.2.2 of the by-laws, to wit:

Articles of Incorporation

xxxx

SEVENTH

xxxx

That this Corporation is an exclusive club and is organized on a non-


profit basis for the sole benefit of its member/members. Ownership of
a share shall entitle the registered owner to the use of all the sports
and other facilities of the club, but subject to the terms and conditions
herein prescribed, to the By-laws of the corporation, and to the
policies, rules and regulations as may from time to time be
promulgated by the Board of Directors. (Bold emphasis supplied)19

By-Laws

xxxx

2.2.2 Subject to compliance with rules and regulations, a Regular


Member is entitled to use all the facilities and privileges of the Club. x
x x (Bold emphasis supplied)20

Entitle is a term that means to give a right, claim or legal title


to.21 And, as far as the courts have dealt with the term, it may be
gathered that entitle signifies the granting of a privilege or right to be
exercised at the option of the party for whose benefit the term is used
upon which no limitation can be arbitrarily imposed.22 Nonetheless, the
use of the recreational facilities of the Club is commonly known
as playing rights of the corporate member or its nominees.

Golf clubs usually sell shares to individuals and juridical entities in


order to raise capital for the construction of their recreational facilities.
In that regard, golf clubs accept juridical entities to become regular
members,23 and allow such entities to designate corporate nominees
because only natural persons can enjoy the sports facilities. In the
context of this arrangement, Gardpro’s two nominees held playing
rights. But the articles of incorporation of Forest Hills and Section
2.2.2 of its by-laws recognized the right of the corporate member to
replace the nominees, subject to the payment of the transfer fee in
such amount as the Board of Directors determined for every change.
The replacement could take place for any of the following reasons,
namely: (a) if the nominee should cease to be an officer of the
corporate member;24 or (b) if the corporate member should request
the replacement. In case of a replacement, the playing rights would
also be transferred to the new nominees.

According to the second paragraph of Section 13.6 of the by-laws, the


transfer of playing rights entailed the payment of P10,000.00. Yet,
Section 2.2.2 of the by-laws stipulated a transfer fee for every
replacement. This warranted the conclusion that Gardpro should pay to
Forest Hills the transfer fee of P10,000.00 because it desired to change
its nominees.

There was an inconsistency between the by-laws of Forest Hills and


the affidavit of Albert as to the amounts of the membership fees of
corporate members. On one hand, Section 13.7 (Membership Fees) of
the by-laws stated that “the membership fee of Forty Five Thousand
Pesos (P45,000.00) x x x for corporate members must be paid by the
applicant;” on the other, Albert’s affidavit alleged that “each nominee
shall pay the P75,000.00 membership fee.” To resolve the
inconsistency, the by-laws should prevail because they constituted the
private statutes of the corporation and its members and must be
strictly complied with and applied to the letter.

Martin attested that he and Reyes, as the nominees of Gardpro, paid


P50,000.00 each as membership fees.25 With the payment of the fees
being the personal obligation of Gardpro, the Court leaves the matter
to the internal determination of Gardpro and its nominees.
The relevant provisions of the articles of incorporation and the by-laws
of Forest Hills governed the relations of the parties as far as the issues
between them were concerned. Indeed, the articles of incorporation of
Forest Hills defined its charter as a corporation and the contractual
relationships between Forest Hills and the State, between its
stockholders and the State, and between Forest Hills and its
stockholder; hence, there could be no gainsaying that the contents of
the articles of incorporation were binding not only on Forest Hills but
also on its shareholders.26 On the other hand, the by-laws were the
self-imposed rules resulting from the agreement between Forest Hills
and its members to conduct the corporate business in a particular way.
In that sense, the by-laws were the private “statutes” by which Forest
Hills was regulated, and would function. The charter and the by-laws
were thus the fundamental documents governing the conduct of Forest
Hills’ corporate affairs; they established norms of procedure for
exercising rights, and reflected the purposes and intentions of the
incorporators. Until repealed, the by-laws were a continuing rule for
the government of Forest Hills and its officers, the proper function
being to regulate the transaction of the incidental business of Forest
Hills. The by-laws constituted a binding contract as between Forest
Hills and its members, and as between the members themselves.
Every stockholder governed by the by-laws was entitled to access
them.27 The by-laws were self-imposed private laws binding on all
members, directors and officers of Forest Hills. The prevailing rule is
that the provisions of the articles of incorporation and the by-laws
must be strictly complied with and applied to the letter.28

In construing and applying the provisions of the articles of


incorporation and the by-laws of Forest Hills, the CA has leaned on the
plain meaning rule embodied in Article 1370 of the Civil Code, to the
effect that if the terms of the contract are clear and leave no doubt
upon the intention of

the contracting parties, the literal meaning of its stipulations shall


control. The application of the rule has been fittingly explained as
follows:

Our ruling in Benguet Corporation, et al. v. Cesar Cabildo is


instructive:chanroblesvirtuallawlibrary
The cardinal rule in the interpretation of contracts is embodied in the
first paragraph of Article 1370 of the Civil Code: “[i]f the terms of a
contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control.”
This provision is akin to the “plain meaning rule” applied by
Pennsylvania courts, which assumes that the intent of the parties to an
instrument is “embodied in the writing itself, and when the words are
clear and unambiguous the intent is to be discovered only from the
express language of the agreement.” It also resembles the “four
corners” rule, a principle which allows courts in some cases to search
beneath the semantic surface for clues to meaning. A court’s purpose
in examining a contract is to interpret the intent of the contracting
parties, as objectively manifested by them. The process of interpreting
a contract requires the court to make a preliminary inquiry as to
whether the contract before it is ambiguous. A contract provision is
ambiguous if it is susceptible of two reasonable alternative
interpretations. Where the written terms of the contract are not
ambiguous and can only be read one way, the court will interpret the
contract as a matter of law. If the contract is determined to be
ambiguous, then the interpretation of the contract is left to the court,
to resolve the ambiguity in the light of the intrinsic evidence.

In our jurisdiction, the rule is thoroughly discussed in Bautista v. Court


of Appeals:chanroblesvirtuallawlibrary
The rule is that where the language of a contract is plain and
unambiguous, its meaning should be determined without reference to
extrinsic facts or aids. The intention of the parties must be gathered
from that language, and from that language alone. Stated differently,
where the language of a written contract is clear and unambiguous,
the contract must be taken to mean that which, on its face, it purports
to mean, unless some good reason can be assigned to show that the
words should be understood in a different sense. Courts cannot make
for the parties better or more equitable agreements than they
themselves have been satisfied to make, or rewrite contracts because
they operate harshly or inequitably as to one of the parties, or alter
them for the benefit of one party and to the detriment of the other, or
by construction, relieve one of the parties from the terms which he
voluntarily consented to, or impose on him those which he did not.29

The CA was also guided by Article 1374 of the Civil Code, which
declares that “[t]he various stipulations of a contract shall be
interpreted together, attributing to the doubtful ones that sense which
may result from all of them taken jointly.” Verily, all stipulations of the
contract are considered and the whole agreement is rendered valid
and enforceable, instead of treating some provisions as superfluous,
void, or inoperable.

2.
The CA did not encroach upon the prerogative
of Forest Hills to determine its own rules and procedures
and to decide all questions on the construction of
its articles of incorporation and by-laws

Anent the second issue, the Court disagrees with the contention of
Forest Hills that the CA encroached upon its prerogative to determine
its own rules and procedures and to decide all issues on the
construction of its articles of incorporation and by-laws. On the
contrary, the CA acted entirely within its legal competence to decide
the issues between the parties.

The complaint of Gardpro stated a cause of action, and thus contained


the operative acts that gave rise to its remedial right against Forest
Hills.30 The cause of action required not only the interpretation of
contracts and the application of corporate laws but also the application
of the civil law itself, particularly its tenets on unjust enrichment31 and
those regulating property rights arising from ownership. If Forest Hills
were allowed to charge nominees membership fees, and then to still
charge their replacement nominees every time a corporate member
changed its nominees, Gardpro would be unduly deprived of its full
enjoyment and control of its property even as the former would be
unjustly enriched.

The interpretation and application of laws have been assigned to the


Judiciary under our system of constitutional government. Indeed,
defining and interpreting the laws are truly a judicial function.32Hence,
the CA could not be denied the authority to interpret the provisions of
the articles of incorporation and by-laws of Forest Hills, because such
provisions, albeit in the nature of private laws, impacted on the
definition of the rights and obligations of the parties. This,
notwithstanding that Section 16.4 of the by-laws gave to the Board of
Directors of Forest Hills the authority to decide all questions on the
construction of its articles of incorporation and by-laws, and its rules
and regulations.

3.
Intervention of the Federation of Golf Clubs
of the Philippines, Inc. as amicus curiae was not necessary

The CA properly disallowed the intervention of the Federation of Golf


Clubs of the Philippines, Inc. as amicus curiae.

The courts may invite experienced and impartial attorneys to appear


as amici curiae to help in the disposition of issues submitted to
them.33 As such, the appearance of amicus curiae, whether by
invitation or by leave, has always been a matter of favor or grace, not
of right or privilege. There is no right to compel the courts to
permit amici curiae to appear. This simply means that the intervention
of amicus curiae lies in the discretion of the courts, which may grant or
refuse leave, according as they deem the proffered information timely
and useful, or otherwise. Where matters of public concern are
involved, the courts exercise great liberality in granting leave to
appear; but where the parties are assisted by competent counsel,
leave to appear as amici curiae has been usually withheld. In general,
the courts desist from allowing the intervention as amicus curiae of
anyone whose attitude appears to be partisan (such as a person in the
service of those having private interests in the outcome of the
litigation).34

The membership of Federation of Golf Clubs of the Philippines Inc.


included Forest Hills and other similarly situated golf clubs. Hence, its
partisanship or partiality on the pending issues was beyond question.
Its participation in the action would not advance the objective
appreciation by the CA of such issues. In any event, the action herein
involved the contract between parties, and was a private matter fully
within the competence of the SEC and the CA to consider and resolve.
It is notable that Forest Hills was adequately represented by capable
counsel.

WHEREFORE, the Court AFFIRMS the decision promulgated on


September 26, 2003; and ORDERS the petitioner to pay the costs of
suit.

SO ORDERED.

16. LOPEZ REALTY, INC. VS SPS. TANJANGCO

LOPEZ REALTY, INC. and ASUNCION LOPEZ-GONZALES, Petitioners,


vs.
SPOUSES REYNALDO TANJANGCO and MARIA LUISA ARGUELLES-
TANJANGCO, Respondents.

DECISION

REYES, J.:
This is a Petition for Review1 under Rule 45 of the Rules of Court from the
Decision2 dated February 22, 2002 of the Court of Appeals (CA) in CA-G.R. CV
No. 63519 which reversed and set aside the Decision3 dated June 25, 1997 of
the Regional Trial Court (RTC) of Manila, Branch 25, in Civil Case No. 144667.

Antecedents Facts

Lopez Realty, Inc. (LRI) and Dr. Jose Tanjangco (Jose) were the registered co-
owners of three parcels of land and the building erected thereon known as the
"Trade Center Building", which were covered by Transfer Certificates of Title
(TCT) Nos. 127778, 127779 and 127780 (subject properties) of the Register
ofDeeds of Manila. Jose’s one-half share in the subject properties were later
transferred and registered in the name of his son Reynaldo Tanjangco and
daughter-in-law, Maria Luisa Arguelles (spouses Tanjangco).

At the time material to this case,the stockholders of record of LRI were the
following:

a. Asuncion Lopez-Gonzalez (Asuncion) – 7,831 shares;

b. Arturo F. Lopez (Arturo) – 7,830 shares;

c. Teresita Lopez-Marquez (Teresita) – 7,830 shares;

d. Rosendo de Leon (Rosendo) – 5 shares

e. Benjamin Bernardino (Benjamin) – 1 share;

f. Augusto de Leon (Augusto) – 1 share; and

g. Leo Rivera (Leo) – 1 share4

Except for Arturo and Teresita, the rest of the stockholders were members of the
Board of Directors.5 Asuncion was LRI’s Corporate Secretary.

In a special meeting of the stockholders held on July 27, 1981, the sale of the
one-half share of LRI in the Trade Center Building was discussed:

MINUTES OF SPECIAL MEETING OF STOCKHOLDERS OF LOPEZ REALTY[,]


INCORPORATED ON JULY 27, 1981 AT 3:00 P.M.

STOCKHOLDERS PRESENT:

TERESITA L. MARQUEZ - 7,830 shares

ASUNCION F. LOPEZ - 7,831 shares


ARTURO F. LOPEZ - 7,830 shares

ROSENDO DE LEON - 5 share[s]

BENJAMIN B. BERNARDINO - 1 share

LEO R. RIVERA - 1 share

TOTAL 23,498 Shares

II. Sale of One-Half (1/2) Share of Lopez Realty, Inc. in Trade Center Building

The matter of the sale of ½ share of Lopez Realty, Inc., in the Trade Center
Building was taken up. Atty. Benjamin B. Bernardino informed the body that the
selling price is pegged at 4 Million Pesos, and the Tanjangcos are offering 3.6
Million Pesos plus 50% of the receivablesor a total of 3.8 Million Pesos payable
under the following terms:

1) 50% - upon registration 50% - 30 days thereafter

2) All expenses and documentary stamp tax to be born[e] by the


Tanjangcos.

3) Transfer Tax and Reserve Fund to be borne by Lopez Realty, Inc.

ASUNCION F. LOPEZ countered for a selling price of 5 Million Pesos, LOPEZ


REALTY, INC., clean and of everything. At this point, TERESITA L. MARQUEZ
and BENJAMIN B. BERNARDINO offered to ASUNCION F. LOPEZ that they
(she) accept (equal) the TANJANGCO’s offer as stated above. At this juncture,
ASUNCION F. LOPEZ x x x called and talked with TANJANGCO over the phone
three (3) times and offered the selling price at 5 Million Pesos but the latter did
not move from their original offer as above-stated.

It was finally agreed by the body that ASUNCION F. LOPEZ x x x be given the
priority to accept [equal] the TANJANGCO offer and the same to be exercised
within ten (10 accept) days. Failure on her part to act on the offer, the said offer
will be deemed accepted.6 (Emphasis in the original)

On July 28, 1981, Teresita died.7

Asuncion failed to exercise her option to purchase the subject properties within
the stated period. Thus, on August 17, 1981, while Asuncion was abroad, the
remaining directors: Rosendo, Benjamin and Leo convened in a special meeting,
where the following resolution was passed and approved:8
III. Upon motion duly seconded, Mr. ARTURO F. LOPEZ had been authorized by
the Board to immediately negotiate with the Tanjangcos on the matter of the
latter’s offer to purchase ½ of the Trade Center Building and in connection there
with he is given full power and authority by the Boardto carry out the complete
termination of the sale terms and conditions as embodied in the Resolution of
July 27, 1981 and in connection therewith is likewise authorized to sign for and in
behalf of Lopez Realty Incorporated.

RESOLUTION
Series of 1981

RESOLVED, as it is hereby resolved that ARTURO F. LOPEZ negotiate with the


Tanjangcos on the matter of the sale of 1/2 of Trade Center Bldg., in accordance
with the terms and conditions embodied in the Minutes of the Special Meeting of
July 27, 1981.9 (Emphasis in the original) On August 25, 1981, on the strength
ofthe foregoing board resolution, Arturo executed a Deed of Sale selling LRI’s
one-half interest in the subject properties to Jose, who was represented by his
son, Manuel Tanjangco (Manuel). The price was fixed at ₱3,600,000.00, payable
in the following manner: 50% or ₱1,800,000.00 upon registration of the Deed of
Sale and the other 50% within 30 days from such registration.10

Upon learning of the above developments, Asuncion sent cablegrams to


Rosendo and Jose on August 25, 1981,requesting them not to proceed with the
sale.11 Consequently, on September 1, 1981, the Board had a special meeting
where the following resolution was passed and approved:

RESOLUTION
Series of 1981

"In view of the cable of Ms. Asuncion Lopez, the [B]oard decided to postpone
[the] final action on the sale of Lopez Realty, Inc. share in Trade Center Building
to the Tanjangcosso that she can be enlightened on all proceedings of the Board
during her absence.

UNANIMOUSLY APPROVED."12

Upon Asuncion’s arrival, the Board had a meeting on September 16, 1981,
where she moved for the repeal and/or amendment of the August 17, 1981 and
August 24, 1981 Board Resolutions. While Benjamin opposed Asuncion’s
motion, the members of the Board agreed to defer action on the matter until such
time when Arturo and Asuncion have conferred or settled the matter.13

As Jose’s one-half interest in the subject properties had already been transferred
to the spouses Tanjangco,it was requested that LRI execute another deed of
sale, where the spouses Tanjangco shall be designated as buyers. Thus, on
October 5, 1981, Arturoexecuted a Deed ofSale similar to that which was
executed on August 25,1981 in favor of the spouses Tanjangco.14

The spouses Tanjangco paid LRI the amount of ₱1,800,000.00, which the latter
accepted by issuing Official Receipt No. 723.15 The spouses Tanjangco then
registered the Deed of Sale with the Register of Deeds of Manila, causing the
cancellation of TCT Nos. 127778,127779 and 127780 and the issuance of TCT
Nos. 145983, 145984 and 145985 in their name.16 Consequently, on November
4, 1981, LRI and Asuncion (herein petitioners) filed with the then Court of First
Instance of Manila, a Complaint17 for annulment of sale, cancellation of title,
reconveyance and damages with prayer for the issuance of temporary restraining
order (TRO) and/or writ of preliminary injunction against the spouses Tanjangco,
Arturo and the Registrar of Deeds of Manila. The complaint was docketed as
Civil Case No. 144667 and raffled to Branch 25.Essentially, it was alleged that
the sale is not binding on LRI as the August 17, 1981 Board Resolution,
authorizing Arturo to sell the corporation’s one-half interest in the subject
properties, is invalid for lack of notice to Asuncion. It was also alleged that the
said board resolution had already been revoked by the Board of Directors in their
September 1, 1981 and September 16, 1981 Resolutions.

On November 11, 1981, the trial court issued a TRO, enjoining the spouses
Tanjangco from paying the balance of the purchase price and Arturo from
accepting payment.18

On November 13, 1981, Manuel, in representation of the spouses Tanjangco,


wrote LRI, enclosing a manager’s check for ₱1,743,000.00 covering the balance
of the purchase price less the transfer tax, LRI’s share in the common fund and
payables to the Bureau of Internal Revenue (BIR). Rosendo, however, deferred
acceptance in view of the pendency of the cases filed by the directors of LRI
against eachother and the order of the Security and Exchange Commission
(SEC), restraining him from acting on LRI matters.19 Apparently, several cases
were pending with the SEC involving the directors and shareholders of LRI, one
of which is Asuncion’s complaint for the nullification of the August 17, 1981 Board
Resolution.

On November 21, 1981, the spouses Tanjangco filed a motion for the production
of a copy of the board resolution authorizing Asuncion to file the complaint on
LRI’s behalf. In her Comment, Asuncion claimed that the action is a derivative
suit she initiated as LRI’s minority stockholder, for which no authorization from
LRI’s Board of Directors is necessary.20

On December 7, 1981, Arturo moved to dismiss the complaint on the grounds of


lack of jurisdiction and litis pendentia. With regard to the first ground, Arturo
alleged that the case essentially involves an intra-corporate dispute, which falls
within the exclusive jurisdiction of the SEC. As to the second ground, Arturo
alleged that Asuncion filed a complaint with the SEC, which was docketed as
SEC Case No. 2164, against him and Benjamin, seeking to annul the August 17,
1981 Board Resolution.21

On July 30, 1982, the stockholders of LRI had a meeting where they voted on
whether to ratify and confirm the sale of the subject properties to the spouses
Tanjangco. The minutes of such meeting state:

At this juncture, Juanito Santos moved for the ratification and confirmation of the
sale of Trade Center Building to the [spouses Tanjangco] and thereby ratifying
and confirming all minutes relative to the sale made to the [spouses Tanjangco],
and the same being seconded, it was placed to a vote amongst the stockholders
and Directors present and the votes were as follows:

Leo Rivera - yes

Rosendo de Leon - yes

Juanito Santos - yes

Benjamin Bernardino - yes

After the ratification and confirmation of the sale of Trade Center Building,
Asuncion Lopez stated that she is not preparing the minutes of today’s meeting
as well as that of June 29, 1982 and prior ones, but she was reminded that if she
refuses to do what is incumbent upon her as Secretary, the same would be
prepared and if she refuses to sign, that’s up to her, for the corporation is
governed by the Board of Directors coupled by the majority of the stockholders
who ratify the acts of the Board.

That the sale of Trade Center Building in point of stockholders and in point of the
Board of Directors had been duly ratified and confirmed and likewise it was
moved and seconded that the votes will be submitted to the Securities and
Exchange Commission (SEC) in order that the said office may be properly
apprised of the situation of Lopez Realty, Inc.

There being no further business to take up, upon motion and duly seconded, the
meeting [is] adjourned.22

On November 11, 1982, the executor of Teresita’s estate, Juanito L. Santos


(Juanito), moved to intervene, stating among others that the case is "basically an
intra-corporate contest among the stockholders of LRI in respect to the sale or
disposition of corporate property and the distribution of the proceeds thereof."23

On February 6, 1984, the trial court issued an order, denying the spouses
Tanjangco’s, Juanito’s and Arturo’s respective motions.24
On March 1, 1985, Asuncion and Arturo filed a Joint Motion to Dismiss in SEC
Case No. 2164 on the ground that a "final settlement has been arrived at and that
they hereby waive and renounce any further claim or counterclaim that they may
have against each other x x x." This was granted by the SEC.25

The petitioners then filed a supplemental complaint, claiming that the


negotiations between the parties to settle the case resulted in an agreement
where the spouses Tanjangco would sell to the petitioners their interest in the
subject properties for ₱6,000,000.00 on the condition that the petitioners would
return the ₱1,800,000.00 the spouses Tanjangco paid to LRI. According to the
petitioners, in order for Asuncion to meet her obligations under the agreement,
she borrowed ₱4,000,000.00 from a bank at a high interest, sold her house at
Magallanes for less than its market value and disposed several pieces of her
jewelry. However, during the formal signing of the agreement, the spouses
Tanjangco refused to sign for no apparent reason. The petitioners thus
prayedthat the spouses Tanjangco be compelled to sign and indemnify Asuncion
for the damages she incurred.26

During the trial, the petitioners, among others, attempted to establish that the
subject sale had not been validly ratified during the July 30, 1982 stockholders’
meeting in view of the failure to meet the required number of votes. Asuncion
testified that Juanito was not qualified to sit as a director during the said meeting
there being no evidence that he owned at least one share. Asuncion likewise
testified that Leo actually voted against the ratification of the sale, contrary to
what is stated in the minutes, which she and Leo did not sign.27

After trial on the merits, the trial court issued a Decision28 on June 25, 1997, the
dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered, thus:

1. Declaring null and void the Deed of Sale, dated 5 October 1981, signed
by defendant Arturo Lopez, in behalf of Lopez Realty[,] Inc., and
defendants Spouses Reynaldo and Maria Luisa Tanjangco, involving the
interest of Lopez Realty, Inc. in the Trade Center Building;

2. Directing the Register of Deeds of Manila to cancel Transfer Certificate


of Title Nos. 145983, 145984 and 145985 in the name of Maria Luisa
Arguelles married to Reynaldo Tanjangco and to reinstate Transfer
Certificates of Title Nos. 127778, 127779 and 127780 in the names of
Lopez Realty, Inc. and Maria Luisa Arguelles married to Reynaldo
Tanjangco;

3. Directing defendants Spouses Reynaldo and Maria Luisa Tanjangco to


make an accounting of all the rentals they collected from the Trade Center
Building from 5 October 1981 and, thereafter, to remit to plaintiff, Lopez
Realty, Inc., one-half (1/2) of the net amount (after deducting reasonable
expenses), plus yearly interest in the amount of 12% until fully paid, all
within 90 days from the finality of this decision;

4. Directing plaintiff Lopez Realty, Inc. to return to defendants spouses


Reynaldo and Maria Luisa Tanjangco the amount of ₱1,800,000.00; and,

5. Directing defendants, SpousesReynaldo and Maria Luisa Tanjangco to


pay plaintiff the amount of ₱150,000.00 as attorney’s fees.

SO ORDERED.29

Finding the sale null and void, the trial court ruled that Arturo lacked the authority
to sell LRI’s interest on the subject properties to the spouses Tanjangco on LRI’s
behalf in view of the procedural infirmities which attended the meeting held on
August 17, 1981. Specifically:

On this issue, the Court rules in favor of the plaintiff. There is merit in plaintiff’s
contention that the 17 August 1981 meeting of the Board of Directors of Lopez
Realty was illegal. Section 53 of the Corporation Code of the Philippines
categorically provides:

"Sec. 53. Regular and Special Meeting[s] of Directors [or] Trustees — Regular
meeting of the board of directors or trustees of every corporation [shall be] held
monthly[,] unless the by-lawsprovides [sic] otherwise.

xxxx

Meeting[s] of directors or trustees of corporations may be held [anywhere] in or


outside [of] the Philippines, unless the by-laws provides [sic] otherwise. Notice of
the regular or special meeting[s] stating the date, time and place of the meeting
must be sent to every director or trustee, at least, one (1) day prior to the
scheduled meeting[,] unless otherwise provided by the by-laws. A director or
trustee may waive this requirement, either expressly or impliedly."

