CORPO CASES

FIRST DIVISION
 
PETRON CORPORATION, G.R. No. 155683
Petitioner,
Present:
 
PUNO, C.J., Chairperson,
SANDOVAL-GUTIERREZ,
- v e r s u s - CORONA,
AZCUNA and
GARCIA, JJ.
NATIONAL COLLEGE OF
BUSINESS AND ARTS,
Respondent. Promulgated:
 
February 16, 2007
 
x----------------------------------------------------x
 
DECISION
 
CORONA, J.:
 
 
The sole question raised in this petition for review on certiorari[1] is whether
petitioner Petron Corporation (Petron) should be held liable to pay attorneys fees
and exemplary damages to respondent National College of Business and Arts
(NCBA).
 
This case, however, is but part of a larger controversy over the lawful
ownership of seven parcels of land[2] in the V. Mapa area of Sta. Mesa, Manila (the
V. Mapaproperties) that arose out of a series of events that began in 1969.[3]
 Sometime in 1969, the V. Mapa properties, then owned by Felipe and
Enrique Monserrat, Jr., were mortgaged to the Development Bank of the
Philippines (DBP) as part of the security for the P5.2 million loan of Manila
Yellow Taxicab Co., Inc. (MYTC) and Monserrat Enterprises Co. MYTC, for its
part, mortgaged four parcels of land located in Quiapo, Manila.
 
On March 31, 1975, however, Felipes undivided interest in the
V. Mapa properties was levied upon in execution of a money judgment rendered
by the Regional Trial Court (RTC) of Manila in Filoil Marketing Corporation v.
MYTC, Felipe Monserrat, and Rosario Vda. De Monserrat (the Manila case).
[4]
 DBP challenged the levy through a third-party claim asserting that the
V. Mapa properties were mortgaged to it and were, for that reason, exempt from
levy or attachment. The RTC quashed it.
On June 18, 1981, MYTC and the Monserrats got DBP to accept
a dacion en pago arrangement whereby MYTC conveyed to the bank the four
mortgaged Quiapoproperties as full settlement of their loan obligation. But despite
this agreement, DBP did not release the V. Mapa properties from the mortgage.
 
On May 21, 1982, Felipe, acting for himself and as Enriques attorney-in-
fact, sold the V. Mapa properties to respondent NCBA. Part of the agreement was
that Felipe and Enrique would secure the release of the titles to the properties free
of all liens and encumbrances including DBPs mortgage lien and Filoils levy on or
before July 31, 1982. But the Monserrats failed to comply with this undertaking.
Thus, on February 3, 1983, NCBA caused the annotation of an affidavit of adverse
claim on the TCTs covering the V. Mapaproperties.
 
 Shortly thereafter, NCBA filed a complaint against Felipe and Enrique for
specific performance with an alternative prayer for rescission and damages in the
RTC of Manila.The case was raffled to Branch 30 and docketed as Civil Case No.
83-16617. On March 30, 1983, NCBA had a notice of lis pendens inscribed on
the TCTs of the V. Mapaproperties. A little over two years later,
NCBA impleaded DBP as an additional defendant in order to compel it to release
the V. Mapa properties from mortgage.
 
On February 28, 1985, during the pendency of Civil Case No. 83-16617,
Enriques undivided interest in the V. Mapa properties was levied on in execution
of a judgment of the RTC of Makati (the Makati case)[5] holding him liable
to Petron (then known as Petrophil Corporation) on a 1972 promissory note. On
April 29, 1985, the V. Mapa properties were sold at public auction to satisfy the
judgments in the Manila and Makati cases. Petron, the highest bidder, acquired
both Felipes and Enriques undivided interests in the property. The final deeds of
sale of Enriques and Felipes shares in the V. Mapa properties were awarded
to Petron in 1986. Sometime later, the Monserrats TCTs were cancelled and new
ones were issued to Petron. Thus it was that, towards the end of
1987, Petron intervened in NCBAs suit against Felipe, Enrique and DBP (Civil
Case No. 83-16617) to assert its right to the V. Mapa properties.
 
The RTC rendered judgment on March 11, 1996.[6] It ruled, among other things,
that Petron never acquired valid title to the V. Mapa properties as the levy and sale
thereof were void and that NCBA was now the lawful owner of the properties.
Moreover, the RTC held Petron, DBP, Felipe and Enrique jointly and severally
liable to NCBA for exemplary damages and attorneys fees for the following
reasons:
 
 FELIPE and ENRIQUE had no reason to renege on their undertaking in
the Deed of Absolute Sale to secure the release of the titles to the
properties xxx free from all the liens and encumbrances, and to cause the
lifting of the levy on execution of Commercial Credit Corporation,
Industrial Finance Corporation[,] and Filoil over the V. Mapa [p]roperty.
Moreover, ENRIQUE had no reason to repudiate FELIPE and disavow
authority he had [given] the latter to sell his share in the
V. Mapa property.
 
On the other hand, the mortgage in favor of DBP had been fully
extinguished thru dacion en pago as early as 18 June 1981 but it
unjustifiably and whimsically refused to release the mortgage and to
surrender to the buyer (NCBA) the owners duplicate copies of Transfer
Certificates of Title No[s]. 83621 to 83627, thereby preventing NCBA
from registering the sale in its favor.
 
Similarly, [Petron] has absolutely no reason to claim the
V. Mapa property. For, as shown above, the levy in execution and sale of
the shares of FELIPE and ENRIQUE in the V. Mapa property were null
and void.
 
Finally, in their Memorandum of Agreement dated 25 September 1992
with Technical Institute of the Philippines, [Petron] and DBP attempted
to pre-empt this Courts power to adjudicate on the claim of ownership
stipulating that to facilitate their defenses and cause of action in Civil
Case No. 83-16617, they agreed on the disposition of the
V. Mapa property among themselves. For obvious reasons, this Court
refused to give its imprimatur and denied their prayer for dismissal of the
complaint against DBP.
 
These acts of defendants and intervenor demonstrate their wanton,
fraudulent, reckless, oppressive and malevolent conduct in their dealings
with NCBA. Furthermore, they acted with gross and evident bad faith in
refusing to satisfy NCBAs plainly valid and demandable claims.
Assessment of exemplary damages and attorneys fees in the amounts
of P100,000.00 and P150,000.00, respectively, is therefore in order
(Arts. 2208 and 2232, Civil Code).[7]
 
Enrique, DBP and Petron appealed to the Court of Appeals (CA). The appeal was
docketed as CAG.R. CV No. 53466. In a decision dated June 21, 2002, [8] the CA
affirmed the RTC decision in toto. On motion for reconsideration, Petron and DBP
tried to have the award of exemplary damages and attorneys fees deleted for lack
of legal and factual basis. The Philippine National Oil Company (PNOC), which
had been allowed to intervene in the appeal as
transferee pendente lite of Petrons right to the V. Mapa properties, moved for
reconsideration of the ruling on ownership. In a resolution dated October 16, 2002,
[9]
 the CA denied these motions for lack of merit. Thereupon, Petron and PNOC
took separate appeals to this Court.
 
In this appeal, the only issue is Petrons liability for exemplary damages and
attorneys fees. And on this matter, we reverse the rulings of the trial and appellate
courts.
Article 2208 lays down the rule that in the absence of stipulation, attorneys
fees cannot be recovered except in the following instances:
 
(1) When exemplary damages are awarded;
(2) When the defendants act or omission has compelled the plaintiff to litigate
with third persons or to incur expense to protect his interest;
(3) In criminal cases of malicious prosecution against the plaintiff;
(4) In case of a clearly unfounded civil action or proceeding against the plaintiff;
(5) Where the defendant acted in gross and evident bad faith in refusing to satisfy
the plaintiffs plainly valid, just and demandable claim;
(6) In actions for legal support;
(7) In actions for the recovery of wages of household helpers, laborers and skilled
workers;
(8) In actions for indemnity under workmens compensation and employers
liability laws;
(9) In a separate civil action to recover civil liability arising from a crime;
(10) When at least double judicial costs are awarded;
(11) In any other case where the court deems it just and equitable that attorneys
fees and expenses of litigation should be recovered.[10]
 
Here, the RTC held Petron liable to NCBA for attorneys fees under Article
2208(5), which allows such an award where the defendant acted in gross and
evident bad faith in refusing to satisfy the plaintiffs plainly valid, just, and
demandable claim. However, the only justification given for this verdict was
that Petron had no reason to claim the V. Mapaproperties because, in
the RTCs opinion, the levy and sale thereof were void.[11] This was sorely
inadequate and it was erroneous for the CA to have upheld that ruling built on such
a flimsy foundation.
 
Article 2208(5) contemplates a situation where one refuses unjustifiably and
in evident bad faith to satisfy anothers plainly valid, just and demandable claim,
compelling the latter needlessly to seek redress from the courts.[12] In such a case,
the law allows recovery of money the plaintiff had to spend for a lawyers
assistance in suing the defendant expenses the plaintiff would not have incurred if
not for the defendants refusal to comply with the most basic rules of fair dealing. It
does not mean, however, that the losing party should be made to pay attorneys fees
merely because the court finds his legal position to be erroneous and upholds that
of the other party, for that would be an intolerable transgression of the policy that
no one should be penalized for exercising the right to have contending claims
settled by a court of law.[13] In fact, even a clearly untenable defense does not
justify an award of attorneys fees unless it amounts to gross and evident bad faith.
[14]

 
Petrons claim to the V. Mapa properties, founded as it was on final deeds of
sale on execution, was far from untenable. No gross and evident bad faith could be
imputed to Petron merely for intervening in NCBAs suit against DBP and
the Monserrats in order to assert what it believed (and had good reason to believe)
were its rights and to have the disputed ownership of the V. Mapa properties
settled decisively in a single lawsuit.
 With respect to the award of exemplary damages, the rule in this jurisdiction
is that the plaintiff must show that he is entitled to moral, temperate or
compensatory damages before the court may even consider the question of whether
exemplary damages should be awarded.[15] In other words, no exemplary damages
may be awarded without the plaintiffs right to moral, temperate, liquidated or
compensatory damages having first been established. Therefore, in view of our
ruling that Petron cannot be made liable to NCBA for compensatory damages (i.e.,
attorneys fees), Petron cannot be held liable for exemplary damages either.
 
WHEREFORE, the petition is hereby GRANTED. The imposition of
liability on Petron Corporation for exemplary damages and attorneys fees
is REVOKED. The June 21, 2002 decision and October 16, 2002 resolution of the
Court of Appeals in CAG.R. CV No. 53466 and the March 11, 1996 decision of
the Regional Trial Court of Manila in Civil Case No. 83-16617 are
hereby MODIFIED accordingly.
 
SO ORDERED.
 

THIRD DIVISION

[G.R. No. 121171. December 29, 1998]

ASSET PRIVATIZATION TRUST, petitioner, vs., COURT OF APPEALS,

JESUS S. CABARRUS, SR., JESUS S. CABARRUS, JR., JAIME T.
CABARRUS, JOSE MIGUEL CABARRUS, ALEJANDRO S.
PASTOR, JR., ANTONIO U. MIRANDA, and MIGUEL M.
ANTONIO, as Minority Stock Holders of Marinduque Mining and
Industrial Corporation, respondents.
 DECISION
KAPUNAN, J.:

The petition for review on certiorari before us seeks us to reverse and set aside the decision
of the Court of Appeals which denied due course to the petition for certiorari filed by the Asset
Privatization Trust (APT) assailing the order of the Regional Trial Court (RTC) Branch 62,
Makati City. The Makati RTCs order upheld and confirmed the award made by the Arbitration
Committee in favor of Marinduque Mining and Industrial Corporation (MMIC) and against the
Government, represented by herein petitioner APT for damages in the amount of P2.5 BILLION
(or approximately P4.5 BILLION, including interest).
Ironically, the staggering amount of damages was imposed on the Government for
exercising its legitimate right of foreclosure as creditor against the debtor MMIC as a
consequence of the latters failure to pay its overdue and unpaid obligation of P22 billion to the
Philippine National Bank (PNB) and the Development Bank of the Philippines (DBP).

The antecedent facts of the case

The development, exploration and utilization of the mineral deposits in the Surigao Mineral
Reservation have been authorized by Republic Act No. 1828, as amended by Republic Acts No.
2077 and 4167, by virtue of which laws, a Memorandum of Agreement was drawn on July 3,
1968, whereby the Republic of the Philippines thru the Surigao Mineral Reservation Board,
granted MMIC the exclusive right to explore, develop and exploit nickel, cobalt and other
minerals in the Surigao mineral reservation.[1] MMIC is a domestic corporation engaged in
mining with respondents Jesus S. Cabarrus, Sr. as President and among its original stockholders.
The Philippine Government undertook to support the financing of MMIC by purchase of
MMIC debenture and extension of guarantees. Further, the Philippine Government obtained a
firm, commitment from the DBP and/or other government financing institutions to subscribed in
MMIC and issue guarantee/s for foreign loans or deferred payment arrangements secured from
the US Eximbank, Asian Development Bank, Kobe Steel, of amount not exceeding US$100
Million.[2]
DBP approved guarantees in favor of MMIC and subsequent requests for guarantees were
based on the unutilized portion of the Government commitment. Thereafter, the Government
extended accommodations to MMIC in various amounts.
On July 13, 1981, MMIC, PNB and DBP executed a Mortgage Trust Agreement[3] whereby
MMIC, as mortgagor, agreed to constitute a mortgage in favor of PNB and DBP as mortgagees,
over all MMICs assets, subject of real estate and chattel mortgage executed by the mortgagor,
and additional assets described and identified, including assets of whatever kind, nature or
description, which the mortgagor may acquire whether in substitution of, in replenishment, or in
addition thereto.
Article IV of the Mortgage Trust Agreement provides for Events of Default, which
expressly includes the event that the MORTGAGOR shall fail to pay any amount secured by this
Mortgage Trust Agreement when due.[4]
 Article V of the Mortgage Trust Agreement prescribes in detail, and in addition to the
enumerated events of defaults, circumstances by which the mortgagor may be declared in
default, the procedure therefor, waiver of period to foreclose, authority of Trustee before, during
and after foreclosure, including taking possession of the mortgaged properties.[5]
In various request for advances/remittances of loans of huge amounts, Deeds of
Undertakings, Promissory Notes, Loans Documents, Deeds of Real Estate Mortgages, MMIC
invariably committed to pay either on demand or under certain terms the loans and
accommodations secured from or guaranteed by both DBP and PNB.
By 1984, DBP and PNBs financial exposure both in loans and in equity in MMIC had
reached tremendous proportions, and MMIC was having a difficult time meeting its financial
obligations. MMIC had an outstanding loan with DBP in the amount of P13,792,607,565.92 as
of August 31, 1984 and in the amount of P8,789,028,249.38 as of July 15, 1984 or a total
Government exposure of Twenty Two Billion Six Hundred Sixty-Eight Million Five Hundred
Thirty-Seven Thousand Seven Hundred Seventy and 05/100 (P22,668,537,770.05), Philippine
Currency.[6] Thus, a financial restructuring plan (FRP) designed to reduce MMIC' interest
expense through debt conversion to equity was drafted by the Sycip Gorres Velayo accounting
firm.[7] On April 30, 1984, the FRP was approved by the Board of Directors of the MMIC.
[8]
 However, the proposed FRP had never been formally adopted, approved or ratified by either
PNB or DBP.[9]
In August and September 1984, as the various loans and advances made by DBP and PNB to
MMIC had become overdue and since any restructuring program relative to the loans was no
longer feasible, and in compliance with the directive of Presidential Decree No. 385, DBP and
PNB as mortgagees of MMIC assets, decided to exercise their right to extrajudicially foreclose
the mortgages in accordance with the Mortgage Trust Agreement.[10]
The foreclosed assets were sold to PNB as the lone bidder and were assigned to three newly
formed corporations, namely, Nonoc Mining Corporation, Maricalum Mining and Industrial
Corporation, and Island Cement Corporation. In 1986, these assets were transferred to the Asset
Privatization Trust (APT).[11]
On February 28, 1985, Jesus S. Cabarrus, Sr., together with the other stockholders of
MMIC, filed a derivative suit against DBP and PNB before the RTC of Makati, Branch 62, for
Annulment of Foreclosures, Specific Performance and Damages.[12] The suit, docketed as Civil
Case No. 9900, prayed that the court: (1) annul the foreclosure, restore the foreclosed assets to
MMIC, and require the banks to account for their use and operation in the interim; (2) direct the
banks to honor and perform their commitments under the alleged FRP; and (3) pay moral and
exemplary damages, attorneys fees, litigation expenses and costs.
In the course of the trial, private respondents and petitioner APT, as successor of the DBP
and PNBs interest in MMIC, mutually agreed to submit the case to arbitration by entering into a
Compromise and Arbitration Agreement, stipulating, inter alia:
NOW, THEREFORE, for and in consideration of the foregoing premises and the
mutual covenants contain herein, the parties agreed as follows:
1. Withdrawal and Compromise. The parties have agreed to withdraw their respective
claims from the Trial Court and to resolve their dispute through arbitration by praying
to the Trial Court to issue a Compromise Judgment based on this Compromise and
Arbitration Agreement.
In withdrawing their dispute form the court and in choosing to resolve it through
arbitration, the parties have agreed that:
(a) their respective money claims shall be reduced to purely money claims; and
(b) as successor and assignee of the PNB and DBP interest in MMIC and the MMIC
accounts, APT shall likewise succeed to the rights and obligations of PNB and DBP in
respect of the controversy subject of Civil Case No. 9900 to be transferred to
arbitration and any arbitral award/order against either PNB and/or DBP shall be the
responsibility of, be discharged by and be enforceable against APT, the partied having
agreed to drop PNB and DBP from the arbitration.
2. Submission. The parties hereby agree that (a) the controversy in Civil Case No. 9900 shall be
submitted instead to arbitration under RA 876 and (b) the reliefs prayed for in Civil Case No.
9900 shall, with the approval of the Trial Court of this Compromise and Arbitration Agreement,
be transferred and reduced to pure pecuniary/money claims with the parties waiving and
foregoing all other forms of reliefs which they prayed for or should have payed for in Civil Case
No. 9900.[13]
The Compromise and Arbitration Agreement limited the issues to the following:
5. Issues. The issues to be submitted for the Committees resolution shall be: (a) Whether
PLAINTIFFS have the capacity or the personality to institute this derivative suit in behalf of the
MMIC or its directors; (b) Whether or not the actions leading to, and including, the PNB-DBP
foreclosure of the MMIC assets were proper, valid and in good faith.[14]
This agreement was presented for approval to the trial court. On October 14, 1992, the
Makati RTC, Branch 62, issued an order, to wit:
WHEREFORE, this Court orders:
1. Substituting PNB and DBP with the Asset Privatization Trust as party
defendant.
2. Approving the Compromise and Arbitration Agreement dated October 6,
1992, attached as Annex C of the Omnibus Motion.
3. Approving the Transformation of the reliefs prayed for [by] the plaintiffs in
this case into pure money claims; and
4. The Complaint is hereby DISMISSED.[15]
The Arbitration Committee was composed of retired Supreme Court Justice Abraham
Sarmiento as Chairman, Atty. Jose C. Sison and former Court of Appeals Justice Magdangal
Elma as Members. On November 24, 1993, after conducting several hearings, the Arbitration
Committee rendered a majority decision in favor of MMIC, the pertinent portions of which read
as follows:
Since, as this Committee finds, there is no foreclosure at all was not legally and
validly done, the Committee holds and so declares that the loans of PNB and DBP to
MMIC, for the payment and recovery of which the void foreclosure sales were
undertaken, continue to remain outstanding and unpaid. Defendant APT as the
successor-in-interest of PNB and DBP to the said loans is therefore entitled and
retains the right, to collect the same from MMIC pursuant to and based on the loan
documents signed by MMIC, subject to the legal and valid defenses that the latter may
duly and seasonably interpose. Such loans shall, however, be reduced by the amount
which APT may have realized from the sale of the seized assets of MMIC which by
agreement should no longer be returned even if the foreclosure were found to be null
and void.
The documentary evidence submitted and adopted by both parties (Exhibits 3, 3-B;
Exhibits 100; and also Exhibit ZZZ) as their exhibits would show that the total
outstanding obligation due to DBP and PNB as of the date of foreclosure
is P22,668,537,770.05, more or less.
Therefore, defendant APT can, and is still entitled to, collect the outstanding
obligations of MMIC to PNB and DBP amounting to P22,668.537,770.05, more or
less, with interest thereon as stipulated in the loan documents from the date of
foreclosure up to the time they are fully paid less the proportionate liability of DBP as
owner of 87% of the total capitalization of MMIC under the FRP. Simply put, DBP
shall share in the award of damages to, and in obligations of MMIC in proportion to
its 87% equity in the total capital stock of MMIC.
x x x.
As this Committee holds that the FRP is valid, DBPs equity in MMIC is raised to
87%. So pursuant to the above provision of the Compromise and Arbitration
Agreement, the 87% equity of DBP is hereby deducted from the actual damages
of P19,486,118,654.00 resulting in the net actual damages of P2,531,635,425.02 plus
interest.
DISPOSITION
WHEREFORE, premises considered, judgment is hereby rendered:
1. Ordering the defendant to pay to the Marinduque Mining and Industrial
Corporation, except the DBP, the sum of P2,531,635,425.02 with interest thereon at
the legal rate of six per cent (6%) per annum reckoned from August 3, 9, and 24,
1984, pari passu, as and for actual damages. Payment of these actual damages shall be
offset by APT from the outstanding and unpaid loans of the MMIC with DBP and
PNB, which have not been converted into equity. Should there be any balance due to
the MMIC after the offsetting, the same shall be satisfied from the funds representing
the purchase price of the sale of the shares of Island Cement Corporation in the
amount of P503,000,000.00 held under escrow pursuant to the Escrow Agreement
dated April 22, 1988 or to such subsequent escrow agreement that would supercede
[sic] it pursuant to paragraph (9) of the Compromise and Arbitration Agreement;
2. Ordering the defendant to pay to the Marinduque Mining and Industrial
Corporation, except the DBP, the sum of P13,000,000.00 as and for moral and
exemplary damages. Payment of these moral and exemplary damages shall be offset
by APT from the outstanding and unpaid loans of MMIC with DBP and PNB, which
have not been converted into equity. Should there be any balance due to MMIC after
the offsetting, the same shall be satisfied from the funds representing the purchase
price of the sale of the shares of Island Cement Corporation in the of P503,000,000.00
held under escrow pursuant to the Escrow Agreement dated April 22, 1988 or to such
subsequent escrow agreement that would supercede [sic] it pursuant to paragraph (9)
of the Compromise and Arbitration Agreement;
3. Ordering the defendant to pay to the plaintiff, Jesus Cabarrus, Sr., the sum
of P10,000,000.00, to be satisfied likewise from the funds held under escrow pursuant
to the Escrow Agreement dated April 22, 1988 or to such subsequent escrow
agreement that would supercede it, pursuant to paragraph (9) of the Compromise and
Arbitration Agreement, as and for moral damages; and
4. Ordering the defendant to pay arbitration costs.
This Decision is FINAL and EXECUTORY.
IT IS SO ORDERED.[16]
Motions for reconsiderations were filed by both parties, but the same were denied.
On October 17, 1994, private respondents filed in the same Civil Case No. 9900 an
Application/Motion for Confirmation of Arbitration Award. Petitioner countered with an
Opposition and Motion to Vacate Judgment raising the following grounds:
1. The plaintiffs Application/Motion is improperly filed with this branch of the Court,
considering that the said motion is neither a part nor the continuation of the
proceedings in Civil Case No. 9900 which was dismissed upon motion of the
parties. In fact, the defendants in the said Civil Case No. 9900 were the Development
Bank of the Philippines and the Philippine National Bank (PNB);
2. Under Section 22 of Rep. Act 876, an arbitration under a contract or submission
shall be deemed a special proceedings and a party to the controversy which was
arbitrated may apply to the court having jurisdiction, (not necessarily with this
Honorable Court) for an order confirming the award;
3. The issues submitted for arbitration have been limited to two: (1) propriety of the
plaintiffs filing the derivative suit and (2) the regularity of the foreclosure
proceedings. The arbitration award sought to be confirmed herein far exceeded the
issues submitted and even granted moral damages to one of the herein plaintiffs;
4. Under Section 24 of Rep. Act 876, the Court must make an order vacating the
award where the arbitrators exceeded their powers, or so imperfectly executed them,
that a mutual final and definite award upon the subject matter submitted to them was
not made.[17]
 Private respondents filed a REPLY AND OPPOSITION dated November 10, 1984, arguing
that a dismissal of Civil case No. 9900 was merely a qualified dismissal to pave the way for the
submission of the controversy to arbitration, and operated simply as a mere suspension of the
proceedings. They denied that the Arbitration Committee had exceeded its powers.
In an Order dated November 28, 1994, the trial court confirmed the award of the Arbitration
Committee. The dispositive portion of said order reads:
WHEREFORE, premises considered, and in the light of the parties [sic] Compromise
and Arbitration Agreement dated October 6, 1992, the Decision of the Arbitration
Committee promulgated on November 24, 1993, as affirmed in a Resolution dated
July 26, 1994, and finally settled and clarified in the Separate Opinion dated
September 2, 1994 of Committee Member Elma, and the pertinent provisions of RA
876,also known as the Arbitration Law, this Court GRANTS PLAINTIFFS
APPLICATION AND THUS CONFIRMS THE ARBITRATION AWARD, AND
JUDGMENT IS HEREBY RENDERED:
(a) Ordering the defendant APT to the Marinduque Mining and Industrial Corporation
(MMIC, except the DBP, the sum of P3,811,757,425.00, as and for actual damages,
which shall be partially satisfied from the funds held under escrow in the amount
of P503,000,000.00 pursuant to the Escrow Agreement dated April 22, 1988. The
Balance of the award, after the escrow funds are fully applied, shall be executed
against the APT;
(b) Ordering the defendant to pay to the MMIC, except the DBP, the sum
of P13,000,000.00 as and moral and exemplary damages;
(c) Ordering the defendant to pay to Jesus S. Cabarrus, Sr., the sum of P10,000,000.00
as and for moral damages; and
(d) Ordering the defendant to pay the herein plaintiffs/applicants/movants the sum
of P1,705,410.22 as arbitration costs.
In reiteration of the mandates of Stipulation No. 10 and Stipulation No. 8 paragraph 2
of the Compromise and Arbitration Agreement, and the final edict of the Arbitration
Committees decision, and with this Courts Confirmation, the issuance of the
Arbitration Committees Award shall henceforth be final and executory.
SO ORDERED.[18]
On December 27, 1994, petitioner filed its motion for reconsideration of the Order dated
November 28, 1994. Private respondents, in turn, submitted their reply and opposition thereto.
On January 18, 1995, the trial court handed down its order denying APTs motion for
reconsideration for lack of merit and for having been filed out of time. The trial court declared
that considering that the defendant APT through counsel, officially and actually received a copy
of the Order of this Court dated November 28, 1994 on December 6, 1994, the Motion for
Reconsideration thereof filed by the defendant APT on December 27, 1994, or after the lapse of
21 days, was clearly filed beyond the 15-day reglementary period prescribed or provided for by
law for the filing of an appeal from final orders, resolutions, awards, judgments or decisions of
any court in all cases, and by necessary implication for the filling of a motion for reconsideration
thereof.
On February 7, 1995, petitioner received private respondents motion for Execution and
Appointment of Custodian of Proceeds of Execution dated February 6, 1995.
Petitioner thereafter filed with the Court of Appeals a special civil action for certiorari with
temporary restraining order and/or preliminary injunction dated February 13, 1996 to annul and
declare as void the Orders of the RTC-Makati dated November 28, 1994 and January 18, 1995
for having been issued without or in excess of jurisdiction and/or with grave abuse of discretion.
[19]
 As ground therefor, petitioner alleged that:
I

THE RESPONDENT JUDGE HAS NOT VALIDLY ACQUIRED JURISDICTION

MUCH LESS, HAS THE COURT AUTHORITY, TO CONFIRM THE ARBITRAL
AWARD CONSIDERING THAT THE ORIGINAL CASE, CIVIL CASE NO. 9900,
HAD PREVIOUSLY BEEN DISMISSED.
II

THE RESPONDENT JUDGE COMMITTED GRAVE ABUSE OF DISCRETION

AND ACTED WITHOUT OR IN EXCESS OF JURISDICTION, IN ISSUING THE
QUESTIONED ORDERS CONFIRMING THE ARBITRAL AWARD AND
DENYING THE MOTION FOR RECONSIDERATION OF ORDER OF AWARD.
III

THE RESPONDENT JUDGE GROSSLY ABUSED HIS DISCRETION AND ACTED

WITHOUT OR IN EXCESS OF AND WITHOUT JURISDICTION IN RECKONING THE
COUNTING OF THE PERIOD TO FILE MOTION FOR RECONSIDERATION, NOT FROM
THE DATE OF SERVICE OF THE COURTS COPY CONFIRMING THE AWARD, BUT
FROM RECEIPT OF A XEROX COPY OF WHAT PRESUMABLY IS THE OPPOSING
COUNSELS COPY THEREOF.[20]
On July 12, 1995, the Court of Appeals, through its fifth Division denied due course and
dismissed the petition for certiorari.
Hence, the instant petition for review on certiorari imputing to the Court of Appeals the
following errors.
ASSIGNMENT OF ERRORS
I

THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE MAKATI

REGIONAL TRIAL COURT, BRANCH 62 WHICH HAS PREVIOULSY
DISMISSED CIVIL CASE NO. 9900 HAD LOST JURISDICTION TO
CONFIRM THE ARBITRAL AWARD UNDER THE SAME CIVIL CASE
AND IN NOT RULING THAT THE APPLICATION FOR CONFIRMATION
 SHOULD HAVE BEEN FILED AS A NEW CASE TO BE RAFFLED OFF
AMONG THE DIFFERENT BRANCHES OF THE RTC.
II

THE COURT OF APPEALS LIKEWISE ERRED IN HOLDING THAT

PETITIONER WAS ESTOPPED FROM QUESTIONING THE ARBITRATION
AWARD, WHEN PETITIONER QUESTIONED THE JURISDICTION OF THE
RTC-MAKATI, BRANCH 62 AND AT THE SAME TIME MOVED TO
VACATE THE ARBITRAL AWARD.
III

THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE

RESPONDENT TRIAL COURT SHOULD HAVE EITHER
DISMISSED/DENIED PRIVATE RESPONDENTS MOTION/PETITION FOR
CONFIRMATION OF ARBITRATION AWARD AND/OR SHOULD HAVE
CONSIDERED THE MERITS OF THE MOTION TO VACATE ARBITRAL
AWARD.
IV

THE COURT OF APPEALS ERRED IN NOT TREATING PETITIONER APTS

PETITION FOR CERTIORARI AS AN APPEAL TAKEN FROM THE ORDER
CONFIRMING THE AWARD
V

THE COURT OF APPEALS ERRED IN NOT RULING ON THE LEGAL ISSUE OF

WHEN TO RECKON THE COUNTING OF THE PERIOD TO FILE A MOTION FOR
RECONSIDERATION.[21]
The petition is impressed with merit.
I

The RTC of Makati, Branch 62, did not have jurisdiction to confirm the arbitral award

The use of the term dismissed is not a mere semantic imperfection. The dispositive portion
of the Order of the trial court dated October 14, 1992 stated in no uncertain terms:
4. The Complaint is hereby DISMISSED.[22]
The term dismiss has a precise definition in law. To dispose of an action suit, or motion without
trial on the issues involved. Conclude, discontinue, terminate, quash.[23]
Admittedly the correct procedure was for the parties to go back to the court where the case
was pending to have the award confirmed by said court. However, Branch 62 made
the fatal mistake of issuing a final order dismissing the case. While Branch 62 should have
merely suspended the case and not dismissed it,[24] neither of the parties questioned said
dismissal. Thus, both parties as well as said court are bound by such error.
It is erroneous then to argue, as private respondents do, that petitioner APT was charged
with the knowledge that the case was merely stayed until arbitration finished, as again, the order
of Branch 62 in very clear terms stated that the complaint was dismissed. By its own action,
Branch 62 had lost jurisdiction over the vase. It could not have validly reacquired jurisdiction
over the said case on mere motion of one of the parties. The Rules of Court is specific on how a
new case may be initiated and such is not done by mere motion in a particular branch of the
RTC. Consequently, as there was no pending action to speak of, the petition to confirm the
arbitral award should have been filed as a new case and raffled accordingly to one of the
branches of the Regional Trial Court.
II

Petitioner was not estopped from questioning the jurisdiction of Branch 62 of the RTC of Makati.