Plaintiff alleged that no notice was sent to her prior to the 17 August 1981
meeting. The Court is inclined to give credit to this allegation considering that
defendants never contested the same. Hence, the said meeting was illegal and
the resolution adopted during the meeting would not produce the effect of binding
the corporation, Lopez Realty.30

The trial court likewise ruled thatthe sale between LRI and the spouses
Tanjangco was not validly ratified in the absence of the required number of votes.
Thus:
Notwithstanding the assertions of the defendants, the Court gives credit to
plaintiff[’s] claim. The claim, which was made under oath, has not been contested
by defendants. Besides, the copy of the minutes itself x x x corroborates it. From
a physical examination of said minutes, it appears that among the five alleged
directors present[,]only de Leon, Bernardino and Santos signed over their names
at the bottom of the minutes. Gonzalez and Rivera, whose names are also
written thereon do not have their signatures on. Since the vote of Santos does
not count, he not being qualified to sit as director, only the two votes de Leon and
Bernardino count for ratification. But that did not constitute a majority vote.
Consequently, there was no validratification of the sale of Lopez Realty’s interest
in the Trade Center Building. The sale has remained invalid and not binding upon
the corporation.31

Nonetheless, the trial court denied Asuncion’s claim for damages as there is no
legal compulsion for the spouses Tanjangco to honor a compromise agreement
that was not perfected prior to its reduction into writing. Thus:

Concerning the third issue, the Court finds no valid reason to compel defendants
to sign the alleged compromise agreement.1âwphi1 Granting that defendants
Tanjangcos did signify initially their conformity with the terms and conditions of
the compromise agreement as alleged by plaintiff, the same did not reach
maturity prior to its execution in writing. Hence, defendants did not commit
breach of contract when, afterwards, they refused to sign the compromise
agreement.32

On both parties’ appeal to the CA, the trial court’s Decision dated June 25, 1997
was reversed. In its Decision dated February 22, 2002, the CA recognized
Arturo’s authority tosell LRI’s interest on the subject properties, holding that this
Court had earlier declared the August 17, 1981 Board Resolution as valid in
Lopez Realty, Inc. v. Fontecha.33Thus:

It is to be recalled that the validity of the board meeting of August 17, 1981 has
already been challenged before the high court, albeit, on another matter. In
Lopez Realty, Inc. vs. Fontecha, 247 SCRA 183 [1995], the same plaintiffs-
appellants challenged the validity of the board resolution granting gratuity pay
and other benefits to some of the company’s employees on the ground that the
meeting was allegedly convened without prior notice to the directors. The high
court, citing American jurisprudence, ruled that the [sic] "an action of the board of
directors during a meeting, which was illegal for lack of notice, may be ratified
either expressly, by the action of the directors in subsequent legal meeting, or
impliedly, by the corporation’s subsequent course of conduct." x x x In holding
the meeting to have been valid, the same Court, among others, considered the
following circumstances: petitioner corporation did not issue any resolution
revoking or nullifying the board resolutions granting gratuity pay; and, petitioner
therein Asuncion Lopez-Gonzales was aware of the said obligations and even
acquiesced thereto by signing two of the checks for gratuity pay. In the case at
bench, it was duly established that the matter of the sale of the property to the
Tanjangcos has been taken up in the subsequent meetings of the corporation
culminating in the meeting of July 30, 1982, where the stockholders ratified and
confirmed not only the sale of Trade Center Building to the appellants
Tanjan[g]cos but also all minutes relative to the said sale. It likewise appears that
in the aforesaid July 30, 1982 meeting, appellant Gonzales was present and was
clearly outvoted by the other stockholders.34

The CA likewise ruled that whatever infirmity attended the August 17, 1981
Board Resolution was cured by ratification of the majority of the directors in the
joint stockholders and directors meeting held on July 30, 1982. Furthermore, the
CA figured that even if Juanito’s vote is disregarded, the ratification was
approved by the majority of the board, including Leo, whose signatureis nowhere
on the minutes:

Based on a perusal of the title ofthe minutes, "MINUTES OF THE MEETING OF


THE STOCKHOLDERS AND BOARD OF DIRECTORS OF LOPEZ REALTY,
INCORPORATED HELD AT ITS PRINCIPAL OFFICE AT RM. 404 DON.
PAQUITO BUILDING, 99 DASMARINAS STREET, BINONDO, MANILA ON
FRIDAY, JULY 30, 1982 AT 2:00 P.M.," x x x it is immediately apparent that the
meeting was a joint board and stockholders’ meeting. The manner of taking the
roll of attendance likewise confirms the participation of the attendees as
stockholders,-

"PRESENT:

Ms. SONY LOPEZ 7,831 shares

Mr. BENJAMIN B. BERNARDINO 1 share

and representing Arturo F.Lopez 7,831 shares

Mr. JUANITO L. SANTOS (representing the Estate 7,830 shares


of Teresita Lopez Marquez)

Mr. LEO RIVERA 1 share

Mr. ROSENDO DE LEON 5 shares

TOTAL SHARES REPRESENTED 23,499 shares

xxxx

while the minutes of the meeting shows that there were instances when the
attendees were asked to vote as directors x x x.
Under Section 40 of the Corporation Code-

Section 40. Sale or other disposition of assets.– Subject to the provisions of


existing laws on illegal combinations and monopolies, a corporation may, by a
majority vote of its board of directors or trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or substantially all of its property
and assets, including its goodwill, upon such terms and conditions and for such
consideration, which may be money, stocks, bonds or other instruments for the
payment of money or other property or consideration, as its board of directors or
trustees may deem expedient, when authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock, or in case
of non-stock corporation, by the vote of at least to two-thirds (2/3) of the
members, in a stockholders’ or members’ meeting duly called for the purpose.
Written notice of the proposed action and of the time and place of the meeting
shall be addressed to each stockholder or member at his place of residence as
shown on the books of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally: Provided, That any
dissenting stockholder may exercise his appraisal right under the conditions
provided in this Code.

A sale or other disposition shall be deemed to cover substantially all the


corporate property and assets if thereby the corporation would be rendered
incapable of continuing the business or accomplishing the purpose for which it
was incorporated.

After such authorization or approval by the stockholders or members, the board


of directors or trustees may, nevertheless, in its discretion, abandon such sale,
lease, exchange, mortgage, pledge or other disposition of property and assets,
subject tothe rights of third parties under any contract relating thereto, without
further action or approval by the stockholders or members.

xxxx

the sale of the company assets requires the majority vote of the board of
directors and vote of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock. In the minutes of the July 30, 1982 meeting, the matter
of the sale of the subject property was put to a vote "among stockholders and
Directors present" x x x jointly assembled, hence, a joint vote. Going back to the
board of directors, even excluding the affirmative vote of Juanito Santos whose
qualification as director was questioned by appellant Gonzales, the votes of Leo
Rivera, Benjamin Bernardino and Rosendo de Leon, as directors, forms the
majority required for the ratification of the sale, as contemplated in the
abovequoted provision of the Corporation Code. Although the tally of votes did
not indicate the capacity under which the votes were taken[.] We follow the high
court’s ruling in Zamboanga Transportation Co. vs. Bachrach Motor Co.,52 Phil.
244, 259-[2]60 [1928], thus:
"We therefore conclude that when the president of the corporation, who is one
ofthe principal stockholders and at the same time its general manager, auditor,
attorney or legal adviser, is empowered by its by-laws to enter into chattel
mortgage contracts, subject to the approval of the board of directors, and enters
into such contracts with the tacit approval of two other members of the board of
directors, one of whom is alsoa principal shareholder, both of whom, together
with the president, form a majority, and said corporation takes advantage of the
benefits afforded by said contract, such acts are equivalent to an implied
ratification of said contract by the board of directors and binds the corporation
even if not formally approved by said board of directors as required by the by-
laws of the aforesaid corporation."

When therefore the aforementioned three directors voted in favor of the


ratification, their votes are, at the very least, tacit approval sufficient for the
application of the aforequoted ruling. It is of no moment that the signature of only
two directors appears at the bottom of the minutes, for it does not refer to the
results of the voting.

On the part of the stockholders, it appears that Leo Rivera, Rosendo De Leon,
Juanito Santos and Benjamin Bernardino, two of them representing two principal
stockholders, voted to ratify the sale of the property to the appellants
Tanjangcos. The cumulation of their votes constitute sixty-seven per cent [sic] or
two-thirds of the capital stock of the appellant company. The contract has thus,
been validly ratified.35

The CA nonetheless upheld the trial court’s jurisdiction over the petitioners’
complaint and Asuncion’s right to bring an action on LRI’s behalf in this wise:

Assailing the trial court’s jurisdiction over the complaint filed in the court below,
the following grounds were adduced to assail it, to wit: first, it involves an intra-
corporate controversy falling under the original and exclusive jurisdiction of the
Securities and Exchange Commission under Section 5(b) of P.D. No. 902-A; and,
second, appellant Gonzales has no legal personality to institute the case.

In the determination of whether the Securities and Exchange Commission


("SEC") shall have jurisdiction over the complaint, there must be a concurrence
of [the] following elements, to wit: "(1) the status or relationship of the parties;
and (2) the nature of the question that is the subject of their controversy." x x x
The Court further explained it in this wise:

"The first element requires that the controversy must arise 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 franchises. The second element requires that the
dispute among the parties be intrinsically connected with the regulation of the
corporation, partnership or association or dealwith the internal affairs of the
corporation, partnership or association. After all, the principal function of the SEC
is the supervision and control of corporations, partnerships and associations with
the end in view that investments in these entities may be encouraged and
protected, and their activities pursued for the promotion of economic
development." x x x Reading the title of the Complaint, dated October 31, 1981,
designated as one for annulment ofsale, cancellation of title, reconveyance and
damages with prayer for the issuance of a writ of preliminary prohibitory
injunction x x x, it is immediately apparent that the principal defendants being
sued are not "stockholders, members of associates" of the appellant Lopez
Realty, Inc., but rather vendees of the subject property. x x x In Dee vs.
Securities and Exchange Commission, 199 SCRA 238, 250 [1991], the Supreme
Court summarized Section 5 of

P.D. No. 902-A in the following manner:

"In other words, in order that the SEC can take cognizance of a case, the
controversy must pertain to any of the following relationships: (a) between
corporation, partnership or association and the public; (b) between the
corporation, partnership or association and its stockholders, partners, members,
or officers;(c) between the corporation, partnership or association and the state
insofar as its franchise, permit or license to operate is concerned; and (d) among
the stockholders, partners or associates themselves.["] x x x

Since the principal defendants-appellants, the Spouses Tanjangcos, are not


connected, in the above described manner,to appellant Lopez Realty, Inc., then
the SEC has no jurisdiction overthe case. Moreover, upon a further reading of the
body of the complaint, it appears that the annulment of the sale to the appellants
Tanjangcos was being sought on the ground of the lack of valid consent on the
part of Lopez Realty, Inc., the vendor. The internal affairs of the corporation were
being brought into the controversy merely to prove that it never authorized
appellant Arturo Lopez to execute the deed of sale. Hence, the controversy is not
intrinsically connected to the regulation or operation of the corporation, negating
the existence of the second element as required in Lozano vs. delos Santos, x x
x.

As to the alleged legal personality of appellant Asuncion Lopez- Gonzalez, to file


the action in the court below, although the Corporation Code does not contain
any provision granting such right, the Supreme Court has recognized derivative
suits, as valid, provided the following requisites are complied with, to wit:

"a) the party bringing suit be a shareholder as of the time of the act or transaction
complained of; b) he has exhausted intra-corporate remedies, i.e., has made a
demand on the board of directors for the appropriate relief butthe latter has failed
or refused to heed his plea; and
c) the cause of action actually devolves on the corporation, the wrongdoing or
harm having been caused to the corporation and not to the particular stockholder
bringing the suit[.]" x x x Appellant Gonzales has been duly established to be a
major stockholder in appellant company and she registeredher opposition to the
sale, by cable sent on August 25, 1981, as reflected in the Minutes of the
Meeting of the Board of Directors on September 16, 1981 x x x on the ground
that the corporation would be prejudiced by the extremely low price.

The rationale for vesting the appellant Gonzales with the legal personality to file
the suit may be found in the following summary of the two leading cases on
derivative suits, Atwol vs. Merriwether, 1867, and Dodge vs. Woolsey, 1855,
respectively promulgated in England and America: "that where corporate
directors have committed a breach of trust either by their frauds, [ultra] viresacts,
or negligence, and the corporation is unable or unwilling to institute suit to
remedy the wrong, a single stockholder may institute that suit, suing on behalf of
himself and other stockholders and for the benefit of the corporation, to bring
about a redress for the wrong done directly to the corporation and indirectly to
the stockholders." x x x36

The CA also concurred with the trial court’s finding that the parties never arrived
at a perfected compromise agreement. Thus:

We are persuaded that the trial court did not commit any error in determining that
there was no perfected compromise agreement between the appellants. It is
noted that based on the aforequoted testimony, appellant Gonzales was herself
aware of the negotiation stage of the proceedings when she allowed the
appellants Tanjangcos to add conditions to the option she has chosen. The
counsel of appellant Gonzales was likewise of the same opinion when he took
the liberty of suggesting the additional provision on tax clearance, although [t]he
latter removed it upon conferring with the counsel of appellants Tanjangcos. The
aforesaid proceedings are consistent with the process of making reciprocal
concessions, characteristic of entering into a compromise. x x x Hence, in
Sanchez vs. Court of Appeals, 279 SCRA 647, 676 [1997], the High Court
acknowledged the long and tedious process of negotiations undergone by the
parties and declared, to wit: "Since this compromise agreement was the result of
a long drawn out process, with all the parties ably striving to protect their
respective interests and to come out with the best they could, there can beno
doubt that the parties entered into it freely and voluntarily. Accordingly, they
should be bound thereby. To be valid, it is merely required under the law to be
based on real claims and actually agreed upon in good faith by the parties
thereto." x x x Unfortunately, in the case at bench, the parties never came to an
agreement due to the fact that the appellants Tanjangcos backedout. x x x When
the appellants Tanjangcos "backed out" or refused tosign the final draft, there
was no meeting of the minds or actual agreement between the parties. x x x.
Resolving the claim of damages allegedly sustained when appellant Gonzales
sold some of her assets and contracted a sizable loan to cover the consideration
of the compromise agreement[.] We find no legal basis for its award. She acted
based on an optimistic expectation that the final draft of the compromise
agreement would be acceptable to the appellants Tanjangcos. Hence, she
testified that she sold her house and lot, as far back as December 1, 1987,
orlong before the alleged meeting at the chambers of Judge Paguio x x x. Upon
further questioning, she revealed that she sold it: "because even prior to March 1,
1988, we have been already negotiating about the compromise and knew
beforehand that I have to be ready, and I even thought that the price was a good
one reason why I sold it because I knew then thatit was a sacrifice price. I would
say, that it was a sacrifice price because after a few days someone who live
nearby, at the corner, came to me and was even buying the property [at] a higher
price." x x x She thus, acted based on the expectation of a settlement and not on
the alleged belief that there was already a perfected compromise agreement
between her and the appellants Tanjangcos. She even admitted that the
negotiations took some time because the parties could not come up with
agreeable terms and she herself had to do study the matter. x x x It follows then
that the sale of her properties and the loans obtained from the banks were
merely tactical errors on her part for which she has no recourse under the law.37

The Petitioner’s Case

Arguing for the nullity of the sale and the existence of a perfected compromise
agreement, the petitionersclaim that: (a) the August 17, 1981 meeting, where the
Resolution authorizing Arturo to negotiate for the sale of the subject properties
was approved, is illegal for lack of notice to Asuncion as required under Section
50 of the Corporation Code; (b) Fontecha does not constitute res judicata insofar
as the issue on the validity of the August 17, 1981 meeting and all the resolutions
passed therein, including the grant of authority to Arturo, are concerned; (c) in
Fontecha, what was ruled as having been ratified was the resolution granting
gratuity pay to its retiring employees and there was nothing mentioned about the
resolution on the sale of the subject properties and Arturo’s authority to act on
LRI’s behalf; (d) it cannot be rightfully claimed that the August 17, 1981 Board
Resolution had been ratified as Asuncion immediately registered her objections
to its validity. The Board of Directors responded to this by issuing the September
1, 1981 and September 16, 1981 Board Resolutions that held the subject sale on
abeyance; (e) the August 17, 1981 Board Resolution merely authorized Arturo to
"negotiate" for the sale of the subject properties and the way it was worded does
not indicate that this include the authority to conclude a sale with the spouses
Tanjangco; (f) even if the July 27, 1981 and August 17, 1981 Board Resolution
are read together to support the claim of the spouses Tanjangco that Arturo had
been duly authorized to sell the subject properties, the latter acted beyond the
authority granted to him when he entered into a sale with the former the terms of
which substantially depart from those provided in the July 27, 1981 Resolutions;
(g) there was not enough votes to ratify the subject salesince Juanito’s
qualification as director had been effectively challenged and Leo actually voted
against such ratification; (h) there was a perfected compromise agreement
between the parties and there is no need for the same to be in writing for it to be
considered as such; and (i) even assuming that there was no perfected
compromise agreement, the spouses Tanjangco abused their right for having
backed out and withdrawn their offer without reason resulting in damage to
Asuncion.

The Spouses Tanjangco’s Case

On the other hand, the spouses Tanjangco assert the validity of the subject sale,
Arturo’s authority to represent LRI in such a sale and the absence of a perfected
compromise agreement, alleging that: (a) as clearly stated in the July 27, 1981
Board Resolution, the sale was perfected when Asuncion failed to match or
outdo the offer of the spouses Tanjangco within the provided period; (b) reading
the August 17, 1981 Board Resolution in conjunction with the July 27, 1981
Board Resolution, Arturo’s mandate was to carry out or implement the July27,
1981 Board Resolution and his authority was not limited to negotiating with the
sale of the subject properties; (c) the petitioners do not dispute the validity of the
July 27, 1981 Board Resolution and Asuncion’s failure to match the offer of the
spouses Tanjangco; (d) the spouses Tanjangco are buyers in good faith and they
cannot be prejudiced by the corporate squabbles among the directors and
stockholders of LRI; (e) the provisions ofthe Deed of Sale are in accordance with
the July 27, 1981 Board Resolution;(f) under the doctrine of apparent authority,
the petitioners are barred from questioning LRI’s consent to the subject sale and
Arturo’s authority to represent LRI in such transaction; (g) the spouses
Tanjangco have the right torely on the minutes of the July 27, 1981 and August
17, 1981 Board Resolutions which appear to be regular on their face; (h) SEC
Case No. 2164, a case filed by Asuncion against Arturo questioning the validity
of August 17, 1981 Board Resolution, was dismissed on joint motion of Arturo
and Asuncion on the ground that "a final settlement has been arrived at"; (i)
contrary to the petitioner’s claim, the August 17, 1981 Board Resolution had not
been revoked; (j) the sale had been ratified during July 30, 1982 meeting of the
stockholders and by LRI’s acceptance of the spouses Tanjangco’s payment; and
(k) withrespect to the compromise agreement, the evidence on record shows that
the parties never went beyond the negotiation phase.

Ruling of the Court

Ratification of the August 17, 1981

Board Resolution

The Court agrees with the petitioners that the August 17, 1981 Board Resolution
did not give Arturo the authority to act as LRI’s representative in the subject sale,
as the meeting of the board of directors where such was passed was conducted
without giving any notice to Asuncion. Section 53 of the Corporation Code
provides for the following:

SEC. 53. Regular and special meetings of directors or trustees.—Regular


meetings of the board of directors or trustees of every corporation shall be held
monthly, unless the by-laws provide otherwise.

Special meetings of the board of directors or trustees may be held at any time
upon call of the president oras provided in the by-laws.

Meetings of directors or trustees of corporations may be held anywhere in or


outside of the Philippines, unless the by-laws provide otherwise. Notice of regular
or special meetings stating the date, time and place of the meeting must be sent
to every director or trustee at least one (1) day prior to the scheduled meeting,
unless otherwise provided by the by-laws. A director or trustee may waive this
requirement, either expressly or impliedly. (Emphasis ours)

The Court took this matter up in Fontecha, involving herein parties, where it was
held that a meeting of the board of directors is legally infirm if there is failure to
comply with the requirements or formalities of the law or the corporation’s by
laws and any action taken on such meeting may be challenged as a
consequence:

The general rule is that a corporation, through its board of directors, should act in
the manner and within the formalities, if any, prescribed by its charter or by the
general law. Thus, directors must act as a body in a meeting called pursuant
tothe law or the corporation’s bylaws, otherwise, any action taken therein may be
questioned by any objecting director or shareholder.38 However, the actions
taken in such a meeting by the directors or trustees may be ratified expressly or
impliedly. "Ratification means that the principal voluntarily adopts, confirms and
gives sanction to some unauthorized act of its agent on its behalf. It is this
voluntary choice, knowingly made, which amounts to a ratification of what was
theretofore unauthorized and becomes the authorized act of the party so making
the ratification. The substance of the doctrine is confirmation after conduct,
amounting to a substitute for a prior authority. Ratification can be made either
expressly or impliedly. Implied ratification may take various forms — like silence
or acquiescence, acts showing approval or adoption of the act, or acceptance
and retention of benefits flowing therefrom."39

The Court's decision in Fontecha concerns the implied ratification of one of the
resolutions passed on August 17, 1981 by the board of directors of LRI despite of
the lack of notice of meeting to Asuncion. This was owing to the subsequent
actions taken therein by the stockholders, including Asuncion herself, as cited by
the CA in its decision. On the other hand, the sale of the property to the spouses
Tanjangco was ratified, not because of implied ratification as was the case in
Fontecha but through the passage of the July 30, 1982 Board Resolution.
In the present case, the ratification was expressed through the July 30, 1982
Board Resolution. Asuncion claims that the July 30, 1982 Board Resolution did
not ratify the Board Resolution dated August 17, 1981 for lack of the required
number of votes because Juanito is not entitled to vote while Leo voted "no" to
the ratification ofthe sale even if the minutes stated otherwise. Asuncion assails
the authority of Juanito to vote because he was not a director and he did not own
any share of stock which would qualify him to be one. On the contrary, Juanito
defends his right to vote as the representative of Teresita’s estate. Upon
examination of the July 30, 1982 minutes of the meeting, it can be deduced that
the meeting is a joint stockholders and directors’ meeting. The Court takes into
account that majority of the board of directors except for Asuncion, had already
approved of the sale to the spouses Tanjangco prior to this meeting. As a
consequence, the power to ratify the previous resolutions and actions of the
board of directors in this case lies inthe stockholders, not in the board of
directors. It would be absurd to require the board of directors to ratify their own
acts—acts which the same directors already approved of beforehand. Hence,
Juanito, as the administrator of Teresita’s estate even though not a director, is
entitled to vote on behalf of Teresita’s estate as the administrator thereof. The
Court reiterates its ruling in Tan v. Sycip,40 viz:

In stock corporations, shareholders may generally transfer their shares. Thus, on


the death of a shareholder, the executor or administrator duly appointed by the
Court is vested with the legal title to the stock and entitled to vote it. Until a
settlement and division of the estate is effected, the stocks of the decedent are
held by the administrator or executor.41 (Citation omitted and emphasis ours)

On the issue that Leo votedagainst the ratification of sale, the Court notes that
only Juanito, Benjamin and Rosendo signed the minutes of the meeting. It was
also not stated who prepared the minutes, given that Asuncion as the corporate
secretary refused to record the same. Also, it was not explained why Leo was not
able to affix his signature on the said minutes if he really voted in favor ofthe
ratification of the sale. What’s more, Leo was not presented to testify onthe
witness stand. Hence, contrary to the position adopted by the CA, only those
whose signatures appear on the minutes of the meeting can be said to have
voted in favor of the ratification. This case must be differentiated from the Court’s
ruling in People v. Dumlao, et al.42

In Dumlao, the Court ruled that the signing of the minutes by all the directors is
not a requisite and that the lack of signatures on the minutes does not mean that
the resolution was not passed by the board. However, there is a notable disparity
between the facts in Dumlaoand the instant case. In Dumlao, the corporate
secretary therein recorded, prepared and certified the correctness of the minutes
of the meeting despite the fact that not all directors signed the minutes. In this
case, it could not even be established who recorded the minutes in view of
Asuncion’s refusal to do so, as demonstrated during the cross examination of
Benjamin by the petitioners’ counsel:
Q: I am showing to you Exhibit 14, I noticed that Exhibit 14 which is the minutes
of the meeting of the stockholders on July 30, 1982 was not prepared by a
secretary but was prepared by some members of the board.