The Court of Appeals ruled that APT was already estopped to question the jurisdiction of the
RTC to confirm the arbitral award because it sought affirmative relief in said court by asking that
the arbitral award be vacated.
The rule is that Where the court itself clearly has no jurisdiction over the subject matter or
the nature of the action, the invocation of this defense may de done at any time. It is neither for
the courts nor for the parties to violate or disregard that rule, let alone to confer that jurisdiction,
this matter being legislative in character.[25] As a rule the, neither waiver nor estoppel shall apply
to confer jurisdiction upon a court barring highly meritorious and exceptional circumstances.
[26]
 One such exception was enunciated in Tijam vs. Sibonghanoy,[27] where it was held that after
voluntarily submitting a cause and encountering an adverse decision on the merits, it is too late
for the loser to question the jurisdiction or power of the court."
Petitioners situation is different because from the outset, it has consistently held the position
that the RTC, Branch 62 had no jurisdiction to confirm the arbitral award; consequently, it
cannot be said that it was estopped from questioning the RTCs jurisdiction. Petitioners prayer for
the setting aside of the arbitral award was not inconsistent with its disavowal of the courts
jurisdiction.
III

Appeal of petitioner to the Court of Appeals thru certiorari  under Rule 65 was proper.

The Court of Appeals in dismissing APTs petition for certiorari upheld the trial courts
denial of APTs motion for reconsideration of the trial courts order confirming the arbitral award,
on the ground that said motion was filed beyond the 15-day reglementary period; consequently,
the petition for certiorari could not be resorted to as substitute to the lost right of appeal.
We do not agree.
 Section 29 of Republic Act No. 876,[28] provides that:
x x x An appeal may be taken from an order made in a proceeding under this Act,
or from a judgment entered upon an award through certiorari proceedings, but
such appeals shall be limited to question of law. x x x.
The aforequoted provision, however, does not preclude a party aggrieved by the arbitral
award from resorting to the extraordinary remedy of certiorari under Rule 65 of the Rules of
Court where, as in this case, the Regional Trial Court to which the award was submitted for
confirmation has acted without jurisdiction, or with grave abuse of discretion and there is no
appeal, nor any plain, speedy remedy in the course of law.
Thus, Section 1 of Rule 65 provides:
SEC 1. Petition for Certiorari: - When any tribunal, board or officer exercising
judicial functions, has acted without or in excess of its or his jurisdiction, or with
grave abuse of discretion and there is no appeal, nor any plain, speedy, and adequate
remedy in the ordinary course of law, a person aggrieved thereby may file a verified
petition in the proper court alleging the facts with certainty and praying that judgment
be rendered annulling or modifying the proceedings, as the law requires, of such
tribunal, board or officer.
In the instant case, the respondent court erred in dismissing the special civil action
for certiorari, it being from the pleadings and the evidence that the trial court lacked jurisdiction
and/or committed grave abuse of discretion in taking cognizance of private respondent motion to
confirm the arbitral award and, worse, in confirming said award which is grossly and patently
not in accord with the arbitration agreement, as will be hereinafter demonstrated.
IV

The nature and limits of the Arbitrators powers.

As a rule, the award of an arbitrator cannot be set aside for mere errors of judgment either as
to the law or as to the facts. [29] Courts are without power to amend or overrule merely because of
disagreement with matters of law or facts determined by the arbitrators. [30] They will not review
the findings of law and fact contained in an award, and will not undertake to substitute their
judgment for that of the arbitrators, since any other rule would make an award the
commencement, not the end, of litigation.[31] Errors of law and fact, or an erroneous decision of
matters submitted to the judgment of the arbitrators, are insufficient to invalidate an award fairly
and honestly made.[32] Judicial review of an arbitration is, thus, more limited than judicial review
of a trial.[33]
Nonetheless, the arbitrators awards is not absolute and without exceptions. The arbitrators
cannot resolve issues beyond the scope of the submission agreement.[34] The parties to such an
agreement are bound by the arbitrators award only to the extent and in the manner prescribed by
the contract and only if the award is rendered in conformity thereto.[35] Thus, Sections 24 and 25
of the Arbitration Law provide grounds for vacating, rescinding or modifying an arbitration
award. Where the conditions described in Articles 2038,[36] 2039[37] and 2040[38] of the Civil Code
applicable to compromises and arbitration are attendant, the arbitration award may also be
annulled.
In Chung Fu Industries (Phils.) vs. Court of Appeals,[39] we held:
x x x. It is stated explicitly under Art. 2044 of the Civil Code that the finality of the
arbitrators awards is not absolute and without exceptions. Where the conditions
described in Articles 2038, 2039, and 2040 applicable to both compromises and
arbitration are obtaining, the arbitrators' award may be annulled or
rescinded. Additionally, under Sections 24 and 25, of the Arbitration Law, there are
grounds for vacating, modifying or rescinding an arbitrators award. Thus, if and when
the factual circumstances referred to in the above-cited provisions are present, judicial
review of the award is properly warranted.
Accordingly, Section 20 of R.A. 876 provides:
SEC. 20. Form and contents of award. The award must be made in writing and signed
and acknowledged by a majority of the arbitrators, if more than one; and by the sole
arbitrator, if there is only one. Each party shall be furnished with a copy of the
award. The arbitrators in their award may grant any remedy or relief which they deem
just and equitable and within the scope of the agreement of the parties, which shall
include, but not be limited to, the specific performance of a contract.
xxx
The arbitrators shall have the power to decide only those matters which have been
submitted to them. The terms of the award shall be confined to such
disputes. (Underscoring ours).
xxx.
Section 24 of the same law enumerating the grounds for vacating an award states:
SEC. 24. Grounds for vacating award. In any one of the following cases, the court
must make an order vacating the award upon the petition of any party to the
controversy when such party proves affirmatively that in the arbitration proceedings:
(a) The award was procured by corruption, fraud, or other undue means; or
(b) That there was evident partiality or corruption in arbitrators or any of them; or
(c) That the arbitrators were guilty of misconduct in refusing to postpone the hearing
upon sufficient cause shown, or in refusing to hear evidence pertinent and material to
the controversy; that one or more of the arbitrators was disqualified to act as such
under section nine hereof, and willfully refrained from disclosing such
disqualifications or any other misbehavior by which the rights of any party have been
materially prejudiced; or
(d) That the arbitrators exceeded their powers, or so imperfectly executed them, that a
mutual, final and definite award upon the subject matter submitted to them was not
made. (Underscoring ours).
xxx.
Section 25 which enumerates the grounds for modifying the award provides:
SEC. 25. Grounds for modifying or correcting award In anyone of the following
cases, the court must make an order modifying or correcting the award, upon the
application of any party to the controversy which was arbitrated:
(a) Where there was an evident miscalculation of figures, or an evident mistake in the
description of any person, thing or property referred to in the award; or
(b) Where the arbitrators have awarded upon a matter not submitted to them, not
affecting the merits of the decision upon the matter submitted; or
(c) Where the award is imperfect in a matter of form not affecting the merits of the
controversy, and if it had been a commissioners report, the defect could have been
amended or disregarded by the court.
x x x.
Finally, it should be stressed that while a court is precluded from overturning an award for
errors in determination of factual issues, nevertheless, if an examination of the record reveals no
support whatever for the arbitrators determinations, their award must be vacated.[40] In the same
manner, an award must be vacated if it was made in manifest disregard of the law.[41]
Against the backdrop of the foregoing provisions and principles, we find that the arbitrators
came out with an award in excess of their powers and palpably devoid of factual and legal basis.
V

There was no financial structuring program; foreclosure of mortgage was fully justified.

The point need not be belabored that PNB and DBP had the legitimate right to foreclose of
the mortgages of MMIC whose obligations were past due. The foreclosure was not a wrongful
act of the banks and, therefore, could not be the basis of any award of damages. There was no
financial restructuring agreement to speak of that could have constituted an impediment to the
exercise of the banks right to foreclose.
As correctly stated by Mr. Jose C. Sison, a member of the Arbitration Committee who wrote
a separate opinion:
1. The various loans and advances made by DBP and PNB to MMIC have become
overdue and remain unpaid. The fact that a FRP was drawn up is enough to establish
that MMIC has not been complying with the terms of the loan
agreement. Restructuring simply connotes that the obligations are past due that is why
it is restructurable;
2. When MMIC thru its board and the stockholders agreed and adopted the FRP, it
only means that MMIC had been informed or notified that its obligations were past
due and that foreclosure is forthcoming;
3. At that stage, MMIC also knew that PNB-DBP had the option of either approving
the FRP or proceeding with the foreclosure. Cabarrus, who filed this case supposedly
in behalf of MMIC should have insisted on the FRP. Yet Cabarrus himself opposed
the FRP;
4. So when PNB-DBP proceeded with the foreclosure, it was done without bad faith
but with honest and sincere belief that foreclosure was the only alternative; a decision
further explained by Dr. Placido Mapa who testified that foreclosure was, in the
judgment of PNB, the best move to save MMIC itself.
Q : Now in this portion of Exh. L which was marked as Exh. L-1, and we adopted as Exh. 37-A for the
respondent, may I know from you, Dr. Mapa what you meant by that the decision to foreclose
was neither precipitate nor arbitrary?
A : Well, it is not a whimsical decision but rather decision arrived at after weighty considerations of
the information that we have received, and listening to the prospects which reported to us that we
had assumed would be the premises of the financial rehabilitation plan was not materialized nor
expected to materialized.
Q : And this statement that it was premised upon the known fact that means, it was referring to the
decision to foreclose, was premised upon the known fact that the rehabilitation plan earlier
approved by the stockholders was no longer feasible, just what is meant by no longer feasible?
A : Because the revenue that they were counting on to make the rehabilitation plan possible, was not
anymore expected to be forthcoming because it will result in a short fall compared to the prices
that were actually taking place in the market.
Q : And I supposed that was you were referring to when you stated that the production targets and
assumed prices of MMICs products, among other projections, used in the financial reorganization
program that will make it viable were not met nor expected to be met?
A : Yes.
xxx
Which brings me to my last point in this separate opinion. Was PNB and DBP
absolutely unjustified in foreclosing the mortgages?
In this connection, it can readily be seen and it cannot quite be denied that MMIC
accounts in PNB-DBP were past due. The drawing up of the FRP is the best proof of
this. When MMIC adopted a restructuring program for its loan, it only meant that
these loans were already due and unpaid. If these loans were restructurable because
they were already due and unpaid, they are likewise forecloseable. The option is with
the PNB-DBP on what steps to take.
The mere fact that MMIC adopted the FRP does not mean that DBP-PNB lost the option to
foreclose. Neither does it mean that the FRP is legally binding and implementable. It must be
pointed that said FRP will, in effect, supersede the existing and past due loans of MMIC with
PNB-DBP. It will become the new loan agreement between the lenders and the borrowers. As in
all other contracts, there must therefore be a meeting of minds of the parties; the PNB and DBP
must have to validly adopt and ratify such FRP before they can be bound by it; before it can be
implemented. In this case, not an iota of proof has been presented by thePLAINTIFFS showing
that PNB and DBP ratified and adopted the FRP. PLAINTIFFS simply relied on a legal doctrine
of promissory estoppel to support its allegation in this regard.[42]
Moreover, PNB and DBP had to initiate foreclosure proceedings as mandated by P.D. No.
385, which took effect on January 31, 1974. The decree requires government financial
institutions to foreclose collaterals for loans where the arrearages amount to 20% of the total
outstanding obligations. The pertinent provisions of said decree read as follows:
SEC. 1. It shall be mandatory for government financial institutions, after the lapse of
sixty (60) days from the issuance of this Decree to foreclose the collaterals and/or
securities for any loan, credit, accommodations, and/or guarantees granted by them
whenever the arrearages on such account, including accrued interest and other
charges, amount to at least twenty percent (20%) of the total outstanding obligations,
including interest and other charges, as appearing in the books of account and/or
related records of the financial institutions concerned. This shall be without prejudice
to the exercise by the government financial institutions of such rights and/or remedies
available to them under their respective contracts with their debtor, including the right
to foreclosure on loans, credits, accommodations and/or guarantees on which the
arrearages are less than twenty percent (20%).
SEC. 2. No restraining order, temporary or permanent injunction shall be issued by
the court against any government financial institution in any action taken by such
institution in compliance with the mandatory foreclosure provided in Section 1 hereof,
whether such restraining order, temporary or permanent injunction is sought by the
borrower(s) or any third party or parties, except after due hearing in which it is
established by the borrower and admitted by the government financial institution
concerned that twenty percent (20%) of the outstanding arrearages has been paid after
the filing of foreclosure proceedings. (Underscoring supplied.)
Private respondents thesis that the foreclosure proceedings were null and void because of
lack of publication in the newspaper is nothing more than a mere unsubstantiated allegation not
borne out by the evidence. In any case, a disputable presumption exists in favor of petitioner that
official duty has been regularly performed and ordinary course of business has been followed.[43]
VI

Not only was the foreclosure rightfully exercised by the PNB and DBP, but also, from the
facts of the case, the arbitrators in making the award went beyond the arbitration agreement.
In their complaint filed before the trial court, private respondent Cabarrus, et al. prayed for
judgment in their favor:
1. Declaring the foreclosure effected by the defendants DBP and PNB on the assets of
MMIC null and void and directing said defendants to restore the foreclosed assets to
the possession of MMIC, to render an accounting of their use and/or operation of said
assets and to indemnify MMIC for the loss occasioned by its dispossession or the
deterioration thereof;
2. Directing the defendants DBP and PNB to honor and perform their commitments
under the financial reorganization plan which was approved at the annual stockholders
meeting of MMIC on 30 April 1984;
3. Condemning the defendants DBP and PNB, jointly and severally to pay the
plaintiffs actual damages consisting of the loss of value of their investment amounting
to not less than P80,000,000.00, the damnum emerges and lucrum cessans in such
amount as may be establish during the trial, moral damages in such amount as this
Honorable Court may deem just and equitable in the premises, exemplary damages in
such amount as this Honorable Court may consider appropriate for the purpose of
setting an example for the public good, attorneys fees and litigation expenses in such
amounts as may be proven during the trial, and the costs legally taxable in this
litigation.
Further, Plaintiffs pray for such other reliefs as may be just and equitable in the
premises.[44]
Upon submission for arbitration, the Compromise and Arbitration Agreement of the parties
clearly and explicitly defined and limited the issues to the following:
(a) whether PLAINTIFFS have the capacity or the personality to institute this derivative suit in
behalf of the MMIC or its directors;
(b) whether or not the actions leading to, and including, the PNB-DBP foreclosure of
the MMIC assets were proper, valid and in good faith.[45]
Item No. 8 of the Agreement provides for the period by which the Committee was to render
its decision, as well as the nature thereof:
8. Decision. The committee shall issue a decision on the controversy not later than six (6)
months from the date of its constitution.

In the event the committee finds that PLAINTIFFS have the personality to file this
suit and extra-judicial foreclosure of the MMIC assets wrongful, it shall make an
award in favor of the PLAINTIFFS (excluding DBP), in an amount as may be
established or warranted by the evidence which shall be payable in Philippine Pesos at
the time of the award. Such award shall be paid by the APT or its successor-in-interest
within sixty (60) days from the date of the award in accordance with the provisions of
par. 9 hereunder. x x x. The PLAINTIFFS remedies under this Section shall be in
addition to other remedies that may be available to the PLAINTIFFS, all such
remedies being cumulative and not exclusive of each other.
On the other hand, in case the arbitration committee finds that PLAINTIFFS have no capacity to
sue and/or that the extra-judicial foreclosure is valid and legal, it shall also make an award in
favor of APT based on the counterclaims of DBP and PNB in an amount as may be established
or warranted by the evidence. This decision of the arbitration committee in favor of APT shall
likewise finally settle all issues regarding the foreclosure of the MMIC assets so that the funds
held in escrow mentioned in par. 9 hereunder will thus be released in full in favor of APT.[46]
The clear and explicit terms of the submission notwithstanding, the Arbitration Committee
clearly exceeded its powers or so imperfectly executed them: (a) in ruling on and declaring valid
the FRP; (b) in awarding damages to MMIC which was not a party to the derivative suit; and (c)
in awarding moral damages to Jesus S. Cabarrus, Sr.

The arbiters overstepped their powers by declaring as valid proposed Financial Restructuring Program.

The Arbitration Committee went beyond its mandate and thus acted in excess of its powers
when it ruled on the validity of, and gave effect to, the proposed FRP.
In submitting the case to arbitration, the parties had mutually agreed to limit the issue to the
validity of the foreclosure and to transform the reliefs prayed for therein into pure money claims.
There is absolutely no evidence that the DBP and PNB agreed, expressly or impliedly, to the
proposed FRP. It cannot be overemphasized that a FRP, as a contract, requires the consent of the
parties thereto.[47] The contract must bind both contracting parties.[48] Private respondents even by
their own admission recognized that the FRP had yet not been carried out and that the loans of
MMIC had not yet been converted into equity.[49]
However, the arbitration Committee not only declared the FRP valid and effective, but also
converted the loans of MMIC into equity raising the equity of DBP to 87%.[50]
The Arbitration Committee ruled that there was a commitment to carry out the FRP [51] on the
ground of promissory estoppel.
Similarly, the principle of promissory estoppel applies in the present case considering
as we observed, the fact that the government (that is Alfredo Velayo) was the FRPs
proponent. Although the plaintiffs are agreed that the government executed no formal
agreement, the fact remains that the DBP itself which made representations that the
FRP constituted a way out for MMIC. The Committee believes that although the DBP
did not formally agree (assuming that the board and stockholders approvals were not
formal enough), it is bound nonetheless if only for its conspicuous representations.
Although the DBP sat in the board in a dual capacity-as holder of 36% of MMICs
equity (at that time) and as MMICs creditor-the DBP can not validly renege on its
commitments simply because at the same time, it held interest against the MMIC.
The fact, of course, is that as APT itself asserted, the FRP was being carried out
although apparently, it would supposedly fall short of its targets. Assuming that the
FRP would fail to meet its targets, the DBP-and so this Committee holds-can not, in
any event, brook any denial that it was bound to begin with, and the fact is that
adequate or not (the FRP), the government is still bound by virtue of its acts.
The FRP, of course, did not itself promise a resounding success, although it raised DBPs equity
in MMIC to 87%. It is not excuse, however, for the government to deny its commitments.[52]
Atty. Sison, however, did not agree and correctly observed that:
But the doctrine of promissory estoppel can hardly find application here. The nearest that there
can be said of any estoppel being present in this case is the fact that the board of MMIC was, at
the time the FRP was adopted, mostly composed of PNB and DBP representatives. But those
representatives, singly or collectively, are not themselves PNB or DBP. They are individuals
with personalities separate and distinct from the banks they represent. PNB and DBP have
different boards with different members who may have different decisions. It is unfair to impose
upon them the decision of the board of another company and thus pin them down on the
equitable principle of estoppel. Estoppel is a principle based on equity and it is certainly not
equitable to apply it in this particular situation. Otherwise the rights of entirely separate, distinct
and autonomous legal entities like PNB and DBP with thousands of stockholders will be
suppressed and rendered nugatory.[53]
As a rule, a corporation exercises its powers, including the power to enter into contracts,
through its board of directors. While a corporation may appoint agents to enter into a contract in
its behalf, the agent, should not exceed his authority.[54] In the case at bar, there was no showing
that the representatives of PNB and DBP in MMIC even had the requisite authority to enter into
a debt-for-equity swap. And if they had such authority, there was no showing that the banks,
through their board of directors, had ratified the FRP.
Further, how could the MMIC be entitled to a big amount of moral damages when its credit
reputation was not exactly something to be considered sound and wholesome. Under Article
2217 of the Civil Code, moral damages include besmirched reputation which a corporation may
possibly suffer. A corporation whose overdue and unpaid debts to the Government alone reached
a tremendous amount of P22 Billion Pesos cannot certainly have a solid business reputation to
brag about. As Atty. Sison in his separate opinion persuasively put it:
Besides, it is not yet a well settled jurisprudence that corporations are entitled to moral
damages. While the Supreme Court may have awarded moral damages to a corporation for
besmirched reputation in Mambulao vs. PNB 22 SCRA 359, such ruling cannot find application
in this case. It must be pointed out that when the supposed wrongful act of foreclosure was done,
MMICs credit reputation was no longer a desirable one. The company then was already suffering
from serious financial crisis which definitely projects an image not compatible with good and
wholesome reputation. So it could not be said that there was a reputation besmirches by the act
of foreclosure.[55]

The arbiters exceeded their authority in awarding damages to MMIC, which is not impleaded as a party to the derivative suit.

Civil Code No. 9900 filed before the RTC being a derivative suit, MMIC should have been
impleaded as a party. It was not joined as a party plaintiff or party defendant at any stage of the
proceedings. As it is, the award of damages to MMIC, which was not a party before the
Arbitration Committee, is a complete nullity.
Settled is the doctrine that in a derivative suit, the corporation is the real party in interest
while the stockholder filing suit for the corporations behalf is only nominal party. The
corporation should be included as a party in the suit.
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 the officials of
the corporation refuse to sue, or are the ones to be sued or hold the control of the corporation. In
such actions, the suing stockholder is regarded as a nominal party, with the corporation as the
real party in interest. x x x.[56]
It is a condition sine qua non that the corporation be impleaded as a party because-
x x x. 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 and 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
corporations must be joined as party because it is its cause of action that is being litigated and
because judgment must be a res ajudicata against it.[57]
The reasons given for not allowing direct individual suit are:
(1) x x x 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) x x x 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 xxx;
(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 a ascertaining the effect of partial recovery by an individual on
the damages recoverable by the corporation for the same act.[58]
If at all an award was due MMIC, which it was not, the same should have been
given sans deduction, regardless of whether or not the party liable had equity in the corporation,
in view of the doctrine that a corporation has a personality separate and distinct from its
individual stockholders or members. DBPs alleged equity, even if it were indeed 87%, did not
give it ownership over any corporate property, including the monetary award, its right over said
corporate property being a mere expectancy or inchoate right.[59]Notably, the stipulation even had
the effect of prejudicing the other creditors of MMIC.

The arbiters, likewise, exceeded their authority in awarding moral damages to Jesus Cabarrus, Sr.