A: I cannot recall anymore. I cannot give you an opinion on that, because I will be
guessing.

Q: From the minutes itself?

A: That is why I told you I cannot be certain if it was prepared by the secretary or
members of the board. This came into existence. Eleven years ago is not a very
short period.

Q: So you cannot remember now who prepared the minutes of the meeting on
July 17, 1982? A: I cannot be accurate - - I said that.43

It is the signature of the corporate secretary, as the one who is tasked to prepare
and record the minutes, that gives the minutes of the meeting probative value
and credibility, as the Court explained in Dumlao, to wit:

The non-signing by the majority of the members of the GSIS Board of Trustees of
the said minutes does not necessarily mean that the supposed resolution was
not approved by the board. The signing of the minutes by all the members of the
board is not required. There is no provision in the Corporation Code of the
Philippines that requires that the minutes of the meeting should be signed by all
the members of the board.

The proper custodian of the books, minutes and official records of a corporation
is usually the corporate secretary. Being the custodian of corporate records, the
corporate secretary has the duty to record and prepare the minutes of the
meeting. The signature of the corporate secretary gives the minutes of the
meeting probative value and credibility. In this case, Antonio Eduardo B.
Nachura, Deputy Corporate Secretary, recorded, prepared and certified the
correctness of the minutes of the meeting of 23 April 1982; and the same was
confirmed by Leonilo M. Ocampo, Chairman of the GSIS Board of Trustees. Said
minutes contained the statement that the board approved the sale of the
properties, subject matter of this case, to respondent La’o.44 (Citations omitted
and emphasis ours)

Thus, without the certification of the corporate secretary, it is incumbent upon the
other directors or stockholders as the case may be, to submit proof that the
minutes of the meeting is accurate and reflective of what transpired during the
meeting. Conformably to the foregoing, in the absence of Asuncion’s certification,
only Juanito, Benjamin and Rosendo, whose signatures appeared on the
minutes, could be considered as to have ratified the sale to the spouses
Tanjangco.
Yet, notwithstanding the lack of Leo’s signature to prove that he indeed voted in
favor of the ratification,the results are just the same for he owns one share of
stock only. Pitted against the shares of the other stockholders who voted in favor
of ratification, Asuncion and Leo were clearly outvoted:

Ms. [ASUNCION] LOPEZ 7, 831 shares


Mr. BENJAMIN B. BERNARDINO 1 share
and representing Arturo F. Lopez 7, 831 shares
Mr. JUANITO L. SANTOS
(representing the Estate of Teresita Lopez Marquez) 7, 830 shares
Mr. LEO RIVERA 1 share
Mr. ROSENDO DE LEON 5 shares

TOTAL SHARES REPRESENTED 23, 499 shares45

In sum, whatever defect there was on the sale to the spouses Tanjangco
pursuant to the August 17, 1981 Board Resolution, the same was cured through
its ratification in the July 30, 1982 Board Resolution. It is of no moment whether
Arturo was authorized to merely negotiate or to enter into a contract of sale on
behalf of LRI as all his actions in connection to the sale were expressly ratified by
the stockholders holding 67% of the outstanding capital stock.1âwphi1

In Cua, Jr. et al. v. Tan, et al.,46 the Court held that by virtue of ratification, the
acts of the board of directors become the acts of the stockholders themselves,
even if those acts were, at the outset, unauthorized:

Clearly, the acquisition by PRCI of JTH and the constitution of the JTH Board of
Directors are no longer just the acts of the majority of the PRCI Board of
Directors, but also of the majority of the PRCI stockholders. By ratification, even
an unauthorized act of an agent becomes the authorized act of the principal. To
declare the Resolution dated 26 September 2006 of the PRCI Board of Directors
null and void will serve no practical use or value, or affect any of the rights of the
parties, because the Resolution dated 7 November 2006 of the PRCI
stockholders - approving and ratifying said acquisition and the manner in which
PRCI shall constitute the JTH Board of Directors – will still remain valid and
binding.47 (Citation omitted and emphasis ours) Compromise agreement

The remaining issue is whether the spouses Tanjangco could be held liable for
damages for reneging on an alleged verbal compromise agreement.
There is no reason for the Court to disturb the unanimous findings of the CA and
the trial court that no compromise agreement was perfected between the parties.
The existence of a perfected contract is a finding of fact that the Court will not
disturb if there is substantial evidence supporting it. "Basic is the rule that factual
findings of trial courts, including their assessment of the witnesses' credibility, are
entitled to great weight and respect by this Court, particularly when the [CA]
affirms the findings."48 For this reason, the spouses Tanjangco may not be
compelled to honor a compromise agreement that never left the negotiation
phase and be held liable for the alleged damages Asuncion incurred as a result
of her attempts to comply to the provisions thereof.

WHEREFORE, the instant petition is DENIED. The Decision dated February 22,
2002 of the Court of Appeals in CA-G.R. CV No. 63519 is hereby AFFIRMED.

SO ORDERED.

BIENVENIDO L. REYES
Associate Justice

WE CONCUR:

17. ABOITIZ EQUITY VENTURES, INC. VS CHIONGBIAN

ABOITIZ EQUITY VENTURES, INC., Petitioner,


vs.
VICTOR S. CHIONGBIAN, BENJAMIN D. GOTHONG, and CARLOS A.
GOTHONG LINES, INC. (CAGLI),Respondents.

DECISION

LEONEN, J.:

This is a petition for review on certiorari with an application for the issuance of a
temporary restraining order and/or writ of preliminary injunction under Rule 45 of
the Rules of Court. This petition prays that the assailed orders dated May 5,
20111 and June 24, 20112 of the Regional Trial Court, Cebu City, Branch 10 in
Civil Case No. CEB-37004 be nullified and set aside and that judgment be
rendered dismissing with prejudice the complaint3 dated July 20, 2010 filed by
respondents Carlos A. Gothong Lines, Inc. ("CAGLI") and Benjamin D. Gothong.
On January 8, 1996, Aboitiz Shipping Corporation ("ASC"), principally owned by
the Aboitiz family, CAGLI, principally owned by the Gothong family, and William
Lines, Inc.("WLI"), principally owned by the Chiongbian family, entered into
anagreement (the "Agreement"),4 whereby ASC and CAGLI would transfer their
shipping assets to WLI in exchange for WLI’s shares of stock.5 WLI, in turn,
would run their merged shipping businesses and, henceforth, be known as
WG&A, Inc. ("WG&A").6

Sec. 11.06 of the Agreement required all disputes arising out of or in connection
with the Agreement tobe settled by arbitration:

11.06 Arbitration

All disputes arising out of or in connection with this Agreement including any
issue as to this Agreement’s validity or enforceability, which cannot be settled
amicably among the parties, shall be finally settled by arbitration in accordance
with the Arbitration Law (Republic Act No. 876) by an arbitration tribunal
composed of four (4) arbitrators. Each of the parties shall appoint one (1)
arbitrator, the three (3) to appoint the fourth arbitrator who shall act as Chairman.
Any award by the arbitration tribunal shall be final and binding upon the parties
and shall be enforced by judgment of the Courts of Cebu or Metro Manila.7

Among the attachments to the Agreement was Annex SL-V.8 This was a letter
dated January 8,1996, from WLI, through its President (herein respondent) Victor
S. Chiongbian addressed to CAGLI, through its Chief Executive Officer Bob D.
Gothong and Executive Vice President for Engineering (herein respondent)
Benjamin D. Gothong. On its second page, Annex SL-V bore the signatures
ofBob D. Gothong and respondent Benjamin D. Gothong by way of a conforme
on behalf of CAGLI.

Annex SL-V confirmed WLI’s commitment to acquire certain inventories of


CAGLI. These inventories would havea total aggregate value of, at most, ₱400
million, "as determinedafter a special examination of the [i]nventories."9Annex
SL-V also specificallystated that such acquisition was "pursuant to the
Agreement."10

The entirety of Annex SL-V’s substantive portion reads:

We refer to the Agreement dated January 8, 1996 (the "Agreement") among


William Lines, Inc. ("Company C"), Aboitiz Shipping Corporation ("Company A")
and Carlos A. Gothong Lines, Inc. ("Company B") regarding the transfer of
various assets of Company A and Company B to Company C in exchangefor
shares of capital stock of Company C. Terms defined in the Agreement are used
herein as therein defined.

This will confirm our commitment to acquire certain spare parts and materials
inventory (the "Inventories") of Company B pursuant to the Agreement.

The total aggregate value of the Inventories to be acquired shall not exceed
₱400 Million as determined after a special examination of the Inventories as
performed by SGV & Co. to be completed on or before the Closing Date under
the agreed procedures determined by the parties.

Subject to documentation acceptable to both parties, the Inventories to be


acquired shall be determined not later than thirty (30) days after the Closing Date
and the payments shall be made in equal quarterly instalments over a period of
two years with the first payment due on March 31, 1996.11

Pursuant to Annex SL-V, inventories were transferred from CAGLI to WLI. These
inventories were assessed to have a value of 514 million, which was later
adjusted to 558.89 million.12 Of the total amount of 558.89 million, "CAGLIwas
paid the amount of 400 Million."13 In addition to the payment of 400
million,petitioner Aboitiz Equity Ventures ("AEV") noted that WG&A shares with a
book value of 38.5 million were transferred to CAGLI.14

As there was still a balance, in2001, CAGLI sent WG&A (the renamed WLI)
demand letters "for the return of or the payment for the excess
[i]nventories."15 AEV alleged that to satisfy CAGLI’s demand, WLI/WG&A
returned inventories amounting to 120.04 million.16 As proof of this, AEV attached
copies of delivery receipts signed by CAGLI’s representatives as Annex "K" of
the present petition.17

Sometime in 2002, the Chiongbian and Gothong families decided to leave the
WG&A enterprise and sell their interest in WG&A to the Aboitiz family. As such, a
share purchase agreement18 ("SPA") was entered into by petitioner AEV and the
respective shareholders groups of the Chiongbians and Gothongs. In the SPA,
AEV agreedto purchase the Chiongbian group's 40.61% share and the Gothong
group's 20.66% share in WG&A’s issued and outstanding stock.19

Section 6.5 of the SPA provided for arbitration as the mode of settling any
dispute arising from the SPA. It reads:

6.5 Arbitration. Should there be any dispute arising between the parties relating
to this Agreement including the interpretation or performance hereof which
cannot beresolved by agreement of the parties within fifteen (15) days after
written notice by a party to another, such matter shall then be finally settled by
arbitration in Cebu City in accordance with the Philippine Arbitration Law.
Substantive aspects of the dispute shall be settled by applying the laws of the
Philippines. The decision of the arbitrators shall be final and binding upon the
parties hereto and the expense of arbitration (including without limitation the
award of attorney’s fees to the prevailing party) shall be paid as the arbitrators
shall determine.20

Section 6.8 of the SPA further provided that the Agreement (of January 8, 1996)
shall be deemed terminated except its Annex SL-V. It reads:
6.8 Termination of Shareholders Agreement. The Buyer and the Sellers hereby
agree that on Closing, the Agreement among Aboitiz Shipping Corporation,
Carlos A. Gothong Lines, Inc. and William Lines, Inc. dated January 8, 1996, as
the same has been amended from time to time (the "Shareholders’ Agreement")
shall all be considered terminated, except with respect to such rights and
obligations that the parties to the Shareholders’ Agreement have under a letter
dated January 8, 1996 (otherwise known as "SL-V") from William Lines, Inc. to
Carlos A. Gothong Lines, Inc. regarding certain spare parts and materials
inventory, which rights and obligations shall survive through the date prescribed
by the applicable statute of limitations.21

As part of the SPA, the parties entered into an Escrow Agreement22 whereby ING
Bank N.V.-Manila Branch was to take custody of the shares subject of the
SPA.23 Section 14.7 of the Escrow Agreement provided that all disputes arising
from it shall be settled through arbitration:

14.7 All disputes, controversies or differences which may arise by and among the
parties hereto out of, or in relation to, or in connection with this Agreement, orfor
the breach thereof shall be finally settled by arbitration in Cebu City in
accordance with the Philippine Arbitration Law. The award rendered by the
arbitrator(s) shall be final and binding upon the parties concerned. However,
notwithstanding the foregoing provision, the parties reserve the right to seek
redress before the regular court and avail of any provisional remedies in the
event of any misconduct, negligence, fraud or tortuous acts which arise from any
extra-contractual conduct that affects the ability ofa party to comply with his
obligations and responsibilities under this Agreement.24

As a result of the SPA, AEV became a stockholder of WG&A. Subsequently,


WG&A was renamed Aboitiz Transport Shipping Corporation ("ATSC").25

Petitioner AEV alleged that in2008, CAGLI resumed making demands despite
having already received 120.04 million worth of excess inventories.26 CAGLI
initially made its demand to ATSC (the renamed WLI/WG&A) through a
letter27 dated February 14, 2008. As alleged by AEV, however, CAGLI
subsequently resorted to a "shotgun approach"28 and directed its subsequent
demand letters to AEV29 as well as to FCLC30 (a company related to respondent
Chiongbian).

AEV responded to CAGLI’s demands through several letters.31 In these letters,


AEV rebuffed CAGLI's demands noting that: (1) CAGLI already received the
excess inventories;(2) it was not a party to CAGLI's claim as it had a personality
distinct from WLI/WG&A/ATSC; and (3) CAGLI's claim was already barred by
prescription.

In a reply-letter32 dated May 5, 2008, CAGLI claimed that it was unaware of the
delivery to it of the excess inventories and asked for copies of the corresponding
delivery receipts.33 CAGLI threatened that unless it received proof of payment or
return ofexcess inventories having been made on or before March 31, 1996, it
would pursue arbitration.34

In letters written for AEV (the first dated October 16, 2008 by Aboitiz and
Company, Inc.’s Associate General Counsel Maria Cristina G. Gabutina35 and
the second dated October 27, 2008 by SyCip Salazar Hernandez and
Gatmaitan36), it was noted that the excess inventories were delivered to GT Ferry
Warehouse.37 Attached to these letters were a listing and/or samples38 of the
corresponding delivery receipts. In these letters it was also noted that the amount
of excess inventories delivered (120.04 million) was actually in excess of the
value of the supposedly unreturned inventories (119.89 million).39 Thus, it was
pointed out that it was CAGLI which was liable to return the difference between
120.04 million and 119.89 million.40 Its claims not having been satisfied, CAGLI
filed on November 6, 2008 the first of two applications for arbitration ("first
complaint")41 against respondent Chiongbian, ATSC, ASC, and petitioner AEV,
before the Cebu City Regional Trial Court, Branch 20. The first complaint was
docketed as Civil Case No. CEB-34951.

In response, AEV filed a motion to dismiss42 dated February 5, 2009. AEV


argued that CAGLI failed to state a cause of action as there was no agreement to
arbitrate between CAGLI and AEV.43 Specifically, AEV pointed out that: (1) AEV
was never a party to the January 8, 1996 Agreement or to its Annex SL-V;44 (2)
while AEV is a party to the SPA and Escrow Agreement, CAGLI's claim had no
connection to either agreement; (3) the unsigned and unexecuted SPA attached
to the complaint cannot be a source of any right to arbitrate;45 and (4) CAGLI did
not say how WLI/WG&A/ATSC's obligation to return the excess inventories can
be charged to AEV.

On December 4, 2009, the Cebu City Regional Trial Court, Branch 20 issued an
order46 dismissing the first complaint with respect to AEV. It sustained AEV’s
assertion that there was no agreement binding AEV and CAGLI to arbitrate
CAGLI’s claim.47 Whether by motion for reconsideration, appeal or other means,
CAGLI did not contest this dismissal.

On February 26, 2010, the Cebu CityRegional Trial Court, Branch 20 issued an
order48 directing the parties remaining in the first complaint (after the discharge of
AEV) to proceed with arbitration.

The February 26, 2010 order notwithstanding, CAGLI filed a notice of


dismissal49 dated July 8, 2010, withdrawing the first complaint. In an
order50 dated August 13, 2010, the Cebu City Regional Trial Court, Branch 20
allowed this withdrawal.
ATSC (the renamed WLI/WG&A) filed a motion for reconsideration51 dated
September 20, 2010 to the allowance of CAGLI's notice of dismissal. This motion
was denied in an order52 dated April 15, 2011.

On September 1, 2010, while the first complaint was still pending (n.b., it was
only on April 15, 2011 that the Cebu City Regional Trial Court, Branch 20 denied
ATSC’s motion for reconsideration assailing the allowance of CAGLI’s notice of
disallowance), CAGLI, now joined by respondent Benjamin D. Gothong, filed a
second application for arbitration ("second complaint")53 before the Cebu City
Regional Trial Court, Branch 10. The second complaint was docketed as Civil
Case No. CEB-37004 and was also in view of the return of the same excess
inventories subject of the first complaint.

On October 28, 2010, AEV filed a motion to dismiss54 the second complaint on
the following grounds:55 (1) forum shopping; (2) failure to state a cause of action;
(3) res judicata; and (4) litis pendentia.

In the first of the two (2) assailed orders dated May 5, 2011,56 the Cebu City
Regional Trial Court, Branch 10 denied AEV's motion to dismiss.

On the matter of litis pendentia, the Regional Trial Court, Branch 10 noted that
the first complaint was dismissed with respect to AEV on December 4, 2009,
while the second complaint was filed on September 1, 2010. As such, the first
complaint was no longer pending at the time of the filing of the second
complaint.57 On the matter of res judicata, the trial court noted that the dismissal
without prejudice of the first complaint "[left] the parties free to litigate the matter
in a subsequent action, as though the dismiss[ed] action had not been
commenced."58 It added that since litis pendentia and res judicata did not exist,
CAGLI could not be charged with forum shopping.59 On the matter of an
agreement to arbitrate, the Regional Trial Court, Branch 10 pointed to the SPA
as "clearly express[ing] the intention of the parties to bring to arbitration process
all disputes, if amicable settlement fails."60 It further dismissed AEV’s claim that it
was not a party to the SPA, as "already touching on the merits of the case"61 and
therefore beyond its duty "to determine if they should proceed to arbitration or
not."62

In the second assailed order63 dated June 24, 2011, the Cebu City Regional Trial
Court, Branch 10 deniedAEV's motion for reconsideration.

Aggrieved, AEV filed the present petition.64 AEV asserts that the second
complaint is barred by res judicata and litis pendentia and that CAGLI engaged in
blatant forum shopping.65 It insists that it is not bound by an agreement to
arbitrate with CAGLI and that, even assuming that it may be required to arbitrate,
it is being ordered to do so under terms that are "manifestly contrary to the . . .
agreements on which CAGLI based its demand for arbitration."66
For resolution are the following issues:

I. Whether the complaint in Civil Case No. CEB-37004 constitutes forum


shopping and/or is barred by res judicata and/or litis pendentia

II. Whether petitioner, Aboitiz Equity Ventures, Inc., is bound by an agreement to


arbitrate with Carlos A. Gothong Lines, Inc., with respect to the latter’s claims for
unreturned inventories delivered to William Lines, Inc./WG&A, Inc./Aboitiz
Transport System Corporation

AEV availed of the wrong


remedy in seeking relief from
this court

Before addressing the specific mattersraised by the present petition, we


emphasize that AEV is in error inseeking relief from this court via a petition for
review on certiorari under Rule45 of the Rules of Court. As such, we are well in a
position to dismiss the present petition outright. Nevertheless, as the actions of
the Cebu City Regional Trial Court, Branch 10 are tainted with grave abuse of
discretion amounting to lack or excess of jurisdiction, this court treats the present
Rule 45 petition as a Rule 65 petition and gives it due course.

A petition for review on certiorari under Rule 45 is a mode of appeal. This is


eminently clear from the very title and from the first section of Rule 45 (as
amended by A.M. No. 07-7-12-SC):

Rule 45
APPEAL BY CERTIORARITO THE SUPREME COURT

SECTION 1. Filing of petition with Supreme Court. A party desiring to appeal by


certiorarifrom a judgment, final order or resolution of the Court of Appeals, the
Sandiganbayan, the Court of Tax Appeals, the Regional Trial Court or other
courts, whenever authorized by law, may file with the Supreme Court a verified
petition for review on certiorari. The petition may include an application for a writ
of preliminary injunction or other provisional remedies and shall raise only
questions of law, which must be distinctly set forth. The petitioner may seek the
same provisional remedies by verified motion filed inthe same action or
proceeding at any time during its pendency. (Emphasis supplied)

Further, it is elementary that anappeal may only be taken from a judgment or


final order that completely disposes of the case.67 As such, no appeal may be
taken from an interlocutory order68 (i.e., "one which refers to something between
the commencement and end of the suit which decides some point or matter but it
is not the final decision of the whole controversy"69). As explained in Sime Darby
Employees Association v. NLRC,70 "[a]n interlocutory order is not appealable
until after the rendition of the judgment on the merits for a contrary rule would
delay the administration of justice and unduly burden the courts."71

An order denying a motion to dismiss is interlocutory in character. Hence, it may


not be the subject of an appeal. The interlocutory nature of an order denying a
motion to dismiss and the remedies for assailing such an order were discussed in
Douglas Lu Ym v. Nabua:72

An order denying a motion to dismiss is an interlocutory order which neither


terminates nor finally disposes of a case, as it leaves something to be done by
the court before the case is finally decided on the merits. As such, the general
rule is that the denial of a motion to dismiss cannot be questioned in a special
civil action for certiorariwhich is a remedy designed to correct errors ofjurisdiction
and not errors of judgment. Neither can a denial of a motion todismiss be the
subject of an appeal unless and until a final judgment or order is rendered.In
order to justify the grant of the extraordinary remedy of certiorari, the denial of the
motion to dismiss must have been tainted with grave abuse of discretion
amounting to lack or excess of jurisdiction.73 (Emphasis supplied)

Thus, where a motion to dismiss is denied, the proper recourse is for the movant
to file an answer.74 Nevertheless, where the order denying the motion to dismiss
is tainted with grave abuse of discretion amounting to lack or excess of
jurisdiction, the movant may assail such order via a Rule 65 (i.e., certiorari,
prohibition, and/or mandamus) petition. This is expressly recognized in the third
paragraph of Rule 41, Section 1 of the Rules of Court.75 Following the
enumeration in the second paragraph of Rule 41, Section 1 of the instances
when an appeal may not be taken, the third paragraph specifies that "[in] any of
the foregoing circumstances, the aggrieved party may file an appropriate special
civil action as provided in Rule 65."76

Per these rules, AEV is in error for having filed what it itself calls a "Petition for
Review on Certiorari [Appeal by Certiorari under Rule 45 of the Rules of
Court]."77 Since AEV availed of the improper remedy, this court is well in a
position to dismiss the present petition.

Nevertheless, there have been instances when a petition for review on certiorari
under Rule 45 was treated by this court as a petition for certiorari under Rule 65.
As explained in China Banking Corporation v. Asian Construction and
Development Corporation:78

[I]n many instances, the Court has treated a petition for review on certiorariunder
Rule 45 as a petition for certiorari under Rule 65 of the Rules of Court, such as in
cases where the subject of the recourse was one of jurisdiction, or the act
complained of was perpetrated by a court with grave abuse of discretion
amounting to lack or excess of jurisdiction.79
In this case, the May 5, 2011 and June 24, 2011 orders of the Cebu City
Regional Trial Court, Branch 10 in Civil Case No. CEB-37004 are assailed for
having denied AEV’s motion todismiss despite: first, the second complaint having
been filed in a manner constituting forum shopping; second, the prior judgment
on the merits made in Civil Case No. CEB-34951, thereby violating the principle
ofres judicata; and third, the (then) pendency of Civil Case No. CEB-34951 with
respect to the parties that, unlike AEV, were not discharged from the case,
thereby violating the principle of litis pendentia. The same orders are assailed for
having allowed CAGLI’s application for arbitration to continue despite supposedly
clear and unmistakable evidence that AEV is not bound by an agreement to
arbitrate with CAGLI.

As such, the Cebu City, Regional Trial Court, Branch 10’s orders are assailed for
having been made with grave abuse of discretion amounting to lack or excess of
jurisdiction in that the Cebu City Regional Trial Court, Branch 10 chose to
continue taking cognizance of the second complaint, despite there being
compelling reasons for its dismissal and the Cebu City, Regional Trial Court
Branch 20’s desistance. Conformably, we treat the present petition as a petition
for certiorari under Rule 65 of the Rules of Court and give it due course.