It is perplexing how the Arbitration Committee can in one breath rule that the case before it
is a derivative suit, in which the aggrieved party or the real party in interest is supposedly the
MMIC, and at the same time award moral damages to an individual stockholder, to wit:
WHEREFORE, premises considered, judgment is hereby rendered:
xxx.
3. Ordering the defendant to pay to the plaintiff, Jesus S. Cabarrus, Sr., the sum
of P10,000,000.00, to be satisfied likewise from the funds held under escrow pursuant
to the Escrow Agreement dated April 22, 1988 or to such subsequent escrow
agreement that would supersede it, pursuant to paragraph (9), Compromise and
Arbitration Agreement, as and for moral damages; x x x[60]
The majority decision of the Arbitration Committee sought to justify its award of moral
damages to Jesus S. Cabarrus, Sr. by pointing to the fact that among the assets seized by the
government were assets belonging to Industrial Enterprise Inc. (IEI), of which Cabarrus is the
majority stockholder. It then acknowledge that Cabarrus had already recovered said assets in the
RTC, but that he won no more than actual damages. While the Committee cannot possibly speak
for the RTC, there is no doubt that Jesus S. Cabarrus, Sr., suffered moral damages on account of
that specific foreclosure, damages the Committee believes and so holds, he Jesus S. Cabarrus,
Sr., may be awarded in this proceeding.[61]
Cabarrus cause of action for the seizure of the assets belonging to IEI, of which he is the
majority stockholder, having been ventilated in a complaint he previously filed with the RTC,
from which he obtained actual damages, he was barred res judicata from filing a similar case in
another court, this time asking for moral damages which he failed to get from the earlier case.
[62]
 Worse, private respondents violated the rule against non-forum shopping.
It is a basic postulate that s corporation has a personality separate and distinct from its
stockholders.[63] The properties foreclosed belonged to MMIC, not to its stockholders. Hence, if
wrong was committed in the foreclosure, it was done against the corporation. Another reason is
that Jesus S. Cabarrus, Sr. cannot directly claim those damages for himself that would result in
the appropriation by, and the distribution to, him part of the corporations assets before the
dissolution of the corporation and the liquidation of its debts and liabilities. The Arbitration
Committee, therefore, passed upon matters not submitted to it. Moreover, said cause of action
had already been decided in a separate case. It is thus quite patent that the arbitration committee
exceeded the authority granted to it by the parties Compromise and Arbitration Agreement by
awarding moral damages to Jesus S. Cabarrus, Sr.
Atty. Sison, in his separate opinion, likewise expressed befuddlement to the award of moral
damages to Jesus S. Cabarrus, Sr.:
It is clear and it cannot be disputed therefore that based on these stipulated issues,
the parties themselves have agreed that the basic ingredient of the causes of action in
this case is the wrong committed on the corporation (MMIC) for the alleged illegal
foreclosure of its assets. By agreeing to this stipulation, PLAINTIFFS themselves
(Cabarrus, et al.) admit that the cause of action pertains only to the
corporation (MMIC) and that they are filing this for and in behalf of MMIC.
Perforce this has to be so because it is the basic rule in Corporation Law that the
shareholders have no title, legal or equitable to the property which is owned by the
corporation (13 Am. Jur. 165; Pascual vs. Oresco, 14 Phil. 83). In Ganzon & Sons vs.
Register of Deeds, 6 SCRA 373, the rule has been reiterated that a stockholder is not
the co-owner of corporate property. Since the property or assets foreclosed belongs
[sic] to MMIC, the wrong committed, if any, is done against the corporation. There is
therefore no direct injury or direct violation of the rights of Cabarrus et al. There is no
way, legal or equitable, by which Cabarrus et al. could recover damages in their
personal capacities even assuming or just because the foreclosure is improper or
invalid. The Compromise and Arbitration Agreement itself and the elementary
principles of Corporation Law say so.Therefore, I am constrained to dissent from the
award of moral damages to Cabarrus.[64]
From the foregoing discussions, it is evident that, not only did the arbitration committee
exceed its powers or so imperfectly execute them, but also, its findings and conclusions are
palpably devoid of any factual basis and in manifest disregard of the law.
We do not find it necessary to remand this case to the RTC for appropriate action. The
pleadings and memoranda filed with this Court, as well as in the Court of Appeals, raised and
extensively discussed the issues on the merits. Such being the case, there is sufficient basis for us
to resolve the controversy between the parties anchored on the records and the pleadings before
us.[65]
WHEREFORE, the Decision of the Court of Appeals dated July 17, 1995, as well as the
Orders of the Regional Trial Court of Makati, Branch 62, dated November 28, 1994 and January
19, 1995, is hereby REVERSED and SET ASIDE, and the decision of the Arbitration Committee
is hereby VACATED.
SO ORDERED

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-22973           January 30, 1968
MAMBULAO LUMBER COMPANY, plaintiff-appellant, 
vs.
PHILIPPINE NATIONAL BANK and ANACLETO HERALDO Deputy Provincial Sheriff of
Camarines Norte,defendants-appellees.
Ernesto P. Vilar and Arthur Tordesillas for plaintiff-appellant. 
Tomas Besa and Jose B. Galang for defendants-appellees.
ANGELES, J.:
An appeal from a decision, dated April 2, 1964, of the Court of First Instance of Manila in Civil Case
No. 52089, entitled "Mambulao Lumber Company, plaintiff, versus Philippine National Bank and
Anacleto Heraldo, defendants", dismissing the complaint against both defendants and sentencing
the plaintiff to pay to defendant Philippine National Bank (PNB for short) the sum of P3,582.52 with
interest thereon at the rate of 6% per annum from December 22, 1961 until fully paid, and the costs
of suit.
In seeking the reversal of the decision, the plaintiff advances several propositions in its brief which
may be restated as follows:
1. That its total indebtedness to the PNB as of November 21, 1961, was only P56,485.87
and not P58,213.51 as concluded by the court a quo; hence, the proceeds of the foreclosure
sale of its real property alone in the amount of P56,908.00 on that date, added to the sum of
P738.59 it remitted to the PNB thereafter was more than sufficient to liquidate its obligation,
thereby rendering the subsequent foreclosure sale of its chattels unlawful;
2. That it is not liable to pay PNB the amount of P5,821.35 for attorney's fees and the
additional sum of P298.54 as expenses of the foreclosure sale;
3. That the subsequent foreclosure sale of its chattels is null and void, not only because it
had already settled its indebtedness to the PNB at the time the sale was effected, but also
for the reason that the said sale was not conducted in accordance with the provisions of the
Chattel Mortgage Law and the venue agreed upon by the parties in the mortgage contract;
4. That the PNB, having illegally sold the chattels, is liable to the plaintiff for its value; and
5. That for the acts of the PNB in proceeding with the sale of the chattels, in utter disregard
of plaintiff's vigorous opposition thereto, and in taking possession thereof after the sale thru
force, intimidation, coercion, and by detaining its "man-in-charge" of said properties, the PNB
is liable to plaintiff for damages and attorney's fees.
The antecedent facts of the case, as found by the trial court, are as follows:
On May 5, 1956 the plaintiff applied for an industrial loan of P155,000 with the Naga Branch
of defendant PNB and the former offered real estate, machinery, logging and transportation
equipments as collaterals. The application, however, was approved for a loan of P100,000
only. To secure the payment of the loan, the plaintiff mortgaged to defendant PNB a parcel
of land, together with the buildings and improvements existing thereon, situated in the
poblacion of Jose Panganiban (formerly Mambulao), province of Camarines Norte, and
covered by Transfer Certificate of Title No. 381 of the land records of said province, as well
as various sawmill equipment, rolling unit and other fixed assets of the plaintiff, all situated in
its compound in the aforementioned municipality.
On August 2, 1956, the PNB released from the approved loan the sum of P27,500, for which
the plaintiff signed a promissory note wherein it promised to pay to the PNB the said sum in
five equal yearly installments at the rate of P6,528.40 beginning July 31, 1957, and every
year thereafter, the last of which would be on July 31, 1961.
On October 19, 1956, the PNB made another release of P15,500 as part of the approved
loan granted to the plaintiff and so on the said date, the latter executed another promissory
note wherein it agreed to pay to the former the said sum in five equal yearly installments at
the rate of P3,679.64 beginning July 31, 1957, and ending on July 31, 1961.
The plaintiff failed to pay the amortization on the amounts released to and received by it.
Repeated demands were made upon the plaintiff to pay its obligation but it failed or
otherwise refused to do so. Upon inspection and verification made by employees of the PNB,
it was found that the plaintiff had already stopped operation about the end of 1957 or early
part of 1958.
On September 27, 1961, the PNB sent a letter to the Provincial Sheriff of Camarines Norte
requesting him to take possession of the parcel of land, together with the improvements
existing thereon, covered by Transfer Certificate of Title No. 381 of the land records of
Camarines Norte, and to sell it at public auction in accordance with the provisions of Act No.
3135, as amended, for the satisfaction of the unpaid obligation of the plaintiff, which as of
September 22, 1961, amounted to P57,646.59, excluding attorney's fees. In compliance with
the request, on October 16, 1961, the Provincial Sheriff of Camarines Norte issued the
corresponding notice of extra-judicial sale and sent a copy thereof to the plaintiff. According
to the notice, the mortgaged property would be sold at public auction at 10:00 a.m. on
November 21, 1961, at the ground floor of the Court House in Daet, Camarines Norte.
On November 6, 1961, the PNB sent a letter to the Provincial Sheriff of Camarines Norte
requesting him to take possession of the chattels mortgaged to it by the plaintiff and sell
them at public auction also on November 21, 1961, for the satisfaction of the sum of
P57,646.59, plus 6% annual interest therefore from September 23, 1961, attorney's fees
equivalent to 10% of the amount due and the costs and expenses of the sale. On the same
day, the PNB sent notice to the plaintiff that the former was foreclosing extrajudicially the
chattels mortgaged by the latter and that the auction sale thereof would be held on
November 21, 1961, between 9:00 and 12:00 a.m., in Mambulao, Camarines Norte, where
the mortgaged chattels were situated.
On November 8, 1961, Deputy Provincial Sheriff Anacleto Heraldo took possession of the
chattels mortgaged by the plaintiff and made an inventory thereof in the presence of a PC
Sergeant and a policeman of the municipality of Jose Panganiban. On November 9, 1961,
the said Deputy Sheriff issued the corresponding notice of public auction sale of the
mortgaged chattels to be held on November 21, 1961, at 10:00 a.m., at the plaintiff's
compound situated in the municipality of Jose Panganiban, Province of Camarines Norte.
On November 19, 1961, the plaintiff sent separate letters, posted as registered air mail
matter, one to the Naga Branch of the PNB and another to the Provincial Sheriff of
Camarines Norte, protesting against the foreclosure of the real estate and chattel mortgages
on the grounds that they could not be effected unless a Court's order was issued against it
(plaintiff) for said purpose and that the foreclosure proceedings, according to the terms of the
mortgage contracts, should be made in Manila. In said letter to the Naga Branch of the PNB,
it was intimated that if the public auction sale would be suspended and the plaintiff would be
given an extension of ninety (90) days, its obligation would be settled satisfactorily because
an important negotiation was then going on for the sale of its "whole interest" for an amount
more than sufficient to liquidate said obligation.
The letter of the plaintiff to the Naga Branch of the PNB was construed by the latter as a
request for extension of the foreclosure sale of the mortgaged chattels and so it advised the
Sheriff of Camarines Norte to defer it to December 21, 1961, at the same time and place. A
copy of said advice was sent to the plaintiff for its information and guidance.
The foreclosure sale of the parcel of land, together with the buildings and improvements
thereon, covered by Transfer Certificate of Title No. 381, was, however, held on November
21, 1961, and the said property was sold to the PNB for the sum of P56,908.00, subject to
the right of the plaintiff to redeem the same within a period of one year. On the same date,
Deputy Provincial Sheriff Heraldo executed a certificate of sale in favor of the PNB and a
copy thereof was sent to the plaintiff.
In a letter dated December 14, 1961 (but apparently posted several days later), the plaintiff
sent a bank draft for P738.59 to the Naga Branch of the PNB, allegedly in full settlement of
the balance of the obligation of the plaintiff after the application thereto of the sum of
P56,908.00 representing the proceeds of the foreclosure sale of parcel of land described in
Transfer Certificate of Title No. 381. In the said letter, the plaintiff reiterated its request that
the foreclosure sale of the mortgaged chattels be discontinued on the grounds that the
 mortgaged indebtedness had been fully paid and that it could not be legally effected at a
place other than the City of Manila.
In a letter dated December 16, 1961, the plaintiff advised the Provincial Sheriff of Camarines
Norte that it had fully paid its obligation to the PNB, and enclosed therewith a copy of its
letter to the latter dated December 14, 1961.
On December 18, 1961, the Attorney of the Naga Branch of the PNB, wrote to the plaintiff
acknowledging the remittance of P738.59 with the advice, however, that as of that date the
balance of the account of the plaintiff was P9,161.76, to which should be added the
expenses of guarding the mortgaged chattels at the rate of P4.00 a day beginning December
19, 1961. It was further explained in said letter that the sum of P57,646.59, which was stated
in the request for the foreclosure of the real estate mortgage, did not include the 10%
attorney's fees and expenses of the sale. Accordingly, the plaintiff was advised that the
foreclosure sale scheduled on the 21st of said month would be stopped if a remittance of
P9,161.76, plus interest thereon and guarding fees, would be made.
On December 21, 1961, the foreclosure sale of the mortgaged chattels was held at 10:00
a.m. and they were awarded to the PNB for the sum of P4,200 and the corresponding bill of
sale was issued in its favor by Deputy Provincial Sheriff Heraldo.
In a letter dated December 26, 1961, the Manager of the Naga Branch of the PNB advised
the plaintiff giving it priority to repurchase the chattels acquired by the former at public
auction. This offer was reiterated in a letter dated January 3, 1962, of the Attorney of the
Naga Branch of the PNB to the plaintiff, with the suggestion that it exercise its right of
redemption and that it apply for the condonation of the attorney's fees. The plaintiff did not
follow the advice but on the contrary it made known of its intention to file appropriate action
or actions for the protection of its interests.
On May 24, 1962, several employees of the PNB arrived in the compound of the plaintiff in
Jose Panganiban, Camarines Norte, and they informed Luis Salgado, Chief Security Guard
of the premises, that the properties therein had been auctioned and bought by the PNB,
which in turn sold them to Mariano Bundok. Upon being advised that the purchaser would
take delivery of the things he bought, Salgado was at first reluctant to allow any piece of
property to be taken out of the compound of the plaintiff. The employees of the PNB
explained that should Salgado refuse, he would be exposing himself to a litigation wherein
he could be held liable to pay big sum of money by way of damages. Apprehensive of the
risk that he would take, Salgado immediately sent a wire to the President of the plaintiff in
Manila, asking advice as to what he should do. In the meantime, Mariano Bundok was able
to take out from the plaintiff's compound two truckloads of equipment.
In the afternoon of the same day, Salgado received a telegram from plaintiff's President
directing him not to deliver the "chattels" without court order, with the information that the
company was then filing an action for damages against the PNB. On the following day, May
25, 1962, two trucks and men of Mariano Bundok arrived but Salgado did not permit them to
take out any equipment from inside the compound of the plaintiff. Thru the intervention,
however, of the local police and PC soldiers, the trucks of Mariano Bundok were able finally
to haul the properties originally mortgaged by the plaintiff to the PNB, which were bought by
it at the foreclosure sale and subsequently sold to Mariano Bundok.
Upon the foregoing facts, the trial court rendered the decision appealed from which, as stated in the
first paragraph of this opinion, sentenced the Mambulao Lumber Company to pay to the defendant
PNB the sum of P3,582.52 with interest thereon at the rate of 6% per annum from December 22,
1961 (day following the date of the questioned foreclosure of plaintiff's chattels) until fully paid, and
the costs. Mambulao Lumber Company interposed the instant appeal.
We shall discuss the various points raised in appellant's brief in seriatim.
The first question Mambulao Lumber Company poses is that which relates to the amount of its
indebtedness to the PNB arising out of the principal loans and the accrued interest thereon. It is
contended that its obligation under the terms of the two promissory notes it had executed in favor of
the PNB amounts only to P56,485.87 as of November 21, 1961, when the sale of real property was
effected, and not P58,213.51 as found by the trial court.
There is merit to this claim. Examining the terms of the promissory note executed by the appellant in
favor of the PNB, we find that the agreed interest on the loan of P43,000.00 — P27,500.00 released
on August 2, 1956 as per promissory note of even date (Exhibit C-3), and P15,500.00 released on
October 19, 1956, as per promissory note of the same date (Exhibit C-4) — was six per cent (6%)
per annum from the respective date of said notes "until paid". In the statement of account of the
appellant as of September 22, 1961, submitted by the PNB, it appears that in arriving at the total
indebtedness of P57,646.59 as of that date, the PNB had compounded the principal of the loan and
the accrued 6% interest thereon each time the yearly amortizations became due, and on the basis of
these compounded amounts charged additional delinquency interest on them up to September 22,
1961; and to this erroneously computed total of P57,646.59, the trial court added 6% interest per
annum from September 23, 1961 to November 21 of the same year. In effect, the PNB has claimed,
and the trial court has adjudicated to it, interest on accrued interests from the time the various
amortizations of the loan became due until the real estate mortgage executed to secure the loan was
extra-judicially foreclosed on November 21, 1961. This is an error. Section 5 of Act No. 2655
expressly provides that in computing the interest on any obligation, promissory note or other
instrument or contract, compound interest shall not be reckoned, except by agreement, or in default
thereof, whenever the debt is judicially claimed. This is also the clear mandate of Article 2212 of the
new Civil Code which provides that interest due shall earn legal interest only from the time it is
judicially demanded, and of Article 1959 of the same code which ordains that interest due and
unpaid shall not earn interest. Of course, the parties may, by stipulation, capitalize the interest due
and unpaid, which as added principal shall earn new interest; but such stipulation is nowhere to be
found in the terms of the promissory notes involved in this case. Clearly therefore, the trial court fell
into error when it awarded interest on accrued interests, without any agreement to that effect and
before they had been judicially demanded.
Appellant next assails the award of attorney's fees and the expenses of the foreclosure sale in favor
of the PNB. With respect to the amount of P298.54 allowed as expenses of the extra-judicial sale of
the real property, appellant maintains that the same has no basis, factual or legal, and should not
have been awarded. It likewise decries the award of attorney's fees which, according to the
appellant, should not be deducted from the proceeds of the sale of the real property, not only
because there is no express agreement in the real estate mortgage contract to pay attorney's fees in
case the same is extra-judicially foreclosed, but also for the reason that the PNB neither spent nor
incurred any obligation to pay attorney's fees in connection with the said extra-judicial foreclosure
under consideration.
There is reason for the appellant to assail the award of P298.54 as expenses of the sale. In this
respect, the trial court said:
The parcel of land, together with the buildings and improvements existing thereon covered
by Transfer Certificate of Title No. 381, was sold for P56,908. There was, however, no
evidence how much was the expenses of the foreclosure sale although from the pertinent
provisions of the Rules of Court, the Sheriff's fees would be P1 for advertising the sale (par.
k, Sec. 7, Rule 130 of the Old Rules) and P297.54 as his commission for the sale (par. n,
Sec. 7, Rule 130 of the Old Rules) or a total of P298.54.
There is really no evidence of record to support the conclusion that the PNB is entitled to the amount
awarded as expenses of the extra-judicial foreclosure sale. The court below committed error in
applying the provisions of the Rules of Court for purposes of arriving at the amount awarded. It is to
be borne in mind that the fees enumerated under paragraphs k and n, Section 7, of Rule 130 (now
Rule 141) are demandable, only by a sheriff serving processes of the court in connection with
judicial foreclosure of mortgages under Rule 68 of the new Rules, and not in cases of extra-judicial
foreclosure of mortgages under Act 3135. The law applicable is Section 4 of Act 3135 which
provides that the officer conducting the sale is entitled to collect a fee of P5.00 for each day of actual
work performed in addition to his expenses in connection with the foreclosure sale. Admittedly, the
PNB failed to prove during the trial of the case, that it actually spent any amount in connection with
the said foreclosure sale. Neither may expenses for publication of the notice be legally allowed in the
absence of evidence on record to support it. 1It is true, as pointed out by the appellee bank, that
courts should take judicial notice of the fees provided for by law which need not be proved; but in the
absence of evidence to show at least the number of working days the sheriff concerned actually
spent in connection with the extra-judicial foreclosure sale, the most that he may be entitled to,
would be the amount of P10.00 as a reasonable allowance for two day's work — one for the
preparation of the necessary notices of sale, and the other for conducting the auction sale and
issuance of the corresponding certificate of sale in favor of the buyer. Obviously, therefore, the
award of P298.54 as expenses of the sale should be set aside.
But the claim of the appellant that the real estate mortgage does not provide for attorney's fees in
case the same is extra-judicially foreclosed, cannot be favorably considered, as would readily be
revealed by an examination of the pertinent provision of the mortgage contract. The parties to the
mortgage appear to have stipulated under paragraph (c) thereof, inter alia:
. . . For the purpose of extra-judicial foreclosure, the Mortgagor hereby appoints the
Mortgagee his attorney-in-fact to sell the property mortgaged under Act 3135, as amended,
to sign all documents and to perform all acts requisite and necessary to accomplish said
purpose and to appoint its substitute as such attorney-in-fact with the same powers as above
specified. In case of judicial foreclosure, the Mortgagor hereby consents to the appointment
of the Mortgagee or any of its employees as receiver, without any bond, to take charge of the
mortgaged property at once, and to hold possession of the same and the rents, benefits and
profits derived from the mortgaged property before the sale, less the costs and expenses of
the receivership; the Mortgagor hereby agrees further that in all cases, attorney's fees
hereby fixed at Ten Per cent (10%) of the total indebtedness then unpaid which in no case
shall be less than P100.00 exclusive of all fees allowed by law, and the expenses of
collection shall be the obligation of the Mortgagor and shall with priority, be paid to the
Mortgagee out of any sums realized as rents and profits derived from the mortgaged
property or from the proceeds realized from the sale of the said property and this mortgage
shall likewise stand as security therefor. . . .
We find the above stipulation to pay attorney's fees clear enough to cover both cases of foreclosure
sale mentioned thereunder, i.e., judicially or extra-judicially. While the phrase "in all cases" appears
to be part of the second sentence, a reading of the whole context of the stipulation would readily
show that it logically refers to extra-judicial foreclosure found in the first sentence and to judicial
foreclosure mentioned in the next sentence. And the ambiguity in the stipulation suggested and
pointed out by the appellant by reason of the faulty sentence construction should not be made to
defeat the otherwise clear intention of the parties in the agreement.
It is suggested by the appellant, however, that even if the above stipulation to pay attorney's fees
were applicable to the extra-judicial foreclosure sale of its real properties, still, the award of
P5,821.35 for attorney's fees has no legal justification, considering the circumstance that the PNB
did not actually spend anything by way of attorney's fees in connection with the sale. In support of
this proposition, appellant cites authorities to the effect: (1) that when the mortgagee has neither
paid nor incurred any obligation to pay an attorney in connection with the foreclosure sale, the claim
for such fees should be denied;  2 and (2) that attorney's fees will not be allowed when the attorney
conducting the foreclosure proceedings is an officer of the corporation (mortgagee) who receives a
salary for all the legal services performed by him for the corporation. 3 These authorities are indeed
enlightening; but they should not be applied in this case. The very same authority first cited suggests
that said principle is not absolute, for there is authority to the contrary. As to the fact that the
foreclosure proceeding's were handled by an attorney of the legal staff of the PNB, we are reluctant
to exonerate herein appellant from the payment of the stipulated attorney's fees on this ground
alone, considering the express agreement between the parties in the mortgage contract under which
appellant became liable to pay the same. At any rate, we find merit in the contention of the appellant
that the award of P5,821.35 in favor of the PNB as attorney's fees is unconscionable and
unreasonable, considering that all that the branch attorney of the said bank did in connection with
the foreclosure sale of the real property was to file a petition with the provincial sheriff of Camarines
Norte requesting the latter to sell the same in accordance with the provisions of Act 3135.
The principle that courts should reduce stipulated attorney's fees whenever it is found under the
circumstances of the case that the same is unreasonable, is now deeply rooted in this jurisdiction to
entertain any serious objection to it. Thus, this Court has explained:
But the principle that it may be lawfully stipulated that the legal expenses involved in the
collection of a debt shall be defrayed by the debtor does not imply that such stipulations
must be enforced in accordance with the terms, no matter how injurious or oppressive they
may be. The lawful purpose to be accomplished by such a stipulation is to permit the creditor
to receive the amount due him under his contract without a deduction of the expenses
caused by the delinquency of the debtor. It should not be permitted for him to convert such a
stipulation into a source of speculative profit at the expense of the debtor.
Contracts for attorney's services in this jurisdiction stands upon an entirely different footing
from contracts for the payment of compensation for any other services. By express provision
of section 29 of the Code of Civil Procedure, an attorney is not entitled in the absence of
express contract to recover more than a reasonable compensation for his services; and even
when an express contract is made the court can ignore it and limit the recovery to
reasonable compensation if the amount of the stipulated fee is found by the court to be
unreasonable. This is a very different rule from that announced in section 1091 of the Civil
Code with reference to the obligation of contracts in general, where it is said that such
obligation has the force of law between the contracting parties. Had the plaintiff herein made
an express contract to pay his attorney an uncontingent fee of P2,115.25 for the services to
be rendered in reducing the note here in suit to judgment, it would not have been enforced
against him had he seen fit to oppose it, as such a fee is obviously far greater than is
necessary to remunerate the attorney for the work involved and is therefore unreasonable. In
order to enable the court to ignore an express contract for an attorney's fees, it is not
necessary to show, as in other contracts, that it is contrary to morality or public policy (Art.
1255, Civil Code). It is enough that it is unreasonable or unconscionable. 4
Since then this Court has invariably fixed counsel fees on a quantum meruit basis whenever the fees
stipulated appear excessive, unconscionable, or unreasonable, because a lawyer is primarily a court
officer charged with the duty of assisting the court in administering impartial justice between the
parties, and hence, the fees should be subject to judicial control. Nor should it be ignored that sound
public policy demands that courts disregard stipulations for counsel fees, whenever they appear to
be a source of speculative profit at the expense of the debtor or mortgagor.  5 And it is not material
that the present action is between the debtor and the creditor, and not between attorney and client.
As court have power to fix the fee as between attorney and client, it must necessarily have the right
to say whether a stipulation like this, inserted in a mortgage contract, is valid.  6
In determining the compensation of an attorney, the following circumstances should be considered:
the amount and character of the services rendered; the responsibility imposed; the amount of money
or the value of the property affected by the controversy, or involved in the employment; the skill and
experience called for in the performance of the service; the professional standing of the attorney; the
results secured; and whether or not the fee is contingent or absolute, it being a recognized rule that
an attorney may properly charge a much larger fee when it is to be contingent than when it is
not. 7 From the stipulation in the mortgage contract earlier quoted, it appears that the agreed fee is
10% of the total indebtedness, irrespective of the manner the foreclosure of the mortgage is to be
effected. The agreement is perhaps fair enough in case the foreclosure proceedings is prosecuted
judicially but, surely, it is unreasonable when, as in this case, the mortgage was foreclosed extra-
judicially, and all that the attorney did was to file a petition for foreclosure with the sheriff concerned.
It is to be assumed though, that the said branch attorney of the PNB made a study of the case
before deciding to file the petition for foreclosure; but even with this in mind, we believe the amount
of P5,821.35 is far too excessive a fee for such services. Considering the above circumstances
mentioned, it is our considered opinion that the amount of P1,000.00 would be more than sufficient
to compensate the work aforementioned.
The next issue raised deals with the claim that the proceeds of the sale of the real properties alone
together with the amount it remitted to the PNB later was more than sufficient to liquidate its total
obligation to herein appellee bank. Again, we find merit in this claim. From the foregoing discussion
of the first two errors assigned, and for purposes of determining the total obligation of herein
appellant to the PNB as of November 21, 1961 when the real estate mortgage was foreclosed, we
have the following illustration in support of this conclusion:
1äwphï1.ñët

A. -
I. Principal Loan
(a) Promissory note dated August 2, 1956 P27,500.00
(1) Interest at 6% per annum from Aug. 2, 1956 to Nov. 21, 1961 8,751.78
(b) Promissory note dated October 19, 1956 P15,500.00
(1) Interest at 6% per annum from Oct.19, 1956 to Nov. 21, 1961 4,734.08
II. Sheriff's fees [for two (2) day's work] 10.00
III. Attorney's fee 1,000.00

Total obligation as of Nov. 21, 1961 P57,495.86

B. -
I. Proceeds of the foreclosure sale of the real estate mortgage on Nov. 21, 1961 P56,908.00
II. Additional amount remitted to the PNB on Dec. 18, 1961 738.59

Total amount of Payment made to PNB as of Dec. 18, 1961 P57,646.59

Deduct: Total obligation to the PNB P57,495.86

Excess Payment to the PNB P 150.73

========
From the foregoing illustration or computation, it is clear that there was no further necessity to
foreclose the mortgage of herein appellant's chattels on December 21, 1961; and on this ground
alone, we may declare the sale of appellant's chattels on the said date, illegal and void. But we take
into consideration the fact that the PNB must have been led to believe that the stipulated 10% of the
unpaid loan for attorney's fees in the real estate mortgage was legally maintainable, and in
accordance with such belief, herein appellee bank insisted that the proceeds of the sale of
appellant's real property was deficient to liquidate the latter's total indebtedness. Be that as it may,
however, we still find the subsequent sale of herein appellant's chattels illegal and objectionable on
other grounds.
That appellant vigorously objected to the foreclosure of its chattel mortgage after the foreclosure of
its real estate mortgage on November 21, 1961, can not be doubted, as shown not only by its letter
to the PNB on November 19, 1961, but also in its letter to the provincial sheriff of Camarines Norte
on the same date. These letters were followed by another letter to the appellee bank on December
14, 1961, wherein herein appellant, in no uncertain terms, reiterated its objection to the scheduled
sale of its chattels on December 21, 1961 at Jose Panganiban, Camarines Norte for the reasons
therein stated that: (1) it had settled in full its total obligation to the PNB by the sale of the real estate
and its subsequent remittance of the amount of P738.59; and (2) that the contemplated sale at Jose
Panganiban would violate their agreement embodied under paragraph (i) in the Chattel Mortgage
which provides as follows:
(i) In case of both judicial and extra-judicial foreclosure under Act 1508, as amended, the
parties hereto agree that the corresponding complaint for foreclosure or the petition for sale
should be filed with the courts or the sheriff of the City of Manila, as the case may be; and
that the Mortgagor shall pay attorney's fees hereby fixed at ten per cent (10%) of the total
indebtedness then unpaid but in no case shall it be less than P100.00, exclusive of all costs
and fees allowed by law and of other expenses incurred in connection with the said
foreclosure. [Emphasis supplied]
Notwithstanding the abovequoted agreement in the chattel mortgage contract, and in utter disregard
of the objection of herein appellant to the sale of its chattels at Jose Panganiban, Camarines Norte
and not in the City of Manila as agreed upon, the PNB proceeded with the foreclosure sale of said
chattels. The trial court, however, justified said action of the PNB in the decision appealed from in
the following rationale:
While it is true that it was stipulated in the chattel mortgage contract that a petition for the
extra-judicial foreclosure thereof should be filed with the Sheriff of the City of Manila,
nevertheless, the effect thereof was merely to provide another place where the mortgage
chattel could be sold in addition to those specified in the Chattel Mortgage Law. Indeed, a
stipulation in a contract cannot abrogate much less impliedly repeal a specific provision of
the statute. Considering that Section 14 of Act No. 1508 vests in the mortgagee the choice
where the foreclosure sale should be held, hence, in the case under consideration, the PNB
had three places from which to select, namely: (1) the place of residence of the mortgagor;
(2) the place of the mortgaged chattels were situated; and (3) the place stipulated in the
contract. The PNB selected the second and, accordingly, the foreclosure sale held in Jose
Panganiban, Camarines Norte, was legal and valid.
To the foregoing conclusion, We disagree. While the law grants power and authority to the
mortgagee to sell the mortgaged property at a public place in the municipality where the mortgagor
resides or where the property is situated, 8 this Court has held that the sale of a mortgaged chattel
may be made in a place other than that where it is found, provided that the owner thereof consents
thereto; or that there is an agreement to this effect between the mortgagor and the mortgagee.  9 But
when, as in this case, the parties agreed to have the sale of the mortgaged chattels in the City of
Manila, which, any way, is the residence of the mortgagor, it cannot be rightly said that mortgagee
still retained the power and authority to select from among the places provided for in the law and the
place designated in their agreement over the objection of the mortgagor. In providing that the
mortgaged chattel may be sold at the place of residence of the mortgagor or the place where it is
situated, at the option of the mortgagee, the law clearly contemplated benefits not only to the
mortgagor but to the mortgagee as well. Their right arising thereunder, however, are personal to
them; they do not affect either public policy or the rights of third persons. They may validly be
waived. So, when herein mortgagor and mortgagee agreed in the mortgage contract that in cases of
both judicial and extra-judicial foreclosure under Act 1508, as amended, the corresponding
complaint for foreclosure or the petition for sale should be filed with the courts or the Sheriff of
Manila, as the case may be, they waived their corresponding rights under the law. The correlative
obligation arising from that agreement have the force of law between them and should be complied
with in good faith. 10
By said agreement the parties waived the legal venue, and such waiver is valid and legally
effective, because it, was merely a personal privilege they waived, which is not contrary, to
public policy or to the prejudice of third persons. It is a general principle that a person may
renounce any right which the law gives unless such renunciation is expressly prohibited or
the right conferred is of such nature that its renunciation would be against public policy. 11
 On the other hand, if a place of sale is specified in the mortgage and statutory requirements
in regard thereto are complied with, a sale is properly conducted in that place. Indeed, in the
absence of a statute to the contrary, a sale conducted at a place other than that stipulated
for in the mortgage is invalid, unless the mortgagor consents to such sale. 12
Moreover, Section 14 of Act 1508, as amended, provides that the officer making the sale should
make a return of his doings which shall particularly describe the articles sold and the amount
received from each article. From this, it is clear that the law requires that sale be made article by
article, otherwise, it would be impossible for him to state the amount received for each item. This
requirement was totally disregarded by the Deputy Sheriff of Camarines Norte when he sold the
chattels in question in bulk, notwithstanding the fact that the said chattels consisted of no less than
twenty different items as shown in the bill of sale. 13 This makes the sale of the chattels manifestly
objectionable. And in the absence of any evidence to show that the mortgagor had agreed or
consented to such sale in gross, the same should be set aside.
It is said that the mortgagee is guilty of conversion when he sells under the mortgage but not in
accordance with its terms, or where the proceedings as to the sale of foreclosure do not comply with
the statute. 14 This rule applies squarely to the facts of this case where, as earlier shown, herein
appellee bank insisted, and the appellee deputy sheriff of Camarines Norte proceeded with the sale
of the mortgaged chattels at Jose Panganiban, Camarines Norte, in utter disregard of the valid
objection of the mortgagor thereto for the reason that it is not the place of sale agreed upon in the
mortgage contract; and the said deputy sheriff sold all the chattels (among which were a skagit with
caterpillar engine, three GMC 6 x 6 trucks, a Herring Hall Safe, and Sawmill equipment consisting of
a 150 HP Murphy Engine, plainer, large circular saws etc.) as a single lot in violation of the
requirement of the law to sell the same article by article. The PNB has resold the chattels to another
buyer with whom it appears to have actively cooperated in subsequently taking possession of and
removing the chattels from appellant compound by force, as shown by the circumstance that they
had to take along PC soldiers and municipal policemen of Jose Panganiban who placed the chief
security officer of the premises in jail to deprive herein appellant of its possession thereof. To
exonerate itself of any liability for the breach of peace thus committed, the PNB would want us to
believe that it was the subsequent buyer alone, who is not a party to this case, that was responsible
for the forcible taking of the property; but assuming this to be so, still the PNB cannot escape liability
for the conversion of the mortgaged chattels by parting with its interest in the property. Neither would
its claim that it afterwards gave a chance to herein appellant to repurchase or redeem the chattels,
improve its position, for the mortgagor is not under obligation to take affirmative steps to repossess
the chattels that were converted by the mortgagee. 15 As a consequence of the said wrongful acts of
the PNB and the Deputy Sheriff of Camarines Norte, therefore, We have to declare that herein
appellant is entitled to collect from them, jointly and severally, the full value of the chattels in
question at the time they were illegally sold by them. To this effect was the holding of this Court in a
similar situation. 16
The effect of this irregularity was, in our opinion to make the plaintiff liable to the defendant
for the full value of the truck at the time the plaintiff thus carried it off to be sold; and of
course, the burden is on the defendant to prove the damage to which he was thus subjected.
...
This brings us to the problem of determining the value of the mortgaged chattels at the time of their
sale in 1961. The trial court did not make any finding on the value of the chattels in the decision
appealed from and denied altogether the right of the appellant to recover the same. We find enough
evidence of record, however, which may be used as a guide to ascertain their value. The record
shows that at the time herein appellant applied for its loan with the PNB in 1956, for which the
chattels in question were mortgaged as part of the security therefore, herein appellant submitted a
list of the chattels together with its application for the loan with a stated value of P107,115.85. An
official of the PNB made an inspection of the chattels in the same year giving it an appraised value
of P42,850.00 and a market value of P85,700.00. 17 The same chattels with some additional
equipment acquired by herein appellant with part of the proceeds of the loan were reappraised in a
re-inspection conducted by the same official in 1958, in the report of which he gave all the chattels
an appraised value of P26,850.00 and a market value of P48,200.00. 18 Another re-inspection report
in 1959 gave the appraised value as P19,400.00 and the market value at P25,600.00. 19 The said
official of the PNB who made the foregoing reports of inspection and re-inspections testified in court
that in giving the values appearing in the reports, he used a conservative method of appraisal which,
of course, is to be expected of an official of the appellee bank. And it appears that the values were
considerably reduced in all the re-inspection reports for the reason that when he went to herein
appellant's premises at the time, he found the chattels no longer in use with some of the heavier
equipments dismantled with parts thereof kept in the bodega; and finding it difficult to ascertain the
value of the dismantled chattels in such condition, he did not give them anymore any value in his
reports. Noteworthy is the fact, however, that in the last re-inspection report he made of the chattels
in 1961, just a few months before the foreclosure sale, the same inspector of the PNB reported that
the heavy equipment of herein appellant were "lying idle and rusty" but were "with a shed free from
rains" 20 showing that although they were no longer in use at the time, they were kept in a proper
place and not exposed to the elements. The President of the appellant company, on the other hand,
testified that its caterpillar (tractor) alone is worth P35,000.00 in the market, and that the value of its
two trucks acquired by it with part of the proceeds of the loan and included as additional items in the
mortgaged chattels were worth no less than P14,000.00. He likewise appraised the worth of its
Murphy engine at P16,000.00 which, according to him, when taken together with the heavy
equipments he mentioned, the sawmill itself and all other equipment forming part of the chattels
under consideration, and bearing in mind the current cost of equipments these days which he
alleged to have increased by about five (5) times, could safely be estimated at P120,000.00. This
testimony, except for the appraised and market values appearing in the inspection and re-inspection
reports of the PNB official earlier mentioned, stand uncontroverted in the record; but We are not
inclined to accept such testimony at its par value, knowing that the equipments of herein appellant
had been idle and unused since it stopped operating its sawmill in 1958 up to the time of the sale of
the chattels in 1961. We have no doubt that the value of chattels was depreciated after all those
years of inoperation, although from the evidence aforementioned, We may also safely conclude that
the amount of P4,200.00 for which the chattels were sold in the foreclosure sale in question was
grossly unfair to the mortgagor. Considering, however, the facts that the appraised value of
P42,850.00 and the market value of P85,700.00 originally given by the PNB official were admittedly
conservative; that two 6 x 6 trucks subsequently bought by the appellant company had thereafter
been added to the chattels; and that the real value thereof, although depreciated after several years
of inoperation, was in a way maintained because the depreciation is off-set by the marked increase
in the cost of heavy equipment in the market, it is our opinion that the market value of the chattels at
the time of the sale should be fixed at the original appraised value of P42,850.00.
Herein appellant's claim for moral damages, however, seems to have no legal or factual basis.
Obviously, an artificial person like herein appellant corporation cannot experience physical
sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock or social
humiliation which are basis of moral damages. 21 A corporation may have a good reputation which, if
besmirched, may also be a ground for the award of moral damages. The same cannot be
considered under the facts of this case, however, not only because it is admitted that herein
appellant had already ceased in its business operation at the time of the foreclosure sale of the
chattels, but also for the reason that whatever adverse effects of the foreclosure sale of the chattels
could have upon its reputation or business standing would undoubtedly be the same whether the
sale was conducted at Jose Panganiban, Camarines Norte, or in Manila which is the place agreed
upon by the parties in the mortgage contract.
But for the wrongful acts of herein appellee bank and the deputy sheriff of Camarines Norte in
proceeding with the sale in utter disregard of the agreement to have the chattels sold in Manila as
provided for in the mortgage contract, to which their attentions were timely called by herein
appellant, and in disposing of the chattels in gross for the miserable amount of P4,200.00, herein
appellant should be awarded exemplary damages in the sum of P10,000.00. The circumstances of
the case also warrant the award of P3,000.00 as attorney's fees for herein appellant.
WHEREFORE AND CONSIDERING ALL THE FOREGOING, the decision appealed from should be,
as hereby, it is set aside. The Philippine National Bank and the Deputy Sheriff of the province of
Camarines Norte are ordered to pay, jointly and severally, to Mambulao Lumber Company the total
amount of P56,000.73, broken as follows: P150.73 overpaid by the latter to the PNB, P42,850.00 the
value of the chattels at the time of the sale with interest at the rate of 6% per annum from December
21, 1961, until fully paid, P10,000.00 in exemplary damages, and P3,000.00 as attorney's fees.
Costs against both appellees.

FIRST DIVISION

[G.R. No. 113176. July 30, 2001]

HANIL DEVELOPMENT CO., LTD., petitioner, vs. COURT OF APPEALS

AND M.R. ESCOBAR EXPLOSIVE ENGINEERS, INC., respondents.

[G.R. No. 113342. July 30, 2001]

M.R. ESCOBAR EXPLOSIVE ENGINEERS, INC., petitioner vs. COURT OF

APPEALS AND HANIL DEVELOPMENT CO., LTD., respondents.

D E C I S I O N**
PUNO, J.:

Before us are Petitions for Review on Certiorari under Rule 45 of the Decision
rendered on August 23, 1993 and the Resolution promulgated on January 5,
1994, both by the Court of Appeals.[1]
In the early seventies, the Ministry of Public Works and Highways (MPWH for
brevity) awarded petitioner Hanil Development Co., Ltd. (Hanil for brevity) the
contract to construct the 200-kilometer Iligan-Cagayan de Oro-Butuan Highway
Project. On November 14, 1976, Hanil sub-let the rock-blasting work portion of the
contract to private respondent M.R. Escobar Explosive Engineers, Inc. (Escobar for
brevity). By express stipulation of the parties, Escobar will be compensated thus:
x x x x x x x x x
9. For the services performed by Sub-Contractor (Escobar) in accordance with the
terms and conditions herein described, Hanil will pay twenty pesos (P20.00) per cubic
meter on the following basis:
a. If the rocks are solid in nature, quantity will be assessed as shown on the cross-
section.
b. If the nature of the rock is soft and can be removed by using ripper, quantity may be
assessed on the actual blasted amount surveyed by both Company and Sub-
Contractors engineers.[2]
On January 3, 1977, Escobar commenced its blasting works. It continued its
services until terminated by Hanil on December 15, 1978. For the duration of the
contract, it worked on the segments of the construction undertaking designated in the
agreement as A-2, B-2, B-3, B-4, and C-1. It was fully paid for the areas A-2 and B-4.
It claimed, however, that Hanil still partially owes it one million three hundred forty
one thousand seven hundred twenty-seven and 40/100 (P1,341,727.40) pesos for
blastings done in the B-2, B-3 and C-1 areas. The claim was predicated on the theory
that the rocks it caused to explode in the contested areas were solid in nature, and
therefore the volume should be computed using the cross-section approach pursuant to
the above-quoted paragraph 9(a). It appears that all the payments it received were
fixed based on the joint survey method under paragraph 9(b). Escobar stressed that
Hanil was always paid by the MPWH using the cross-section system. This was
pursuant to the awarded 200-km. highway project contract between the MPWH and
Hanil, where the volumes of rocks to be blasted in specific areas were already pre-
estimated based on the cross-section approach. In fine, Escobars line of reasoning is
that Hanil should pay it the same amount of money Hanil received from the MPWH
for the blastings it did in the contested areas (B-2, B-3 and C-1). The
figure P1,341,727.40 represents the difference between the two.
Consequently, Escobar instituted Civil Case No. 35966 for recovery of a sum of
money with damages against Hanil before the then Court of First Instance of Rizal
(CFI for brevity). Hanil filed its answer with counterclaim for damages. Trial
thereafter ensued. On April 16, 1982, the CFI handed down a Decision ordering Hanil
to pay P1,341,727.40 for the value of rocks blasted by Escobar; 10% of the amount
due for attorneys fees; and the costs of suit.
On May 24, 1982, upon Escobars motion, the CFI garnished the bank accounts of
Hanil and levied its equipments. On June 29, 1982, it also granted Escobars Ex-parte
Motion to Deposit Cash praying that the Finance Manager of the National Power
Corporation (NAPOCOR) be directed to withdraw Hanils funds from the NAPOCOR
and deposit the same with the Clerk of Court. Hanil challenged the issuance of the
May 24 and June 29 Orders before the Court of Appeals in a Petition for Certiorari
with prayer for Injunction and Preliminary Restraining Order, docketed as CA-G.R.
No. SP-14512. The appellate court, in a decision rendered on February 3, 1983,
voided the challenged Orders.
While the above-mentioned petition was pending before the Court of Appeals and
despite the writ of injunction issued by it, other developments continued to unfold in
the CFI. In an Order dated August 23, 1982, it disapproved Hanils Amended Record
on Appeal and dismissed its appeal. On October 19, 1982, it denied Hanils Motion for
Reconsideration of the August 23 Order and at the same time granted Escobars
Motion for Execution of Judgment. These two Orders were again contested by Hanil
before the appellate court in a Petition for Certiorari and Mandamus with prayer for
Prohibition. The said Orders were again annulled and set aside. Hanils appeal was
reinstated and the CFI was ordered to elevate the entire records of the case to the
Court of Appeals.
After transmittal of the records, the Court of Appeals notified Hanil on February
11, 1985 to file Appellants Brief within forty-five days. On March 13, 1985, and
within the reglementary period to submit its brief, Hanil filed an Application for
Judgment against Attachment Bond and Motion to Defer Filing of Appellants Brief,
praying for a hearing before the Court of Appeals so it could prove the damages it
sustained as a result of the illegal writ of attachment issued by the CFI. It wanted a
judgment against the attachment bond posted by Escobar and its insurer Sanpiro
Insurance Corporation (Sanpiro for brevity) to be included in the appealed decision in
the main case, Civil Case No. 35966, then pending before the Court of
Appeals. Escobar filed its Comment with a Motion to Dismiss Appeal allegedly for
Hanils failure to file its brief.
On April 30, 1985, the appellate court issued a Resolution denying Hanils
Application for Judgment Against the Attachment Bond together with its Motion to
Defer Filing of Appellants Brief. It also dismissed Hanils appeal. Hanils Motion for
Reconsideration was denied on June 20, 1985. Hanil promptly sought relief from said
April 30 and June 20 Resolutions by filing with this Court a Petition for Certiorari,
Mandamus and Prohibition with Mandatory Injunction. In a decision rendered on
September 30, 1986, we reversed and set aside the assailed Resolutions. We also
directed the Court of Appeals to conduct hearings on the application for damages
against the bond filed by Hanil and to reinstate the appeal.
Upon reinstatement of the appeal, the appellate court conducted hearings on the
application for judgment against the attachment bond. On August 23, 1993, it
promulgated the herein contested Decision,[3] the decretal portion of which reads as
follows:
WHEREFORE, in view of the foregoing, judgment is hereby rendered:
1. REVERSING and SETTING ASIDE the appealed decision in Civil Case No.
35966;
2. DISMISSING the complaint in Civil Case No. 35966;
3. ORDERING the plaintiff-appellee (Escobar) to pay defendant-appellant under the
counterclaim in Civil Case No. 35966 the following sums of money:
a. FIFTY THOUSAND (P50,000.00) PESOS, for and as attorneys fees;
b. TWENTY THOUSAND (P20,000.00) PESOS in the concept of nominal damages;
4. ORDERING plaintiff-appellee and bondsman Sanpiro to jointly and severally pay
defendant-appellant under the attachment bond the total sum of FIFTY-SEVEN
THOUSAND FIVE HUNDRED SEVEN AND 90/100 (P57,507.90) PESOS as and
for attorneys fees and litigation expenses; and
5. ORDERING plaintiff-appellee to pay bondsman Sanpiro by way of reimbursement
under their Indemnity Agreement the sum of FIFTY-SEVEN THOUSAND FIVE
HUNDRED SEVEN AND 90/100 (P57,507.90) PESOS.
Costs against plaintiff-appellee.[4]
Hanil and Escobar filed their own respective Motions for Reconsideration, which
were both denied in a Resolution[5] dated January 5, 1994.
On February 15, 1994, Hanil filed before this court a Petition for Review on
Certiorari under Rule 45 assailing the amount of damages awarded to it. This was
docketed as G.R. No. 113176, entitled Hanil Development Co., Ltd., Petitioner, vs.
Court of Appeals and M.R. Escobar Explosive Engineers, Respondents. On
February 24, 1994, Escobar likewise filed its own Petition for Review on Certiorari
under Rule 45, docketed as G.R. No. 113342, entitled M.R. Escobar Explosive
Engineers, Inc., Petitioner, vs. Court of Appeals and Hanil Development Co.,
Ltd., Respondents.
In G.R. No. 113176, petitioner Hanil raises the following grounds:
I. THE U.S.$3,000.00 INCURRED AND SPENT BY PETITIONER IN TAKING
THE DEPOSITION OF ONE OF ITS WITNESSES SHOULD HAVE BEEN
ADJUDGED TO BE PAID BY THE PRIVATE RESPONDENT.
II. THE PETITIONER SHOULD HAVE BEEN AWARDED WITH
TEMPERATE DAMAGES OF P5,000,000.00 IN LIEU OF ACTUAL
DAMAGES, INSTEAD OF THE SMALLER SUM OF P20,000.00 IN
NOMINAL DAMAGES.
III. THE PETITIONER SHOULD HAVE BEEN AWARDED MORAL
DAMAGES IN THE AMOUNT OF P1,000,000.00.
IV. THE PRIVATE RESPONDENT SHOULD BE MADE TO PAY THE
PETITIONER EXEMPLARY DAMAGES IN THE AMOUNT
OF P5,000,000.00 IN ORDER TO BE AN EFFECTIVE DETERRENT TO
MALEVOLENT, FRAUDULENT AND MALICIOUS SUIT AND
APPLICATION FOR ATTACHMENT AND OTHER SIMILAR ACTS;
 V. THE AWARDED ATTORNEYS FEES FOR THE PRINCIPAL ACTION
SHOULD HAVE BEEN INCREASED FROM P50,000.00 TO P500,000.00.[6]
In G. R. No. 113342, petitioner Escobar makes the following assignment of
errors:
I.

THE COURT OF APPEALS ERRED GRAVELY IN NOT AFFIRMING THE

TRIAL COURTS 16 APRIL 1982 DECISION IN PETITIONERS FAVOR.
II.

THE COURT OF APPEALS FURTHER ERRED GRAVELY IN AWARDING

DAMAGES AND ATTORNEYS FEES TO PRIVATE RESPONDENT, AS
WELL AS IN AWARDING ADDITIONAL ATTORNEYS FEES AND
INJUNCTION BOND PREMIUM ON PRIVATE RESPONDENTS
APPLICATION FOR DAMAGES ON ATTACHMENT.
III.

THEREFORE THE COURT OF APPEALS ERRED IN NOT DISMISSING THE

PETITION IN CA-G.R. NO. 05055 OUTRIGHT FOR BEING UTTERLY
DEVOID OF MERIT.[7]
We will jointly discuss the related issues forwarded by the parties, first, in respect
of the appeal from the Decision of the CFI in Civil Case No. 35966, before ruling on
the issues advanced anent the application for judgment on the attachment bond.

Re: Appeal from the Decision of the CFI 

in Civil Case No. 35966

In its petition in G.R. No. 113342, Escobar claims that the Court of Appeals
erroneously relied on sub-paragraph (b) of paragraph 9 of the Sub-Contract
Agreement. It maintains that all the blasting works it performed in areas B-2, B-3 and
C-1 were for and on solid rock areas. It emphasizes that since Hanil was paid by the
MPWH based on the cross-section system in these areas, it should likewise be paid in
the same manner.
The contention fails to impress. Just because the MPWH paid Hanil using the
cross-section approach for the blastings in the contested areas does not necessarily
mean that Hanil should in turn compensate Escobar based on the same technique of
computation. Apropos is the observation made by Mr. N.A. Vaitialingam, the Project
Manager of the engineering consultants Sauti, Certeza & F.F. Cruz for the 200-
kilometer Iligan-Butuan highway construction project. In a letter[8] dated December 10,
1979 addressed to the Honorable Minister of the MPWH, he declared the following:
These payments are made subject to the specification under Clause 105-3-2 Rock
Material of the General Specifications, copy attached. Therefore it is not possible to
ascertain the exact volume of rock or boulders blasted by the sub-contractor from
the volume paid to the contractor because the rock blasted may be, for example, 60%
or 65 % of the volume paid in the cross-section. Also very often boulders are pushed
by the bull-dozers without blasting.
Thus it is desired that the main contractor (Hanil) and the sub-contractor should come
to a mutual agreement on the subject. (emphasis supplied.)
The import of this observation was correctly interpreted by the Court of Appeals, thus:
What Mr. N.A. Vaitialingam simply means is that the cross-section computation for
payment by the MPWH to appellant (Hanil), as contractor, could not be in turn used
as an accurate basis for payment by appellant to appellee (Escobar), as sub-contractor,
not only because the rock blasted in each cross-section might have been (sic)
consisted only of 60% or 65% solid rock but also because very often blasting was no
longer necessary since boulders were just removed by bulldozers. The truth of Mr.
Vaitialingams statement is confirmed by appellees own documentary evidence which
show that rock blasting and boulders comprised a major portion of the work done in
segment B-2 (Exh. B-3) and segment B-3 (Exh. B-2) and that the work in segment C-
1 (Exh. B-1) consisted entirely of blasting and dozing. Moreover, appellees Exhibits
B-1, B-2 and B-3 clearly evince that In all cases there were overburden of earth of
varying depths on top of rock and boulders. In other words, payment to appellee as
shown by cross-section under Sub-paragraph (a) of Paragraph 9 of the questioned
document was obviously inapplicable for not being based on an actual and accurate
method of measurement.[9]
This letter (Exhibit H) is part of the evidence of Escobar. It cannot impugn its own
evidence.[10]
To be sure, what governs the contractual relation between Escobar and Hanil are
the stipulations contained in their Sub-contract Agreement. A contract is the law
between the parties and where there is nothing in it which is contrary to law, morals,
good customs, public policy or public good, its validity must be sustained.
The express terms of the agreement are clear as day to necessitate any
interpretation. For the cross-section approach under paragraph 9(a) to apply, it is
imperative to establish that the rocks blasted were solid in nature. Otherwise, the joint
survey procedure will be followed. Escobar failed to prove the nature of the rocks it
blasted in the disputed areas. It did not introduce in evidence object samples of the
rocks in the area. Neither did it present photographs, both wide and close-up angles of
representative portions of the said areas that it worked on, let alone photographs of
typical clusters of the rock it blasted.[11]
 That the cross-section system was not at all followed by the parties is further
shown by Escobars act in the first seven months of the two-year agreement when it
received monthly payments computed on the basis of the joint survey method. During
the period from January to July 1977, its monthly billings were fixed after a joint
survey of the estimated quantity of rocks before blasting and another joint assessment
of the actual volume of rocks blasted by its own engineers and those of Hanil, which
is in accordance with Paragraph 9(b), not 9(a), of their Sub-contract Agreement. Its
belated assertion that these monthly collections were understood to be mere partial
compensation, subject to adjustment after applying the cross-section approach,
appears to be an afterthought. If the claim is true, it could have easily indicated or
annotated the condition in the billings that it sent Hanil and the receipts for the
payment. Since Escobar accepted payment for a considerable period of time under the
joint survey method [par. 9(b)], it cannot later be allowed to assume an inconsistent
position by invoking the cross-section approach [par. 9(a)].
We now discuss the merit of Hanils petition. For its part, it seeks an increase in
the grant of nominal damages and attorneys fees. It also prays for additional awards of
moral and exemplary damages.
Hanils plea for additional amount in the form of temperate damages in lieu of the
nominal damages awarded to it must be denied. We agree with the appellate courts
ruling that the amount of twenty thousand pesos (P20,000.00) is just. Hanil failed to
prove the actual value of pecuniary injury which it sustained as a consequence of
Escobars institution of an unfounded civil suit. The testimony of one of its witnesses
presented in the CFI, to the effect that the filing of the complaint affected Hanils
reputation and that it affected the management and engineers working in the site, [12]  is
1

not enough proof. The institution of the suit, unfounded though it may be, does not
always lead to pecuniary loss as to warrant an award of actual or temperate damages.
The link between the cause (the suit) and the effect (the loss) must be established by
the required proof.
So, too, must its demand for payment of moral damages fail. The rule is that
moral damages can not be granted in favor of a corporation. Being an artificial person
and having existence only in legal contemplation, a corporation has no feelings, no
emotions, no senses. It cannot, therefore, experience physical suffering, mental
anguish, fright, serious anxiety, wounded feelings or moral shock or social
humiliation, which can be suffered only by one having a nervous system.[13]
Hanils prayer for exemplary damages must likewise be denied. It must be
remembered that this kind of damages cannot be recovered as a matter of right. Its
allowance rests in the sound discretion of the court, and only upon a showing of its
legal foundation. Under the Civil Code, the claimant must first establish that he is
entitled to moral, temperate, compensatory or liquidated damages before it may be
imposed in his favor.[14] Hanil failed to do so, hence, it cannot claim exemplary
damages.
We hold, however, that an increase in the grant of attorneys fees from fifty
thousand pesos (P50,000.00) to one hundred fifty thousand pesos (P150,000.00) is in
order. Although the original complaint lodged with the CFI was merely for collection
of a sum of money with damages, involving as it did modest legal issues, that
complaint had in reality generated several incidents during the close to twenty years
that this case was under litigation. Twice, Hanil filed Petitions for Certiorari with the
Court of Appeals. Once, it elevated the case to this Court questioning the dismissal of
the appeal by the appellate court. Then, after reinstatement of the appeal, it had to
present and defend its case not only for the appeal but also for its application on the
attachment bond. And now, Hanil has to contend with Escobars Petition in G.R. No.
113342, even as it concerns itself with its own Petition in G.R. No. 113176. In fine,
taking into account the over-all factual environment upon which this case proceeded,
we find the award of P50,000.00 insufficient and hereby augment it to P150,000.00.