The complaint in Civil Case


No. CEB-37004 constitutes
forum shopping and is barred
by res judicata

The concept of and rationale against forum shopping were explained by this
court in Top Rate Construction & General Services, Inc. v. Paxton Development
Corporation:80

FORUM SHOPPING is committed by a party who institutes two or more suits in


different courts, either simultaneously or successively, in order to ask the courts
to rule on the same or related causes or to grant the same or substantially the
same reliefs, on the supposition that one or the other court would make a
favorabledisposition or increase a party's chances of obtaining a favorable
decision or action. It is an act of malpractice for it trifles with the courts, abuses
their processes, degrades the administration of justice and adds to the already
congested court dockets. What is critical is the vexation brought upon the courts
and the litigants by a party who asks different courts to rule on the same or
related causes and grant the same or substantially the same reliefs and in the
process creates the possibility of conflicting decisions being rendered by the
different fora upon the same issues, regardless of whether the court in which one
of the suits was brought has no jurisdiction over the action.81

Equally settled is the test for determining forum shopping. As this court explained
in Yap v. Chua:82
To determine whether a party violated the rule against forum shopping, the most
important factor toask is whether the elements of litis pendentiaare present, or
whether a final judgment in one case will amount to res judicatain another;
otherwise stated, the test for determining forum shopping is whether in the two
(or more) cases pending, there is identity of parties, rights or causes of action,
and reliefs sought.83

Litis pendentia "refers to that situation wherein another action is pending between
the same parties for the same cause ofaction, such that the second action
becomes unnecessary and vexatious."84 It requires the concurrence of three (3)
requisites: "(1)the identity of parties, or at least such as representing the same
interests in both actions; (2) the identity of rights asserted and relief prayed
for,the relief being founded on the same facts; and (3) the identity of the two
cases such that judgment in one, regardless of which party issuccessful, would
amount tores judicatain the other."85

In turn, prior judgment or res judicata bars a subsequent case when the following
requisites concur: "(1) the former judgment is final; (2) it is rendered by a court
having jurisdiction over the subject matter and the parties; (3) it is a judgment or
an order on the merits; (4) there is — between the first and the second actions —
identityof parties, of subject matter, and of causes of action."86

Applying the cited concepts and requisites, we find that the complaint in Civil
Case No. CEB-37004 is barred byres judicata and constitutes forum shopping.

First, between the first and second complaints, there is identity of parties. The
first complaint was brought by CAGLI as the sole plaintiff against Victor S.
Chiongbian, ATSC, and AEV as defendants. In the second complaint, CAGLI
was joined by Benjamin D. Gothong as (co-)plaintiff. As to the defendants, ATSC
was deleted while Chiongbian and AEV were retained.

While it is true that the parties to the first and second complaints are not
absolutely identical, this court has clarified that, for purposes of forum shopping,
"[a]bsolute identity of parties is not required [and that it] is enough that there is
substantial identity of parties."87

Even as the second complaint alleges that Benjamin D. Gothong "is . . . suing in
his personal capacity,"88 Gothong failed to show any personal interest in the
reliefs sought by the second complaint. Ultimately, what is at stake in the second
complaint is the extent to which CAGLI may compel AEV and Chiongbian to
arbitrate in order that CAGLI may then recover the value of its alleged unreturned
inventories. This claim for recovery is pursuant to the agreement evinced in
Annex SL-V. Annex SL-V was entered into by CAGLI and not by Benjamin D.
Gothong. While it is true that Benjamin D. Gothong, along with Bob D. Gothong,
signed Annex SL-V, he did so only in a representative, and not in a personal,
capacity. As such, Benjamin D. Gothong cannot claim any right that personally
accrues to him on account of Annex SL-V. From this, it follows that Benjamin D.
Gothong is not a real party in interest — "one who stands to be benefitted or
injured by the judgment in the suit or the party entitled to the avails of the
suit"89 — and that his inclusion in the second complaint is an unnecessary
superfluity.

Second, there is identity in subject matter and cause of action. There is identity in
subject matter as both complaints are applications for the same relief. There is
identity in cause ofaction as both complaints are grounded on the right to be paid
for or to receive the value of excess inventories (and the supposed
corresponding breach thereof) as spelled out in Annex SL-V.

The first and second complaints are both applications for arbitration and are
founded on the same instrument — Annex SL-V. Moreover, the intended
arbitrations in both complaintscater to the sameultimate purpose, i.e., that CAGLI
may recover the value of its supposedly unreturned inventories earlier delivered
to WLI/WG&A/ATSC.

In both complaints, the supposedpropriety of compelling the defendants to submit


themselves to arbitration are anchored on the same bases: (1) Section 6.8 of the
SPA, which provides that the January 8, 1996 Agreement shall be deemed
terminatedbut that the rights and obligations arising from Annex SL-V shall
continue to subsist;90 (2) Section 6.5 of the SPA, which requires arbitration as the
mode for settling disputes relating to the SPA;91 and, (3) defendants’ refusal to
submit themselves to arbitration vis-a-vis Republic Act No. 876, which provides
that "[a] party aggrieved by the failure, neglect or refusal of another to perform
under an agreement in writing providing for arbitration may petition the court for
an order directing that such arbitration proceed in the manner provided for in
such agreement."92

Both complaints also rely on the same factual averments:93

1. that ASC, CAGLI, and WLI entered into an agreement on January 8,


1996;

2. that under Annex SL-V of the Agreement, WLI/WG&A "committed to


acquire certain [inventories], the total aggregate value of which shall not
exceed ₱400 Million";94

3. that after examination, it was ascertained that the value of the


transferred inventories exceeded ₱400 million;

4. that pursuant to Annex SL-V, WG&A paid CAGLI ₱400 million but that
the former failed to return or pay for spare parts representing a value in
excess of ₱400 million;
5. "[t]hat on August 31, 2001, [CAGLI] wrote the WG&A through its AVP
Materials Management, Ms. Concepcion M. Magat, asking for the return of
the excess spare parts";95

6. that on September 5, 2001, WG&A’s Ms. Magat replied that the matter
is beyond her authority level and that she must elevate it to higher
management;

7. that several communications demanding the return of the excess spare


parts were sent to WG&Abut these did not elicit any response; and

8. "[t]hat the issue of excess spare parts, was taken over by events, when
on July 31, 2002,"96 the Chiongbians and Gothongs entered into an
Escrow Agreement with AEV.

Third, the order dated December 4, 2009 of the Cebu City Regional Trial Court,
Branch 20, which dismissed the first complaint with respect to AEV, attained
finality when CAGLI did not file a motion for reconsideration, appealed, or, in any
other manner, questioned the order.

Fourth, the parties did not dispute that the December 4, 2009 order was issued
by a court having jurisdiction over the subject matter and the parties. Specifically
as to jurisdiction over the parties,jurisdiction was acquired over CAGLI as plaintiff
when it filed the first complaint and sought relief from the Cebu City Regional
Trial Court, Branch 20; jurisdiction over defendants AEV, ATSC, and Victor
S.Chiongbian was acquired with the service of summons upon them. Fifth, the
dismissal of the first complaint with respect to AEV was a judgment on the merits.
As explained in Cabreza, Jr. v. Cabreza:97

A judgment may be considered as one rendered on the merits "when it


determines the rights and liabilities of the parties based on the disclosed facts,
irrespective of formal, technical or dilatoryobjections"; or when the judgment is
rendered "aftera determination of which party is right, as distinguished from a
judgment rendered upon some preliminary or formal or merely technical point."98

Further, as this court clarified in Mendiola v. Court of Appeals,99 "[i]t is not


necessary . . . that there [be] a trial"100 in order that a judgment be considered as
one on the merits.

Prior to issuing the December 4, 2009 order dismissing the first complaint with
respect to AEV, the Cebu City Regional Trial Court, Branch 20 allowed the
parties the full opportunity to establish the facts and to ventilate their arguments
relevant to the complaint. Specifically, the Cebu City Regional Trial Court, Branch
20 admitted: 1) AEV’s motion to dismiss;101 2) CAGLI’s opposition to the motion
to dismiss;102 3) AEV’s reply and opposition;103 4) CAGLI’s rejoinder;104 and 5)
AEV’s surrejoinder.105
Following these, the Cebu City Regional Trial Court, Branch 20 arrived at the
following findings and made a definitive determination that CAGLI had no right to
compel AEV to subject itself to arbitration with respect to CAGLI’s claims under
Annex SL-V:

After going over carefully the contentions and arguments of both parties, the
court has found that no contract or document exists binding CAGLI and AEV to
arbitrate the former’s claim. The WLI Letter upon which the claim is based
confirms only the commitment of William Lines, Inc. (WLI) to purchase certain
material inventories from CAGLI. It does not involve AEV. The court has
searched in vain for any agreement or document showing that said commitment
was passed on to and assumed by AEV. Such agreement or document, if one
exists, being an actionable document, should have been attached to the
complaint. While the Agreement of January 8, 1996 and the Share Purchase
Agreement provide for arbitration of disputes, they refer to disputes arising from
or in connection with the Agreements themselves. No reference is made, as
included therein, to the aforesaid commitment of WLI or to any claim that CAGLI
may pursue based thereon or relative thereto. Section 6.8 of the Share Purchase
Agreement, cited by plaintiff CAGLI, does not incorporate therein, expressly or
impliedly, the WLI commitment above-mentioned. It only declares that the rights
and obligations of the parties under the WLI Letter shall survive even after the
termination of the Shareholder’s Agreement. It does not speak of arbitration.
Finally, the complaint does not allege the existence of a contract obliging CAGLI
and AEV to arbitrate CAGLI’s claim under the WLI Letter. Consequently, there is
no legal or factual basis for the present complaint for application for
arbitration.106 (Emphasis supplied)

In the assailed order dated May 5, 2011, the Cebu City Regional Trial Court,
Branch 10 made much of the Cebu City Regional Trial Court, Branch 20’s
pronouncement in the latter’s December 4, 2009 order that "the [first] complaint
fails to state a cause of action."107 Based on this, the Cebu City Regional Trial
Court, Branch 10 concluded that the dismissal of the first complaint was one
made without prejudice, thereby "leav[ing] the parties free to litigate the matter
ina subsequent action, as though the dismissal [sic] action had not been
commenced."108

The Cebu City Regional Trial Court, Branch 10 is in serious error. In holding that
the second complaint was not barred by res judicata, the Cebu City Regional
Trial Court, Branch 10 ignored established jurisprudence.

Referring to the earlier cases of Manalo v. Court of Appeals109 and Mendiola v.


Court of Appeals,110 this court emphasized in Luzon Development Bank v.
Conquilla111 that dismissal for failure to state a cause of action may very well be
considered a judgment on the merits and, thereby, operate as res judicata on a
subsequent case:
[E]ven a dismissal on the ground of "failure to state a cause of action" may
operate as res judicata on a subsequent case involving the same parties, subject
matter, and causes of action, provided that the order of dismissalactually ruled on
the issues raised.What appears to be essential to a judgment on the merits is
that it be a reasoned decision, which clearly states the facts and the law on which
it is based.112 (Emphasis supplied)

To reiterate, the Cebu City Regional Trial Court, Branch 20 made a definitive
determination that CAGLI had no right to compel AEV to subject itself to
arbitrationvis-a-vis CAGLI’s claims under Annex SL-V. This determination was
arrived at after due consideration of the facts established and the arguments
advancedby the parties. Accordingly, the Cebu City Regional Trial Court, Branch
20’s December 4, 2009 order constituted a judgment on the merits and operated
as res judicata on the second complaint.

In sum, the requisites for res judicata have been satisfied and the second
complaint should, thus, have been dismissed. From this, it follows that CAGLI
committed an act of forum shopping in filing the second complaint. CAGLI
instituted two suits in two regional trial court branches, albeit successively and
not simultaneously. It asked both branches to rule on the exact same cause and
to grant the exact same relief. CAGLI did so after it had obtained an unfavorable
decision (at least with respect to AEV) from the Cebu City Regional Trial Court,
Branch 20. These circumstances afford the reasonable inference that the second
complaint was filed in the hopes of a more favorable ruling.

Notwithstanding our pronouncements sustaining AEV’s allegations that CAGLI


engaged in forum shopping and that the second complaint was barred by res
judicata, we find that at the time of the filing of the second complaint, AEV had
already been discharged from the proceedings relating to the first complaint.
Thus, asbetween AEV and CAGLI, the first complaint was no longer pending at
the time of the filing of the second complaint. Accordingly, the second complaint
could not have been barred by litis pendentia.

There is no agreement
binding AEV to arbitrate
with CAGLI on the latter’s
claims arising from Annex SL-V

For arbitration to be proper, it is imperative thatit be grounded on an agreement


between the parties. This was adequately explained in Ormoc Sugarcane
Planters’ Association,Inc. v. Court of Appeals:113

Section 2 of R.A. No. 876 (the Arbitration Law) pertinently provides:

Sec. 2. Persons and matterssubject to arbitration. – Two or more persons or


parties may submit to the arbitration of one or more arbitrators any controversy
existing between them at the time of the submission and which may be the
subject of an action, or the parties to any contract may in such contract agree to
settle by arbitration a controversy thereafter arising between them. Such
submission or contract shall be valid, enforceable and irrevocable, save upon
such grounds as exist at law for the revocation of any contract. . . . (Emphasis
ours)

The foregoing provision speaks of two modes of arbitration: (a) an agreement to


submit to arbitration somefuture dispute, usually stipulated upon in a civil contract
between the parties, and known as an agreement to submit to arbitration, and (b)
an agreement submitting an existing matter of difference to arbitrators, termed
the submission agreement. Article XX of the milling contract is an agreement to
submit to arbitrationbecause it was made in anticipation of a dispute that might
arise between the parties after the contract’s execution.

Except where a compulsory arbitration is provided by statute, the first step


toward the settlement of a difference by arbitration is the entry by the parties into
a valid agreement to arbitrate.An agreement to arbitrate is a contract, the relation
ofthe parties is contractual, and the rights and liabilities of the parties are
controlled by the law of contracts. In an agreement for arbitration, the ordinary
elements of a valid contract must appear, including an agreement toarbitrate
some specific thing, and an agreement to abide by the award, either in express
language or by implication.114 (Emphasis supplied)

In this petition, not one of the parties — AEV, CAGLI, Victor S. Chiongbian, and
Benjamin D. Gothong — has alleged and/or shown that the controversy is
properly the subject of "compulsory arbitration [as] provided by statute."115 Thus,
the propriety of compelling AEV to submit itself to arbitration must necessarilybe
founded on contract.

Four (4) distinct contracts have been cited in the present petition:

1. The January 8, 1996 Agreement in which ASC, CAGLI, and WLI


merged their shipping enterprises, with WLI (subsequently renamed
WG&A) as the surviving entity. Section 11.06 of this Agreement provided
for arbitration as the mechanism for settling all disputes arising out of or in
connection with the Agreement.

2. Annex SL-V of the Agreement between CAGLI and WLI (and excluded
ASC and any other Aboitiz-controlled entity), and which confirmed WLI’s
commitment to acquire certain inventories, worth not more than 400
million, of CAGLI. Annex SL-V stated that the acquisition was "pursuant to
the Agreement."116 It did not contain an arbitration clause.

3. The September 23, 2003 Share Purchase Agreement or SPA in which


AEV agreed to purchasethe Chiongbian and Gothong groups' shares in
WG&A’s issued and outstanding stock. Section 6.5 of the SPA provided
for arbitration as the mode of settling any dispute arising from the SPA.
Section 6.8 of the SPA further provided that the Agreement of January 8,
1996 shall be deemed terminatedexcept its Annex SL-V.

4. The Escrow Agreement whereby ING Bank N.V.-Manila Branch was to


take custody of the shares subject of the SPA. Section 14.7 of the Escrow
Agreement provided that all disputes arising from it shall be settled via
arbitration.

The obligation for WLI to acquire certain inventories of CAGLI and which is the
subject of the present petition was contained in Annex SL-V. It is therefore this
agreement which deserves foremost consideration. As to this particular
agreement, these points must be underscored: first, that it has no arbitration
clause; second, Annex SL-V is only between WLI and CAGLI.

On the first point, it is clear, pursuant to this court’s pronouncements in Ormoc


Sugarcane Planters’ Association, that neither WLI nor CAGLI can compel
arbitration under Annex SL-V. Plainly, there is no agreement to arbitrate.

It is of no moment that Annex SL-Vstates that it was made "pursuant to the


Agreement" or that Section 11.06 of the January 8, 1996 Agreement provides for
arbitration as the mode of settling disputes arising out of or in connection with the
Agreement.

For one, to say that Annex SL-V was made"pursuant to the Agreement" is merely
to acknowledge: (1) the factual context in which Annex SL-V was executed and
(2) that it was that context that facilitated the agreement embodied in it.
Absentany other clear or unequivocal pronouncement integrating Annex SL-V
into the January 8, 1996 Agreement, it would be too much of a conjecture to
jump to the conclusion that Annex SL-V is governed by the exact same
stipulations which govern the January 8, 1996 Agreement.

Likewise, a reading of the Agreement’s arbitration clause will reveal that it does
not contemplate disputes arising from Annex SL-V.

Section 11.06 of the January 8, 1996 Agreement requires the formation of an


arbitration tribunal composed of four (4) arbitrators. Each of the parties — WLI,
CAGLI, and ASC — shall appoint one (1) arbitrator, and the fourth arbitrator, who
shall actas chairman, shall be appointed by the three (3) arbitrators appointed by
the parties. From the manner by which the arbitration tribunal is to be constituted,
the necessary implication is that the arbitration clause is applicable tothree-party
disputes — as will arise from the tripartite January 8, 1996 Agreement — and not
to two-party disputesas will arise from the two-party Annex SL-V.
From the second point — that Annex SL-V is only between WLI and CAGLI — it
necessarily follows that none but WLI/WG&A/ATSC and CAGLI are bound by the
terms of Annex SL-V. It is elementary that contracts are characterized by
relativity or privity, that is, that "[c]ontracts take effect only between the parties,
their assigns and heirs."117 As such, one who is not a party to a contract may not
seek relief for such contract’s breach. Likewise, one who is not a party to a
contract may not be held liable for breach of any its terms.

While the principle of privity or relativity of contracts acknowledges that


contractual obligations are transmissible to a party’s assigns and heirs, AEV is
not WLI’s successor-in-interest. In the period relevant to this petition, the
transferee of the inventories transferred by CAGLI pursuant to Annex SL-V
assumed three (3) names: (1) WLI, the original name of the entity that survived
the merger under the January 8, 1996 Agreement; (2) WG&A, the name taken by
WLI in the wake of the Agreement; and (3) ATSC, the name taken by WLI/WG&A
inthe wake of the SPA. As such, it is now ATSC that is liable under Annex SL-V.

Pursuant to the January 8, 1996 Agreement, the Aboitiz group (via ASC) and the
Gothong group (viaCAGLI) became stockholders of WLI/WG&A, along with the
Chiongbiangroup (which initially controlled WLI). This continued until, pursuant to
the SPA, the Gothong group and the Chiongbian group transferred their shares
to AEV. With the SPA, AEV became a stockholder of WLI/WG&A, which was
subsequently renamed ATSC. Nonetheless, AEV’s status asATSC’s stockholder
does not subject it to ATSC’s obligations

It is basic that a corporation has a personality separate and distinct from that of
its individual stockholders. Thus, a stockholder does not automatically assume
the liabilities of the corporation of which he is a stockholder. As explained in
Philippine National Bankv. Hydro Resources Contractors Corporation:118

A corporation is an artificial entitycreated by operation of law. It possesses the


right of succession and such powers, attributes, and properties expressly
authorized by law or incident to its existence. It has a personality separate and
distinct from that of its stockholders and from that of other corporations to which it
may be connected. As a consequence of its status as a distinct legal entityand as
a result of a conscious policy decision to promote capital formation, a corporation
incurs its own liabilities and is legally responsible for payment of its obligations. In
other words, by virtue of the separate juridical personality ofa corporation, the
corporate debt or credit is not the debt or credit of the stockholder. This
protection from liability for shareholders is the principle of limited liability.119

In fact, even the ownership by a single stockholder of all or nearly all the capital
stock of a corporation is not, in and of itself, a ground for disregarding a
corporation’s separate personality. As explained in Secosa v. Heirs of
Francisco:120
It is a settled precept in this jurisdiction that a corporation is invested by law with
a personality separate from thatof its stockholders or members. It has a
personality separate and distinct from those of the persons composing it as well
as from that of any other entity to which it may be related. Mere ownership by a
single stockholder or by another corporation of all or nearly all of the capital stock
of a corporation is not in itself sufficient ground for disregarding the separate
corporate personality.A corporation’s authority to act and its liability for its actions
are separate and apart from the individuals who own it.

The so-called veil of corporation fiction treats as separate and distinct the affairs
of a corporation and its officers and stockholders. As a general rule, a
corporation will be looked upon as a legal entity, unless and until sufficient
reason to the contrary appears. When the notion of legal entity is used to defeat
public convenience, justify wrong, protect fraud, or defend crime, the law will
regard the corporation as an association of persons. Also, the corporate entity
may be disregarded in the interest of justice in such cases asfraud that may work
inequities among members of the corporation internally, involving no rights of the
public or third persons. In both instances, there must have been fraud and proof
of it. For the separate juridical personality of a corporation to be disregarded, the
wrongdoing must be clearly and convincingly established. It cannot be
presumed.121 (Emphasis supplied)

AEV’s status as ATSC’s stockholder is, in and of itself, insufficient to make AEV
liable for ATSC’s obligations. Moreover, the SPA does not contain any stipulation
which makes AEV assume ATSC’s obligations. It is true that Section 6.8 of the
SPA stipulates that the rights and obligations arising from Annex SL-V are not
terminated. But all that Section 6.8 does is recognize that the obligations under
Annex SL-V subsist despite the termination of the January 8, 1996 Agreement.
At no point does the text of Section 6.8 support the position that AEV steps into
the shoes of the obligor under Annex SL-V and assumes its obligations.

Neither does Section 6.5 of the SPAsuffice to compel AEV to submit itself to
arbitration. While it is true that Section 6.5 mandates arbitration as the mode for
settling disputes between the parties to the SPA, Section 6.5 does not
indiscriminatelycover any and all disputes which may arise between the parties to
the SPA. Rather, Section 6.5 is limited to "dispute[s] arising between the parties
relating tothis Agreement [i.e., the SPA]."122 To belabor the point, the obligation
which is subject of the present dispute pertains to Annex SL-V, not to the SPA.
That the SPA, in Section 6.8, recognizes the subsistence of Annex SL-Vis merely
a factual recognition. It does not create new obligations and does not alter or
modify the obligations spelled out in Annex SL-V.

AEV was drawn into the present controversy on account of its having entered
into the SPA. This SPA made AEV a stockholder of WLI/WG&A/ATSC. Even
then, AEV retained a personality separate and distinct from WLI/WG&A/ATSC.
The SPA did not render AEV personally liable for the obligations of the
corporation whose stocks it held.

The obligation animating CAGLI’s desire to arbitrate is rooted in Annex SL-V.


Annex SL-V is a contractentirely different from the SPA. It created distinct
obligations for distinctparties. AEV was never a party to Annex SL-V. Rather than
pertaining to AEV, Annex SL-V pertained to a different entity: WLI (renamed
WG&A then renamed ATSC). AEV is, thus, not bound by Annex SL-V.

On one hand, Annex SL-V does not stipulate that disputes arising from it are to
be settled via arbitration.On the other hand, the SPA requires arbitration as the
mode for settling disputes relating to it and recognizes the subsistence of the
obligations under Annex SL-V. But as a separate contract, the mere mention of
Annex SL-V in the SPA does not suffice to place Annex SL-V under the ambit of
the SPA or to render it subject to the SPA’s terms, such as the requirement to
arbitrate.

WHEREFORE, the petition is GRANTED. The assailed orders dated May 5,


2011 and June 24,2011 of the Regional Trial Court, Cebu City, Branch 10 in Civil
Case No. CEB-37004 are declared VOID. The Regional Trial Court, Cebu City,
Branch 10 is ordered to DISMISSCivil Case No. CEB-37004.

SO ORDERED.

MARVIC MARIO VICTOR F. LEONEN


Associate Justice

18. VILLAMOR, JR. VS UMALE

ALFREDO L. VILLAMOR, JR., Petitioner, v. JOHN S. UMALE, IN


SUBSTITUTION OF HERNANDO F. BALMORES, Respondent.

G.R. NO. 172881

RODIVAL E. REYES, HANS M. PALMA AND DOROTEO M.


PANGILINAN, Petitioners, v. HERNANDO F.
BALMORES, Respondent.

DECISION

LEONEN, J.:

Before us is a petition for review on certiorari 1 under Rule 45 of the


Rules of Court, assailing the decision2 of the Court of Appeals dated
March 2, 2006 and its resolution3 dated May 29, 2006, denying
petitioners' motions for reconsideration. The Court of Appeals placed
Pasig Printing Corporation (PPC) under receivership and appointed an
interim management committee for the corporation.4cralawlawlibrary

MC Home Depot occupied a prime property (Rockland area) in Pasig.