Re: Application for Judgment on the Attachment Bond

Apropos the Application for Judgment on the Attachment Bond, Escobar claims
in its petition that the award of attorneys fees and injunction bond premium in favor of
Hanil is to law and jurisprudence. It contends that no malice or bad faith may be
imputed to it in procuring the writ.
Escobars protestation is now too late in the day. The question of the illegality of
the attachment and Escobars bad faith in obtaining it has long been settled in one of
the earlier incidents of this case. The Court of Appeals, in its decision rendered on
February 3, 1983 in C.A.-G.R. No. SP-14512, voided the challenged writ, having been
issued with grave abuse of discretion. Escobars bad faith in procuring the writ cannot
be doubted. Its Petition for the Issuance of Preliminary Attachment made such
damning allegations that: Hanil was already able to secure a complete release of its
final collection from the MPWH; it has moved out some of its heavy equipments for
unknown destination, and it may leave the country anytime. Worse, its Ex
Parte Motion to Resolve Petition alleged that after personal verification by (Escobar)
of (Hanils) equipment in Cagayan de Oro City, it appears that the equipments were no
longer existing from their compound. All these allegations of Escobar were found to
be totally baseless and untrue. So manifest was their baselessness that Escobar did not
even submit a reply to refute the assertions Hanil made in its Opposition to the
Petition for the Issuance of Preliminary Attachment. Nor did it attempt to negate the
same assertions of Hanil in its Motion for Reconsideration.Instead, it advanced the
evasive claim that the Motion has become moot and academic on the ground that the
writ of attachment has already been executed.
We therefore hold that on the basis of the evidence presented, Hanil is entitled to
temperate damages in the amount of five hundred thousand pesos (P500,000.00). As a
consequence of the illegal writ, Hanil suffered the following damages: (1) some of the
checks it issued were dishonored after its bank accounts were garnished; (2) its
operation stopped temporarily for five days because it was prevented from using its
equipments and machineries; and (3) its goodwill, reputation and commercial standing
as one of the top multi-national construction firms in Asia was tarnished.
In light of Escobars bad faith in procuring the attachment and garnishment orders,
we grant the additional award of exemplary damages in the amount of one million
pesos (P1,000,000.00) by way of example or correction for public good. This should
deter parties in litigations from resorting to baseless and preposterous allegations to
obtain writs of attachments from gullible judges. The misuse of our legal processes
cannot be tolerated especially if they victimize persons and institutions of foreign
nationality doing legitimate business in our jurisdiction. While as a general rule, the
liability on the attachment bond is limited to actual (or in some cases, temperate or
nominal) damages, exemplary damages may be recovered where the attachment was
established to be maliciously sued out.[15]
We, however, delete the award of attorneys fees for the litigation of the
application for damages against the bond since we have already included the same in
our grant of attorneys fees in the main action concerning the appeal.
In other aspects, we sustain the assailed Decision and Resolution of the Court of
Appeals. The claim of Hanil that as part of the cost of suit, Escobar should be made to
pay three thousand U.S. dollars (U.S.$3,000.00) for the money it spent in taking the
deposition upon written interrogatories of one of its witnesses, Engr. Chan Woo Park,
in South Korea on November 18, 1988 is bereft of merit. The case law on this issue is
now settled, viz.:
(T)he expenses of taking depositions are allowable as costs only if it appears to the
court: (1) that they were reasonably necessary; (2) the burden of so demonstrating
is upon the party claiming such expenses as costs; (3) whether that burden is met is
within the sound discretion of the trial court; and (4) its ruling thereon is presumed
to be correct and will not be disturbed unless it is so unreasonable as to manifest a
clear abuse of discretion.[16] (emphasis supplied)
Whether the taking of a deposition was reasonably necessary to the protection of
the partys interests as to entitle it to reimbursement of expenses is a question primarily
for the lower court to decide based on all the facts and circumstances of the case. On
this score, the Court of Appeals (which heard the Application for Damages)
disallowed Hanils claim since the deposition was merely corroborative in nature
and, therefore, superfluous.[17] We agree. A cursory reading of the transcript of
deposition of Engr. Chan will readily reveal that his testimony only corroborated that
of Hanils earlier witness, Mr. Chang Yong Ahn, its Operations Manager, who took the
stand on February 26, 1988. The two testimonies dealt with the same topic: the illegal
writ of attachment on Hanils equipments and garnishment of its funds, and the
pecuniary loss it suffered as a consequence thereof. In fact, despite the Court of
Appealss own conclusion about the superfluity of the deposition, it still decided in
favor of Hanil based on the other undisputed evidence on record.
In the same vein, we sustain the grant of seven thousand five hundred seven pesos
and ninety centavos (P7,507.90) as injunction bond premium for being reasonable
under the premises.
Finally, we find and so hold that, as between Escobar and its bondsman Sanpiro,
the former is liable to the latter by virtue of their Indemnity Agreement[18]  for the
1

damages the subject attachment bond is herein made to answer. However, since the
extent of its liability will be determined only by the terms and conditions of the
contract of suretyship,[19] it can only be held answerable up to the amount of one
million three hundred forty-one thousand, seven hundred twenty-seven pesos and
forty centavos (P1,341,727.40).
IN VIEW WHEREOF, the assailed Decision and Resolution of the Court of
Appeals are hereby modified as follows:
1. ORDERING Escobar to pay Hanil under the counterclaim in Civil Case No.
35966 the following sums of money:
a. TWENTY THOUSAND PESOS (P20,000.00) as nominal damages;
b. ONE HUNDRED FIFTY THOUSAND PESOS (P150,000.00) for and as attorneys
fees.
2. ORDERING Escobar, and bondsman Sanpiro to jointly and severally pay with
it up to the extent of one million three hundred forty-one thousand seven hundred
twenty-seven pesos and forty centavos (P1,341,727.40), to pay Hanil under the
attachment bond the following sums of money:
a. FIVE HUNDRED THOUSAND PESOS (P500,000.00) as temperate damages;
b. ONE MILLION PESOS (P1,000,000.00) as exemplary damages;
c. SEVEN THOUSAND FIVE HUNDRED SEVEN PESOS AND NINETY
CENTAVOS (P7,507.90) for the Injunction Bond Premium.
3. ORDERING Escobar to pay Hanil the remainder of the amount of temperate,
exemplary and bond premium damages - which cannot be fully covered by the
attachment bond - in the sum of ONE HUNDRED SIXTY-FIVE THOUSAND
SEVEN HUNDRED EIGHTY PESOS AND FIFTY CENTAVOS (P165,780.50).
4. ORDERING Escobar to pay bondsman Sanpiro by way of reimbursement
under their Indemnity Agreement the sum of ONE MILLION THREE HUNDRED
FORTY-ONE THOUSAND SEVEN HUNDRED TWENTY-SEVEN PESOS AND
FORTY CENTAVOS (P1,341,727.40).
Costs against Escobar.
SO ORDERED.
147 Phil. 794
BACHE and Co. Case

VILLAMOR, J.:
This is an original action of certiorari, prohibition and mandamus, with
prayer for a writ of preliminary mandatory and prohibitory injunction.  In
their petition Bache & Co. (Phil.), Inc., a corporation duly organized and
existing under the laws of the Philippines, and its President, Frederick
E. Seggerman, pray this Court to declare null and void Search Warrant No.
2-M-70 issued by respondent Judge on February 25, 1970; to order
respondents to desist from enforcing the same and/or keeping the
documents, papers and effects seized by virtue thereof, as well as from
enforcing the tax assessments on petitioner corporation alleged by
petitioners to have been made on the basis of the said documents, papers
and effects, and to order the return of the latter to petitioners.  We gave due
course to the petition but did not issue the writ of preliminary injunction
prayed for therein.
The pertinent facts of this case, as gathered from the record, are as follows:
On February 24, 1970, respondent Misael P. Vera, Commissioner of
Internal Revenue, wrote a letter addressed to respondent
Judge Vivencio M. Ruiz requesting the issuance of a search warrant against
petitioners for violation of Section 46(a) of the National Internal Revenue
Code, in relation to all other pertinent provisions thereof, particularly
Sections 53, 72, 73, 208 and 209, and authorizing Revenue Examiner
Rodolfo de Leon, one of herein respondents, to make and file the
application for search warrant which was attached to the letter.
In the afternoon of the following day, February 25, 1970, respondent de
Leon and his witness, respondent Arturo Logronio, went to the Court of
First Instance of Rizal.  They brought with them the following papers:  res-
pondent Vera's aforesaid letter-request; an application for search warrant
already filled up but still unsigned by respondent de Leon; an affidavit of
respondent Logroniosubscribed before respondent de Leon; a deposition in
printed form of respondent Logronio already accomplished and signed by
him but not yet subscribed; and a search warrant already accomplished but
still unsigned by respondent Judge.
At that time respondent Judge was hearing a certain case; so, by means of a
note, he instructed his Deputy Clerk of Court to take the depositions of
respondents de Leon and Logronio.  After the session had adjourned,
respondent Judge was informed that the depositions had already been
taken.  The stenographer, upon request of respondent Judge, read to him
her stenographic notes; and thereafter, respondent Judge asked
respondent Logronio to take the oath and warned him that if his deposition
was found to be false and without legal basis, he could be charged for
perjury.  Respondent Judge signed respondent de Leon's application for
search warrant and respondent Logronio's deposition, Search Warrant No.
2-M-70 was then signed by respondent Judge and accordingly issued.
Three days later, or on February 28, 1970, which was a Saturday, the BIR
agents served the search warrant on petitioners at the offices of petitioner
corporation on Ayala Avenue, Makati, Rizal.  Petitioners' lawyers protested
the search on the ground that no formal complaint or transcript of
testimony was attached to the warrant.  The agents nevertheless proceeded
with their search which yielded six boxes of documents.
On March 3, 1970, petitioners filed a petition with the Court of First
Instance of Rizal praying that the search warrant be quashed, dissolved or
recalled, that preliminary prohibitory and mandatory writs of injunction be
issued, that the search warrant be declared null and void, and that the
respondents be ordered to pay petitioners, jointly and severally, damages
and attorney's fees.  On March 18, 1970, the respondents, thru the Solicitor
General, filed an answer to the petition.  After hearing, the court, presided
over by respondent Judge, issued on July 29, 1970, an order dismissing the
petition for dissolution of the search warrant.  In the meantime, or on April
16, 1970, the Bureau of Internal Revenue made tax assessments on
petitioner corporation in the total sum of P2,594,729.97, partly, if not en-
tirely, based on the documents thus seized.  Petitioners came to this Court.
The petition should be granted for the following reasons:
1.  Respondent Judge failed to personally examine the complainant and his
witness.
The pertinent provisions of the Constitution of the Philippines and of the
Revised Rules of Court are:
"(3)  The right of the people to be secure in their persons, houses, papers
and effects against unreasonable searches and seizures shall not be
violated, and no warrants shall issue but upon probable cause, to be
determined by the judge after examination under oath or affirmation of the
complainant and the witnesses he may produce, and particularly describing
the place to be searched, and the persons or things to be seized." (Art. III,
Sec. 1, Constitution.)
"SEC. 3.  Requisites for issuing search warrant.  - A search warrant shall not
issue but upon probable cause in connection with one specific offense to be
determined by the judge or justice of the peace after examination under
oath or affirmation of the complainant and the witnesses he may produce,
and particularly describing the place to be searched and the persons or
things to be seized.
"No search warrant shall issue for more than one specific offense.
"SEC. 4.  Examination of the applicant.  - The judge or justice of the peace
must, before issuing the warrant, personally examine on oath or affirmation
the complainant and any witnesses he may produce and take their
depositions in writing, and attach them to the record, in addition to any
affidavits presented to him." (Rule 126, Revised Rules of Court.)
The examination of the complainant and the witnesses he may produce,
required by Art. III, Sec. 1, par. 3, of the Constitution, and by Secs. 3 and 4,
Rule 126 of the Revised Rules of Court, should be conducted by the judge
himself and not by others.  The phrase "which shall be determined by the
judge after examination under oath or affirmation of the complainant and
the witnesses he may produce," appearing in the said constitutional
provision, was introduced by Delegate Francisco as an amendment to the
draft submitted by the Sub-Committee of Seven.  The following discussion
in the Constitutional Convention (Laurel, Proceedings of the Philippine
Constitutional Convention, Vol. III, pp. 755-757) is enlightening:
"SR. ORENSE.  Vamos a dejar compañero, los piropos y vamos al grano.
En los casos de una necesidad de actuar inmediatamente para que no
se frustren los fines de la justicia mediante el registroinmediato y
la incautacion del cuerpo del delito,
no cree Su Señoria que causaria cierta demora el procedimiento apuntado e
n suenmienda en tal forma que podria frustrar los fines de
la justicia o si Su Señoria encuentra un remedio para estos casos con el fin
de compaginar los fines de la justicia con los derechos del indi-
viduo en su persona, bienes etcetera, etcetera.
"SR. FRANCISCO.  No puedo ver en
la practica el caso hipotetico que Su Señoria pregunta por la sigutente razon
:  el que solicitaun mandamiento de registro tiene que hacerlo por escrito y 
ese escrito no aparecera en la Mesa
del Juez sin que alguien vaya al juez a presentar ese escrito o peticion de sec
uestro.  Esa persona que presenta el registro puede ser
el mismo denunciante o alguna persona que solicita dicho mandamiento de 
registro.  Ahora toda la enmienda en esos casos consiste en que haya peticio
nde registro y el juez no
se atendra solamente a esa peticion sino que el juez examinara a ese denunc
iante y si tiene testigostambien examinara a los testigos.
"SR. ORENSE.  No cree Su Señoria que el tomar la declaracion de ese denu
nciante por escrito siempre requeriria algun tiempo?
"SR. FRANCISCO.  Seria cuestion de un par
de horas, pero por otro lado minimizamos en todo lo posible las vejaciones i
njustascon
la expedicion & arbitraria de los mandamientos de registro.  Creo que entre 
dos males debemos escoger el menor.
x        x          x          x          x
"MR. LAUREL.  x x x The reason why we are in favor of this amendment is
because we are incorporating in our constitution something of a
fundamental character.  Now, before a judge could issue a search warrant,
he must be under the obligation to examine personally under oath the
complainant and if he has any witness, the witnesses that he may pro-
duce.  x x x."
The implementing rule in the Revised Rules of Court, Sec. 4, Rule 126, is
more emphatic and candid, for it requires the judge, before issuing a search
warrant, to "personally examine on oath or affirmation the complainant
and any witnesses he may produce x x x."
Personal examination by the judge of the complainant and his witnesses is
necessary to enable him to determine the existence or non-existence of a
probable cause, pursuant to Art. III, Sec. 1, par. 3, of the Constitution, and
Sec. 3, Rule 126 of the Revised Rules of Court, both of which prohibit the
issuance of warrants except "upon probable cause." The determination of
whether or not a probable cause exists calls for the exercise of judgment
after a judicial appraisal of facts and should not be allowed to be delegated
in the absence of any rule to the contrary.
In the case at bar, no personal examination at all was conducted by
respondent Judge of the complainant (respondent de Leon) and his witness
(respondent Logronio).  While it is true that the complainant's application
for search warrant and the witness' printed-form deposition were
subscribed and sworn to before respondent Judge, the latter did not ask
either of the two any question the answer to which could possibly be the
basis for determining whether or not there was probable cause against
herein petitioners.  Indeed, the participants seem to have attached so little
significance to the matter that notes of the proceedings before respondent
Judge were not even taken.  At this juncture it may be well to recall the
salient facts.  The transcript of stenographic notes (pp. 61-76, April 1, 1970,
Annex J-2 of the Petition) taken at the hearing of this case in the court
below shows that per instruction of respondent Judge, Mr. Eleodoro V.
Gonzales, Special Deputy Clerk of Court, took the depositions of the
complainant and his witness, and that stenographic notes thereof were
taken by Mrs. Gaspar.  At that time respondent Judge was at
the sala hearing a case.  After respondent Judge was through with the
hearing, Deputy Clerk Gonzales, stenographer Gaspar, complainant de
Leon and witness Logronio went to respondent Judge's chamber and
informed the Judge that they had finished the depositions.  Respondent
Judge then requested the stenographer to read to him her stenographic
notes.  Special Deputy Clerk Gonzales testified as follows:
"A    And after finishing reading the stenographic notes, the Honorable
Judge requested or instructed them, requested Mr. Logronio to raise his
hand and warned him if his deposition will be found to be false and without
legal basis, he can be charged criminally for perjury.  The Honorable Court
told Mr. Logronio whether he affirms the facts contained in his deposition
and the affidavit executed before Mr. Rodolfo de Leon.
"Q   And thereafter?
"A    And thereafter, he signed the deposition of Mr. Logronio.
"Q   Who is this he?
"A    The Honorable Judge.
"Q   The deposition or the affidavit?
"A    The affidavit, Your Honor."
Thereafter, respondent Judge signed the search warrant.
The participation of respondent Judge in the proceedings which led to the
issuance of Search Warrant No. 2-M-70 was thus limited to listening to the
stenographer's reading of her notes, to a few words of warning against the
commission of perjury, and to administering the oath to the complainant
and his witness.  This cannot be considered as a personal examination.  If
there was an examination at all of the complainant and his witness, it was
the one conducted by the Deputy Clerk of Court.  But, as already stated, the
Constitution and the rules require a personal examination by the judge.  It
was precisely on account of the intention of the delegates to the
Constitutional Convention to make it a duty of the issuing judge to
personally examine the complainant and his witnesses that the question of
how much time would be consumed by the judge in examining them came
up before the Convention, as can be seen from the record of the
proceedings quoted above.  The reading of the stenographic notes to
respondent Judge did not constitute sufficient compliance with the
constitutional mandate and the rule; for by that manner respondent Judge
did not have the opportunity to observe the demeanor of the complainant
and his witness, and to propound initial and follow-up questions which the
judicial mind, on account of its training, was in the best position to
conceive.  These were important in arriving at a sound inference on the all-
important question of whether or not there was probable cause.
2.  The search warrant was issued for more than one specific offense.
Search Warrant No. 2-M-70 was issued for "[v]iolation of Sec. 46(a) of the
National Internal Revenue Code in relation to all other pertinent provisions
thereof particularly Secs. 53, 72, 73, 208 and 209." The question is:  Was
the said search warrant issued "in connection with one specific offense," as
required by Sec. 3, Rule 126?
To arrive at the correct answer it is essential to examine closely the
provisions of the Tax Code referred to above.  Thus we find the following:
Sec. 46(a) requires the filing of income tax returns by corporations.
Sec. 53 requires the withholding of income taxes at source.
Sec. 72 imposes surcharges for failure to render income tax returns and for
rendering false and fraudulent returns.
Sec. 73 provides the penalty for failure to pay the income tax, to make a
return or to supply the information required under the Tax Code.
Sec. 208 penalizes "[a]ny person who distills, rectifies, repacks,
compounds, or manufactures any article subject to a specific tax, without
having paid the privilege tax therefor, or who aids or abets in the conduct of
illicit distilling, rectifying, compounding, or illicit manufacture of any
article subject to specific tax x x x," and provides that in the case of a
corporation, partnership, or association, the official and/or employee who
caused the violation shall be responsible.
Sec. 209 penalizes the failure to make a return of receipts, sales, business,
or gross value of output removed, or to pay the tax due thereon.
The search warrant in question was issued for at least four distinct offenses
under the Tax Code.  The first is the violation of Sec. 46(a), Sec. 72 and Sec.
73 (the filing of income tax returns), which are interrelated.  The second is
the violation of Sec. 53 (withholding of income taxes at source).  The third
is the violation of Sec. 208 (unlawful pursuit of business or occupation);
and the fourth is the violation of Sec. 209 (failure to make a return of
receipts, sales, business or gross value of output actually removed or to pay
the tax due thereon).  Even in their classification the six above-mentioned
provisions are embraced in two different titles:  Secs. 46(a), 53, 72 and 73
are under Title II (Income Tax); while Secs. 208 and 209 are under Title V
(Privilege Tax on Business and Occupation).
Respondents argue that Stonehill, et al. vs. Diokno, et al., L-19550, June 19,
1967 (20 SCRA 383), is not applicable, because there the search warrants
were issued for "violation of Central Bank Laws, Internal Revenue (Code)
and Revised Penal Code;" whereas, here Search Warrant No. 2-M-70 was
issued for violation of only one code, i.e., the National Internal Revenue
Code.  The distinction is more apparent than real, because it was precisely
on account of the Stonehill incident, which occurred sometime before the
present Rules of Court took effect on January 1, 1964, that this Court
amended the former rule by inserting therein the phrase "in connection
with one specific offense," and adding the sentence "No search warrant
shall issue for more than one specific offense," in what is now Sec. 3, Rule
126.  Thus we said in Stonehill:
"Such is the seriousness of the irregularities committed in connection with
the disputed search warrants, that this Court deemed it fit to amend Section
3 of Rule 122 of the former Rules of Court by providing in its counterpart,
under the Revised Rules of Court that 'a search warrant shall not issue but
upon probable cause in connection with one specific offense.' Not satisfied
with this qualification, the Court added thereto a paragraph, directing that
'no search warrant shall issue for more than one specific offense.'"
3.  The search warrant does not particularly describe the things to be seized.
The documents, papers and effects sought to be seized are described in
Search Warrant No. 2-M-70 in this manner:
"Unregistered and private books of accounts (ledgers, journals, columnars,
receipts and disbursements books, customers ledgers); receipts for
payments received; certificates of stocks and securities; contracts, promis-
sory notes and deeds of sale; telex and coded messages; business
communications; accounting and business records; checks and check stubs;
records of bank deposits and withdrawals; and records of foreign
remittances, covering the years 1966 to 1970."
The description does not meet the requirement in Art. III, Sec. 1, of the
Constitution, and of Sec. 3, Rule 126 of the Revised Rules of Court, that the
warrant should particularly describe the things to be seized.
In Stonehill, this Court, speaking thru Mr. Chief Justice
Roberto Concepcion, said:
"The grave violation of the Constitution made in the application for the con-
tested search warrants was compounded by the description therein made of
the effects to be searched for and seized, to wit:
'Books of accounts, financial records, vouchers, journals, correspondence,
receipts, ledgers, portfolios, credit journals, typewriters, and other
documents and/or papers showing all business transactions including
disbursement receipts, balance sheets and related profit and loss
statements.'
"Thus, the warrants authorized the search for and seizure of records
pertaining to all business transactions of petitioners herein, regardless of
whether the transactions were legal or illegal.  The warrants sanctioned the
seizure of all records of the petitioners and the aforementioned
corporations, whatever their nature, thus openly contravening the explicit
command of our Bill of Rights - that the things to be seized
be particularly described - as well as tending to defeat its major
objective:  the elimination of general warrants."
While the term "all business transactions" does not appear in Search
Warrant No. 2-M-70, the said warrant nevertheless tends to defeat the
major objective of the Bill of Rights, i.e., the elimination of general
warrants, for the language used therein is so all-embracing as to include all
conceivable records of petitioner corporation, which, if seized, could
possibly render its business inoperative.
In Uy Kheytin, et al. vs. Villareal, etc., et al., 42 Phil. 886, 896, this Court
had occasion to explain the purpose of the requirement that the warrant
should particularly describe the place to be searched and the things to be
seized, to wit:
"x x x Both the Jones Law (sec. 3) and General Orders No. 58 (sec. 97)
specifically require that a search warrant should particularly describe the
place to be searched and the things to be seized.  The evident purpose and
intent of this requirement is to limit the things to be seized to those, and
only those, particularly described in the search warrant - to leave the
officers of the law with no discretion regarding what articles they shall
seize, to the end that 'unreasonable searches and seizures' may not be
made, - that abuses may not be committed.  That this is the correct
interpretation of this constitutional provision is borne out by American
authorities."
The purpose as thus explained could, surely and effectively, be defeated
under the search warrant issued in this case.
A search warrant may be said to particularly describe the things to be seized
when the description therein is as specific as the circumstances will
ordinarily allow (People vs. Rubio, 57 Phil., 384); or when the description
expresses a conclusion of fact - not of law - by which the warrant officer
may be guided in making the search and seizure (idem., dissent
of Abad Santos, J.); or when the things describes are limited to those which
bear direct relation to the offense for which the warrant is being issued
(Sec. 2, Rule 126, Revised Rules of Court).  The herein search warrant does
not conform to any of the foregoing tests.  If the articles desired to be seized
have any direct relation to an offense committed, the applicant must
necessarily have some evidence, other than those articles, to prove the said
offense; and the articles subject of search and seizure should come in handy
merely to strengthen such evidence.  In this event, the description
contained in the herein disputed warrant should have mentioned, at least,
the dates, amounts, persons, and other pertinent data regarding the
receipts of payments, certificates of stocks and securities, contracts,
promissory notes, deeds of sale, messages and communications, checks,
bank deposits and withdrawals, records of foreign remittances, among
others, enumerated in the warrant.
Respondents contend that certiorari does not lie because petitioners failed
to file a motion for reconsideration of respondent Judge's order of July 29,
1970.  The contention is without merit.  In the first place, when the
questions raised before this Court are the same as those which were
squarely raised in and passed upon by the court below, the filing of a
motion for reconsideration in said court before certiorari can be instituted
in this Court is no longer a prerequisite.  (Pajo, etc., et al. vs. Ago, et al., 108
Phil., 905).  In the second place, the rule requiring the filing of a motion for
reconsideration before an application for a writ of certiorari can be
entertained was never intended to be applied without considering the
circumstances.  (Matutina vs. Buslon, et al. 109 Phil., 140.) In the case at
bar time is of the essence in view of the tax assessments sought to be
enforced by respondent officers of the Bureau of Internal Revenue
against petitioner corporation, on account of which immediate and more
direct action becomes necessary.  (Matute vs. Court of Appeals, et al., 26
SCRA 768.) Lastly, the rule does not apply where, as in this case, the
deprivation of petitioners' fundamental right to due process taints the
proceeding against them in the court below not only with irregularity but
also with nullity.  (Matute vs. Court of Appeals, et al., supra.)
It is next contended by respondents that a corporation is not entitled to
protection against unreasonable searches and seizures.  Again, we find no
merit in the contention.
"Although, for the reasons above stated, we are of the opinion that an
officer of a corporation which is charged with a violation of a statute of the
state of its creation, or of an act of Congress passed in the exercise of its
constitutional powers, cannot refuse to produce the books and papers of
such corporation, we do not wish to be understood as holding that a
corporation is not entitled to immunity, under the 4th Amendment,
against unreasonable searches and seizures.  A corporation is, after all, but
an association of individuals under an assumed name and with a distinct
legal entity.  In organizing itself as a collective body it waives no
constitutional immunities appropriate to such body.  Its property cannot be
taken without compensation.  It can only be proceeded against by due
process of law, and is protected, under the 14th Amendment, against
unlawful discrimination.  x xx." (Hale v. Henkel, 201 U.S. 43, 50 L. ed. 652.)
"In Linn v. United States, 163 C.C.A. 470, 251 Fed. 476, 480, it was thought
that a different rule applied to a corporation, on the ground that it was not
privileged from producing its books and papers.  But the rights of a
corporation against unlawful search and seizure are to be protected even if
the same result might have been achieved in a lawful way." (Silverthorne
Lumber Company, et al. v. United States of America, 251 U.S. 385, 64 L. ed.
319.)
In Stonehill, et al. vs. Diokno, et al., supra, this Court impliedly recognized
the right of a corporation to object against unreasonable searches and
seizures, thus:
"As regards the first group, we hold that petitioners herein have no cause of
action to assail the legality of the contested warrants and of the seizures
made in pursuance thereof, for the simple reason that said corporations
have their respective personalities, separate and distinct from the
personality of herein petitioners, regardless of the amount of shares of
stock or of the interest of each of them in said corporations, and whatever
the offices they hold therein may be.  Indeed, it is well settled that the
legality of a seizure can be contested only by the part whose rights is have
been impaired thereby, and that the objection to an unlawful search and
seizure is purely personal and cannot be availed of by third
parties.  Consequently, petitioners herein may not validly object to the use
in evidence against them of the documents, papers and things seized from
the offices and premises of the corporations adverted to above, since the
right to object to the admission of said papers in evidence belongs
exclusively to the corporations, to whom the seized effects belong, and may
not be invoked by the corporate officers in proceedings against them in
their individual capacity.  x x x."
In the Stonehill case only the officers of the various corporations in whose
offices documents, papers and effects were searched and seized were the
petitioners.  In the case at bar, the corporation to whom the seized
documents belong, and whose rights have thereby been impaired, is itself a
petitioner.  On that score, petitioner corporation here stands on a different
footing from the corporations in Stonehill.
The tax assessments referred to earlier in this opinion were, if not entirely -
as claimed by petitioners - at least partly - as in effect admitted by
respondents - based on the documents seized by virtue of Search Warrant
No. 2-M-70.  Furthermore, the fact that the assessments were made some
one and one-half months after the search and seizure on February 25, 1970,
is a strong indication that the documents thus seized served as basis for the
assessments.  These assessments should therefore not be enforced.
PREMISES CONSIDERED, the petition is granted.  Accordingly, Search
Warrant No. 2-M-70 issued by respondent Judge is declared null and void;
respondents are permanently enjoined from enforcing the said search
warrant; the documents, papers and effects seized thereunder are ordered
to be returned to petitioners; and respondent officials of the Bureau of
Internal Revenue and their representatives are permanently enjoined from
enforcing the assessments mentioned in Annex "G" of the present petition,
as well as other assessments based on the documents, papers and effects
seized under the search warrant herein nullified, and from using the same
against petitioners in any criminal or other proceeding.  No pronouncement
as to costs.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-31061 August 17, 1976
SULO NG BAYAN INC., plaintiff-appellant, 
vs.
GREGORIO ARANETA, INC., PARADISE FARMS, INC., NATIONAL WATERWORKS &
SEWERAGE AUTHORITY, HACIENDA CARETAS, INC, and REGISTER OF DEEDS OF
BULACAN, defendants-appellees.
Hill & Associates Law Offices for appellant.
Araneta, Mendoza & Papa for appellee Gregorio Araneta, Inc.
Carlos, Madarang, Carballo & Valdez for Paradise Farms, Inc.
Leopoldo M. Abellera, Arsenio J. Magpale & Raul G. Bernardo, Office of the Government Corporate
Counsel for appellee National Waterworks & Sewerage Authority.
Candido G. del Rosario for appellee Hacienda Caretas, Inc.