The property was part of the area owned by Mid-Pasig Development
Corporation (Mid-Pasig).5cralawlawlibrary

On March 1, 2004, PPC obtained an option to lease portions of Mid-


Pasig's property, including the Rockland area.6cralawlawlibrary

On November 11, 2004, PPC's board of directors issued a


resolution7 waiving all its rights, interests, and participation in the
option to lease contract in favor o£ the law firm of Atty. Alfredo
Villamor, Jr. (Villamor), petitioner in G.R. No. 172843. PPC received no
consideration for this waiver in favor of Villamor's law
firm.8cralawlawlibrary

On November 22, 2004, PPC, represented by Villamor, entered into a


memorandum of agreement (MOA) with MC Home Depot.9 Under the
MO A, MC Home Depot would continue to occupy the area as PPC's
sublessee for four (4) years, renewable for another four (4) years, at a
monthly rental of P4,500,000.00 plus goodwill of
P18,000,000.00.10cralawlawlibrary

In compliance with the terms of the MOA, MC Home Depot issued 20


post-dated checks representing rental payments for one year and the
goodwill money. The checks were given to Villamor who did not turn
these or the equivalent amount over to PPC, upon
encashment.11cralawlawlibrary

Hernando Balmores, respondent in G.R. No. 172843 and G.R. No.


172881 and a stockholder and director of PPC,12 wrote a letter
addressed to PPJC's directors, petitioners in G.R. No. 172881, on April
4, 2005.13He informed them that Villamor should be made to deliver to
PPC and account for MC Home Depot's checks or their equivalent
value.14cralawlawlibrary

Due to the alleged inaction of the directors, respondent Balmores filed


with the Regional Trial Court an intra-corporate controversy complaint
under Rule 1, Section 1(a)(1) of the Interim Rules for Intra-Corporate
Controversies15 (Interim Rules) against petitioners for their alleged
devices or schemes amounting to fraud or misrepresentation
"detrimental to the interest of the Corporation and its
stockholders."16cralawlawlibrary

Respondent Balmores alleged in his complaint that because of


petitioners' actions, PPC's assets were ". . . not only in imminent
danger, but have actually been dissipated, lost, wasted and
destroyed."17cralawlawlibrary

Respondent Balmores prayed that a receiver be appointed from his list


of nominees.18 He also prayed for petitioners' prohibition from "selling,
encumbering, transferring or disposing in any manner any of [PPC's]
properties, including the MC Home [Depot] checks and/or their
proceeds."19 He prayed for the accounting and remittance to PPC of
the MC Home Depot checks or their proceeds and for the annulment of
the board's resolution "vaiving PPC's rights in favor of Villamor's law
firm.20cralawlawlibrary

Ruling of the
Regional Trial Court

In its resolution21 dated June 15, 2005, the Regional Trial Court denied
respondent Balmores' prayer for the appointment of a receiver or the
creation of a management committee. The dispositive portion
reads:chanRoblesvirtualLawlibrary

WHEREFORE, premises considered the appointment of


a Receiver and the creation of a Management
Committee applied for by plaintiff Hernando F. Balmores are, as
they are hereby, DENIED.22 (Emphasis in the original)

According to the trial court, PPC's entitlement to the checks was


doubtful. The resolution issued by PPC's board of directors; waiving its
rights to the option to lease contract in favor of Villamor's law firm,
must be accorded prima facie validity.23cralawlawlibrary

The trial court also noted that there was a pending case filed by one
Leonardo Umale against Villamor, involving the same checks. Umale
was also claiming ownership of the checks.24 This, according to the
trial court, weakened respondent Balmores' claim that the checks were
properties of PPC.25cralawlawlibrary

The trial court also found that there was "no clear and positive
showing of dissipation, loss, wastage, or destruction of [PPC's] assets .
. . [that was] prejudicial to the interest of the minority stockholders,
parties-litigants or the general public."26 The board's failure to recover
the disputed amounts was not an indication of mismanagement
resulting in the dissipation of assets.27cralawlawlibrary

The trial court noted that PPC was earning substantial rental income
from its other sub-lessees.28cralawlawlibrary

The trial court added that the failure to implead PPC was. fatal. PPC
should have been impleaded as an indispensable party, without which,
there would be no final determination of the action.29cralawlawlibrary

Ruling of the
Court of Appeals

Respondent Balmores filed with the Court of Appeals a petition


for certiorari under Rule 65 of the Rules of Court.30 He assailed the
decision of the trial court, which denied his "application for the
appointment of a [r]eceiver and the creation of a [management
[c]ommittee."31cralawlawlibrary

In the decision promulgated on March 2, 2006, the Court of Appeals


gave due course to respondent Balmores' petition. It reversed the trial
court's decision, and issued a new order placing PPC under
receivership and creating an interim management committee.32 The
dispositive portion reads:chanRoblesvirtualLawlibrary

WHEREFORE, premises considered, the instant petition is


hereby GRANTED and GIVEN DUE COURSE and the June 15, 2005
Order/Resolution of the commercial court, the Regional Trial Court of
Pasig City, Branch 167, in S.E.C. Case No. 05-62, is
hereby REVERSED and SET ASIDE and a NEW
ORDER is ISSUED that, during the pendency of the derivative suit,
until judgment on the merits is rendered by the commercial court, in
order to prevent dissipation, loss, wastage or destruction of the assets,
in order to prevent paralization of business operations which may be
prejudicial to the interest of stockholders, parties-litigants or the
general public, and in order to prevent violations of the corporation
laws: (1) Pasig Printing Corporation (PPC) is hereby placed under
receivership pursuant to the Rules Governing Intra-Corporate
Controversies under R.A. No. 8799; (2) an Interim Management
Committee is hereby created for Pasig Printing Corporation (PPC)
composed of Andres Narvasa, Jr., Atty. Francis Gustilo and Ms
Rosemarie Salvio-Leonida; (3) the interim management committee is
hereby directed to forthwith, during the pendency of the derivative suit
until judgment on the merits is rendered by the commercial court, to:
(a) take over the business of Pasig Printing Corporation (PPC), (b) take
custody and control of all assets and properties owned and possessed
by Pasig Printing Corporation (PPC), (c) take the place of the
management and the board of directors of Pasig Printing Corporation
(PPC), (d) preserve Pasig Printing Corporation's assets and properties,
(e) stop and prevent any disposal, in any manner, of any of the
properties of Pasig Printing Corporation (PPC) including the MC Home
Depot checks and/or their proceeds; and (3) [sic] restore the status
quo ante prevailing by directing respondents their associates and
agents to account and return to the Interim Management Committee
for Pasig Printing Corporation (PPC) all the money proceeds of the 20
MC Home Depot checks taken by them and to account and surrender
to the Interim Management Committee all subsequent MC Home Depot
checks or proceeds.33 (Citation omitted)

The Court of Appeals characterized the assailed order/resolution of the


trial court as an interlocutory order that is not appealable.34 In
reversing tie trial court order/resolution, the Court of Appeals
considered the danger of dissipation, wastage, and loss of PPC's assets
if the review of the trial court's judgment would be
delayed.35cralawlawlibrary

The Court of Appeals ruled that the case filed by respondent Balmores
with the trial court "[was] a derivative suit because there were
allegations of fraud or ultra vires acts ... by [PPC's
directors]."36cralawlawlibrary

According to the Court of Appeals, the trial court abandoned its duty to
the stockholders in a derivative suit when it refused to appoint a
receiver or create a management committee, all during the pendency
of the proceedings. The assailed order of the trial court removed from
the stockholders their right, in an intra-corporate controversy, to be
allowed the remedy of appointment of a receiver during the pendency
of a derivative suit, leaving the corporation under the control of an
outsider and its assets prone to dissipation.37 The Court of Appeals
also ruled that this amounts to "despotic, capricious, or whimsical
exercise of judicial power"38 on the part of the trial court.

In justifying its decision to place PPC under receivership and to create


a management committee, the Court of Appeals stated that the
board's waiver of PPC's rights in favor of Villamor's law firm without
any consideration and its inaction on Villamor's failure to turn over the
proceeds of rental payments to PPC warrant the creation of a
management committee.39 The circumstances resulted in the imminent
danger of loss, waste, or dissipation of PPC's assets.40cralawlawlibrary

Petitioners filed separate motions for reconsideration. Both motions


were denied by the Court of Appeals on May 29, 2006. The dispositive
portion of the Court of Appeals' resolution
reads:chanRoblesvirtualLawlibrary

WHEREFORE, for lack of merit, respondents' March 10/2006 and


March 20, 2006 Motions for Reconsideration are
hereby DENIED.41chanrobleslaw

Petitioners filed separate petitions for review under Rule 45, raising
the following threshold issues:chanRoblesvirtualLawlibrary

I. Whether the Court of Appeals correctly characterized respondent


Balmores' action as a derivative suit

II. Whether the Court of Appeals properly placed PPC under


receivership and created a receiver or management committee

PPC's directors argued that the Court of Appeals erred in


characterizing respondent Balmores' suit as a derivative suit because
of his failure to implead PPC as party in the case. Hence, the appellate
court did not acquire jurisdiction over the corporation, and the
appointment of a receiver or management committee is not
valid.42cralawlawlibrary

The directors further argued that the requirements for the


appointment of a receiver or management committee under Rule 943 of
the Interim Rules were not satisfied. The directors pointed out that
respondent Balmores failed to prove that the assets of the corporation
were in imminent danger of being dissipated.44cralawlawlibrary

According to the directors, assuming that a receiver or management


committee may be appointed in the case, it is the Regional Trial Court
only arid not the. Court of Appeals that must appoint
them.45cralawlawlibrary

Meanwhile, Villamor argued that PPC's entitlement to the checks or


their proceeds was still in dispute. In a separate civil case against
Villamor, a certain Leonardo Umale was claiming ownership of the
checks.46cralawlawlibrary
Villamor also argued that the Court of Appeals' order to place PPC
under receivership and to appoint a management committee does not
endanger PPC's assets because the MC Home Depot checks were not
the only assets of PPC.47 Therefore, it would not affect the operation of
PPC or result in its paralysation.48cralawlawlibrary

In his comment, respondent Balmores argued that Villamor's and the


directors' petitions raise questions of facts, which cannot be allowed in
a petition for review under Rule 45.49cralawlawlibrary

On the appointment of a receiver or management committee,


respondent Balmores stated that the ". . . very practice of waiving
assets and income for no consideration can in fact lead, not only to the
paralyzation of business, but to the complete loss or cessation of
business of PPC[.] It is precisely because of this fraudulent practice
that a receiver/management committee must be appointed to protect
the assets of PPC from further fraudulent acts, devices and
schemes."50cralawlawlibrary

The petitions have merit.

Petition for review on


certiorari under Rule 45
was proper

First, we rule on the issue of whether petitioners properly filed a


petition for review on certiorari under Rule 45.

Respondent Balmores argued that the petition raises questions of fact.

Under Rule 45, only questions of law may be raised.51 There is a


question of law "when there is doubt or controversy as to what the law
is on a certain [set] of facts."52 The test is "whether the appellate court
can determine the issue-raised without reviewing or evaluating the
evidence."53 Meanwhile, there is a question of fact when there is
"doubt... as to the truth or falsehood of facts."54 The question must
involve the examination of probative value of the evidence presented.

In this case, petitioners raise issues on the correctness of the Court of


Appeals' conclusions.
Specifically, petitioners ask (1) whether respondent Balmores' failure
to implead PPC in his action with the trial court was fatal; (2) whether
the Court of Appeals correctly characterized respondent Balmores'
action as a derivative suit; (3) whether the Court of Appeals'
appointment of a management committee was proper; and (4)
whether the Court of Appeals may exercise the power to appoint a
management committee.

These are questions of law that may be determined without looking


into the evidence presented. The question of whether the conclusion
drawn by the Court of Appeals from a set of facts is correct is a
question of law, cognizable by this court.55cralawlawlibrary

Petitioners, therefore, properly filed, a petition for review under Rule


45.

II

Respondent Balmores' action in


the trial court is not a derivative suit

A derivative suit is an action filed by stockholders to enforce a


corporate action.56 It is an exception to the general rule that the
corporation's power to sue57 is exercised only by the board of directors
or trustees.58cralawlawlibrary

Individual stockholders may be allowed to sue on behalf of the


corporation whenever the directors or officers of the corporation refuse
to sue to vindicate the rights of the corporation or are the ones to be
sued and are in control of the corporation.59 It is allowed when the
"directors [or officers] are guilty of breach of . . . trust, [and] not of
mere error of judgment."60 In derivative suits, the real party in
interest is the corporation, and the suing stockholder is a mere
nominal party.61 Thus, this court noted:chanRoblesvirtualLawlibrary

The Court has recognized that a stockholder's right to institute a


derivative suit is not based on any express provision of the
Corporation Code, or even the Securities Regulation Code, but is
impliedly recognized when the said laws make corporate directors or
officers liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties. In effect, the suit is
an action for specific performance of an obligation, owed by the
corporation to the stockholders, to assist its rights of action when the
corporation has been put in default by the wrongful refusal of the
directors or management to adopt suitable measures for its
protection.62chanrobleslaw

Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate


Controversies (Interim Rules) provides the five (5) requisites63 for
filing derivative suits:chanRoblesvirtualLawlibrary

SECTION 1. Derivative action. - A stockholder or member may bring


an action in the name of a corporation or association, as the case may
be, provided, that:chanRoblesvirtualLawlibrary

(1) He was a stockholder or member at the time the acts or


transactions subject of the action occurred and at the time the
action was filed;
(2) He exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available
under the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he
desires;
(3) No appraisal rights are available for the act or acts complained of;
and
(4) The suit is not a nuisance or harassment suit.

In case of nuisance or harassment suit, the court shall forthwith


dismiss the case.

The fifth requisite for filing derivative suits, while not included in the
enumeration, is implied in the first paragraph of Rule 8, Section 1 of
the Interim Rules: The action brought by the stockholder or member
must be "in the name of [the] corporation or association. ..." This
requirement has already been settled in jurisprudence.

Thus, in Western Institute of Technology, Inc., et al v. Solas, et


al,64 this court said that "[a]mong the basic requirements for a
derivative suit to prosper is that the minority shareholder who is suing
for and on behalf of the corporation must allege in his complaint before
the proper forum that he is suing on a derivative cause of action on
behalf of the corporation and all other shareholders similarly situated
who wish to join [him]."65 This principle on derivative suits has been
repeated in, among other cases, Tarn Wing Tak v. Hon. Makasiar and
De Guia66 and in Chua v. Court of Appeals,67 which was cited in Hi-
Yield Realty, Incorporated v. Court of Appeals.68cralawlawlibrary
Moreover, it is important that the corporation be made a party to the
case.69cralawlawlibrary

This court explained in Asset Privatization Trust v. Court of


Appeals70 why it is a condition sine qua nonthat the corporation be
impleaded as party in derivative suits.
Thus:chanRoblesvirtualLawlibrary

Not only is the corporation an indispensible party, but it is also the


present rule that it must be served with process. The reason given is
that the judgment must be made binding upon the corporation in order
that the corporation may get the benefit of the suit and may not bring
a subsequent suit against the same defendants for the same cause of
action. In other words the corporation must be joined as party because
it is its cause of action that is being litigated and because judgment
must be a res judicata against it.71chanrobleslaw

In the same case, this court enumerated the reasons for disallowing a
direct individual suit.

The reasons given for not allowing direct individual suit


are:chanRoblesvirtualLawlibrary

(1) . . . "the universally recognized doctrine that a stockholder in a


corporation has no title legal or equitable to the corporate
property; that both of. these are in the corporation itself for the
benefit of the stockholders." In other words, to allow shareholders
to sue separately would conflict with the separate corporate entity
principle;
(2) . . . that the prior rights of the creditors may be prejudiced. Thus,
our Supreme Court held in the case of Evangelista v. Santos, that
'the stockholders may not directly claim those damages for
themselves for that would result in the appropriation by, and the
distribution among them of part of the corporate assets before the
dissolution of the corporation and the liquidation of its debts and
liabilities, something which cannot be legally done in view of
Section 16 of the Corporation Law. . .";
(3) the filing of such suits would conflict with the duty of the
management to sue for the protection of all concerned;
(4) it would produce wasteful multiplicity of suits; and
(5) it would involve confusion in ascertaining the effect of partial
recovery by an individual on the damages recoverable by the
corporation for the same act.72
While it is true that the basis for allowing stockholders to file derivative
suits on behalf of corporations is based on equity, the above legal
requisites for its filing must necessarily be complied with for its
institution.73cralawlawlibrary

Respondent Balmores' action in the trial court failed to satisfy all the
requisites of a derivative suit.

Respondent Balmores failed to exhaust all available remedies to obtain


the reliefs he prayed for. Though he tried to communicate with PPC's
directors about the checks in Villamor's possession before he filed an
action with the trial court, respondent Balmores was not able to show
that this comprised -all the remedies available under the articles of
incorporation, bylaws, laws, or rules governing PPC.

An allegation that appraisal rights were not available for the acts
complained of is another requisite for filing derivative suits under Rule
8, Section 1(3) of the Interim Rules.

Section 81 of the Corporation Code provides the instances of appraisal


right:chanRoblesvirtualLawlibrary

SEC. 81. Instances of appraisal right.— Any stockholder of a


corporation shah1 have the right to dissent and demand payment of
the fair value of his shares in the following instances:

1. In case any amendment to the articles of incorporation has the


effect of changing or restricting the rights of any stockholders or
class of shares, or of authorizing preferences in any respect
superior to those of outstanding shares of any class, or of
extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or
other disposition of all or substantially all of the corporate
property and assets as provided in this Code; and
3. In case of merger or consolidation.

Section 82 of the Corporation Code provides that the stockholder may


exercise the right if he or she voted against the proposed corporate
action and if he made a written demand for payment on the
corporation within thirty (30) days after the date of voting.

Respondent Balmores complained about the alleged inaction of PPC's


directors in his letter informing them that Villamor should be made to
deliver to PPC and account for MC Home Depot's checks or their
equivalent value. He alleged that these are devices or schemes
amounting to fraud or misrepresentation detrimental to the
corporation's and the stockholders' interests. He also alleged that the
directors' inaction placed PPC's assets in imminent and/or actual
dissipation, loss, wastage, and destruction.

Granting that (a) respondent Balmores' attempt to communicate with


the other PPC directors already comprised all the available remedies
that he could have exhausted and (b) the corporation was under full-
control of petitioners that exhaustion of remedies became impossible
or futile,74 respondent Balmores failed to allege that appraisal rights
were not available for the acts complained of here.

Neither did respondent Balmores implead PPC as party in the case nor
did he allege that he was filing on behalf of the corporation.

The non-derivative character of respondent Balmores' action may also


be gleaned from his allegations in the trial court complaint. In the
complaint, he described the nature of his action as an action under
Rule 1, Section l(a)(l) of the Interim Rules, and not an action under
Rule 1, Section l(a)(4) of the Interim Rules, which refers to derivative
suits. Thus, respondent Balmores said:chanRoblesvirtualLawlibrary

1.1 This is an action under Section 1 (a) (1), Rule 1 of the


Interim Rules of Procedure for Intra-corporate Controversies,
involving devices or schemes employed by, or acts of, the defendants
as board of directors, business associates and officers of Pasig Printing
Corporation (PPC), amounting to fraud or misrepresentation, which are
detrimental to the interest of the plaintiff as stockholder of
PPC.75 (Emphasis supplied)

Rule 1, Section 1 (a)(1) of the Interim Rules refers to acts of the


board, associates, and officers, amounting to fraud or
misrepresentation, which may be detrimental to the interest of the
stockholders. This is different from a derivative suit.

While devices and schemes of the board of directors, business


associates,-or officers amounting to fraud under Rule 1, Section l(a)(l)
of the Interim Rules are causes of a derivative suit, it is not always the
case that derivative suits are limited to such causes or that they are
necessarily derivative suits. Hence, they are separately enumerated in
Rule 1, Section 1 (a) of the Interim Rules:chanRoblesvirtualLawlibrary
SECTION 1. (a) Cases covered. - These Rules shall govern the
procedure to be observed in civil cases involving the
following:chanRoblesvirtualLawlibrary

(1)Devices or schemes employed by, or any act of, the board of


directors, business associates, officers or partners,
amounting to fraud or misrepresentation which may be
detrimental to the interest of the public and/or of the
stockholders, partners, or members of any corporation,
partnership, or association;
(2) Controversies arising out of intra-corporate, partnership, or
association relations, between and among stockholders, members,
or associates; and between, any or all of them and the corporation,
partnership, or association of which they are stockholders,
members, or associates, respectively;
(3) Controversies in the election or appointment of directors, trustees,
officers, or managers of corporations, partnerships, or
associations;
(4) Derivative suits; and
(5) Inspection of corporate books. (Emphasis supplied)

Stockholder/s' suits based on fraudulent or wrongful acts of directors,


associates, or officers may also be individual suits or class suits.

Individual suits are filed when the cause of action belongs to the
individual stockholder personally, and not to the stockholders as a
group or to the corporation, e.g., denial of right to inspection and
denial of dividends to a stockholder.76 If the cause of action belongs to
a group of stockholders, such as when the rights violated belong to
preferred stockholders, a class or representative suit may be filed to
protect the stockholders in the group.77cralawlawlibrary

In this case, respondent Balmores filed an individual suit. His intent


was very clear from his manner of describing the nature of his
action:chanRoblesvirtualLawlibrary

1.1 This is an action under Section 1 (a) (1), Rule 1 of the Interim
Rules of Procedure for Intra-corporate Controversies, involving devices
or schemes employed by, or acts of, the defendants as board of
directors, business associates and officers of Pasig Printing Corporation
(PPC), amounting to fraud or misrepresentation, which are
detrimental to the interest of the plaintiff as stockholder of
PPC.78 (Emphasis supplied)
His intent was also explicit from his
prayer:chanRoblesvirtualLawlibrary

WHEREFORE, plaintiff respectfully prays that the Honorable Court -

2. After notice and due proceedings -


Declare that the acts of defendant Directors in allowing defendant
VILLAMOR to retain custody of the MC Home checks and encash them
upon maturity, as well as their refusal or failure to take any action
against defendant VILLAMOR to make him account and deliver the MC
Home checks and/or their proceeds to Pasig Printing Corporation are
devices, schemes or acts amounting to fraud that are
detrimental to plaintiff's interest as a stockholder of
PPC;79 (Emphasis supplied)

Respondent Balmores did not bring the action for the benefit of the
corporation. Instead, he was alleging that the acts of PPC's directors,
specifically the waiver of rights in favor of Villamor's law firm and their
failure to take back the MC Home Depot checks from Villamor, were
detrimental to his individual interest as a stockholder. In filing an
action, therefore, his intention was to vindicate his individual
interest and not PPC's or a group of stockholders'.

The essence of a derivative suit is that it must be filed on behalf of the


corporation. This is because the cause of action belongs, primarily, to
the corporation. The stockholder who sues on behalf of a corporation is
merely a nominal party.

Respondent Balmores' intent to file an individual suit removes it from


the coverage of derivative suits.

III

Respondent Balmores has no


cause of action that would entitle
him to the reliefs sought

Corporations have a personality that is separate and distinct from their


stockholders and directors. A wrong to the corporation does not
necessarily create an individual cause of action. "A cause of action is
the act or omission by which a party violates the right of another."80 A
cause of action must pertain to complainant if he or she is to be
entitled to the reliefs sought.

Thus, in Cua v. Tan,81 this court


emphasized:chanRoblesvirtualLawlibrary

. . . where the acts complained of constitute a wrong to the


corporation itself, the cause of action belongs to the corporation and
not to the individual stockholder or member. Although in most every
case of wrong to the corporation, each stockholder is necessarily
affected because the value of his interest therein would be impaired,
this fact of itself is not sufficient to give him an individual cause of
action since the corporation is a person distinct and separate from
him, and can and should itself sue the wrongdoer. Otherwise, not only
would the theory of separate entity be violated, but there would be
multiplicity of suits as well as a violation of the priority rights of
creditors. Furthermore, there is the difficulty of determining the
amount of damages that should be paid to each individual
stockholder.82chanrobleslaw

In this case, respondent Balmores did not allege any cause of action
that is personal to him. His allegations are limited to the facts that
PPC's directors waived their rights to rental income in favor of
Villamor's law firm without consideration and that they failed to take
action when Villamor refused to turn over the amounts to PPC. These
are wrongs that pertain to PPC. Therefore, the cause of action belongs
to PPC — not to respondent Balmores or any stockholders as
individuals.

For this reason, respondent Balmores is not entitled to the reliefs


sought in the complaint. Only the corporation, or arguably the
stockholders as a group, is entitled to these reliefs, which should have
been sought in a proper derivative suit filed on behalf of the
corporation.

PPC will not be bound by a decision granting the application for the
appointment of a receiver or management committee. Since it was not
impleaded in the complaint, the courts did not acquire jurisdiction over
it. On this matter, it is an indispensable party, without which, no final
determination can be had.

Hence, it is not only respondent Balmores' failure to implead PPC that


is fatal to his action, as petitioners point out. It is the fact that he
alleged no cause of action that pertains personally to him that
disqualifies him from the reliefs he sought in his complaint.
On this basis alone, the Court of Appeals erred in giving due course to
respondent Balmores' petition for certiorari , reversing the trial court's
decision, and issuing a new order placing PPC under receivership and
creating an interim management committee.

IV

Appointment of a management
committee was not proper

Assuming that respondent Balmores has an individual cause of action,


the Court of Appeals still erred in placing PPC under receivership and
in creating and appointing a management committee.