ANTONIO, J.:
The issue posed in this appeal is whether or not plaintiff corporation (non- stock may institute an
action in behalf of its individual members for the recovery of certain parcels of land allegedly owned
by said members; for the nullification of the transfer certificates of title issued in favor of defendants
appellees covering the aforesaid parcels of land; for a declaration of "plaintiff's members as absolute
owners of the property" and the issuance of the corresponding certificate of title; and for damages.
On April 26, 1966, plaintiff-appellant Sulo ng Bayan, Inc. filed an accion de revindicacion with the
Court of First Instance of Bulacan, Fifth Judicial District, Valenzuela, Bulacan, against defendants-
appellees to recover the ownership and possession of a large tract of land in San Jose del Monte,
Bulacan, containing an area of 27,982,250 square meters, more or less, registered under the
Torrens System in the name of defendants-appellees' predecessors-in-interest.   The complaint, as
1

amended on June 13, 1966, specifically alleged that plaintiff is a corporation organized and existing
under the laws of the Philippines, with its principal office and place of business at San Jose del
Monte, Bulacan; that its membership is composed of natural persons residing at San Jose del
Monte, Bulacan; that the members of the plaintiff corporation, through themselves and their
predecessors-in-interest, had pioneered in the clearing of the fore-mentioned tract of land, cultivated
the same since the Spanish regime and continuously possessed the said property openly and public
under concept of ownership adverse against the whole world; that defendant-appellee Gregorio
Araneta, Inc., sometime in the year 1958, through force and intimidation, ejected the members of the
plaintiff corporation fro their possession of the aforementioned vast tract of land; that upon
investigation conducted by the members and officers of plaintiff corporation, they found out for the
first time in the year 1961 that the land in question "had been either fraudelently or erroneously
included, by direct or constructive fraud, in Original Certificate of Title No. 466 of the Land of
Records of the province of Bulacan", issued on May 11, 1916, which title is fictitious, non-existent
and devoid of legal efficacy due to the fact that "no original survey nor plan whatsoever" appears to
have been submitted as a basis thereof and that the Court of First Instance of Bulacan which issued
the decree of registration did not acquire jurisdiction over the land registration case because no
notice of such proceeding was given to the members of the plaintiff corporation who were then in
actual possession of said properties; that as a consequence of the nullity of the original title, all
subsequent titles derived therefrom, such as Transfer Certificate of Title No. 4903 issued in favor of
Gregorio Araneta and Carmen Zaragoza, which was subsequently cancelled by Transfer Certificate
of Title No. 7573 in the name of Gregorio Araneta, Inc., Transfer Certificate of Title No. 4988 issued
in the name of, the National Waterworks & Sewerage Authority (NWSA), Transfer Certificate of Title
No. 4986 issued in the name of Hacienda Caretas, Inc., and another transfer certificate of title in the
name of Paradise Farms, Inc., are therefore void. Plaintiff-appellant consequently prayed (1) that
Original Certificate of Title No. 466, as well as all transfer certificates of title issued and derived
therefrom, be nullified; (2) that "plaintiff's members" be declared as absolute owners in common of
said property and that the corresponding certificate of title be issued to plaintiff; and (3) that
defendant-appellee Gregorio Araneta, Inc. be ordered to pay to plaintiff the damages therein
specified.
On September 2, 1966, defendant-appellee Gregorio Araneta, Inc. filed a motion to dismiss the
amended complaint on the grounds that (1) the complaint states no cause of action; and (2) the
cause of action, if any, is barred by prescription and laches. Paradise Farms, Inc. and Hacienda
Caretas, Inc. filed motions to dismiss based on the same grounds. Appellee National Waterworks &
Sewerage Authority did not file any motion to dismiss. However, it pleaded in its answer as special
and affirmative defenses lack of cause of action by the plaintiff-appellant and the barring of such
action by prescription and laches.
During the pendency of the motion to dismiss, plaintiff-appellant filed a motion, dated October 7,
1966, praying that the case be transferred to another branch of the Court of First Instance sitting at
Malolos, Bulacan, According to defendants-appellees, they were not furnished a copy of said motion,
hence, on October 14, 1966, the lower court issued an Order requiring plaintiff-appellant to furnish
the appellees copy of said motion, hence, on October 14, 1966, defendant-appellant's motion dated
October 7, 1966 and, consequently, prayed that the said motion be denied for lack of notice and for
failure of the plaintiff-appellant to comply with the Order of October 14, 1966. Similarly, defendant-
appellee paradise Farms, Inc. filed, on December 2, 1966, a manifestation information the court that
it also did not receive a copy of the afore-mentioned of appellant. On January 24, 1967, the trial
court issued an Order dismissing the amended complaint.
On February 14, 1967, appellant filed a motion to reconsider the Order of dismissal on the grounds
that the court had no jurisdiction to issue the Order of dismissal, because its request for the transfer
of the case from the Valenzuela Branch of the Court of First Instance to the Malolos Branch of the
said court has been approved by the Department of Justice; that the complaint states a sufficient
cause of action because the subject matter of the controversy in one of common interest to the
members of the corporation who are so numerous that the present complaint should be treated as a
class suit; and that the action is not barred by the statute of limitations because (a) an action for the
reconveyance of property registered through fraud does not prescribe, and (b) an action to impugn a
void judgment may be brought any time. This motion was denied by the trial court in its Order dated
February 22, 1967. From the afore-mentioned Order of dismissal and the Order denying its motion
for reconsideration, plaintiff-appellant appealed to the Court of Appeals.
On September 3, 1969, the Court of Appeals, upon finding that no question of fact was involved in
the appeal but only questions of law and jurisdiction, certified this case to this Court for resolution of
the legal issues involved in the controversy.
I
Appellant contends, as a first assignment of error, that the trial court acted without authority and
jurisdiction in dismissing the amended complaint when the Secretary of Justice had already
approved the transfer of the case to any one of the two branches of the Court of First Instance of
Malolos, Bulacan.
Appellant confuses the jurisdiction of a court and the venue of cases with the assignment of cases in
the different branches of the same Court of First Instance. Jurisdiction implies the power of the court
to decide a case, while venue the place of action. There is no question that respondent court has
jurisdiction over the case. The venue of actions in the Court of First Instance is prescribed in Section
2, Rule 4 of the Revised Rules of Court. The laying of venue is not left to the caprice of plaintiff, but
must be in accordance with the aforesaid provision of the rules.  The mere fact that a request for the
2

transfer of a case to another branch of the same court has been approved by the Secretary of
Justice does not divest the court originally taking cognizance thereof of its jurisdiction, much less
does it change the venue of the action. As correctly observed by the trial court, the indorsement of
the Undersecretary of Justice did not order the transfer of the case to the Malolos Branch of the
Bulacan Court of First Instance, but only "authorized" it for the reason given by plaintiff's counsel that
the transfer would be convenient for the parties. The trial court is not without power to either grant or
deny the motion, especially in the light of a strong opposition thereto filed by the defendant. We hold
that the court a quo acted within its authority in denying the motion for the transfer the case to
Malolos notwithstanding the authorization" of the same by the Secretary of Justice.
II
Let us now consider the substantive aspect of the Order of dismissal.
In dismissing the amended complaint, the court a quo said:
The issue of lack of cause of action raised in the motions to dismiss refer to the lack
of personality of plaintiff to file the instant action. Essentially, the term 'cause of
action' is composed of two elements: (1) the right of the plaintiff and (2) the violation
of such right by the defendant. (Moran, Vol. 1, p. 111). For these reasons, the rules
require that every action must be prosecuted and defended in the name of the real
party in interest and that all persons having an interest in the subject of the action
and in obtaining the relief demanded shall be joined as plaintiffs (Sec. 2, Rule 3). In
the amended complaint, the people whose rights were alleged to have been violated
by being deprived and dispossessed of their land are the members of the corporation
and not the corporation itself. The corporation has a separate. and distinct
personality from its members, and this is not a mere technicality but a matter of
substantive law. There is no allegation that the members have assigned their rights
to the corporation or any showing that the corporation has in any way or manner
succeeded to such rights. The corporation evidently did not have any rights violated
by the defendants for which it could seek redress. Even if the Court should find
against the defendants, therefore, the plaintiff corporation would not be entitled to the
reliefs prayed for, which are recoveries of ownership and possession of the land,
issuance of the corresponding title in its name, and payment of damages. Neither
can such reliefs be awarded to the members allegedly deprived of their land, since
they are not parties to the suit. It appearing clearly that the action has not been filed
in the names of the real parties in interest, the complaint must be dismissed on the
ground of lack of cause of action. 
3
Viewed in the light of existing law and jurisprudence, We find that the trial court correctly dismissed
the amended complaint.
It is a doctrine well-established and obtains both at law and in equity that a corporation is a distinct
legal entity to be considered as separate and apart from the individual stockholders or members who
compose it, and is not affected by the personal rights, obligations and transactions of its
stockholders or members.   The property of the corporation is its property and not that of the
4

stockholders, as owners, although they have equities in it. Properties registered in the name of the
corporation are owned by it as an entity separate and distinct from its members.  Conversely, a
5

corporation ordinarily has no interest in the individual property of its stockholders unless transferred
to the corporation, "even in the case of a one-man corporation.   The mere fact that one is president
6

of a corporation does not render the property which he owns or possesses the property of the
corporation, since the president, as individual, and the corporation are separate
similarities.   Similarly, stockholders in a corporation engaged in buying and dealing in real estate
7

whose certificates of stock entitled the holder thereof to an allotment in the distribution of the land of
the corporation upon surrender of their stock certificates were considered not to have such legal or
equitable title or interest in the land, as would support a suit for title, especially against parties other
than the corporation.  8

It must be noted, however, that the juridical personality of the corporation, as separate and distinct
from the persons composing it, is but a legal fiction introduced for the purpose of convenience and to
subserve the ends of justice.   This separate personality of the corporation may be disregarded, or
9

the veil of corporate fiction pierced, in cases where it is used as a cloak or cover for fraud or
illegality, or to work -an injustice, or where necessary to achieve equity. 10

Thus, 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, or in the
case of two corporations, merge them into one, the one being merely regarded as part or
instrumentality of the other.   The same is true where a corporation is a dummy and serves no
11

business purpose and is intended only as a blind, or an alter ego or business conduit for the sole
benefit of the stockholders.   This doctrine of disregarding the distinct personality of the corporation
12

has been applied by the courts in those cases when the corporate entity is used for the evasion of
taxes   or when the veil of corporate fiction is used to confuse legitimate issue of employer-employee
13

relationship,   or when necessary for the protection of creditors, in which case the veil of corporate
14

fiction may be pierced and the funds of the corporation may be garnished to satisfy the debts of a
principal stockholder.   The aforecited principle is resorted to by the courts as a measure protection
15

for third parties to prevent fraud, illegality or injustice. 

16

It has not been claimed that the members have assigned or transferred whatever rights they may
have on the land in question to the plaintiff corporation. Absent any showing of interest, therefore, a
corporation, like plaintiff-appellant herein, has no personality to bring an action for and in behalf of its
stockholders or members for the purpose of recovering property which belongs to said stockholders
or members in their personal capacities.
It is fundamental that there cannot be a cause of action 'without an antecedent primary legal right
conferred' by law upon a person.   Evidently, there can be no wrong without a corresponding right,
17

and no breach of duty by one person without a corresponding right belonging to some other
person.   Thus, the essential elements of a cause of action are legal right of the plaintiff, correlative
18

obligation of the defendant, an act or omission of the defendant in violation of the aforesaid legal
right.   Clearly, no right of action exists in favor of plaintiff corporation, for as shown heretofore it
19

does not have any interest in the subject matter of the case which is material and, direct so as to
entitle it to file the suit as a real party in interest.
III
Appellant maintains, however, that the amended complaint may be treated as a class suit, pursuant
to Section 12 of Rule 3 of the Revised Rules of Court.
In order that a class suit may prosper, the following requisites must be present: (1) that the subject
matter of the controversy is one of common or general interest to many persons; and (2) that the
parties are so numerous that it is impracticable to bring them all before the court.  20

Under the first requisite, the person who sues must have an interest in the controversy, common
with those for whom he sues, and there must be that unity of interest between him and all such other
persons which would entitle them to maintain the action if suit was brought by them jointly.  21

As to what constitutes common interest in the subject matter of the controversy, it has been
explained in Scott v. Donald   thus:
22

The interest that will allow parties to join in a bill of complaint, or that will enable the
court to dispense with the presence of all the parties, when numerous, except a
determinate number, is not only an interest in the question, but one in common in the
subject Matter of the suit; ... a community of interest growing out of the nature and
condition of the right in dispute; for, although there may not be any privity between
the numerous parties, there is a common title out of which the question arises, and
which lies at the foundation of the proceedings ... [here] the only matter in common
among the plaintiffs, or between them and the defendants, is an interest in the
Question involved which alone cannot lay a foundation for the joinder of parties.
There is scarcely a suit at law, or in equity which settles a Principle or applies a
principle to a given state of facts, or in which a general statute is interpreted, that
does not involved a Question in which other parties are interested. ... (Emphasis
supplied )
Here, there is only one party plaintiff, and the plaintiff corporation does not even have an interest in
the subject matter of the controversy, and cannot, therefore, represent its members or stockholders
who claim to own in their individual capacities ownership of the said property. Moreover, as correctly
stated by the appellees, a class suit does not lie in actions for the recovery of property where several
persons claim Partnership of their respective portions of the property, as each one could alleged and
prove his respective right in a different way for each portion of the land, so that they cannot all be
held to have Identical title through acquisition prescription. 23

Having shown that no cause of action in favor of the plaintiff exists and that the action in the lower
court cannot be considered as a class suit, it would be unnecessary and an Idle exercise for this
Court to resolve the remaining issue of whether or not the plaintiffs action for reconveyance of real
property based upon constructive or implied trust had already prescribed.
ACCORDINGLY, the instant appeal is hereby DISMISSED with costs against the plaintiff-appellant.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 131723             December 13, 2007
MANILA ELECTRIC COMPANY, petitioner, 
vs.
T.E.A.M. ELECTRONICS CORPORATION, TECHNOLOGY ELECTRONICS ASSEMBLY and
MANAGEMENT PACIFIC CORPORATION; and ULTRA ELECTRONICS INSTRUMENTS,
INC., respondents.
DECISION
NACHURA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking the reversal of
the Decision1of the Court of Appeals (CA) dated June 18, 1997 and its Resolution 2 dated December
3, 1997 in CA-G.R. CV No. 40282 denying the appeal filed by petitioner Manila Electric Company.
The facts of the case, as culled from the records, are as follows:
Respondent T.E.A.M. Electronics Corporation (TEC) was formerly known as NS Electronics
(Philippines), Inc. before 1982 and National Semi-Conductors (Phils.) before 1988. TEC is wholly
owned by respondent Technology Electronics Assembly and Management Pacific Corporation
(TPC). On the other hand, petitioner Manila Electric Company (Meralco) is a utility company
supplying electricity in the Metro Manila area.
Petitioner and NS Electronics (Philippines), Inc., the predecessor-in-interest of respondent TEC,
were parties to two separate contracts denominated as Agreements for the Sale of Electric Energy
under the following account numbers: 09341-1322-163 and 09341-1812-13.4 Under the aforesaid
agreements, petitioner undertook to supply TEC's building known as Dyna Craft International Manila
(DCIM) located at Electronics Avenue, Food Terminal Complex, Taguig, Metro Manila, with electric
power. Another contract was entered into for the supply of electric power to TEC's NS Building under
Account No. 19389-0900-10.
In September 1986, TEC, under its former name National Semi-Conductors (Phils.) entered into a
Contract of Lease5 with respondent Ultra Electronics Industries, Inc. (Ultra) for the use of the former's
DCIM building for a period of five years or until September 1991. Ultra was, however, ejected from
the premises on February 12, 1988 by virtue of a court order, for repeated violation of the terms and
conditions of the lease contract.
On September 28, 1987, a team of petitioner's inspectors conducted a surprise inspection of the
electric meters installed at the DCIM building, witnessed by Ultra's 6 representative, Mr. Willie
Abangan. The two meters covered by account numbers 09341-1322-16 and 09341-1812-13, were
found to be allegedly tampered with and did not register the actual power consumption in the
building. The results of the inspection were reflected in the Service Inspection Reports 7 prepared by
the team.
In a letter dated November 25, 1987, petitioner informed TEC of the results of the inspection and
demanded from the latter the payment of P7,040,401.01 representing its unregistered consumption
from February 10, 1986 until September 28, 1987, as a result of the alleged tampering of the
meters.8 TEC received the letters on January 7, 1988. Since Ultra was in possession of the subject
building during the covered period, TEC's Managing Director, Mr. Bobby Tan, referred the demand
letter to Ultra9 which, in turn, informed TEC that its Executive Vice-President had met with petitioner's
representative. Ultra further intimated that assuming that there was tampering of the meters,
petitioner's assessment was excessive.10 For failure of TEC to pay the differential billing, petitioner
disconnected the electricity supply to the DCIM building on April 29, 1988.
TEC demanded from petitioner the reconnection of electrical service, claiming that it had nothing to
do with the alleged tampering but the latter refused to heed the demand. Hence, TEC filed a
complaint on May 27, 1988 before the Energy Regulatory Board (ERB) praying that electric power
be restored to the DCIM building.11 The ERB immediately ordered the reconnection of the service but
petitioner complied with it only on October 12, 1988 after TEC paid P1,000,000.00, under protest.
The complaint before the ERB was later withdrawn as the parties deemed it best to have the issues
threshed out in the regular courts. Prior to the reconnection, or on June 7, 1988, petitioner
conducted a scheduled inspection of the questioned meters and found them to have been tampered
anew.12
Meanwhile, on April 25, 1988, petitioner conducted another inspection, this time, in TEC's NS
Building. The inspection allegedly revealed that the electric meters were not registering the correct
power consumption. Petitioner, thus, sent a letter dated June 18, 1988 demanding payment
of P280,813.72 representing the differential billing.13 TEC denied petitioner's allegations and claim in
a letter dated June 29, 1988.14 Petitioner, thus, sent TEC another letter demanding payment of the
aforesaid amount, with a warning that the electric service would be disconnected in case of
continued refusal to pay the differential billing.15 To avert the impending disconnection of electrical
service, TEC paid the above amount, under protest.16
On January 13, 1989, TEC and TPC filed a complaint for damages against petitioner and
Ultra17 before the Regional Trial Court (RTC) of Pasig. The case was raffled to Branch 162 and was
docketed as Civil Case No. 56851.18 Upon the filing of the parties' answer to the complaint, pre-trial
was scheduled.
At the pre-trial, the parties agreed to limit the issues, as follows:
1. Whether or not the defendant Meralco is liable for the plaintiffs' disconnection of electric
service at DCIM Building.
2. Whether or not the plaintiff is liable for (sic) the defendant for the differential billings in the
amount of P7,040,401.01.
3. Whether or not the plaintiff is liable to defendant for exemplary damages. 19
For failure of the parties to reach an amicable settlement, trial on the merits ensued. On June 17,
1992, the trial court rendered a Decision in favor of respondents TEC and TPC, and against
respondent Ultra and petitioner. The pertinent portion of the decision reads:
WHEREFORE, judgment is hereby rendered in this case in favor of the plaintiffs and against
the defendants as follows:
(1) Ordering both defendants Meralco and ULTRA Electronics Instruments, Inc. to
jointly and severally reimburse plaintiff TEC actual damages in the amount of ONE
MILLION PESOS with legal rate of interest from the date of the filing of this case on
January 19, 1989 until the said amount shall have been fully paid;
(2) Ordering defendant Meralco to pay to plaintiff TEC the amount of P280,813.72 as
actual damages with legal rate of interest also from January 19, 1989;
(3) Ordering defendant Meralco to pay to plaintiff TPC the amount of P150,000.00 as
actual damages with interest at legal rate from January 19, 1989;
(4) Condemning defendant Meralco to pay both plaintiffs moral damages in the
amount pf P500,000.00;
(5) Condemning defendant Meralco to pay both plaintiffs corrective and/or exemplary
damages in the amount of P200,000.00;
(6) Ordering defendant Meralco to pay attorney's fees in the amount of P200,000.00
Costs against defendant Meralco.
SO ORDERED.20
The trial court found the evidence of petitioner insufficient to prove that TEC was guilty of tampering
the meter installations. The deformed condition of the meter seal and the existence of an opening in
the wire duct leading to the transformer vault did not, in themselves, prove the alleged tampering,
especially since access to the transformer was given only to petitioner's employees. 21 The sudden
drop in TEC's (or Ultra's) electric consumption did not, per se, show meter tampering. The delay in
the sending of notice of the results of the inspection was likewise viewed by the court as evidence of
inefficiency and arbitrariness on the part of petitioner. More importantly, petitioner's act of
disconnecting the DCIM building's electric supply constituted bad faith and thus makes it liable for
damages.22 The court further denied petitioner's claim of differential billing primarily on the ground of
equitable negligence.23 Considering that TEC and TPC paid P1,000,000.00 to avert the
disconnection of electric power; and because Ultra manifested to settle the claims of petitioner, the
court imposed solidary liability on both Ultra and petitioner for the payment of the P1,000,000.00.
Ultra and petitioner appealed to the CA which affirmed the RTC decision, with a modification of the
amount of actual damages and interest thereon. The dispositive portion of the CA decision dated
June 18, 1997, states:
WHEREFORE, this Court renders judgment affirming in toto the Decision rendered by the
trial court with the slight modification that the interest at legal rate shall be computed from
January 13, 1989 and that Meralco shall pay plaintiff T.E.A.M. Electronics Corporation and
Technology Electronics Assembly and Management Pacific Corporation the sum
of P150,000.00 per month for five (5) months for actual damages incurred when it was
compelled to lease a generator set with interest at the legal rate from the above-stated date.
 SO ORDERED.24
The appellate court agreed with the RTC's conclusion. In addition, it considered petitioner negligent
for failing to discover the alleged defects in the electric meters; in belatedly notifying TEC and TPC
of the results of the inspection; and in disconnecting the electric power without prior notice.
Petitioner now comes before this Court in this petition for review on certiorari contending that:
The Court of Appeals committed grievous errors and decided matters of substance contrary
to law and the rulings of this Honorable Court:
1. In finding that the issue in the case is whether there was deliberate tampering of the
metering installations at the building owned by TEC.
2. In not finding that the issue is: whether or not, based on the tampered meters, whether or
not petitioner is entitled to differential billing, and if so, how much.
3. In declaring that petitioner ME RALCO had the burden of proof to show by clear and
convincing evidence that with respect to the tampered meters that TEC and/or TPC authored
their tampering.
4. In finding that petitioner Meralco should not have held TEC and/or TPC responsible for the
acts of Ultra.
5. In finding that TEC should not be held liable for the tampering of this electric meter in its
DCIM Building.
6. In finding that there was no notice of disconnection.
7. In finding that petitioner MERALCO was negligent in informing TEC of the alleged
tampering.
8. In making the finding that it is difficult to believe that when petitioner MERALCO inspected
on June 7, 1988 the meter installations, they were found to be tampered.
9. In declaring that petitioner MERALCO estopped from claiming any tampering of the
meters.
10. In finding that "the method employed by MERALCO to as certain (sic) the 'correct'
amount of electricity consumed is questionable";
11. In declaring that MERALCO all throughout its dealings with TEC took on an "attitude"
which is oppressive, wanton and reckless.
12. In declaring that MERALCO acted arbitrarily in inspecting TEC's DCIM building and the
NS building.
13. In declaring that respondents TEC and TPC are entitled to the damages which it
awarded.
14. In not declaring that petitioner is entitled to the differential bill.
15. In not declaring that respondents are liable to petitioner for exemplary damages,
attorney's fee and expenses for litigation.25
The petition must fail.
The issues for resolution can be summarized as follows: 1) whether or not TEC tampered with the
electric meters installed at its DCIM and NS buildings; 2) If so, whether or not it is liable for the
differential billing as computed by petitioner; and 3) whether or not petitioner was justified in
disconnecting the electric power supply in TEC's DCIM building.
Petitioner insists that the tampering of the electric meters installed at the DCIM and NS buildings
owned by respondent TEC has been established by overwhelming evidence, as specifically shown
by the shorting devices found during the inspection. Thus, says petitioner, tampering of the meter is
no longer an issue.
It is obvious that petitioner wants this Court to revisit the factual findings of the lower courts. Well-
established is the doctrine that under Rule 45 of the Rules of Court, only questions of law, not of
fact, may be raised before the Court. We would like to stress that this Court is not a trier of facts and
may not re-examine and weigh anew the respective evidence of the parties. Factual findings of the
trial court, especially those affirmed by the Court of Appeals, are binding on this Court. 26
Looking at the record, we note that petitioner claims to have discovered three incidences of meter-
tampering; twice in the DCIM building on September 28, 1987 and June 7, 1988; and once in the NS
building on April 24, 1988.
The first instance was supposedly discovered on September 28, 1987. The inspector allegedly found
the presence of a short circuiting device and saw that the meter seal was deformed. In addition,
petitioner, through the Supervising Engineer of its Special Billing Analysis Department, 27 claimed that
there was a sudden and unexplainable drop in TEC's electrical consumption starting February 10,
1986. On the basis of the foregoing, petitioner concluded that the electric meters were tampered
with.
However, contrary to petitioner's claim that there was a drastic and unexplainable drop in TEC's
electric consumption during the affected period, the Pattern of TEC's Electrical Consumption 28 shows
that the sudden drop is not peculiar to the said period. Noteworthy is the observation of the RTC in
this wise:
In fact, in Account No. 09341-1812-13 (heretofore referred as Account/Meter No. 2), as
evidenced by Exhibits "35" and "35-A," there was likewise a sudden drop of electrical
consumption from the year 1984 which recorded an average 141,300 kwh/month to 1985
which recorded an average kwh/month at 87,600 or a difference-drop of 53,700 kwh/month;
from 1985's 87,600 recorded consumption, the same dropped to 18,600 kwh/month or a
difference-drop of 69,000 kwh/month. Surely, a drop of 53,700 could be equally categorized
as a sudden drop amounting to 69,000 which, incidentally, the Meralco claimed as
"unexplainable. x x x.29
The witnesses for petitioner who testified on the alleged tampering of the electric meters, declared
that tampering is committed by consumers to prevent the meter from registering the correct amount
of electric consumption, and result in a reduced monthly electric bill, while continuing to enjoy the
same power supply. Only the registration of actual electric energy consumption, not the supply of
electricity, is affected when a meter is tampered with.30 The witnesses claimed that after the
inspection, the tampered electric meters were corrected, so that they would register the correct
consumption of TEC. Logically, then, after the correction of the allegedly tampered meters, the
customer's registered consumption would go up.
In this case, the period claimed to have been affected by the tampered electric meters is from
February 1986 until September 1987. Based on petitioner's Billing Record 31 (for the DCIM building),
TEC's monthly electric consumption on Account No. 9341-1322-16 was between 4,500 and 27,000
kwh.32 Account No. 9341-1812-13 showed a monthly consumption between 9,600 and 34,200
kwh.33 It is interesting to note that, after correction of the allegedly tampered meters, TEC's monthly
electric consumption from October 1987 to February 1988 (the last month that Ultra occupied the
DCIM building) was between 8,700 and 24,300 kwh in its first account, and 16,200 to 46,800 kwh on
the second account.
Even more revealing is the fact that TEC's meters registered 9,300 kwh and 19,200 kwh
consumption on the first and second accounts, respectively, a month prior to the inspection. On the
first month after the meters were corrected, TEC's electric consumption registered at 9,300 kwh and
22,200 kwh on the respective accounts. These figures clearly show that there was no palpably
drastic difference between the consumption before and after the inspection, casting a cloud of doubt
over petitioner's claim of meter-tampering. Indeed, Ultra's explanation that the corporation was
losing; thus, it had lesser consumption of electric power appear to be the more plausible reason for
the drop in electric consumption.
Petitioner likewise claimed that when the subject meters were again inspected on June 7, 1988, they
were found to have been tampered anew. The Court notes that prior to the inspection, TEC was
informed about it; and months before the inspection, there was an unsettled controversy between
TEC and petitioner, brought about by the disconnection of electric power and the non-payment of
differential billing. We are more disposed to accept the trial court's conclusion that it is hard to
believe that a customer previously apprehended for tampered meters and assessed P7 million would
further jeopardize itself in the eyes of petitioner. 34 If it is true that there was evidence of tampering
found on September 28, 1987 and again on June 7, 1988, the better view would be that the
defective meters were not actually corrected after the first inspection. If so, then Manila Electric
Company v. Macro Textile Mills Corporation35 would apply, where we said that we cannot sanction a
situation wherein the defects in the electric meter are allowed to continue indefinitely until suddenly,
the public utilities demand payment for the unrecorded electricity utilized when they could have
remedied the situation immediately. Petitioner's failure to do so may encourage neglect of public
utilities to the detriment of the consuming public. Corollarily, it must be underscored that petitioner
has the imperative duty to make a reasonable and proper inspection of its apparatus and equipment
to ensure that they do not malfunction, and the due diligence to discover and repair defects therein.
Failure to perform such duties constitutes negligence. 36 By reason of said negligence, public utilities
run the risk of forfeiting amounts originally due from their customers. 37
As to the alleged tampering of the electric meter in TEC's NS building, suffice it to state that the
allegation was not proven, considering that the meters therein were enclosed in a metal cabinet the
metal seal of which was unbroken, with petitioner having sole access to the said meters. 38
In view of the negative finding on the alleged tampering of electric meters on TEC's DCIM and NS
buildings, petitioner's claim of differential billing was correctly denied by the trial and appellate
courts. With greater reason, therefore, could petitioner not exercise the right of immediate
disconnection.
The law in force at the time material to this controversy was Presidential Decree (P.D.) No.
40139 issued on March 1, 1974.40 The decree penalized unauthorized installation of water, electrical
or telephone connections and such acts as the use of tampered electrical meters. It was issued in
answer to the urgent need to put an end to illegal activities that prejudice the economic well-being of
both the companies concerned and the consuming public. 41P.D. 401 granted the electric companies
the right to conduct inspections of electric meters and the criminal prosecution 42 of erring consumers
who were found to have tampered with their electric meters. It did not expressly provide for more
expedient remedies such as the charging of differential billing and immediate disconnection against
erring consumers. Thus, electric companies found a creative way of availing themselves of such
remedies by inserting into their service contracts (or agreements for the sale of electric energy) a
provision for differential billing with the option of disconnection upon non-payment by the erring
consumer. The Court has recognized the validity of such stipulations. 43 However, recourse to
differential billing with disconnection was subject to the prior requirement of a 48-hour written notice
of disconnection.44
Petitioner, in the instant case, resorted to the remedy of disconnection without prior notice. While it is
true that petitioner sent a demand letter to TEC for the payment of differential billing, it did not
include any notice that the electric supply would be disconnected. In fine, petitioner abused the
remedies granted to it under P.D. 401 and Revised General Order No. 1 by outrightly depriving TEC
of electrical services without first notifying it of the impending disconnection. Accordingly, the CA did
not err in affirming the RTC decision.
As to the damages awarded by the CA, we deem it proper to modify the same. Actual damages are
compensation for an injury that will put the injured party in the position where it was before the injury.
They pertain to such injuries or losses that are actually sustained and susceptible of measurement.
Except as provided by law or by stipulation, a party is entitled to adequate compensation only for
such pecuniary loss as is duly proven. Basic is the rule that to recover actual damages, not only
must the amount of loss be capable of proof; it must also be actually proven with a reasonable
degree of certainty, premised upon competent proof or the best evidence obtainable. 45
Respondent TEC sufficiently established, and petitioner in fact admitted, that the former
paid P1,000,000.00 and P280,813.72 under protest, the amounts representing a portion of the
latter's claim of differential billing. With the finding that no tampering was committed and, thus, no
differential billing due, the aforesaid amounts should be returned by petitioner, with interest, as
ordered by the Court of Appeals and pursuant to the guidelines set forth by the Court. 46
However, despite the appellate court's conclusion that no tampering was committed, it held Ultra
solidarily liable with petitioner for P1,000,000.00, only because the former, as occupant of the
building, promised to settle the claims of the latter. This ruling is erroneous. Ultra's promise was
conditioned upon the finding of defect or tampering of the meters. It did not acknowledge any
culpability and liability, and absent any tampered meter, it is absurd to make the lawful occupant
liable. It was petitioner who received the P1 million; thus, it alone should be held liable for the return
of the amount.
TEC also sufficiently established its claim for the reimbursement of the amount paid as rentals for
the generator set it was constrained to rent by reason of the illegal disconnection of electrical
service. The official receipts and purchase orders submitted by TEC as evidence sufficiently show
that such rentals were indeed made. However, the amount of P150,000.00 per month for five
months, awarded by the CA, is excessive. Instead, a total sum of P150,000.00, as found by the
RTC, is proper.
As to the payment of exemplary damages and attorney's fees, we find no cogent reason to disturb
the same. Exemplary damages are imposed by way of example or correction for the public good in
addition to moral, temperate, liquidated, or compensatory damages. 47 In this case, to serve as an
example – that before a disconnection of electrical supply can be effected by a public utility, the
requisites of law must be complied with – we affirm the award of P200,000.00 as exemplary
damages. With the award of exemplary damages, the award of attorney's fees is likewise proper,
pursuant to Article 220848 of the Civil Code. It is obvious that TEC needed the services of a lawyer to
argue its cause through three levels of the judicial hierarchy. Thus, the award of P200,000.00 is in
order.49
We, however, deem it proper to delete the award of moral damages. TEC's claim was premised
allegedly on the damage to its goodwill and reputation. 50 As a rule, a corporation is not entitled to
moral damages because, not being a natural person, it cannot experience physical suffering or
sentiments like wounded feelings, serious anxiety, mental anguish and moral shock. The only
exception to this rule is when the corporation has a reputation that is debased, resulting in its
humiliation in the business realm.51 But in such a case, it is imperative for the claimant to present
proof to justify the award. It is essential to prove the existence of the factual basis of the damage and
its causal relation to petitioner's acts.52 In the present case, the records are bereft of any evidence
that the name or reputation of TEC/TPC has been debased as a result of petitioner's acts. Besides,
the trial court simply awarded moral damages in the dispositive portion of its decision without stating
the basis thereof.
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No.
40282 dated June 18, 1997 and its Resolution dated December 3, 1997 are AFFIRMED with the
following MODIFICATIONS: (1) the award of P150,000.00 per month for five months as
reimbursement for the rentals of the generator set is REDUCED to P150,000.00; and (2) the award
of P500,000.00 as moral damages is hereby DELETED.
SO ORDERED.