A corporation may be placed under receivership, or management


committees may be created to preserve properties involved in a suit
and to protect the rights of the parties under the control and
supervision of the court.83 Management committees and receivers are
appointed when the corporation is in imminent danger of "(1)
[dissipation, loss, wastage or destruction of assets or other properties;
and (2) [p]aralysation of its business operations that may be
prejudicial to' the interest of the minority stockholders, parties-
litigants, or the general public."84cralawlawlibrary

Applicants for the appointment of a receiver or management


committee need to establish the confluence of these two requisites.
This is because appointed receivers and management committees will
immediately take over the management of the corporation and will
have the management powers specified in law.85 This may have a
negative effect on the operations and affairs of the corporation with
third parties,86 as persons who are more familiar with its operations
are necessarily dislodged from their positions in favor of appointees
who are strangers to the corporation's operations and affairs.

Thus, in Sy Chim v. Sy Sly Ho & Sons, Inc.,87 this court


said:chanRoblesvirtualLawlibrary

. . . the creation and appointment of a management committee and a


receiver is an extraordinary and drastic remedy to be exercised with
care and caution; and only when the requirements under the Interim
Rules are shown. It is a drastic course for the benefit of the minority
stockholders, the parties-litigants or the general public are allowed
only under pressing circumstances and, when there is inadequacy,
ineffectual or exhaustion of legal or other remedies . . . The power of
the court to continue a business of a corporation . . . must be
exercised with the greatest care and caution. There should be a full
consideration of all the attendant facts, including the interest of all the
parties concerned.88chanrobleslaw

PPC waived its rights, without any consideration in favor of Villamor.


The checks were already in Villamor's possession. Some of the checks
may have already been encashed. This court takes judicial notice that
the goodwill money of PI 8,000,000.00 and the rental payments of
P4,500,000.00 every month are not meager amounts only to be
waived without any consideration. It is, therefore, enough to constitute
loss or dissipation of assets under the Interim Rules.

Respondent Balmores, however, failed to show that there was an


imminent danger of paralysis of PPC's business operations. Apparently,
PPC was- earning substantial amounts from its other sub-lessees.
Respondent Balmores did not prove otherwise. He, therefore, failed to
show at least one of the requisites for appointment of a receiver or
management committee.

The Court of Appeals had no


jurisdiction to appoint the receiver
or management committee

The Court of Appeals has no power to appoint a receiver or


management committee. The Regional Trial Court has original and
exclusive jurisdiction89 to hear and decide intra-corporate
controversies,90including incidents of such controversies.91 These
incidents include applications for the appointment of receivers or
management committees.

"The receiver and members of the management committee . . . are


considered officers of the court and shall be under its control and
supervision."92 They are required to report to the court on the status
of the corporation within sixty (60) days from their appointment and
every three (3) months after.93cralawlawlibrary

When respondent Balmores filed his petition for certiorari with the
Court of Appeals, there was still a pending action in the trial court. No
less than the Court of Appeals stated that it allowed respondent
Balmores' petition under Rule 65 because the order or resolution in
question was an interlocutory one. This means that jurisdiction over
the main case was still lodged with the trial court.

The court making the appointment controls and supervises the


appointed receiver or management committee. Thus, the Court of
Appeals' appointment of a management committee would result in an
absurd scenario wherein while the main case is still pending before the
trial court, the receiver or management committee reports' to the
Court of Appeals.

WHEREFORE, the petitions are GRANTED. The decision of the Court


of Appeals dated March 2, 2006 and its resolution dated May 29, 2006
are SET ASIDE.

SO ORDERED.

19. CHING VS SUBIC BAY GOLF CLUB, INC.

NESTOR CHING and ANDREW WELLINGTON, Petitioners,


vs.
SUBIC BAY GOLF AND COUNTRY CLUB, INC., HU HO HSIU LIEN alias
SUSAN HU, HU TSUNG CHIEH alias JACK HU, HU TSUNG HUI, HU TSUNG
TZU and REYNALD R. SUAREZ, Respondents.

DECISION

LEONARDO-DE CASTRO, J.:

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court
seeking the review of the Decision1dated October 27, 2005 of the Court of
Appeals in CA-G.R. CV No. 81441, which affirmed the Order2 dated July 8, 2003
of the Regional Trial Court (RTC), Branch 72 of Olongapo City in Civil Case No.
03-001 dismissing the Complaint filed by herein petitioners.

On February 26, 2003, petitioners Nestor Ching and Andrew Wellington filed a
Complaint3 with the RTC of Olongapo City on behalf of the members of Subic
Bay Golf and Country Club, Inc. (SBGCCI) against the said country club and its
Board of Directors and officers under the provisions of Presidential Decree No.
902-A in relation to Section 5.2 of the Securities Regulation Code. The Subic Bay
Golfers and Shareholders Incorporated (SBGSI), a corporation composed of
shareholders of the defendant corporation, was also named as plaintiff. The
officers impleaded as defendants were the following: (1) itsPresident, Hu Ho Hsiu
Lien alias Susan Hu; (2) its treasurer, Hu Tsung Chieh alias Jack Hu; (3)
corporate secretary Reynald Suarez; and (4) directors Hu Tsung Hui and Hu
Tsung Tzu. The case was docketed as Civil Case No. 03-001. The complaint
alleged that the defendant corporation sold shares to plaintiffs at US$22,000.00
per share, presenting to them the Articles of Incorporation which contained the
following provision:

No profit shall inure to the exclusive benefit of any of its shareholders, hence, no
dividends shall be declared in their favor. Shareholders shall be entitled only to a
pro-rata share of the assets of the Club at the time of its dissolution or
liquidation.4

However, on June 27, 1996, an amendment to the Articles of Incorporation was


approved by the Securities and Exchange Commission (SEC), wherein the
above provision was changed as follows:

No profit shall inure to the exclusive benefit of any of its shareholders, hence, no
dividends shall be declared in their favor. In accordance with the Lease and
Development Agreement by and between Subic Bay Metropolitan Authority and
The Universal International Group of Taiwan, where the golf courseand
clubhouse component thereof was assigned to the Club, the shareholders shall
not have proprietary rights or interests over the properties of the Club.5x x x.
(Emphasis supplied.)

Petitioners claimed in the Complaint that defendant corporation did not disclose
to them the above amendment which allegedly makes the shares non-
proprietary, as it takes away the rightof the shareholders to participate in the pro-
rata distribution of the assets of the corporation after its dissolution. According to
petitioners, this is in fraud of the stockholders who only discovered the
amendment when they filed a case for injunction to restrain the corporation from
suspending their rights to use all the facilities of the club. Furthermore, petitioners
alleged that the Board of Directors and officers of the corporation did not call any
stockholders’ meeting from the time of the incorporation, in violation of Section
50 of the Corporation Code and the By-Laws of the corporation. Neither did the
defendant directors and officers furnish the stockholders with the financial
statements of the corporation nor the financial report of the operation of the
corporation in violation of Section 75 of the Corporation Code. Petitioners also
claim that on August 15, 1997, SBGCCI presented to the SEC an amendment to
the By-Laws of the corporation suspending the voting rights of the shareholders
except for the five founders’ shares. Said amendment was allegedly passed
without any stockholders’ meeting or notices to the stockholders in violation of
Section 48 of the Corporation Code.
The Complaint furthermore enumerated several instances of fraud in the
management of the corporation allegedly committed by the Board of Directors
and officers of the corporation, particularly:

a. The Board of Directors and the officers of the corporation did not
indicate in its financial report for the year 1999 the amount of
₱235,584,000.00 collected from the subscription of 409 shareholders who
paid U.S.$22,000.00 for one (1) share of stock at the then prevailing rate
of ₱26.18 to a dollar. The stockholders were not informed how these funds
were spent or its whereabouts.

b. The Corporation has been collecting green fees from the patrons of the
golf course at an average sum of ₱1,600.00 per eighteen (18) holes but
the income is not reported in their yearly report. The yearly report for the
year 1999 contains the report of the Independent Public Accountant who
stated that the company was incorporated on April 1, 1996 but has not yet
started its regular business operation. The golf course has been in
operation since 1997 and as such has collected green fees from non-
members and foreigners who played golf in the club. There is no financial
report as to the income derived from these sources.

c. There is reliable information that the Defendant Corporation has not


paid its rentals to the Subic Bay Metropolitan Authority which up to the
present is estimated to be not less than one (1) million U.S. Dollars.
Furthermore, the electric billings of the corporation [have] not been paid
which amounts also to several millions of pesos.

d. That the Supreme Court sustained the pre-termination of its contract


with the SBMA and presently the club is operating without any valid
contract with SBMA. The defendant was ordered by the Supreme Court to
yield the possession, the operation and the management of the golf
course to SBMA. Up to now the defendants [have] defied this Order.

e. That the value of the shares of stock of the corporation has drastically
declined from its issued value of U.S.$22,000.00 to only Two Hundred
Thousand Pesos, (₱200,000.00) Philippine Currency. The shareholders
[have] lost in terms ofinvestment the sum estimated to be more than two
hundred thousand pesos.This loss is due to the fact that the Club is
mismanaged and the golf course is poorly maintained. Other amenities of
the Club has (sic) not yet been constructed and are not existing despite
the lapse of morethan five (5) years from the time the stocks were offered
for sale to the public. The cause of the decrease in value of the sharesof
stocks is the fraudulent mismanagement of the club.6
Alleging that the stockholders suffered damages as a result of the fraudulent
mismanagement of the corporation, petitioners prayed in their Complaint for the
following:

WHEREFORE, it is most respectfully prayed that upon the filing of this case a
temporary restraining order be issued enjoining the defendants from acting as
Officers and Board of Directors of the Corporation. After hearing[,] a writ of
preliminary injunction be issued enjoining defendants to act as Board of Directors
and Officers of the Corporation. In the meantime a Receiver be appointed by the
Court to act as such until a duly constituted Board of Directors and Officers of the
Corporation be elected and qualified.

That defendants be ordered to pay the stockholders damages in the sum of Two
Hundred Thousand Pesos each representing the decrease in value of their
shares of stocks plus the sum of ₱100,000.00 as legal expense and attorney’s
fees, as well as appearance fee of ₱4,000.00 per hearing.7

In their Answer, respondents specifically denied the allegations of the Complaint


and essentially averred that:

(a) The subscriptions of the 409 shareholders were paid to Universal


International Group Development Corporation (UIGDC), the majority
shareholder of SBGCCI, from whom plaintiffs and other shareholders
bought their shares;8

(b) Contrary to the allegations in the Complaint, said subscriptions were


reflected inSBGCCI’s balance sheets for the fiscal years 1998 and 1999;9

(c) Plaintiffs were never presented the original Articles of Incorporation of


SBGCCI since their shares were purchased after the amendment of the
Articles of Incorporation and such amendment was publicly known to all
members prior and subsequent to the said amendment;10

(d) Shareholders’ meetingshad been held and the corporate acts


complained of were approved at shareholders’ meetings;11

(e) Financial statements of SBGCCI had always been presented to


shareholders justifiably requesting copies;12

(f) Green fees collected were reported in SBGCCI’s audited financial


statements;13

(g) Any unpaid rentals are the obligation of UIGDC with SBMA and
SBGCCI continued to operate under a valid contract with the SBMA;14 and
(h) SBGCCI’s Board of Directors was not guilty of any mismanagement
and in fact the value of members’ shares have increased.15

Respondents further claimed by way ofdefense that petitioners failed (a) to show
that it was authorized by SBGSI to file the Complaint on the said corporation’s
behalf; (b) to comply with the requisites for filing a derivative suit and an action
for receivership; and (c) to justify their prayer for injunctive relief since the
Complaint may be considered a nuisance or harassment suit under Section 1(b),
Rule1 of the Interim Rules of Procedure for Intra-Corporate
Controversies.16 Thus, they prayed for the dismissal of the Complaint.

On July 8, 2003, the RTC issued an Order dismissing the Complaint. The RTC
held that the action is a derivative suit, explaining thus:

The Court finds that this case is intended not only for the benefit of the two
petitioners. This is apparentfrom the caption of the case which reads Nestor
Ching, Andrew Wellington and the Subic Bay Golfers and Shareholders, Inc., for
and in behalf of all its members as petitioners. This is also shown in the
allegations of the petition[.] x x x.

On the bases of these allegations of the petition, the Court finds that the case is
a derivative suit. Being a derivative suit in accordance with Rule 8 of the Interim
Rules, the stockholders and members may bring an action in the name of the
corporation or association provided that he (the minority stockholder) exerted all
reasonable efforts and allege[d] the same with particularity in the complaint to
exhaust of (sic) all remedies available under the articles of incorporation, by-laws
or rules governing the corporation or partnership to obtain the reliefs he desires.
An examination of the petition does not show any allegation that the petitioners
applied for redress to the Board of Directors of respondent corporation there
being no demand, oralor written on the respondents to address their complaints.
Neither did the petitioners appl[y] for redress to the stockholders of the
respondent corporation and ma[k]e an effort to obtain action by the stockholders
as a whole. Petitioners should have asked the Board of Directors of the
respondent corporation and/or its stockholders to hold a meeting for the taking up
of the petitioners’ rights in this petition.17

The RTC held that petitioners failed to exhaust their remedies within the
respondent corporation itself. The RTC further observed that petitioners Ching
and Wellington were not authorized by their co-petitioner Subic Bay Golfers and
Shareholders Inc. to filethe Complaint, and therefore had no personality to file the
same on behalf ofthe said shareholders’ corporation. According to the RTC, the
shareholdings of petitioners comprised of two shares out of the 409 alleged
outstanding shares or 0.24% is an indication that the action is a nuisance or
harassment suit which may be dismissed either motu proprio or upon motion in
accordance with Section 1(b) of the Interim Rules of Procedure for Intra-
Corporate Controversies.18
Petitioners Ching and Wellington elevated the case to the Court of Appeals,
where it was docketed as CA-G.R. CV No. 81441. On October 27, 2005, the
Court of Appeals rendered the assailed Decision affirming that of the RTC.

Hence, petitioners resort to the present Petition for Review, wherein they argue
that the Complaint they filed with the RTC was not a derivative suit. They claim
that they filed the suit in their own right as stockholders against the officers and
Board of Directors of the corporation under Section 5(a) of Presidential
DecreeNo. 902-A, which provides:

Sec. 5. In addition tothe regulatory and adjudicative functions of the Securities


and Exchange Commission over corporations, partnerships and other forms of
associations registered with it as expressly granted under existing laws and
decrees, it shall have original and exclusive jurisdiction to hear and decide cases
involving:

(a) Devices or schemes employed by or any acts of the board of directors,


business associates, its officers or partners, amounting to fraud and
misrepresentation which may be detrimental to the interest of the public
and/or of the stockholders, partners, members of associations or
organizations registered with the Commission.

According to petitioners, the above provision (which should be read in relation to


Section 5.2 of the Securities Regulation Code which transfers jurisdiction over
such cases to the RTC) allows any stockholder to file a complaint against the
Board of Directors for employing devices or schemes amounting to fraud and
misrepresentation which is detrimental to the interest of the public and/or the
stockholders.

In the alternative, petitioners allege that if this Court rules that the Complaint is a
derivative suit, it should nevertheless reverse the RTC’s dismissal thereof on the
ground of failure to exhaust remedies within the corporation. Petitioners cite
Republic Bank v. Cuaderno19 wherein the Court allowed the derivative suit even
without the exhaustion of said remedies as it was futile to do so since the Board
ofDirectors were all members of the same family. Petitioners also point out that in
Cuadernothis Court held that the fact that therein petitioners had only one share
of stock does not justify the denial of the relief prayed for.

To refute the lower courts’ ruling that there had been non-exhaustion of intra-
corporate remedies on petitioners’ part, they claim that they filed in Court a case
for Injunction docketed as Civil Case No. 103-0-01, to restrain the corporation
from suspending their rights to use all the facilities of the club, on the ground that
the club cannot collect membership fees until they have completed the amenities
as advertised when the shares of stock were sold to them. They allegedly asked
the Club to produce the minutes of the meeting of the Board of Directors allowing
the amendments of the Articles of Incorporation and By-Laws. Petitioners
likewise assail the dismissal of the Complaint for being a harassment ornuisance
suit before the presentation of evidence. They claim that the evidence they were
supposed to present will show that the members of the Board of Directors are not
qualified managers of a golf course.

We find the petition unmeritorious.

At the outset, it should be noted thatthe Complaint in question appears to have


been filed only by the two petitioners, namely Nestor Ching and Andrew
Wellington, who each own one stock in the respondent corporation SBGCCI.
While the caption of the Complaint also names the "Subic Bay Golfers and
Shareholders Inc. for and in behalf of all its members," petitioners did not attach
any authorization from said alleged corporation or its members to file the
Complaint. Thus, the Complaint is deemed filed only by petitioners and not by
SBGSI.

On the issue of whether the Complaint is indeed a derivative suit, we are mindful
of the doctrine that the nature of an action, as well as which court or body has
jurisdiction over it, isdetermined based on the allegations contained in the
complaint of the plaintiff, irrespective of whether or not the plaintiff is entitled to
recover upon all or some of the claims asserted therein.20

We have also held that the body rather than the title of the complaint determines
the nature of an action.21

In Cua, Jr. v. Tan,22 the Court previously elaborated on the distinctions among a
derivative suit, anindividual suit, and a representative or class suit:

A derivative suit must be differentiated from individual and representative or class


suits, thus:

"Suits by stockholders or members of a corporation based on wrongful or


fraudulent acts of directors or other persons may be classified intoindividual suits,
class suits, and derivative suits. Where a stockholder or member is denied the
right of inspection, his suit would be individual because the wrong is done to him
personally and not to the other stockholders or the corporation. Where the wrong
is done to a group of stockholders, as where preferred stockholders’ rights are
violated, a class or representative suitwill be proper for the protection of all
stockholders belonging to the same group. But where the acts complained of
constitute a wrong to the corporation itself, the cause of action belongs to the
corporation and not to the individual stockholder or member. Although in most
every case of wrong to the corporation, each stockholder is necessarily affected
because the value of his interest therein would be impaired, this fact of itself is
not sufficient to give him an individual cause of action since the corporation is a
person distinct and separate from him, and can and should itself sue the
wrongdoer. Otherwise, not only would the theory of separate entity be violated,
but there would be multiplicity of suits as well as a violation of the priority rights of
creditors. Furthermore,there is the difficulty of determining the amount of
damages that should be paid to each individual stockholder.

However, in cases of mismanagement where the wrongful acts are committed by


the directors or trustees themselves, a stockholder or member may find that he
has no redress because the former are vested by law with the right to decide
whether or notthe corporation should sue, and they will never be willing to sue
themselves. The corporation would thus be helpless to seek remedy. Because of
the frequent occurrence of such a situation, the common law gradually
recognized the right of a stockholder to sue on behalf of a corporation in what
eventually became known as a "derivative suit." It has been proven to be an
effective remedy of the minority against the abuses of management. Thus, an
individual stockholder is permitted to institute a derivative suit on behalf of the
corporation wherein he holds stock in order to protect or vindicate corporate
rights, whenever officials of the corporation refuse to sue orare the ones to be
sued or hold the control of the corporation. In such actions, the suing stockholder
is regarded as the nominal party, with the corporation as the party in interest."

xxxx

Indeed, the Court notes American jurisprudence to the effect that a derivative
suit, on one hand, and individual and class suits, on the other, are mutually
exclusive, viz.:

"As the Supreme Court has explained: "A shareholder’s derivative suit seeks to
recover for the benefit of the corporation and its whole body of shareholders
when injury is caused to the corporation that may not otherwise be redressed
because of failureof the corporation to act. Thus, ‘the action is derivative, i.e., in
the corporate right, if the gravamen of the complaint is injury to the corporation,
or to the whole body of its stock and property without any severance or
distribution among individual holders, or it seeks to recover assets for the
corporation or to prevent the dissipation of its assets.’ x x x. In contrast, "a
directaction [is one] filed by the shareholder individually (or on behalf of a classof
shareholders to which he or she belongs) for injury to his or her interestas a
shareholder. x x x. [T]he two actions are mutually exclusive: i.e., the right of
action and recovery belongs to either the shareholders (direct action) *651 or the
corporation(derivative action)." x x x.

Thus, in Nelson v. Anderson(1999), x x x, the **289 minority shareholder alleged


that the other shareholder of the corporation negligently managed the business,
resulting in its total failure. x x x. The appellate court concluded that the plaintiff
could not maintain the suit as a direct action: "Because the gravamen of the
complaint is injury to the whole body of its stockholders, it was for the corporation
to institute and maintain a remedial action. x x x. A derivative action would have
been appropriate if its responsible officials had refused or failed to act." x x x. The
court wenton to note that the damages shown at trial were the loss of corporate
profits. x x x. Since "[s]hareholders own neither the property nor the earnings of
the corporation," any damages that the plaintiff alleged that resulted from such
loss of corporate profits "were incidental to the injury to the corporation."
(Citations omitted.)

The reliefs sought in the Complaint, namely that of enjoining defendants from
acting as officers and Board of Directors of the corporation, the appointment of a
receiver, and the prayer for damages in the amount of the decrease in the value
of the sharesof stock, clearly show that the Complaint was filed to curb the
alleged mismanagement of SBGCCI. The causes of action pleaded by petitioners
do not accrue to a single shareholder or a class of shareholders but to the
corporation itself.

However, as minority stockholders, petitioners do not have any statutory right to


override the business judgments of SBGCCI’s officers and Board of Directors on
the ground of the latter’s alleged lackof qualification to manage a golf course.
Contraryto the arguments of petitioners, Presidential Decree No. 902-A, which is
entitled REORGANIZATION OF THE SECURITIES AND EXCHANGE
COMMISSION WITH ADDITIONAL POWERS AND PLACING THE SAID
AGENCY UNDER THE ADMINISTRATIVE SUPERVISION OF THE OFFICE OF
THE PRESIDENT, does not grant minority stockholders a cause of action against
waste and diversion by the Board of Directors, but merely identifies the
jurisdiction of the SEC over actionsalready authorized by law or jurisprudence. It
is settled that a stockholder’s right to institute a derivative suit is not based on
any express provisionof the Corporation Code, or even the Securities Regulation
Code, but is impliedly recognized when the said laws make corporate directors or
officers liable for damages suffered by the corporation and its stockholders for
violation of their fiduciary duties.23

At this point, we should take note that while there were allegations in the
Complaint of fraud in their subscription agreements, such as the
misrepresentation of the Articles of Incorporation, petitioners do not pray for the
rescission of their subscription or seekto avail of their appraisal rights. Instead,
they ask that defendants be enjoined from managing the corporation and to pay
damages for their mismanagement. Petitioners’ only possible cause of action as
minority stockholders against the actions of the Board of Directors is the common
law right to file a derivative suit. The legal standing of minority stockholders to
bring derivative suits is not a statutory right, there being no provision in the
Corporation Code or related statutes authorizing the same, but is instead a
product of jurisprudence based on equity. However, a derivative suit cannot
prosper without first complying with the legal requisites for its institution.24

Section 1, Rule 8 of the Interim Rules of Procedure Governing IntraCorporate


Controversies imposes the following requirements for derivative suits:
(1) He was a stockholder or member at the time the acts or transactions
subject of the action occurred and at the time the action was filed;

(2) He exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available under the
articles of incorporation, by-laws, laws or rules governing the corporation
or partnership to obtain the relief he desires;

(3) No appraisal rights are available for the act or acts complained of; and

(4) The suit is not a nuisance or harassment suit.

The RTC dismissed the Complaint for failure to comply with the second and
fourth requisites above.

Upon a careful examination of the Complaint, this Court finds that the same
should not have been dismissed on the ground that it is a nuisance or
harassment suit. Although the shareholdings of petitioners are indeed only two
out of the 409 alleged outstanding shares or 0.24%, the Court has held that it is
enough that a member or a minority of stockholders file a derivative suit for and
in behalf of a corporation.25

With regard, however, to the second requisite, we find that petitioners failed to
state with particularity in the Complaint that they had exerted all reasonable
efforts to exhaust all remedies available under the articles of incorporation, by-
laws, and laws or rules governing the corporation to obtain the relief they desire.
The Complaint contained no allegation whatsoever of any effort to avail of intra-
corporate remedies. Indeed, even if petitioners thought it was futile to exhaust
intra-corporate remedies, they should have stated the same in the Complaint and
specified the reasons for such opinion. Failure to do so allows the RTC to
dismiss the Complaint, even motu proprio, in accordance with the Interim Rules.
The requirement of this allegation in the Complaint is not a useless formality
which may be disregarded at will.1âwphi1 We ruled in Yu v. Yukayguan26:

The wordings of Section 1, Rule8 of the Interim Rules of Procedure Governing


Intra-Corporate Controversies are simple and do not leave room for statutory
construction. The second paragraph thereof requires that the stockholder filing a
derivative suit should have exerted all reasonable efforts to exhaust all remedies
availableunder the articles of incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he desires; and to allege such fact
with particularityin the complaint. The obvious intent behind the rule is to make
the derivative suit the final recourse of the stockholder, after all other remedies to
obtain the relief sought had failed.

WHEREFORE, the Petition for Review is hereby DENIED. The Decision of the
Court of Appeals in CA-G.R. CV No. 81441 which affirmed the Order of the
Regional Trial Court (RTC) of Olongapo City dismissing the Complaint filed
thereon by herein petitioners is AFFIRMED.

SO ORDERED.

20. OLONGAPO CITY VS SUBIC WATER & SEWERAGE, INC.

OLONGAPO CITY, Petitioner, v. SUBIC WATER AND SEWERAGE


CO., INC., Respondent.

DECISION

BRION, J.:

We resolve in this petition for certiorari1 under Rule 65 the challenge


to the July 6, 2005 decision2 and the January 3, 2006
resolution3 (assailed CA rulings) of the Court of Appeals (CA) in CA-
G.R. SP No. 80947.

These assailed CA rulings annulled and set aside: a) the July 29, 2003
order4 of the Regional Trial Court of Olongapo, Br. 75 (RTC Olongapo),
which directed the issuance of a writ of execution in Civil Case No.
582-0-90, against respondent Subic Water and Sewerage Co., Inc.
(Subic Water); b) the July 31, 2003 writ of execution5 subsequently
issued by the same court; and c) the October 7, 2003 order6 of RTC
Olongapo, denying Subic Water’s special appearance with motion to
reconsider order dated July 29, 2003 and to quash writ of execution
dated July 31, 2003.7cralawred

Factual Antecedents

On May 25, 1973, Presidential Decree No. 1988 (PD 198) took effect.
This law authorized the creation of local water districts which may
acquire, install, maintain and operate water supply and distribution
systems for domestic, industrial, municipal and agricultural
uses.9cralawred

Pursuant to PD 198, petitioner Olongapo City (petitioner) passed


Resolution No. 161, which transferred all its existing water facilities
and assets under the Olongapo City Public Utilities Department
Waterworks Division, to the jurisdiction and ownership of the Olongapo
City Water District (OCWD).10cralawred
PD 198, as amended,11 allows local water districts (LWDs) which have
acquired an existing water system of a local government unit (LGU) to
enter into a contract to pay the concerned LGU. In lieu of the LGU’s
share in the acquired water utility plant, it shall be paid by the LWD an
amount not exceeding three percent (3%) of the LWD’s gross receipts
from water sales in any year.12cralawred

On October 24, 1990, petitioner filed a complaint for sum of money


and damages against OCWD. Among others, petitioner alleged that
OCWD failed to pay its electricity bills to petitioner and remit its
payment under the contract to pay, pursuant to OCWD’s acquisition of
petitioner’s water system. In its complaint, petitioner prayed for the
following reliefs:chanRoblesvirtualLawlibrary

“WHEREOF, it is respectfully prayed of this Honorable Court that after


due hearing and notice, judgment be rendered in favor of plaintiff
ordering the defendant to:cralawlawlibrary

(a) pay the amount of P26,798,223.70 plus legal interests from the
filing of the Complaint to actual full payment;
(b) pay the amount of its in lieu share representing three percent of
the defendant’s gross receipts from water sales starting 1981 up to
present;
(c) pay the amount of P1,000,000 as moral damages; and
(d) pay the cost of suit and other litigation expenses.”13

In its answer,14 OCWD posed a counterclaim against petitioner for


unpaid water bills amounting to P3,080,357.00.15cralawred

In the interim, OCWD entered into a Joint Venture Agreement16 (JVA)


with Subic Bay Metropolitan Authority (SBMA), Biwater International
Limited (Biwater), and D.M. Consunji, Inc. (DMCI) on November 24,
1996. Pursuant to this agreement, Subic Water – a new corporate
entity – was incorporated, with the following equity participation from
its shareholders:chanRoblesvirtualLawlibrary

SBMA 19.99% or 20%


OCWD 9.99% or 10%
Biwater 29.99% or 30%
DMCI 39.99% or 40%17

On November 24, 1996, Subic Water was granted the franchise to


operate and to carry on the business of providing water and sewerage
services in the Subic Bay Free Port Zone, as well as in Olongapo
City.18 Hence, Subic Water took over OCWD’s water operations in
Olongapo City.19cralawred

To finally settle their money claims against each other, petitioner and
OCWD entered into a compromise agreement20 on June 4, 1997. In
this agreement, petitioner and OCWD offset their respective claims
and counterclaims. OCWD also undertook to pay to petitioner its net
obligation amounting to P135,909,467.09, to be amortized for a period
of not exceeding twenty-five (25) years at twenty-four percent (24%)
per annum.21cralawred

The compromise agreement also contained a provision regarding the


parties’ request that Subic Water, Philippines, which took over the
operations of the defendant Olongapo City Water District be made
the co-maker for OCWD’s obligations. Mr. Noli Aldip, then chairman
of Subic Water, acted as its representative and signed the agreement
on behalf of Subic Water.

Subsequently, the parties submitted the compromise agreement to


RTC Olongapo for approval. In its decision dated June 13, 1997,22 the
trial court approved the compromise agreement and adopted it as its
judgment in Civil Case No. 580-0-90.

Pursuant to the compromise agreement and in payment of OCWD’s


obligations to petitioner, petitioner and OCWD executed a Deed of
Assignment on November 24, 1997.23 OCWD assigned all of its rights
in the JVA in favor of the petitioner, including but not limited to the
assignment of its shares, lease payments, regulatory assistance fees
and other receivables arising out of or related to the Joint Venture
Agreement and the Lease Agreement.24 On December 15, 1998,
OCWD was judicially dissolved.25cralawred

On May 7, 1999, to enforce the compromise agreement, the petitioner


filed a motion for the issuance of a writ of execution26 with the trial
court. In its July 23, 1999 order,27 the trial court granted the motion,
but did not issue the corresponding writ of execution.

Almost four years later, on May 30, 2003, the petitioner, through its
new counsel, filed a notice of appearance with urgent
motion/manifestation28 and prayed again for the issuance of a writ of
execution against OCWD. A certain Atty. Segundo Mangohig, claiming
to be OCWD’s former counsel, filed a manifestation alleging that
OCWD had already been dissolved and that Subic Water is now the
former OCWD.29cralawred
Because of this assertion, Subic Water also filed a manifestation
informing the trial court that as borne out by the articles of
incorporation and general information sheet of Subic Water x x x
defendant OCWD is not Subic Water.30 The manifestation also
indicated that OCWD was only a ten percent (10%) shareholder of
Subic Water; and that its 10% share was already in the process of
being transferred to petitioner pursuant to the Deed of Assignment
dated November 24, 1997.31cralawred

The trial court granted the motion for execution and directed its
issuance against OCWD and/or Subic Water. Because of this
unfavorable order, Subic Water filed a special appearance with motion
to: (1) reconsider order dated July 29, 2003; and (2) quash writ of
execution dated July 31, 2003.32cralawred

The trial court denied Subic Water’s special appearance, motion for
reconsideration, and its motion to quash. Subic Water then filed a
petition for certiorari33 with the CA, imputing grave abuse of discretion
amounting to lack or excess of jurisdiction to RTC Olongapo for issuing
its July 29, 2003 and October 7, 2003 orders as well as the writ of
execution dated July 31, 2003.

The CA’s Ruling

In its decision dated July 6, 2005,34 the CA granted Subic Water’s


petition for certiorari and reversed the trial court’s rulings.

The CA found that the writ of execution dated July 31, 200335 did not
comply with Section 6, Rule 39 of the Rules of Court, to
wit:chanRoblesvirtualLawlibrary

Section 6. Execution by motion or by independent action. — A final


and executory judgment or order may be executed on motion within
five (5) years from the date of its entry. After the lapse of such
time, and before it is barred by the statute of limitations, a
judgment may be enforced by action. The revived judgment may
also be enforced by motion within five (5) years from the date of its
entry and thereafter by action before it is barred by the statute of
limitations. (6a) [emphasis ours]

A judgment on a compromise agreement is immediately executory and


is considered to have been entered on the date it was approved by the
trial court.36 Since the compromise agreement was approved and
adopted by the trial court on June 13, 1997, this should be the
reckoning date for the counting of the period for the filing of a valid
motion for issuance of a writ of execution. Petitioner thus had until
June 13, 2002, to file its motion.

The CA further remarked that while it was true that a motion for
execution was filed by petitioner on May 7, 1999, and the same was
granted by the trial court in its July 23, 1999 order,37 no writ of
execution was actually issued.

As the CA looked at the case, petitioner, instead of following up with


the trial court the issuance of the writ of execution, did not do
anything to secure its prompt issuance. It waited another four years to
file a second motion for execution on May 30, 2003.38 By this time,
the allowed period for the filing of a motion for the issuance of the writ
had already lapsed. Hence, the trial court’s July 29, 2003 order
granting the issuance of the writ was null and void for having been
issued by a court without jurisdiction.

The CA denied petitioner’s subsequent motion for


reconsideration. Petitioner is now before us on a petition
for certiorari under Rule 65.

The Petition

The petitioner acknowledged the rule that the execution of a judgment


could no longer be made by mere motion after the prescribed five-year
period had already lapsed. However, it argued that the delay for the
issuance of the writ of execution was caused by OCWD and Subic
Water. The petitioner submitted that this Court had allowed execution
by mere motion even after the lapse of the five-year period, when the
delay was caused or occasioned by the actions of the judgment
debtor.39cralawred

Also, the petitioner asserted that although Subic Water was not a
party in the case, it could still be subjected to a writ of execution,
since it was identified as OCWD’s co-maker and successor-in-interest
in the compromise agreement.40cralawred

Lastly, the petitioner contended that the compromise agreement was


signed by Mr. Noli R. Aldip, then Subic Water’s chairman, signifying
Subic Water’s consent to the agreement.

The Court’s Ruling


We DISMISS the petition for being the wrong remedy and, in any
case, for lack of merit; what we have before us is a final judgment that
we can no longer touch unless there is grave abuse of discretion.

A. Procedural Law Aspect

Certiorari is not a substitute for a lost appeal.

At the outset, we emphasize that the present petition, brought under


Rule 65, merits outright dismissal for having availed an improper
remedy.

The instant petition should have been brought under Rule 45 in a


petition for review on certiorari. Section 1 of this Rule
mandates:chanRoblesvirtualLawlibrary

Section 1. Filing of petition with Supreme Court. — A party desiring


to appeal by certiorari from a judgment or final order or
resolution of the Court of Appeals, the Sandiganbayan, the
Regional Trial Court or other courts whenever authorized by law, may
file with the Supreme Court a verified petition for review on certiorari.
The petition shall raise only questions of law which must be distinctly
set forth. (1a, 2a) [emphasis supplied]

Supplementing Rule 45 are Sections 341 and 442 of Rule 56 which


govern the applicable procedure in the Supreme Court.

Appeals from judgments or final orders or resolutions of the CA should


be made through a verified petition for review on certiorari under Rule
45.43 In this case, petitioner questioned the July 6, 2005
decision44 and the January 3, 2006 resolution45 of the CA which
declared as null and void the writ of execution issued by the trial court.
Since the CA’s pronouncement completely disposed of the case
and the issues raised by the parties, it was the proper subject of a
Rule 45 petition. It was already a final order that resolved the subject
matter in its entirety, leaving nothing else to be done.

A petition for certiorari under Rule 65 is appropriate only if there is no


appeal, or any plain, speedy, and adequate remedy in the ordinary
course of law available to the aggrieved party. As we have distinctly
explained in the case of Pasiona v. Court of Appeals:46cralawred
The aggrieved party is proscribed from assailing a decision or final
order of the CA via Rule 65 because such recourse is proper only if the
party has no plain, speedy and adequate remedy in the course of law.
In this case, petitioner had an adequate remedy, namely, a
petition for review on certiorari under Rule 45 of the Rules of
Court. A petition for review on certiorari, not a special civil
action for certiorari was, therefore, the correct remedy.

xxxx

Settled is the rule that where appeal is available to the


aggrieved party, the special civil action for certiorari will not be
entertained – remedies of appeal and certiorari are mutually
exclusive, not alternative or successive. Hence, certiorari is not
and cannot be a substitute for a lost appeal, especially if one's
own negligence or error in one's choice of remedy occasioned such loss
or lapse.47 [emphasis ours]

The petitioner received the CA’s assailed resolution denying its motion
for reconsideration on January 9, 2006. Following Rule 45, Section 2
of the Rules of Court,48 the petitioner had until January 24, 2006 to file
its petition for review. It could have even filed a motion for a 30-day
extension of time, a motion that this Court grants for justifiable
reasons.49 But all of these, it failed to do. Thus, the assailed CA
rulings became final and executory and could no longer be the subject
of an appeal.

Apparently, to revive its lost appeal, petitioner filed the present


petition for certiorari that – under Rule 65 – may be filed within sixty
days from the promulgation of the assailed CA resolution (on January
3, 2006). A Rule 65 petition for certiorari, however, cannot be a
substitute for a lost appeal. With the lapse of the prescribed period for
appeal without an action from the petitioner, the present petition
for certiorari – a mere replacement –must be dismissed.

But even without the procedural infirmity, the present recourse to us


has no basis on the merits and must be denied.

Execution by motion is only


available within the five-year
period from entry of judgment.

Under Rule 39, Section 6,50 a judgment creditor has two modes in
enforcing the court’s judgment. Execution may be either through
motion or an independent action.

These two modes of execution are available depending on the timing


when the judgment creditor invoked its right to enforce the court’s
judgment. Execution by motion is only available if the
enforcement of the judgment was sought within five (5) years
from the date of its entry. On the other hand, execution by
independent action is mandatory if the five-year prescriptive period for
execution by motion had already elapsed.51 However, for execution by
independent action to prosper – the Rules impose another limitation –
the action must be filed before it is barred by the statute of limitations
which, under the Civil Code, is ten (10) years from the finality of the
judgment.52cralawred

On May 7, 1999, within the five-year period from the trial court’s
judgment, petitioner filed its motion for the issuance of a writ of
execution. However, despite the grant of the motion, the court did not
issue an actual writ. It was only on May 30, 2003 that petitioner filed a
second motion to ask again for the writ’s issuance. By this time, the
allowed five-year period for execution by motion had already lapsed.

As will be discussed below, since the second motion was filed beyond
the five-year prescriptive period set by the Rules, then the writ of
execution issued by the trial court on July 31, 2003 was null and void
for having been issued by a court already ousted of its jurisdiction.

In Arambulo v. Court of First Instance of Laguna,53 we explained the


rule that the jurisdiction of a court to issue a writ of execution by
motion is only effective within the five-year period from the entry of
judgment. Outside this five-year period, any writ of execution issued
pursuant to a motion filed by the judgment creditor, is null and void. If
no writ of execution was issued by the court within the five-year
period, even a motion filed within such prescriptive period would not
suffice. A writ issued by the court after the lapse of the five-year
period is already null and void.54 The judgment creditor’s only
recourse then is to file an independent action, which must also be
within the prescriptive period set by law for the enforcement of
judgments.

This Court subsequently reiterated its Arambulo ruling in Ramos v.


Garciano,55 where we said:chanRoblesvirtualLawlibrary

There seems to be no serious dispute that the 4th alias writ of


execution was issued eight (8) days after the lapse of the five (5) year
period from the date of the entry of judgment in Civil Case No.
367. As a general rule, after the lapse of such period a
judgment may be enforced only by ordinary action, not by mere
motion (Section 6, Rule 39, Rules of Court).

xxxx

The limitation that a judgment be enforced by execution within


five years, otherwise it loses efficacy, goes to the very
jurisdiction of the Court. A writ issued after such period is void, and
the failure to object thereto does not validate it, for the reason that
jurisdiction of courts is solely conferred by law and not by express or
implied will of the parties.56 [emphasis supplied]

To clearly restate these rulings, for execution by motion to be valid,


the judgment creditor must ensure the accomplishment of two acts
within the five-year prescriptive period. These are: a) the filing of
the motion for the issuance of the writ of execution; and b) the
court’s actual issuance of the writ. In the instances when the
Court allowed execution by motion even after the lapse of five years,
we only recognized one exception, i.e., when the delay is caused or
occasioned by actions of the judgment debtor and/or is incurred for his
benefit or advantage.57 However, petitioner failed to show or cite
circumstances showing how OCWD or Subic Water caused it to
belatedly file its second motion for execution.

Strictly speaking, the issuance of the writ should have been a


ministerial duty on the part of the trial court after it gave its July 23,
1999 order, approving the first motion and directing the issuance of
such writ. The petitioner could have easily compelled the court to
actually issue the writ by filing a manifestation on the existence of the
July 23, 1999 order. However, petitioner idly sat and waited for the
five-year period to lapse before it filed its second motion. Having slept
on its rights, petitioner had no one to blame but itself.

A writ of execution cannot affect


a non- party to a case.

Strangers to a case are not bound by the judgment rendered in


it. Thus, a writ of execution can only be issued against a party and
not against one who did not have his day in court.58cralawred

Subic Water never participated in the proceedings in Civil Case No.


580-0-90, where OCWD and petitioner were the contending parties.
Subic Water only came into the picture when one Atty. Segundo
Mangohig, claiming to be OCWD’s former counsel, manifested before
the trial court that OCWD had already been judicially dissolved and
that Subic Water assumed OCWD’s personality.

In the present case, the compromise agreement, although signed by


Mr. Noli Aldip, did not carry the express conformity of Subic
Water. Mr. Aldip was never given any authorization to conform to or
bind Subic Water in the compromise agreement. Also, the agreement
merely labeled Subic Water as a co-maker. It did not contain any
provision where Subic Water acknowledged its solidary liability with
OCWD.

Lastly, Subic Water did not voluntarily submit to the court’s


jurisdiction. In fact, the motion it filed was only made as a special
appearance, precisely to avoid the court’s acquisition of jurisdiction
over its person. Without any participation in the proceedings below, it
cannot be made liable on the writ of execution issued by the court a
quo.

B. Substantive Law Aspect

Solidary liability must be expressly stated.

The petitioner also argued that Subic Water could be held solidarily
liable under the writ of execution since it was identified as OCWD’s co-
maker in the compromise agreement. The petitioner’s basis for this is
the following provision of the agreement:chanRoblesvirtualLawlibrary

4. Both parties also request that Subic Water, Philippines which took
over the operations of the defendant Olongapo City Water District be
made as co-maker for the obligation herein above-cited.59 [emphasis
supplied]

As the rule stands, solidary liability is not presumed. This stems from
Art. 1207 of the Civil Code, which
provides:chanRoblesvirtualLawlibrary

Art. 1207. x x x There is a solidary liability only when the


obligation expressly so states, or when the law or the nature of the
obligation requires solidarity. [emphasis supplied]

In Palmares v. Court of Appeals,60 the Court did not hesitate to rule


that although a party to a promissory note was only labeled as a co-
maker, his liability was that of a surety, since the
instrument expressly provided for his joint and several
liability with the principal.

In the present case, the joint and several liability of Subic Water and
OCWD was nowhere clear in the agreement. The agreement simply
and plainly stated that petitioner and OCWD were only
requestingSubic Water to be a co-maker, in view of its assumption of
OCWD’s water operations. No evidence was presented to show that
such request was ever approved by Subic Water’s board of directors.

Under these circumstances, petitioner cannot proceed after Subic


Water for OCWD’s unpaid obligations. The law explicitly states
that solidary liability is not presumed and must be expressly
provided for. Not being a surety, Subic Water is not an insurer of
OCWD’s obligations under the compromise agreement. At best, Subic
Water was merely a guarantor against whom petitioner can claim,
provided it was first shown that: a) petitioner had already proceeded
after the properties of OCWD, the principal debtor; b) and despite this,
the obligation under the compromise agreement, remains to be not
fully satisfied.61 But as will be discussed next, Subic Water could not
also be recognized as a guarantor of OCWD’s obligations.

An officer’s actions can only bind


the corporation if he had been
authorized to do so.

An examination of the compromise agreement reveals that it was not


accompanied by any document showing a grant of authority to Mr. Noli
Aldip to sign on behalf of Subic Water.

Subic Water is a corporation. A corporation, as a juridical entity,


primarily acts through its board of directors, which exercises its
corporate powers. In this capacity, the general rule is that, in the
absence of authority from the board of directors, no person, not even
its officers, can validly bind a corporation.62Section 23 of the
Corporation Code provides:chanRoblesvirtualLawlibrary

Section 23. The board of directors or trustees. – Unless otherwise


provided in this Code, the corporate powers of all corporations
formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and
held by the board of directors or trustees to be elected from
among the holders of stocks, or where there is no stock, from among
the members of the corporation, who shall hold office for one (1) year
until their successors are elected and qualified. (28a) [emphasis
supplied]chanrobleslaw

In People’s Aircargo and Warehousing Co., Inc. v. Court of


Appeals,63 we held that under Section 23 of the Corporation
Code, the power and responsibility to decide whether a
corporation can enter into a binding contract is lodged with the
board of directors, subject to the articles of incorporation, by-laws,
or relevant provisions of law. As we have clearly explained in another
case:chanRoblesvirtualLawlibrary

A corporate officer or agent may represent and bind the


corporation in transactions with third persons to the extent
that [the] authority to do so has been conferred upon him, and
this includes powers which have been intentionally conferred, and also
such powers as, in the usual course of the particular business, are
incidental to, or may be implied from, the powers intentionally
conferred, powers added by custom and usage, as usually pertaining
to the particular officer or agent, and such apparent powers as the
corporation has caused persons dealing with the officer or agent to
believe that it has conferred.64 [emphasis ours]

Mr. Noli Aldip signed the compromise agreement purely in his own
capacity. Moreover, the compromise agreement did not expressly
provide that Subic Water consented to become OCWD’s co-maker. As
worded, the compromise agreement merely provided that both parties
[also] request Subic Water, Philippines, which took over the
operations of Olongapo City Water District be made as co-maker [for
the obligations above-cited]. This request was never forwarded to
Subic Water’s board of directors. Even if due notification had been
made (which does not appear in the records), Subic Water’s board
does not appear to have given any approval to such request. No
document such as the minutes of Subic Water’s board of directors’
meeting or a secretary’s certificate, purporting to be an authorization
to Mr. Aldip to conform to the compromise agreement, was ever
presented. In effect, Mr. Aldip’s act of signing the compromise
agreement was outside of his authority to undertake.

Since Mr. Aldip was never authorized and there was no showing that
Subic Water’s articles of incorporation or by-laws granted him such
authority, then the compromise agreement he signed cannot bind
Subic Water. Subic Water cannot likewise be made a surety or even a
guarantor for OCWD’s obligations. OCWD’s debts under the
compromise agreement are its own corporate obligations to petitioner.

OCWD and Subic Water are two


separate and different entities.

Petitioner practically suggests that since Subic Water took over


OCWD’s water operations in Olongapo City, it also acquired OCWD’s
juridical personality, making the two entities one and the same.

This is an interpretation that we cannot make or adopt under the facts


and the evidence of this case. Subic Water clearly demonstrated that
it was a separate corporate entity from OCWD.

OCWD is just a ten percent (10%) shareholder of Subic Water. As a


mere shareholder, OCWD’s juridical personality cannot be equated nor
confused with that of Subic Water. It is basic in corporation law that a
corporation is a juridical entity vested with a legal personality separate
and distinct from those acting for and in its behalf and, in general,
from the people comprising it.65cralawred

Under this corporate reality, Subic Water cannot be held liable for
OCWD’s corporate obligations in the same manner that OCWD cannot
be held liable for the obligations incurred by Subic Water as a separate
entity. The corporate veil should not and cannot be pierced unless it is
clearly established that the separate and distinct personality of the
corporation was used to justify a wrong, protect fraud, or perpetrate a
deception.66cralawred

In Concept Builders, Inc. v. NLRC,67 the Court enumerated the possible


probative factors of identity which could justify the application of the
doctrine of piercing the corporate veil. These
are:chanRoblesvirtualLawlibrary

(1) Stock ownership by one or common ownership of both


corporations;chanroblesvirtuallawlibrary

(2) Identity of directors and officers;chanroblesvirtuallawlibrary

(3) The manner of keeping corporate books and records;


andChanRoblesVirtualawlibrary

(4) Methods of conducting the business.68chanrobleslaw

The burden of proving the presence of any of these probative factors


lies with the one alleging it. Unfortunately, petitioner simply claimed
that Subic Water took over OCWD’s water operations in Olongapo
City. Apart from this allegation, petitioner failed to demonstrate any
link to justify the construction that Subic Water and OCWD are one
and the same.

Under this evidentiary situation, our duty is to respect the separate


and distinct personalities of these two juridical entities.

We thus deny the present petition. The writ of execution issued by


RTC Olongapo, Br. 75, in favor of Olongapo City, is hereby confirmed
to be null and void. Accordingly, respondent Subic Water cannot be
made liable under this writ.

WHEREFORE, premises considered, we hereby DISMISS the


petition. The Court of Appeals’ decision dated July 6, 2005 and
resolution dated January 3, 2006, annulling and setting aside the
orders of the Regional Trial Court of Olongapo, Branch 75 dated
July 29, 2003 and October 7, 2003, and the writ of execution dated
July 31, 2003, are hereby AFFIRMED. Costs against the City of
Olongapo.