EN BANC
 
WILSON P. GAMBOA, G.R. No. 176579
Petitioner,
Present:
 - versus -  
  CORONA, C.J.,
FINANCE SECRETARY CARPIO,
MARGARITO B. TEVES, VELASCO, JR.,
FINANCE UNDERSECRETARY LEONARDO-DE CASTRO,
JOHN P. SEVILLA, AND
BRION,
COMMISSIONER RICARDO
ABCEDE OF THE PRESIDENTIAL PERALTA,
COMMISSION ON GOOD BERSAMIN,
GOVERNMENT (PCGG) IN DEL CASTILLO,
THEIR CAPACITIES AS CHAIR ABAD,
AND MEMBERS, VILLARAMA, JR.,
RESPECTIVELY, OF THE PEREZ,
PRIVATIZATION COUNCIL,
MENDOZA, and
CHAIRMAN ANTHONI SALIM OF
FIRST PACIFIC CO., LTD. IN HIS SERENO, JJ.
CAPACITY AS DIRECTOR OF  
METRO PACIFIC ASSET  
HOLDINGS INC., CHAIRMAN  
MANUEL V. PANGILINAN OF  
PHILIPPINE LONG DISTANCE  
TELEPHONE COMPANY (PLDT)  
IN HIS CAPACITY AS  
MANAGING DIRECTOR OF  
FIRST PACIFIC CO., LTD.,  
PRESIDENT NAPOLEON L.  
NAZARENO OF PHILIPPINE  
LONG DISTANCE TELEPHONE  
COMPANY, CHAIR FE BARIN OF  
THE SECURITIES EXCHANGE  
COMMISSION, and PRESIDENT  
FRANCIS LIM OF THE  
PHILIPPINE STOCK EXCHANGE,  
Respondents.
PABLITO V. SANIDAD and Promulgated:
ARNO V. SANIDAD,  
Petitioners-in-Intervention. June 28, 2011
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
 
  
DECISION
 
 
CARPIO, J.:
 
 
The Case
 
This is an original petition for prohibition, injunction, declaratory relief and
declaration of nullity of the sale of shares of stock of Philippine Telecommunications
Investment Corporation (PTIC) by the government of the Republic of the Philippines
to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company
Limited (First Pacific).
 
The Antecedents
 
The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine
Long Distance Telephone Company (PLDT), are as follows:1
 
On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which
granted PLDT a franchise and the right to engage in telecommunications business. In
1969, General Telephone and Electronics Corporation (GTE), an American company
and a major PLDT stockholder, sold 26 percent of the outstanding common shares of
PLDT to PTIC. In 1977, Prime Holdings, Inc. (PHI) was incorporated by several
persons, including Roland Gapud and Jose Campos, Jr. Subsequently, PHI became the
owner of 111,415 shares of stock of PTIC by virtue of three Deeds of Assignment
executed by PTIC stockholders Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the
111,415 shares of stock of PTIC held by PHI were sequestered by the Presidential
Commission on Good Government (PCGG). The 111,415 PTIC shares, which
represent about 46.125 percent of the outstanding capital stock of PTIC, were later
declared by this Court to be owned by the Republic of the Philippines.2
 
In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm,
acquired the remaining 54 percent of the outstanding capital stock of PTIC. On 20
November 2006, the Inter-Agency Privatization Council (IPC) of the Philippine
Government announced that it would sell the 111,415 PTIC shares, or 46.125 percent
of the outstanding capital stock of PTIC, through a public bidding to be conducted on
4 December 2006. Subsequently, the public bidding was reset to 8 December 2006,
and only two bidders, Parallax Venture Fund XXVII (Parallax) and Pan-Asia Presidio
Capital, submitted their bids. Parallax won with a bid of P25.6 billion or US$510
million.
 
Thereafter, First Pacific announced that it would exercise its right of first refusal as a
PTIC stockholder and buy the 111,415 PTIC shares by matching the bid price of
Parallax. However, First Pacific failed to do so by the 1 February 2007 deadline set by
IPC and instead, yielded its right to PTIC itself which was then given by IPC until 2
March 2007 to buy the PTIC shares. On 14 February 2007, First Pacific, through its
subsidiary, MPAH, entered into a Conditional Sale and Purchase Agreement of the
111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC, with
the Philippine Government for the price of P25,217,556,000 or US$510,580,189. The
sale was completed on 28 February 2007.
 
Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of
46.125 percent of PTIC shares is actually an indirect sale of 12 million shares or about
6.3 percent of the outstanding common shares of PLDT. With the sale, First Pacifics
common shareholdings in PLDT increased from 30.7 percent to 37 percent,
thereby increasing the common shareholdings of foreigners in PLDT to about
81.47 percent. This violates Section 11, Article XII of the 1987 Philippine
Constitution which limits foreign ownership of the capital of a public utility to not
more than 40 percent.3
 
On the other hand, public respondents Finance Secretary Margarito B. Teves,
Undersecretary John P. Sevilla, and PCGG Commissioner Ricardo Abcede allege the
following relevant facts:
 
On 9 November 1967, PTIC was incorporated and had since engaged in the business
of investment holdings. PTIC held 26,034,263 PLDT common shares, or 13.847
percent of the total PLDT outstanding common shares. PHI, on the other hand, was
incorporated in 1977, and became the owner of 111,415 PTIC shares or 46.125
percent of the outstanding capital stock of PTIC by virtue of three Deeds of
Assignment executed by Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the
111,415 PTIC shares held by PHI were sequestered by the PCGG, and subsequently
declared by this Court as part of the ill-gotten wealth of former President Ferdinand
Marcos. The sequestered PTIC shares were reconveyed to the Republic of the
Philippines in accordance with this Courts decision4 which became final
and executory on 8 August 2006.
The Philippine Government decided to sell the 111,415 PTIC shares, which represent
6.4 percent of the outstanding common shares of stock of PLDT, and designated the
Inter-Agency Privatization Council (IPC), composed of the Department of Finance
and the PCGG, as the disposing entity. An invitation to bid was published in seven
different newspapers from 13 to 24 November 2006. On 20 November 2006, a pre-bid
conference was held, and the original deadline for bidding scheduled on 4 December
2006 was reset to 8 December 2006. The extension was published in nine different
newspapers.
 
During the 8 December 2006 bidding, Parallax Capital Management LP emerged as
the highest bidder with a bid of P25,217,556,000. The government notified First
Pacific, the majority owner of PTIC shares, of the bidding results and gave First
Pacific until 1 February 2007 to exercise its right of first refusal in accordance with
PTICs Articles of Incorporation. First Pacific announced its intention to match
Parallaxs bid.
 
On 31 January 2007, the House of Representatives (HR) Committee on Good
Government conducted a public hearing on the particulars of the then impending sale
of the 111,415 PTIC shares. Respondents Teves and Sevilla were among those who
attended the public hearing. The HR Committee Report No. 2270 concluded that: (a)
the auction of the governments 111,415 PTIC shares bore due diligence, transparency
and conformity with existing legal procedures; and (b) First Pacifics intended
acquisition of the governments 111,415 PTIC shares resulting in First Pacifics
100% ownership of PTIC will not violate the 40 percent constitutional limit on
foreign ownership of a public utility since PTIC holds only 13.847 percent of the
total outstanding common shares of PLDT.5 On 28 February 2007, First Pacific
completed the acquisition of the 111,415 shares of stock of PTIC.
 
Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted a
public bidding for the sale of 111,415 PTIC shares or 46 percent of the outstanding
capital stock of PTIC (the remaining 54 percent of PTIC shares was already owned by
First Pacific and its affiliates); (b) Parallax offered the highest bid amounting
to P25,217,556,000; (c) pursuant to the right of first refusal in favor of PTIC and its
shareholders granted in PTICs Articles of Incorporation, MPAH, a First Pacific
affiliate, exercised its right of first refusal by matching the highest bid offered for
PTIC shares on 13 February 2007; and (d) on 28 February 2007, the sale was
consummated when MPAH paid IPC P25,217,556,000 and the government delivered
the certificates for the 111,415 PTIC shares. Respondent Pangilinan denies the other
allegations of facts of petitioner.
 
On 28 February 2007, petitioner filed the instant petition for prohibition, injunction,
declaratory relief, and declaration of nullity of sale of the 111,415 PTIC shares.
Petitioner claims, among others, that the sale of the 111,415 PTIC shares would result
in an increase in First Pacifics common shareholdings in PLDT from 30.7 percent to
37 percent, and this, combined with Japanese NTT DoCoMos common shareholdings
in PLDT, would result to a total foreign common shareholdings in PLDT of 51.56
percent which is over the 40 percent constitutional limit.6 Petitioner asserts:
 
If and when the sale is completed, First Pacifics equity in PLDT will go up
from 30.7 percent to 37.0 percent of its common or voting- stockholdings,
x x x. Hence, the consummation of the sale will put the two largest foreign
investors in PLDT First Pacific and Japans NTT DoCoMo, which is the worlds
largest wireless telecommunications firm, owning 51.56 percent of PLDT
common equity. x x x With the completion of the sale, data culled from the
official website of the New York Stock Exchange (www.nyse.com) showed that
those foreign entities, which own at least five percent of common equity, will
collectively own 81.47 percent of PLDTs common equity. x x x
x x x as the annual disclosure reports, also referred to as Form 20-
K reports x x x which PLDT submitted to the New York Stock
Exchange for the period 2003-2005, revealed that First Pacific and
several other foreign entities breached the constitutional limit of
40 percent ownership as early as 2003. x x x7
 
Petitioner raises the following issues: (1) whether the consummation of the then
impending sale of 111,415 PTIC shares to First Pacific violates the constitutional limit
on foreign ownership of a public utility; (2) whether public respondents committed
grave abuse of discretion in allowing the sale of the 111,415 PTIC shares to First
Pacific; and (3) whether the sale of common shares to foreigners in excess of 40
percent of the entire subscribed common capital stock violates the constitutional limit
on foreign ownership of a public utility.8
 
On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for
Leave to Intervene and Admit Attached Petition-in-Intervention. In the Resolution of
28 August 2007, the Court granted the motion and noted the Petition-in-Intervention.
 
Petitioners-in-intervention join petitioner Wilson Gamboa x x x in seeking, among
others, to enjoin and/or nullify the sale by respondents of the 111,415 PTIC shares to
First Pacific or assignee. Petitioners-in-intervention claim that, as PLDT subscribers,
they have a stake in the outcome of the controversy x x x where the Philippine
Government is completing the sale of government owned assets in [PLDT],
unquestionably a public utility, in violation of the nationality restrictions of the
Philippine Constitution.
 
 
The Issue
 
 
This Court is not a trier of facts. Factual questions such as those raised by
petitioner,9 which indisputably demand a thorough examination of the evidence of the
parties, are generally beyond this Courts jurisdiction. Adhering to this well-settled
principle, the Court shall confine the resolution of the instant controversy solely on
the threshold and purely legal issue of whether the term capital in Section 11,
Article XII of the Constitution refers to the total common shares only or to the total
outstanding capital stock (combined total of common and non-voting preferred shares)
of PLDT, a public utility.
 

The Ruling of the Court

 
The petition is partly meritorious.
 
Petition for declaratory relief treated as petition for mandamus
 
At the outset, petitioner is faced with a procedural barrier. Among the remedies
petitioner seeks, only the petition for prohibition is within the original jurisdiction of
this court, which however is not exclusive but is concurrent with the Regional Trial
Court and the Court of Appeals. The actions for declaratory relief,10 injunction, and
annulment of sale are not embraced within the original jurisdiction of the Supreme
Court. On this ground alone, the petition could have been dismissed outright.
 

While direct resort to this Court may be justified in a petition for prohibition,11 the
Court shall nevertheless refrain from discussing the grounds in support of the petition
for prohibition since on 28 February 2007, the questioned sale was consummated
when MPAH paid IPC P25,217,556,000 and the government delivered the certificates
for the 111,415 PTIC shares.
 
However, since the threshold and purely legal issue on the definition of the term
capital in Section 11, Article XII of the Constitution has far-reaching implications to
the national economy, the Court treats the petition for declaratory relief as one for
mandamus.12
 
In Salvacion v. Central Bank of the Philippines,13 the Court treated the petition for
declaratory relief as one for mandamus considering the grave injustice that would
result in the interpretation of a banking law. In that case, which involved the crime of
rape committed by a foreign tourist against a Filipino minor and the execution of the
final judgment in the civil case for damages on the tourists dollar deposit with a local
bank, the Court declared Section 113 of Central Bank Circular No. 960, exempting
foreign currency deposits from attachment, garnishment or any other order or process
of any court, inapplicable due to the peculiar circumstances of the case. The Court
held that injustice would result especially to a citizen aggrieved by a foreign guest like
accused x x x that would negate Article 10 of the Civil Code which provides that in
case of doubt in the interpretation or application of laws, it is presumed that the
lawmaking body intended right and justice to prevail. The Court therefore required
respondents Central Bank of the Philippines, the local bank, and the accused to
comply with the writ of execution issued in the civil case for damages and to release
the dollar deposit of the accused to satisfy the judgment.
 

In Alliance of Government Workers v. Minister of Labor,14 the Court similarly brushed

aside the procedural infirmity of the petition for declaratory relief and treated the
same as one for mandamus. In Alliance, the issue was whether the government
unlawfully excluded petitioners, who were government employees, from the
enjoyment of rights to which they were entitled under the law. Specifically, the
question was: Are the branches, agencies, subdivisions, and instrumentalities of the
Government, including government owned or controlled corporations included among
the four employers under Presidential Decree No. 851 which are required to pay their
employees x x x a thirteenth (13th) month pay x x x ? The Constitutional principle
involved therein affected all government employees, clearly justifying a relaxation of
the technical rules of procedure, and certainly requiring the interpretation of the
assailed presidential decree.
 
In short, it is well-settled that this Court may treat a petition for declaratory relief as
one for mandamus if the issue involved has far-reaching implications. As this Court
held in Salvacion:
 
The Court has no original and exclusive jurisdiction over a petition for
declaratory relief. However, exceptions to this rule have been
recognized. Thus, where the petition has far-reaching implications and
 raises questions that should be resolved, it may be treated as one for
mandamus.15 (Emphasis supplied)
 
 
In the present case, petitioner seeks primarily the interpretation of the term capital in
Section 11, Article XII of the Constitution. He prays that this Court declare that the
term capital refers to common shares only, and that such shares constitute the sole
basis in determining foreign equity in a public utility. Petitioner further asks this Court
to declare any ruling inconsistent with such interpretation unconstitutional.
 
The interpretation of the term capital in Section 11, Article XII of the Constitution has
far-reaching implications to the national economy. In fact, a resolution of this issue
will determine whether Filipinos are masters, or second class citizens, in their own
country. What is at stake here is whether Filipinos or foreigners will have effective
control of the national economy. Indeed, if ever there is a legal issue that has far-
reaching implications to the entire nation, and to future generations of Filipinos, it is
the threshhold legal issue presented in this case.
 
The Court first encountered the issue on the definition of the term capital in Section
11, Article XII of the Constitution in the case of Fernandez v. Cojuangco, docketed
as G.R. No. 157360.16 That case involved the same public utility (PLDT) and
substantially the same private respondents. Despite the importance and novelty of the
constitutional issue raised therein and despite the fact that the petition involved a
purely legal question, the Court declined to resolve the case on the merits, and instead
denied the same for disregarding the hierarchy of courts.17 There, petitioner Fernandez
assailed on a pure question of law the Regional Trial Courts Decision of 21 February
2003 via a petition for review under Rule 45. The Courts Resolution, denying the
petition, became final on 21 December 2004.
The instant petition therefore presents the Court with another opportunity to finally
settle this purely legal issue which is of transcendental importance to the national
economy and a fundamental requirement to a faithful adherence to our Constitution.
The Court must forthwith seize such opportunity, not only for the benefit of the
litigants, but more significantly for the benefit of the entire Filipino people, to ensure,
in the words of the Constitution, a self-reliant and independent national
economy effectively controlled by Filipinos.18 Besides, in the light of vague and
confusing positions taken by government agencies on this purely legal issue, present
and future foreign investors in this country deserve, as a matter of basic fairness, a
categorical ruling from this Court on the extent of their participation in the capital of
public utilities and other nationalized businesses.
 
Despite its far-reaching implications to the national economy, this purely legal issue
has remained unresolved for over 75 years since the 1935 Constitution. There is no
reason for this Court to evade this ever recurring fundamental issue and delay again
defining the term capital, which appears not only in Section 11, Article XII of the
Constitution, but also in Section 2, Article XII on co-production and joint venture
agreements for the development of our natural resources,19 in Section 7, Article XII on
ownership of private lands,20 in Section 10, Article XII on the reservation of certain
investments to Filipino citizens,21 in Section 4(2), Article XIV on the ownership of
educational institutions,22 and in Section 11(2), Article XVI on the ownership of
advertising companies.23
 

Petitioner has locus standi

 

There is no dispute that petitioner is a stockholder of PLDT. As such, he has the right
to question the subject sale, which he claims to violate the nationality requirement
prescribed in Section 11, Article XII of the Constitution. If the sale indeed violates the
Constitution, then there is a possibility that PLDTs franchise could be revoked, a dire
consequence directly affecting petitioners interest as a stockholder.
 
More importantly, there is no question that the instant petition raises matters of
transcendental importance to the public. The fundamental and threshold legal issue in
this case, involving the national economy and the economic welfare of the Filipino
people, far outweighs any perceived impediment in the legal personality of the
petitioner to bring this action.
 
In Chavez v. PCGG,24 the Court upheld the right of a citizen to bring a suit on matters
of transcendental importance to the public, thus:
 
In Taada  v. Tuvera, the Court asserted that when the issue concerns a public right and the
object of mandamus is to obtain the enforcement of a public duty, the people are regarded
as the real parties in interest; and because it is sufficient that petitioner is a citizen and as
such is interested in the execution of the laws, he need not show that he has any legal or
special interest in the result of the action. In the aforesaid case, the petitioners sought to
enforce their right to be informed on matters of public concern, a right then recognized in
Section 6, Article IV of the 1973 Constitution, in connection with the rule that laws in order to be
valid and enforceable must be published in the Official Gazette or otherwise effectively
promulgated. In ruling for the petitioners legal standing, the Court declared that the right they
sought to be enforced is a public right recognized by no less than the fundamental law of the
land.
Legaspi  v. Civil Service Commission, while reiterating Taada, further declared that when a
mandamus proceeding involves the assertion of a public right, the requirement of personal
interest is satisfied by the mere fact that petitioner is a citizen and, therefore, part of the
general public which possesses the right.
Further, in Albano v. Reyes, we said that while expenditure of public funds may not have been
involved under the questioned contract for the development, management and operation of the
Manila International Container Terminal, public interest [was] definitely involved considering
the important role [of the subject contract] . . . in the economic development of the country
and the magnitude of the financial consideration involved. We concluded that, as a
consequence, the disclosure provision in the Constitution would constitute sufficient authority
for upholding the petitioners standing. (Emphasis supplied)
 

Clearly, since the instant petition, brought by a citizen, involves matters of

transcendental public importance, the petitioner has the requisite locus standi.
 

Definition of the Term Capital in

Section 11, Article XII of the 1987 Constitution
 
Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution
mandates the Filipinization of public utilities, to wit:
 
 
Section 11. No franchise, certificate, or any other form of authorization for
the operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or associations organized under the laws of
the Philippines, at least sixty per centum of whose capital is owned by such
citizens; nor shall such franchise, certificate, or authorization be exclusive in
character or for a longer period than fifty years. Neither shall any such
franchise or right be granted except under the condition that it shall be subject
to amendment, alteration, or repeal by the Congress when the common good so
requires. The State shall encourage equity participation in public utilities by the
general public. The participation of foreign investors in the governing body of
any public utility enterprise shall be limited to their proportionate share in its
capital, and all the executive and managing officers of such corporation or
association must be citizens of the Philippines. (Emphasis supplied)
 
 
The above provision substantially reiterates Section 5, Article XIV of the 1973
Constitution, thus:
 
Section 5. No franchise, certificate, or any other form of authorization for
the operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or associations organized under the laws of
the Philippines at least sixty per centum of the capital of which is owned by
such citizens, nor shall such franchise, certificate, or authorization be exclusive
in character or for a longer period than fifty years. Neither shall any such
franchise or right be granted except under the condition that it shall be subject
to amendment, alteration, or repeal by the National Assembly when the public
interest so requires. The State shall encourage equity participation in public
utilities by the general public. The participation of foreign investors in the
governing body of any public utility enterprise shall be limited to their
proportionate share in the capital thereof. (Emphasis supplied)
 
 
 
The foregoing provision in the 1973 Constitution reproduced Section 8, Article XIV
of the 1935 Constitution, viz:
 
Section 8. No franchise, certificate, or any other form of authorization for
the operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or other entities organized under the laws of
the Philippines sixty per centum of the capital of which is owned by
citizens of the Philippines, nor shall such franchise, certificate, or
authorization be exclusive in character or for a longer period than fifty years.
No franchise or right shall be granted to any individual, firm, or corporation,
except under the condition that it shall be subject to amendment, alteration, or
repeal by the Congress when the public interest so requires. (Emphasis
supplied)
 
 
Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional
Commission, reminds us that the Filipinization provision in the 1987 Constitution is
one of the products of the spirit of nationalism which gripped the 1935 Constitutional
Convention.25 The 1987 Constitution provides for the Filipinization of public utilities
by requiring that any form of authorization for the operation of public utilities should
be granted only to citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines at least sixty per centum of whose capital
is owned by such citizens. The provision is [an express] recognition of the sensitive
and vital position of public utilities both in the national economy and for national
security.26 The evident purpose of the citizenship requirement is to prevent aliens
from assuming control of public utilities, which may be inimical to the national
interest.27 This specific provision explicitly reserves to Filipino citizens control of
public utilities, pursuant to an overriding economic goal of the 1987 Constitution: to
conserve and develop our patrimony28 and ensure a self-reliant and independent
national economy effectively controlled by Filipinos.29
 
Any citizen or juridical entity desiring to operate a public utility must therefore meet
the minimum nationality requirement prescribed in Section 11, Article XII of the
Constitution. Hence, for a corporation to be granted authority to operate a public
utility, at least 60 percent of its capital must be owned by Filipino citizens.
 
The crux of the controversy is the definition of the term capital. Does the term capital
in Section 11, Article XII of the Constitution refer to common shares or to the total
outstanding capital stock (combined total of common and non-voting preferred
shares)?
 
Petitioner submits that the 40 percent foreign equity limitation in domestic public
utilities refers only to common shares because such shares are entitled to vote and it is
through voting that control over a corporation is exercised. Petitioner posits that the
term capital in Section 11, Article XII of the Constitution refers to the ownership of
common capital stock subscribed and outstanding, which class of shares alone, under
the corporate set-up of PLDT, can vote and elect members of the board of directors. It
is undisputed that PLDTs non-voting preferred shares are held mostly by Filipino
citizens.30 This arose from Presidential Decree No. 217,31 issued on 16 June 1973 by
then President Ferdinand Marcos, requiring every applicant of a PLDT telephone line
to subscribe to non-voting preferred shares to pay for the investment cost of installing
the telephone line.32
 
Petitioners-in-intervention basically reiterate petitioners arguments and adopt
petitioners definition of the term capital.33 Petitioners-in-intervention allege that the
approximate foreign ownership of common capital stock of PLDT x x x already
amounts to at least 63.54% of the total outstanding common stock, which means that
foreigners exercise significant control over PLDT, patently violating the 40 percent
foreign equity limitation in public utilities prescribed by the Constitution.
 
Respondents, on the other hand, do not offer any definition of the term capital in
Section 11, Article XII of the Constitution. More importantly, private
respondents Nazareno and Pangilinan of PLDT do not dispute that more than 40
percent of the common shares of PLDT are held by foreigners.
 
In particular, respondent Nazarenos Memorandum, consisting of 73 pages, harps
mainly on the procedural infirmities of the petition and the supposed violation of the
due process rights of the affected foreign common shareholders.
Respondent Nazareno does not deny petitioners allegation of foreigners dominating
the common shareholdings of PLDT. Nazarenostressed mainly that the petition seeks
to divest foreign common shareholders purportedly exceeding 40% of the total
common shareholdings in PLDT of their ownership over their shares. Thus, the
foreign natural and juridical PLDT shareholders must be impleaded in this suit so that
they can be heard.34 Essentially, Nazareno invokes denial of due process on behalf of
the foreign common shareholders.
 
While Nazareno does not introduce any definition of the term capital, he states
that among the factual assertions that need to be established to counter
petitioners allegations is the uniform interpretation by government agencies
(such as the SEC), institutions and corporations (such as the Philippine National
Oil Company-Energy Development Corporation or PNOC-EDC) of including
both preferred shares and common shares in controlling interest in view of
testing compliance with the 40% constitutional limitation on foreign ownership
in public utilities.35
 
Similarly, respondent Manuel V. Pangilinan does not define the term capital in
Section 11, Article XII of the Constitution. Neither does he refute petitioners claim of
foreigners holding more than 40 percent of PLDTs common shares. Instead,
respondent Pangilinan focuses on the procedural flaws of the petition and the alleged
violation of the due process rights of foreigners. Respondent Pangilinan emphasizes in
his Memorandum (1) the absence of this Courts jurisdiction over the petition; (2)
petitioners lack of standing; (3) mootness of the petition; (4) non-availability of
declaratory relief; and (5) the denial of due process rights. Moreover,
respondent Pangilinan alleges that the issue should be whether owners of shares in
PLDT as well as owners of shares in companies holding shares in PLDT may be
required to relinquish their shares in PLDT and in those companies without any law
requiring them to surrender their shares and also without notice and trial.
 