SO ORDERED.

21. LANUZA, JR. VS BF CORP.

GERARDO LANUZA, JR. AND ANTONIO O. OLBES, Petitioners,


vs.
BF CORPORATION, SHANGRI-LA PROPERTIES, INC., ALFREDO C.
RAMOS, RUFO B. COLAYCO, MAXIMO G. LICAUCO III, AND BENJAMIN C.
RAMOS, Respondents.

DECISION

LEONEN, J.:

Corporate representatives may be compelled to submit to arbitration proceedings


pursuant to a contract entered into by the corporation they represent if there are
allegations of bad faith or malice in their acts representing the corporation.

This is a Rule 45 petition, assailing the Court of Appeals' May 11, 2006 decision
and October 5, 2006 resolution. The Court of Appeals affirmed the trial court's
decision holding that petitioners, as director, should submit themselves as parties
tothe arbitration proceedings between BF Corporation and Shangri-La
Properties, Inc. (Shangri-La).

In 1993, BF Corporation filed a collection complaint with the Regional Trial Court
against Shangri-Laand the members of its board of directors: Alfredo C. Ramos,
Rufo B.Colayco, Antonio O. Olbes, Gerardo Lanuza, Jr., Maximo G. Licauco III,
and Benjamin C. Ramos.1

BF Corporation alleged in its complaint that on December 11, 1989 and May 30,
1991, it entered into agreements with Shangri-La wherein it undertook to
construct for Shangri-La a mall and a multilevel parking structure along EDSA.2

Shangri-La had been consistent in paying BF Corporation in accordance with its


progress billing statements.3However, by October 1991, Shangri-La started
defaulting in payment.4

BF Corporation alleged that Shangri-La induced BF Corporation to continue with


the construction of the buildings using its own funds and credit despite Shangri-
La’s default.5 According to BF Corporation, ShangriLa misrepresented that it had
funds to pay for its obligations with BF Corporation, and the delay in payment
was simply a matter of delayed processing of BF Corporation’s progress billing
statements.6

BF Corporation eventually completed the construction of the buildings.7 Shangri-


La allegedly took possession of the buildings while still owing BF Corporation an
outstanding balance.8

BF Corporation alleged that despite repeated demands, Shangri-La refused to


pay the balance owed to it.9 It also alleged that the Shangri-La’s directors were in
bad faith in directing Shangri-La’s affairs. Therefore, they should be held jointly
and severally liable with Shangri-La for its obligations as well as for the damages
that BF Corporation incurred as a result of Shangri-La’s default.10

On August 3, 1993, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco, Maximo G.


Licauco III, and Benjamin C. Ramos filed a motion to suspend the proceedings in
view of BF Corporation’s failure to submit its dispute to arbitration, in accordance
with the arbitration clauseprovided in its contract, quoted in the motion as
follows:11

35. Arbitration

(1) Provided always that in case any dispute or difference shall arise between the
Owner or the Project Manager on his behalf and the Contractor, either during the
progress or after the completion or abandonment of the Works as to the
construction of this Contract or as to any matter or thing of whatsoever nature
arising there under or inconnection therewith (including any matter or thing left by
this Contract to the discretion of the Project Manager or the withholding by the
Project Manager of any certificate to which the Contractor may claim to be
entitled or the measurement and valuation mentioned in clause 30(5)(a) of these
Conditions or the rights and liabilities of the parties under clauses 25, 26, 32 or
33 of these Conditions), the owner and the Contractor hereby agree to exert all
efforts to settle their differences or dispute amicably. Failing these efforts then
such dispute or difference shall be referred to arbitration in accordance with the
rules and procedures of the Philippine Arbitration Law.

xxx xxx xxx

(6) The award of such Arbitrators shall be final and binding on the parties. The
decision of the Arbitrators shall be a condition precedent to any right of legal
action that either party may have against the other. . . .12 (Underscoring in the
original)

On August 19, 1993, BF Corporation opposed the motion to suspend


proceedings.13

In the November 18, 1993 order, the Regional Trial Court denied the motion to
suspend proceedings.14

On December 8, 1993, petitioners filed an answer to BF Corporation’s complaint,


with compulsory counter claim against BF Corporation and crossclaim against
Shangri-La.15 They alleged that they had resigned as members of Shangri-La’s
board of directors as of July 15, 1991.16

After the Regional Trial Court denied on February 11, 1994 the motion for
reconsideration of its November 18, 1993 order, Shangri-La, Alfredo C. Ramos,
Rufo B. Colayco,Maximo G. Licauco III, and Benjamin Ramos filed a petition for
certiorari with the Court of Appeals.17

On April 28, 1995, the Court of Appeals granted the petition for certiorari and
ordered the submission of the dispute to arbitration.18

Aggrieved by the Court of Appeals’ decision, BF Corporation filed a petition for


review on certiorari with this court.19On March 27, 1998, this court affirmed the
Court of Appeals’ decision, directing that the dispute be submitted for
arbitration.20

Another issue arose after BF Corporation had initiated arbitration proceedings.


BF Corporation and Shangri-La failed to agree as to the law that should govern
the arbitration proceedings.21 On October 27, 1998, the trial court issued the
order directing the parties to conduct the proceedings in accordance with
Republic Act No. 876.22
Shangri-La filed an omnibus motion and BF Corporation an urgent motion for
clarification, both seeking to clarify the term, "parties," and whether Shangri-La’s
directors should be included in the arbitration proceedings and served with
separate demands for arbitration.23

Petitioners filed their comment on Shangri-La’s and BF Corporation’s motions,


praying that they be excluded from the arbitration proceedings for being non-
parties to Shangri-La’s and BF Corporation’s agreement.24

On July 28, 2003, the trial court issued the order directing service of demands for
arbitration upon all defendants in BF Corporation’s complaint.25 According to the
trial court, Shangri-La’s directors were interested parties who "must also be
served with a demand for arbitration to give them the opportunity to ventilate their
side of the controversy, safeguard their interest and fend off their respective
positions."26 Petitioners’ motion for reconsideration ofthis order was denied by
the trial court on January 19, 2005.27

Petitioners filed a petition for certiorari with the Court of Appeals, alleging grave
abuse of discretion in the issuance of orders compelling them to submit to
arbitration proceedings despite being third parties to the contract between
Shangri-La and BF Corporation.28

In its May 11, 2006 decision,29 the Court of Appeals dismissed petitioners’
petition for certiorari. The Court of Appeals ruled that ShangriLa’s directors were
necessary parties in the arbitration proceedings.30 According to the Court of
Appeals:

[They were] deemed not third-parties tothe contract as they [were] sued for their
acts in representation of the party to the contract pursuant to Art. 31 of the
Corporation Code, and that as directors of the defendant corporation, [they], in
accordance with Art. 1217 of the Civil Code, stand to be benefited or injured by
the result of the arbitration proceedings, hence, being necessary parties, they
must be joined in order to have complete adjudication of the controversy.
Consequently, if [they were] excluded as parties in the arbitration proceedings
and an arbitral award is rendered, holding [Shangri-La] and its board of directors
jointly and solidarily liable to private respondent BF Corporation, a problem will
arise, i.e., whether petitioners will be bound bysuch arbitral award, and this will
prevent complete determination of the issues and resolution of the controversy.31

The Court of Appeals further ruled that "excluding petitioners in the arbitration
proceedings . . . would be contrary to the policy against multiplicity of suits."32

The dispositive portion of the Court of Appeals’ decision reads:


WHEREFORE, the petition is DISMISSED. The assailed orders dated July 28,
2003 and January 19, 2005 of public respondent RTC, Branch 157, Pasig City, in
Civil Case No. 63400, are AFFIRMED.33

The Court of Appeals denied petitioners’ motion for reconsideration in the


October 5, 2006 resolution.34

On November 24, 2006, petitioners filed a petition for review of the May 11, 2006
Court of Appeals decision and the October 5, 2006 Court of Appeals resolution.35

The issue in this case is whether petitioners should be made parties to the
arbitration proceedings, pursuant to the arbitration clause provided in the contract
between BF Corporation and Shangri-La.

Petitioners argue that they cannot be held personally liable for corporate acts or
obligations.36 The corporation is a separate being, and nothing justifies BF
Corporation’s allegation that they are solidarily liable with Shangri-La.37Neither
did they bind themselves personally nor did they undertake to shoulder Shangri-
La’s obligations should it fail in its obligations.38 BF Corporation also failed to
establish fraud or bad faith on their part.39

Petitioners also argue that they are third parties to the contract between BF
Corporation and Shangri-La.40Provisions including arbitration stipulations should
bind only the parties.41 Based on our arbitration laws, parties who are strangers
to an agreement cannot be compelled to arbitrate.42

Petitioners point out thatour arbitration laws were enacted to promote the
autonomy of parties in resolving their disputes.43 Compelling them to submit to
arbitration is against this purpose and may be tantamount to stipulating for the
parties.44

Separate comments on the petition werefiled by BF Corporation, and Maximo G.


Licauco III, Alfredo C.Ramos and Benjamin C. Ramos.45

Maximo G. Licauco III Alfredo C. Ramos, and Benjamin C. Ramos agreed with
petitioners that Shangri-La’sdirectors, being non-parties to the contract, should
not be made personally liable for Shangri-La’s acts.46 Since the contract was
executed only by BF Corporation and Shangri-La, only they should be affected
by the contract’s stipulation.47 BF Corporation also failed to specifically allege the
unlawful acts of the directors that should make them solidarily liable with Shangri-
La for its obligations.48

Meanwhile, in its comment, BF Corporation argued that the courts’ ruling that the
parties should undergo arbitration "clearly contemplated the inclusion of the
directors of the corporation[.]"49 BF Corporation also argued that while petitioners
were not parties to the agreement, they were still impleaded under Section 31 of
the Corporation Code.50Section 31 makes directors solidarily liable for fraud,
gross negligence, and bad faith.51 Petitioners are not really third parties to the
agreement because they are being sued as Shangri-La’s representatives, under
Section 31 of the Corporation Code.52

BF Corporation further argued that because petitioners were impleaded for their
solidary liability, they are necessary parties to the arbitration proceedings.53 The
full resolution of all disputes in the arbitration proceedings should also be done in
the interest of justice.54

In the manifestation dated September 6, 2007, petitioners informed the court that
the Arbitral Tribunal had already promulgated its decision on July 31, 2007.55 The
Arbitral Tribunal denied BF Corporation’s claims against them.56Petitioners stated
that "[they] were included by the Arbitral Tribunal in the proceedings conducted . .
. notwithstanding [their] continuing objection thereto. . . ."57 They also stated that
"[their] unwilling participation in the arbitration case was done ex abundante ad
cautela, as manifested therein on several occasions."58 Petitioners informed the
court that they already manifested with the trial court that "any action taken on
[the Arbitral Tribunal’s decision] should be without prejudice to the resolution of
[this] case."59

Upon the court’s order, petitioners and Shangri-La filed their respective
memoranda. Petitioners and Maximo G. Licauco III, Alfredo C. Ramos, and
Benjamin C. Ramos reiterated their arguments that they should not be held liable
for Shangri-La’s default and made parties to the arbitration proceedings because
only BF Corporation and Shangri-La were parties to the contract.

In its memorandum, Shangri-La argued that petitioners were impleaded for their
solidary liability under Section 31 of the Corporation Code. Shangri-La added that
their exclusion from the arbitration proceedings will result in multiplicity of suits,
which "is not favored in this jurisdiction."60 It pointed out that the case had
already been mooted by the termination of the arbitration proceedings, which
petitioners actively participated in.61 Moreover, BF Corporation assailed only the
correctness of the Arbitral Tribunal’s award and not the part absolving Shangri-
La’s directors from liability.62

BF Corporation filed a counter-manifestation with motion to dismiss63 in lieu of


the required memorandum.

In its counter-manifestation, BF Corporation pointed out that since "petitioners’


counterclaims were already dismissed with finality, and the claims against them
were likewise dismissed with finality, they no longer have any interest
orpersonality in the arbitration case. Thus, there is no longer any need to resolve
the present Petition, which mainly questions the inclusion of petitioners in the
arbitration proceedings."64 The court’s decision in this case will no longer have
any effect on the issue of petitioners’ inclusion in the arbitration proceedings.65
The petition must fail.

The Arbitral Tribunal’s decision, absolving petitioners from liability, and its binding
effect on BF Corporation, have rendered this case moot and academic.

The mootness of the case, however, had not precluded us from resolving issues
so that principles may be established for the guidance of the bench, bar, and the
public. In De la Camara v. Hon. Enage,66 this court disregarded the fact that
petitioner in that case already escaped from prison and ruled on the issue of
excessive bails:

While under the circumstances a ruling on the merits of the petition for certiorari
is notwarranted, still, as set forth at the opening of this opinion, the fact that this
case is moot and academic should not preclude this Tribunal from setting forth in
language clear and unmistakable, the obligation of fidelity on the part of lower
court judges to the unequivocal command of the Constitution that excessive bail
shall not be required.67

This principle was repeated in subsequent cases when this court deemed it
proper to clarify important matters for guidance.68

Thus, we rule that petitioners may be compelled to submit to the arbitration


proceedings in accordance with Shangri-Laand BF Corporation’s agreement, in
order to determine if the distinction between Shangri-La’s personality and their
personalities should be disregarded.

This jurisdiction adopts a policy in favor of arbitration. Arbitration allows the


parties to avoid litigation and settle disputes amicably and more expeditiously by
themselves and through their choice of arbitrators.

The policy in favor of arbitration has been affirmed in our Civil Code,69 which was
approved as early as 1949. It was later institutionalized by the approval of
Republic Act No. 876,70 which expressly authorized, made valid, enforceable,
and irrevocable parties’ decision to submit their controversies, including
incidental issues, to arbitration. This court recognized this policy in Eastboard
Navigation, Ltd. v. Ysmael and Company, Inc.:71

As a corollary to the question regarding the existence of an arbitration


agreement, defendant raises the issue that, even if it be granted that it agreed to
submit its dispute with plaintiff to arbitration, said agreement is void and without
effect for it amounts to removing said dispute from the jurisdiction of the courts in
which the parties are domiciled or where the dispute occurred. It is true that there
are authorities which hold that "a clause in a contract providing that all matters in
dispute between the parties shall be referred to arbitrators and to them alone, is
contrary to public policy and cannot oust the courts of jurisdiction" (Manila
Electric Co. vs. Pasay Transportation Co., 57 Phil., 600, 603), however, there are
authorities which favor "the more intelligent view that arbitration, as an
inexpensive, speedy and amicable method of settling disputes, and as a means
of avoiding litigation, should receive every encouragement from the courts which
may be extended without contravening sound public policy or settled law" (3 Am.
Jur., p. 835). Congress has officially adopted the modern view when it
reproduced in the new Civil Code the provisions of the old Code on Arbitration.
And only recently it approved Republic Act No. 876 expressly authorizing
arbitration of future disputes.72 (Emphasis supplied)

In view of our policy to adopt arbitration as a manner of settling disputes,


arbitration clauses are liberally construed to favor arbitration. Thus, in LM Power
Engineering Corporation v. Capitol Industrial Construction Groups, Inc.,73 this
court said:

Being an inexpensive, speedy and amicable method of settling disputes,


arbitration — along with mediation, conciliation and negotiation — is encouraged
by the Supreme Court. Aside from unclogging judicial dockets, arbitration also
hastens the resolution of disputes, especially of the commercial kind. It is thus
regarded as the "wave of the future" in international civil and commercial
disputes. Brushing aside a contractual agreement calling for arbitration between
the parties would be a step backward.

Consistent with the above-mentioned policy of encouraging alternative dispute


resolution methods, courts should liberally construe arbitration clauses. Provided
such clause is susceptible of an interpretation that covers the asserted dispute,
an order to arbitrate should be granted. Any doubt should be resolved in favor of
arbitration.74(Emphasis supplied)

A more clear-cut statement of the state policy to encourage arbitration and to


favor interpretations that would render effective an arbitration clause was later
expressed in Republic Act No. 9285:75

SEC. 2. Declaration of Policy.- It is hereby declared the policy of the State to


actively promote party autonomy in the resolution of disputes or the freedom of
the party to make their own arrangements to resolve their disputes. Towards this
end, the State shall encourage and actively promote the use of Alternative
Dispute Resolution (ADR) as an important means to achieve speedy and
impartial justice and declog court dockets. As such, the State shall provide
means for the use of ADR as an efficient tool and an alternative procedure for the
resolution of appropriate cases. Likewise, the State shall enlist active private
sector participation in the settlement of disputes through ADR. This Act shall be
without prejudice to the adoption by the Supreme Court of any ADR system, such
as mediation, conciliation, arbitration, or any combination thereof as a means of
achieving speedy and efficient means of resolving cases pending before all
courts in the Philippines which shall be governed by such rules as the Supreme
Court may approve from time to time.
....

SEC. 25. Interpretation of the Act.- In interpreting the Act, the court shall have
due regard to the policy of the law in favor of arbitration.Where action is
commenced by or against multiple parties, one or more of whomare parties who
are bound by the arbitration agreement although the civil action may continue as
to those who are not bound by such arbitration agreement. (Emphasis supplied)

Thus, if there is an interpretation that would render effective an arbitration clause


for purposes ofavoiding litigation and expediting resolution of the dispute, that
interpretation shall be adopted. Petitioners’ main argument arises from the
separate personality given to juridical persons vis-à-vis their directors, officers,
stockholders, and agents. Since they did not sign the arbitration agreement in
any capacity, they cannot be forced to submit to the jurisdiction of the Arbitration
Tribunal in accordance with the arbitration agreement. Moreover, they had
already resigned as directors of Shangri-Laat the time of the alleged default.

Indeed, as petitioners point out, their personalities as directors of Shangri-La are


separate and distinct from Shangri-La.

A corporation is an artificial entity created by fiction of law.76 This means that


while it is not a person, naturally, the law gives it a distinct personality and treats
it as such. A corporation, in the legal sense, is an individual with a personality
that is distinct and separate from other persons including its stockholders,
officers, directors, representatives,77 and other juridical entities. The law vests in
corporations rights,powers, and attributes as if they were natural persons with
physical existence and capabilities to act on their own.78 For instance, they have
the power to sue and enter into transactions or contracts. Section 36 of the
Corporation Code enumerates some of a corporation’s powers, thus:

Section 36. Corporate powers and capacity.– Every corporation incorporated


under this Code has the power and capacity:

1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for the period of time stated in the
articles of incorporation and the certificate ofincorporation;

3. To adopt and use a corporate seal;

4. To amend its articles of incorporation in accordance with the provisions


of this Code;

5. To adopt by-laws, not contrary to law, morals, or public policy, and to


amend or repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and
to sell treasury stocks in accordance with the provisions of this Code; and
to admit members to the corporation if it be a non-stock corporation;

7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,


mortgage and otherwise deal with such real and personal property,
including securities and bonds of other corporations, as the transaction of
the lawful business of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and the Constitution;

8. To enter into merger or consolidation with other corporations as


provided in this Code;

9. To make reasonable donations, including those for the public welfare or


for hospital, charitable, cultural, scientific, civic, or similar purposes:
Provided, That no corporation, domestic or foreign, shall give donations in
aid of any political party or candidate or for purposes of partisan political
activity;

10. To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers and employees; and

11. To exercise such other powers asmay be essential or necessary to


carry out its purpose or purposes as stated in its articles of incorporation.
(13a)

Because a corporation’s existence is only by fiction of law, it can only exercise its
rights and powers through itsdirectors, officers, or agents, who are all natural
persons. A corporation cannot sue or enter into contracts without them.

A consequence of a corporation’s separate personality is that consent by a


corporation through its representatives is not consent of the representative,
personally. Its obligations, incurred through official acts of its representatives, are
its own. A stockholder, director, or representative does not become a party to a
contract just because a corporation executed a contract through that stockholder,
director or representative.

Hence, a corporation’s representatives are generally not bound by the terms of


the contract executed by the corporation. They are not personally liable for
obligations and liabilities incurred on or in behalf of the corporation.

Petitioners are also correct that arbitration promotes the parties’ autonomy in
resolving their disputes. This court recognized in Heirs of Augusto Salas, Jr. v.
Laperal Realty Corporation79 that an arbitration clause shall not apply to persons
who were neither parties to the contract nor assignees of previous parties, thus:
A submission to arbitration is a contract. As such, the Agreement, containing the
stipulation on arbitration, binds the parties thereto, as well as their assigns and
heirs. But only they.80 (Citations omitted)

Similarly, in Del Monte Corporation-USA v. Court of Appeals,81 this court ruled:

The provision to submit to arbitration any dispute arising therefrom and the
relationship of the parties is part of that contract and is itself a contract. As a rule,
contracts are respected as the law between the contracting parties and produce
effect as between them, their assigns and heirs. Clearly, only parties to the
Agreement . . . are bound by the Agreement and its arbitration clause as they are
the only signatories thereto.82 (Citation omitted)

This court incorporated these rulings in Agan, Jr. v. Philippine International Air
Terminals Co., Inc.83 and Stanfilco Employees v. DOLE Philippines, Inc., et al.84

As a general rule, therefore, a corporation’s representative who did not


personally bind himself or herself to an arbitration agreement cannot be forced to
participate in arbitration proceedings made pursuant to an agreement entered
into by the corporation. He or she is generally not considered a party to that
agreement.

However, there are instances when the distinction between personalities of


directors, officers,and representatives, and of the corporation, are disregarded.
We call this piercing the veil of corporate fiction.

Piercing the corporate veil is warranted when "[the separate personality of a


corporation] is used as a means to perpetrate fraud or an illegal act, or as a
vehicle for the evasion of an existing obligation, the circumvention of statutes, or
to confuse legitimate issues."85 It is also warranted in alter ego cases "where a
corporation is merely a farce since it is a mere alter ego or business conduit of a
person, or where the corporation is so organized and controlled and its affairs are
so conducted as to make it merely an instrumentality, agency, conduit or adjunct
of another corporation."86

When corporate veil is pierced, the corporation and persons who are normally
treated as distinct from the corporation are treated as one person, such that
when the corporation is adjudged liable, these persons, too, become liable as if
they were the corporation.

Among the persons who may be treatedas the corporation itself under certain
circumstances are its directors and officers. Section 31 of the Corporation Code
provides the instances when directors, trustees, or officers may become liable for
corporate acts:
Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who
willfully and knowingly vote for or assent to patently unlawful acts of the
corporation or who are guilty of gross negligence or bad faith in directing the
affairs of the corporation or acquire any personal or pecuniary interest in conflict
with their duty as such directors or trustees shall be liable jointly and severally for
all damages resulting therefrom suffered by the corporation, its stockholders or
members and other persons.

When a director, trustee or officer attempts to acquire or acquires, in violation of


his duty, any interest adverse to the corporation in respect of any matter which
has been reposed inhim in confidence, as to which equity imposes a disability
upon him to deal in his own behalf, he shall be liable as a trustee for the
corporation and must account for the profits which otherwise would have accrued
to the corporation. (n)

Based on the above provision, a director, trustee, or officer of a corporation may


be made solidarily liable with it for all damages suffered by the corporation, its
stockholders or members, and other persons in any of the following cases:

a) The director or trustee willfully and knowingly voted for or assented to a


patently unlawful corporate act;

b) The director or trustee was guilty of gross negligence or bad faith in


directing corporate affairs; and

c) The director or trustee acquired personal or pecuniary interest in conflict


with his or her duties as director or trustee.

Solidary liability with the corporation will also attach in the following instances:

a) "When a director or officer has consented to the issuance of watered


stocks or who, having knowledge thereof, did not forthwith file with the
corporate secretary his written objection thereto";87

b) "When a director, trustee or officer has contractually agreed or


stipulated to hold himself personally and solidarily liable with the
corporation";88 and

c) "When a director, trustee or officer is made, by specific provision of law,


personally liable for his corporate action."89

When there are allegations of bad faith or malice against corporate directors or
representatives, it becomes the duty of courts or tribunals to determine if these
persons and the corporation should be treated as one. Without a trial, courts and
tribunals have no basis for determining whether the veil of corporate fiction
should be pierced. Courts or tribunals do not have such prior knowledge. Thus,
the courts or tribunals must first determine whether circumstances exist towarrant
the courts or tribunals to disregard the distinction between the corporation and
the persons representing it. The determination of these circumstances must be
made by one tribunal or court in a proceeding participated in by all parties
involved, including current representatives of the corporation, and those persons
whose personalities are impliedly the sameas the corporation. This is because
when the court or tribunal finds that circumstances exist warranting the piercing
of the corporate veil, the corporate representatives are treated as the corporation
itself and should be held liable for corporate acts. The corporation’s distinct
personality is disregarded, and the corporation is seen as a mere aggregation of
persons undertaking a business under the collective name of the corporation.

Hence, when the directors, as in this case, are impleaded in a case against a
corporation, alleging malice orbad faith on their part in directing the affairs of the
corporation, complainants are effectively alleging tha