Respondent Pangilinan further asserts that Section 11, [Article XII of the
Constitution] imposes no nationality requirement on the shareholders of the
utility company as a condition for keeping their shares in the utility
company. According to him, Section 11 does not authorize taking one persons
property (the shareholders stock in the utility company) on the basis of another partys
alleged failure to satisfy a requirement that is a condition only for that other partys
retention of another piece of property (the utility company being at least 60%
Filipino-owned to keep its franchise).36
 
The OSG, representing public respondents Secretary Margarito Teves, Undersecretary
John P. Sevilla, Commissioner Ricardo Abcede, and Chairman Fe Barin, is likewise
silent on the definition of the term capital. In its Memorandum37 dated 24 September
2007, the OSG also limits its discussion on the supposed procedural defects of the
petition, i.e. lack of standing, lack of jurisdiction, non-inclusion of interested parties,
and lack of basis for injunction. The OSG does not present any definition or
interpretation of the term capital in Section 11, Article XII of the Constitution. The
OSG contends that the petition actually partakes of a collateral attack on PLDTs
franchise as a public utility, which in effect requires a full-blown trial where all the
parties in interest are given their day in court.38
 
Respondent Francisco Ed Lim, impleaded as President and Chief Executive Officer of
the Philippine Stock Exchange (PSE), does not also define the term capital and seeks
the dismissal of the petition on the following grounds: (1) failure to state a cause of
action against Lim; (2) the PSE allegedly implemented its rules and required all listed
companies, including PLDT, to make proper and timely disclosures; and (3) the reliefs
prayed for in the petition would adversely impact the stock market.
 
In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to
be a stockholder of record of PLDT, contended that the term capital in the 1987
Constitution refers to shares entitled to vote or the common shares. Fernandez
explained thus:
 
The forty percent (40%) foreign equity limitation in public utilities prescribed
by the Constitution refers to ownership of shares of stock entitled to vote, i.e.,
common shares, considering that it is through voting that control is being
exercised. x x x
 
Obviously, the intent of the framers of the Constitution in imposing limitations
and restrictions on fully nationalized and partially nationalized activities is for
Filipino nationals to be always in control of the corporation undertaking said
activities. Otherwise, if the Trial Courts ruling upholding respondents
arguments were to be given credence, it would be possible for the ownership
structure of a public utility corporation to be divided into one percent (1%)
common stocks and ninety-nine percent (99%) preferred stocks. Following the
Trial Courts ruling adopting respondents arguments, the common shares can be
owned entirely by foreigners thus creating an absurd situation wherein
foreigners, who are supposed to be minority shareholders, control the public
utility corporation.
 
x x x x
 
Thus, the 40% foreign ownership limitation should be interpreted to apply to
both the beneficial ownership and the controlling interest.
 
x x x x
 
Clearly, therefore, the forty percent (40%) foreign equity limitation in public
utilities prescribed by the Constitution refers to ownership of shares of stock
entitled to vote, i.e., common shares. Furthermore, ownership of record of
shares will not suffice but it must be shown that the legal and beneficial
ownership rests in the hands of Filipino citizens. Consequently, in the case of
petitioner PLDT, since it is already admitted that the voting interests of
foreigners which would gain entry to petitioner PLDT by the acquisition of
SMART shares through the Questioned Transactions is equivalent to 82.99%,
and the nominee arrangements between the foreign principals and the Filipino
owners is likewise admitted, there is, therefore, a violation of Section 11,
Article XII of the Constitution.
Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987 cited
by the Trial Court to support the proposition that the meaning of the word
capital as used in Section 11, Article XII of the Constitution allegedly refers to
the sum total of the shares subscribed and paid-in by the shareholder and it
allegedly is immaterial how the stock is classified, whether as common or
preferred, cannot stand in the face of a clear legislative policy as stated in the
FIA which took effect in 1991 or way after said opinions were rendered, and as
clarified by the above-quoted Amendments. In this regard, suffice it to state
that as between the law and an opinion rendered by an administrative agency,
the law indubitably prevails. Moreover, said Opinions are merely advisory and
cannot prevail over the clear intent of the framers of the Constitution.
 
 In the same vein, the SECs construction of Section 11, Article XII of the
Constitution is at best merely advisory for it is the courts that finally determine
what a law means.39
 
 
On the other hand, respondents therein, Antonio O. Cojuangco, Manuel V. Pangilinan,
Carlos A. Arellano, Helen Y. Dee, Magdangal B. Elma, Mariles Cacho-Romulo,
Fr. Bienvenido F. Nebres, Ray C. Espinosa, Napoleon L. Nazareno, Albert F. Del
Rosario, and Orlando B. Vea, argued that the term capital in Section 11, Article XII of
the Constitution includes preferred shares since the Constitution does not distinguish
among classes of stock, thus:
 
16.  The Constitution applies its foreign ownership limitation on the corporations
capital, without distinction as to classes of shares. x x x
 
In this connection, the Corporation Code which was already in force at the time
the present (1987) Constitution was drafted defined outstanding capital stock as
follows:
 
Section 137. Outstanding capital stock defined. The term outstanding capital
stock, as used in this Code, means the total shares of stock issued under binding
subscription agreements to subscribers or stockholders, whether or not fully or
partially paid, except treasury shares.
 
Section 137 of the Corporation Code also does not distinguish between
common and preferred shares, nor exclude either class of shares, in determining
the outstanding capital stock (the capital) of a corporation. Consequently,
petitioners suggestion to reckon PLDTs foreign equity only on the basis of
PLDTs outstanding common shares is without legal basis. The language of the
Constitution should be understood in the sense it has in common use.
x x x x
 
17.  But even assuming that resort to the proceedings of the Constitutional
Commission is necessary, there is nothing in the Record of the Constitutional
Commission (Vol. III) which petitioner misleadingly cited in the Petition
x x x which supports petitioners view that only common shares should form the
basis for computing a public utilitys foreign equity.
x x x x
 
 18.  In addition, the SEC the government agency primarily responsible for
implementing the Corporation Code, and which also has the responsibility of
ensuring compliance with the Constitutions foreign equity restrictions as
regards nationalized activities x x x has categorically ruled that both common
and preferred shares are properly considered in determining outstanding capital
stock and the nationality composition thereof.40
 
 
We agree with petitioner and petitioners-in-intervention. The term capital in Section
11, Article XII of the Constitution refers only to shares of stock entitled to vote in the
election of directors, and thus in the present case only to common shares,41 and not to
the total outstanding capital stock comprising both common and non-voting preferred
shares.
The Corporation Code of the Philippines42 classifies shares as common or preferred,
thus:
 
Sec. 6. Classification of shares. - The shares of stock of stock corporations may
be divided into classes or series of shares, or both, any of which classes or
series of shares may have such rights, privileges or restrictions as may be stated
in the articles of incorporation: Provided, That no share may be deprived of
voting rights except those classified and issued as preferred or redeemable
shares, unless otherwise provided in this Code: Provided, further, That there
shall always be a class or series of shares which have complete voting rights.
Any or all of the shares or series of shares may have a par value or have no par
value as may be provided for in the articles of incorporation: Provided,
however, That banks, trust companies, insurance companies, public utilities,
and building and loan associations shall not be permitted to issue no-par value
shares of stock.
Preferred shares of stock issued by any corporation may be given preference in
the distribution of the assets of the corporation in case of liquidation and in the
distribution of dividends, or such other preferences as may be stated in the
articles of incorporation which are not violative of the provisions of this Code:
Provided, That preferred shares of stock may be issued only with a stated par
value. The Board of Directors, where authorized in the articles of incorporation,
may fix the terms and conditions of preferred shares of stock or any series
thereof: Provided, That such terms and conditions shall be effective upon the
filing of a certificate thereof with the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully paid and
non-assessable and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto: Provided; That shares without
 par value may not be issued for a consideration less than the value of five
(P5.00) pesos per share: Provided, further, That the entire consideration
received by the corporation for its no-par value shares shall be treated as capital
and shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring
compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the
certificate of stock, each share shall be equal in all respects to every other
share.
Where the articles of incorporation provide for non-voting shares in the cases
allowed by this Code, the holders of such shares shall nevertheless be entitled
to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or
other corporations;
7. Investment of corporate funds in another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary
to approve a particular corporate act as provided in this Code shall be deemed
to refer only to stocks with voting rights.
 
 
Indisputably, one of the rights of a stockholder is the right to participate in the control
or management of the corporation.43 This is exercised through his vote in the election
of directors because it is the board of directors that controls or manages the
corporation.44 In the absence of provisions in the articles of incorporation denying
voting rights to preferred shares, preferred shares have the same voting rights as
common shares. However, preferred shareholders are often excluded from
any control, that is, deprived of the right to vote in the election of directors and on
other matters, on the theory that the preferred shareholders are merely investors in the
corporation for income in the same manner as bondholders.45 In fact, under the
Corporation Code only preferred or redeemable shares can be deprived of the right to
vote.46 Common shares cannot be deprived of the right to vote in any corporate
meeting, and any provision in the articles of incorporation restricting the right of
common shareholders to vote is invalid.47
 
Considering that common shares have voting rights which translate to control, as
opposed to preferred shares which usually have no voting rights, the term capital in
Section 11, Article XII of the Constitution refers only to common shares. However, if
the preferred shares also have the right to vote in the election of directors, then the
term capital shall include such preferred shares because the right to participate in the
control or management of the corporation is exercised through the right to vote in the
election of directors. In short, the term capital in Section 11, Article XII of the
Constitution refers only to shares of stock that can vote in the election of
directors.
 
This interpretation is consistent with the intent of the framers of the Constitution to
place in the hands of Filipino citizens the control and management of public utilities.
As revealed in the deliberations of the Constitutional Commission, capital refers to the
voting stock or controlling interest of a corporation, to wit:
 
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or
Filipino equity and foreign equity; namely, 60-40 in Section 3, 60-40 in Section
9 and 2/3-1/3 in Section 15.
 
MR. VILLEGAS. That is right.
 
MR. NOLLEDO. In teaching law, we are always faced with this question:
Where do we base the equity requirement, is it on the authorized capital stock,
on the subscribed capital stock, or on the paid-up capital stock of a corporation?
Will the Committee please enlighten me on this?
 
MR. VILLEGAS. We have just had a long discussion with the members of the
team from the UP Law Center who provided us a draft. The phrase that is
contained here which we adopted from the UP draft is 60 percent of voting
stock.
 
MR. NOLLEDO. That must be based on the subscribed capital stock, because
unless declared delinquent, unpaid capital stock shall be entitled to vote.
 
MR. VILLEGAS. That is right.
 
MR. NOLLEDO. Thank you.
 
With respect to an investment by one corporation in another corporation, say, a
corporation with 60-40 percent equity invests in another corporation which is
permitted by the Corporation Code, does the Committee adopt the grandfather
rule?
 
MR. VILLEGAS. Yes, that is the understanding of the Committee.
 
MR. NOLLEDO. Therefore, we need additional Filipino capital?
 
MR. VILLEGAS. Yes.48
 
x x x x
MR. AZCUNA. May I be clarified as to that portion that was accepted by
the Committee.
 
MR. VILLEGAS. The portion accepted by the Committee is the deletion of the
phrase voting stock or controlling interest.
 
MR. AZCUNA. Hence, without the Davide amendment, the committee report
would read: corporations or associations at least sixty percent of whose
CAPITAL is owned by such citizens.
 
MR. VILLEGAS. Yes.
 
MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60
percent of the capital to be owned by citizens.
 
MR. VILLEGAS. That is right.
 
MR. AZCUNA. But the control can be with the foreigners even if they are
the minority. Let us say 40 percent of the capital is owned by them, but it is
the voting capital, whereas, the Filipinos own the nonvoting shares. So we
can have a situation where the corporation is controlled by foreigners
 despite being the minority because they have the voting capital. That is the
anomaly that would result here.
 
MR. BENGZON. No, the reason we eliminated the word stock as stated in
the 1973 and 1935 Constitutions is that according to Commissioner
Rodrigo, there are associations that do not have stocks. That is why we say
CAPITAL.
 
MR. AZCUNA. We should not eliminate the phrase controlling interest.
 
MR. BENGZON. In the case of stock corporations, it is
assumed.49 (Emphasis supplied)
 
 
Thus, 60 percent of the capital assumes, or should result in, controlling interest in the
corporation. Reinforcing this interpretation of the term capital, as referring to
controlling interest or shares entitled to vote, is the definition of a Philippine national
in the Foreign Investments Act of 1991,50 to wit:
 
SEC. 3. Definitions. - As used in this Act:
 
a.  The term Philippine national shall mean a citizen of the Philippines; or a
domestic partnership or association wholly owned by citizens of the
Philippines; or a corporation organized under the laws of the Philippines of
which at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a corporation organized abroad and registered as doing business
in the Philippines under the Corporation Code of which one hundred percent
(100%) of the capital stock outstanding and entitled to vote is wholly owned by
Filipinos or a trustee of funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine national and at least sixty
percent (60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That where a corporation and its non-Filipino stockholders
own stocks in a Securities and Exchange Commission (SEC) registered
enterprise, at least sixty percent (60%) of the capital stock outstanding and
entitled to vote of each of both corporations must be owned and held by
citizens of the Philippines and at least sixty percent (60%) of the members of
the Board of Directors of each of both corporations must be citizens of the
 Philippines, in order that the corporation, shall be considered a Philippine
national. (Emphasis supplied)
 

In explaining the definition of a Philippine national, the Implementing Rules and

Regulations of the Foreign Investments Act of 1991 provide:
 
b. Philippine national shall mean a citizen of the Philippines or a domestic
partnership or association wholly owned by the citizens of the Philippines; or a
corporation organized under the laws of the Philippines of which at least
sixty percent [60%] of the capital stock outstanding and entitled to vote is
owned and held by citizens of the Philippines; or a trustee of funds for
pension or other employee retirement or separation benefits, where the trustee
is a Philippine national and at least sixty percent [60%] of the fund will accrue
to the benefit of the Philippine nationals; Provided, that where a corporation its
non-Filipino stockholders own stocks in a Securities and Exchange
Commission [SEC] registered enterprise, at least sixty percent [60%] of the
capital stock outstanding and entitled to vote of both corporations must be
owned and held by citizens of the Philippines and at least sixty percent [60%]
of the members of the Board of Directors of each of both corporation must be
citizens of the Philippines, in order that the corporation shall be considered a
Philippine national. The control test shall be applied for this purpose.
 
Compliance with the required Filipino ownership of a corporation shall be
determined on the basis of outstanding capital stock whether fully paid or
not, but only such stocks which are generally entitled to vote are
considered.
 
For stocks to be deemed owned and held by Philippine citizens or
Philippine nationals, mere legal title is not enough to meet the required
Filipino equity. Full beneficial ownership of the stocks, coupled with
appropriate voting rights is essential. Thus, stocks, the voting rights of
which have been assigned or transferred to aliens cannot be considered
held by Philippine citizens or Philippine nationals.
 
Individuals or juridical entities not meeting the aforementioned
qualifications are considered as non-Philippine nationals. (Emphasis
supplied)
 
 
  
 
 
 
Mere legal title is insufficient to meet the 60 percent Filipino-owned capital required
in the Constitution. Full beneficial ownership of 60 percent of the outstanding capital
stock, coupled with 60 percent of the voting rights, is required. The legal and
beneficial ownership of 60 percent of the outstanding capital stock must rest in the
hands of Filipino nationals in accordance with the constitutional mandate. Otherwise,
the corporation is considered as non-Philippine national[s].
 
Under Section 10, Article XII of the Constitution, Congress may reserve to citizens of
the Philippines or to corporations or associations at least sixty per centum of whose
capital is owned by such citizens, or such higher percentage as Congress
may prescribe, certain areas of investments. Thus, in numerous laws Congress has
reserved certain areas of investments to Filipino citizens or to corporations at least
sixty percent of the capital of which is owned by Filipino citizens. Some of these laws
are: (1) Regulation of Award of Government Contracts or R.A. No. 5183; (2)
Philippine Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro,
Small and Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping
Development Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004
or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No. 10055;
and (7) Ship Mortgage Decree or P.D. No. 1521. Hence, the term capital in Section
11, Article XII of the Constitution is also used in the same context in numerous
lawsreserving certain areas of investments to Filipino citizens.
 
To construe broadly the term capital as the total outstanding capital stock, including
both common and non-voting preferred shares, grossly contravenes the intent and
letter of the Constitution that the State shall develop a self-reliant and independent
national economy effectively controlled by Filipinos. A broad definition unjustifiably
disregards who owns the all-important voting stock, which necessarily equates to
control of the public utility.
 
We shall illustrate the glaring anomaly in giving a broad definition to the term capital.
Let us assume that a corporation has 100 common shares owned by foreigners and
1,000,000 non-voting preferred shares owned by Filipinos, with both classes of share
having a par value of one peso (P1.00) per share. Under the broad definition of the
term capital, such corporation would be considered compliant with the 40 percent
constitutional limit on foreign equity of public utilities since the overwhelming
majority, or more than 99.999 percent, of the total outstanding capital stock is Filipino
owned. This is obviously absurd.
 
In the example given, only the foreigners holding the common shares have voting
rights in the election of directors, even if they hold only 100 shares. The foreigners,
with a minuscule equity of less than 0.001 percent, exercise control over the public
utility. On the other hand, the Filipinos, holding more than 99.999 percent of the
equity, cannot vote in the election of directors and hence, have no control over the
public utility. This starkly circumvents the intent of the framers of the Constitution, as
well as the clear language of the Constitution, to place the control of public utilities in
the hands of Filipinos. It also renders illusory the State policy of an independent
national economy effectively controlled by Filipinos.
 
The example given is not theoretical but can be found in the real world, and in fact
exists in the present case.
 
Holders of PLDT preferred shares are explicitly denied of the right to vote in the
election of directors. PLDTs Articles of Incorporation expressly state that the holders
of Serial Preferred Stock shall not be entitled to vote at any meeting of the
stockholders for the election of directors or for any other purpose or otherwise
participate in any action taken by the corporation or its stockholders, or to receive
notice of any meeting of stockholders.51
 
On the other hand, holders of common shares are granted the exclusive right to vote in
the election of directors. PLDTs Articles of Incorporation52 state that each holder of
Common Capital Stock shall have one vote in respect of each share of such stock held
by him on all matters voted upon by the stockholders, and the holders of Common
Capital Stock shall have the exclusive right to vote for the election of directors
and for all other purposes.53
 
In short, only holders of common shares can vote in the election of directors, meaning
only common shareholders exercise control over PLDT. Conversely, holders of
preferred shares, who have no voting rights in the election of directors, do not have
any control over PLDT. In fact, under PLDTs Articles of Incorporation, holders of
common shares have voting rights for all purposes, while holders of preferred shares
have no voting right for any purpose whatsoever.
 
It must be stressed, and respondents do not dispute, that foreigners hold a majority
of the common shares of PLDT. In fact, based on PLDTs 2010 General Information
Sheet (GIS),54 which is a document required to be submitted annually to the Securities
and Exchange Commission,55 foreigners hold 120,046,690 common shares of PLDT
whereas Filipinos hold only 66,750,622 common shares.56 In other words, foreigners
hold 64.27% of the total number of PLDTs common shares, while Filipinos hold only
35.73%. Since holding a majority of the common shares equates to control, it is clear
that foreigners exercise control over PLDT. Such amount of control unmistakably
exceeds the allowable 40 percent limit on foreign ownership of public utilities
expressly mandated in Section 11, Article XII of the Constitution.
 
Moreover, the Dividend Declarations of PLDT for 2009,57 as submitted to the SEC,
shows that per share the SIP58 preferred shares earn a pittance in dividends compared
to the common shares. PLDT declared dividends for the common shares at P70.00 per
share, while the declared dividends for the preferred shares amounted to a
measly P1.00 per share.59So the preferred shares not only cannot vote in the election
of directors, they also have very little and obviously negligible dividend earning
capacity compared to common shares.
 
As shown in PLDTs 2010 GIS,60 as submitted to the SEC, the par value of PLDT
common shares is P5.00 per share, whereas the par value of preferred shares is P10.00
per share. In other words, preferred shares have twice the par value of common shares
but cannot elect directors and have only 1/70 of the dividends of common shares.
Moreover, 99.44% of the preferred shares are owned by Filipinos while foreigners
own only a minuscule 0.56% of the preferred shares.61 Worse, preferred shares
constitute 77.85% of the authorized capital stock of PLDT while common shares
constitute only 22.15%.62 This undeniably shows that beneficial interest in PLDT is
not with the non-voting preferred shares but with the common shares, blatantly
violating the constitutional requirement of 60 percent Filipino control and Filipino
beneficial ownership in a public utility.
 
The legal and beneficial ownership of 60 percent of the outstanding capital stock must
rest in the hands of Filipinos in accordance with the constitutional mandate. Full
beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60
percent of the voting rights, is constitutionally required for the States grant of
authority to operate a public utility. The undisputed fact that the PLDT preferred
shares, 99.44% owned by Filipinos, are non-voting and earn only 1/70 of the
dividends that PLDT common shares earn, grossly violates the constitutional
requirement of 60 percent Filipino control and Filipino beneficial ownership of a
public utility.
In short, Filipinos hold less than 60 percent of the voting stock, and earn less
than 60 percent of the dividends, of PLDT. This directly contravenes the express
command in Section 11, Article XII of the Constitution that [n]o franchise, certificate,
or any other form of authorization for the operation of a public utility shall be granted
except to x x xcorporations x x x organized under the laws of the Philippines, at least
sixty per centum of whose capital is owned by such citizens x x x.
 
To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of
shares exercises the sole right to vote in the election of directors, and thus exercise
control over PLDT; (2) Filipinos own only 35.73% of PLDTs common shares,
constituting a minority of the voting stock, and thus do not exercise control over
PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting rights; (4)
preferred shares earn only 1/70 of the dividends that common shares earn;63 (5)
preferred shares have twice the par value of common shares; and (6) preferred shares
constitute 77.85% of the authorized capital stock of PLDT and common shares only
22.15%. This kind of ownership and control of a public utility is a mockery of the
Constitution.
 
Incidentally, the fact that PLDT common shares with a par value of P5.00 have a
current stock market value of P2,328.00 per share,64 while PLDT preferred shares with
a par value of P10.00 per share have a current stock market value ranging from
only P10.92 to P11.06 per share,65 is a glaring confirmation by the market that control
and beneficial ownership of PLDT rest with the common shares, not with the
preferred shares.
 
Indisputably, construing the term capital in Section 11, Article XII of the Constitution
to include both voting and non-voting shares will result in the abject surrender of our
telecommunications industry to foreigners, amounting to a clear abdication of the
States constitutional duty to limit control of public utilities to Filipino citizens. Such
an interpretation certainly runs counter to the constitutional provision reserving
certain areas of investment to Filipino citizens, such as the exploitation of natural
resources as well as the ownership of land, educational institutions and advertising
businesses. The Court should never open to foreign control what the Constitution has
expressly reserved to Filipinos for that would be a betrayal of the Constitution and of
the national interest. The Court must perform its solemn duty to defend and uphold
the intent and letter of the Constitution to ensure, in the words of the Constitution, a
self-reliant and independent national economy effectively controlled by Filipinos.
 
Section 11, Article XII of the Constitution, like other provisions of the Constitution
expressly reserving to Filipinos specific areas of investment, such as the development
of natural resources and ownership of land, educational institutions and advertising
business, is self-executing. There is no need for legislation to implement these self-
executing provisions of the Constitution. The rationale why these constitutional
provisions are self-executing was explained in Manila Prince Hotel v. GSIS,66 thus:
x x x Hence, unless it is expressly provided that a legislative act is necessary to
enforce a constitutional mandate, the presumption now is that all provisions of
the constitution are self-executing. If the constitutional provisions are treated as
requiring legislation instead of self-executing, the legislature would have the
power to ignore and practically nullify the mandate of the fundamental law.
This can be cataclysmic. That is why the prevailing view is, as it has always
been, that
 
. . . in case of doubt, the Constitution should be considered self-executing rather
than non-self-executing. . . . Unless the contrary is clearly intended, the
provisions of the Constitution should be considered self-executing, as a
contrary rule would give the legislature discretion to determine when, or
whether, they shall be effective. These provisions would be subordinated to
the will of the lawmaking body, which could make them entirely meaningless
by simply refusing to pass the needed implementing statute. (Emphasis
supplied)
 
 
 
 
 
In Manila Prince Hotel, even the Dissenting Opinion of then Associate
Justice Reynato S. Puno, later Chief Justice, agreed that constitutional provisions are
presumed to be self-executing. Justice Puno stated:
 
Courts as a rule consider the provisions of the Constitution as self-executing,
rather than as requiring future legislation for their enforcement. The reason is
not difficult to discern. For if they are not treated as self-executing, the
mandate of the fundamental law ratified by the sovereign people can be
easily ignored and nullified by Congress. Suffused with wisdom of the ages
is the unyielding rule that legislative actions may give breath to
constitutional rights but congressional inaction should not suffocate them.
 
 
Thus, we have treated as self-executing the provisions in the Bill of Rights on
arrests, searches and seizures, the rights of a person under custodial
investigation, the rights of an accused, and the privilege against self-
 incrimination. It is recognized that legislation is unnecessary to enable courts to
effectuate constitutional provisions guaranteeing the fundamental rights of life,
liberty and the protection of property. The same treatment is accorded to
constitutional provisions forbidding the taking or damaging of property for
public use without just compensation. (Emphasis supplied)
 
 
Thus, in numerous cases,67 this Court, even in the absence of implementing
legislation, applied directly the provisions of the 1935, 1973 and 1987 Constitutions
limiting land ownership to Filipinos. In Soriano v. Ong Hoo,68 this Court ruled:
 
x x x As the Constitution is silent as to the effects or consequences of a sale by
a citizen of his land to an alien, and as both the citizen and the alien have
violated the law, none of them should have a recourse against the other, and it
should only be the State that should be allowed to intervene and determine
what is to be done with the property subject of the violation. We have said that
what the State should do or could do in such matters is a matter of public
policy, entirely beyond the scope of judicial authority. (Dinglasan, et al. vs. Lee
Bun Ting, et al., 6 G. R. No. L-5996, June 27, 1956.) While the legislature
has not definitely decided what policy should be followed in cases of
violations against the constitutional prohibition, courts of justice cannot go
beyond by declaring the disposition to be null and void as violative of the
Constitution. x x x (Emphasis supplied)
 
 
To treat Section 11, Article XII of the Constitution as not self-executing would mean
that since the 1935 Constitution, or over the last 75 years, not one of the constitutional
provisions expressly reserving specific areas of investments to corporations, at least
60 percent of the capital of which is owned by Filipinos, was enforceable. In short, the
framers of the 1935, 1973 and 1987 Constitutions miserably failed to effectively
reserve to Filipinos specific areas of investment, like the operation by corporations of
public utilities, the exploitation by corporations of mineral resources, the ownership
by corporations of real estate, and the ownership of educational institutions. All the
legislatures that convened since 1935 also miserably failed to enact legislations to
implement these vital constitutional provisions that determine who will effectively
control the national economy, Filipinos or foreigners. This Court cannot allow such an
absurd interpretation of the Constitution.
 
This Court has held that the SEC has both regulatory and adjudicative
functions.69 Under its regulatory functions, the SEC can be compelled by mandamus
to perform its statutory duty when it unlawfully neglects to perform the same. Under
its adjudicative or quasi-judicial functions, the SEC can be also be compelled by
mandamus to hear and decide a possible violation of any law it administers or
enforces when it is mandated by law to investigate such violation.
 
Under Section 17(4)70 of the Corporation Code, the SEC has the regulatory function to
reject or disapprove the Articles of Incorporation of any corporation where the
required percentage of ownership of the capital stock to be owned by citizens of
the Philippines has not been complied with as required by existing laws or the
Constitution. Thus, the SEC is the government agency tasked with the statutory duty
to enforce the nationality requirement prescribed in Section 11, Article XII of the
Constitution on the ownership of public utilities. This Court, in a petition for
declaratory relief that is treated as a petition for mandamus as in the present case, can
direct the SEC to perform its statutory duty under the law, a duty that the SEC has
apparently unlawfully neglected to do based on the 2010 GIS that respondent PLDT
submitted to the SEC.
Under Section 5(m) of the Securities Regulation Code,71 the SEC is vested with the
power and function to 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. The SEC is mandated
under Section 5(d) of the same Code with the power and function to investigate
x x x the activities of persons to ensure compliance with the laws and regulations
that SEC administers or enforces. The GIS that all corporations are required to submit
to SEC annually should put the SEC on guard against violations of the nationality
requirement prescribed in the Constitution and existing laws. This Court can compel
the SEC, in a petition for declaratory relief that is treated as a petition for mandamus
as in the present case, to hear and decide a possible violation of Section 11, Article
XII of the Constitution in view of the ownership structure of PLDTs voting shares, as
admitted by respondents and as stated in PLDTs 2010 GIS that PLDT submitted to
SEC.
 
WHEREFORE, we PARTLY GRANT the petition and rule that the term capital in
Section 11, Article XII of the 1987 Constitution refers only to shares of stock entitled
to vote in the election of directors, and thus in the present case only to common
shares, and not to the total outstanding capital stock (common and non-voting
preferred shares). Respondent Chairperson of the Securities and Exchange
Commission is DIRECTED to apply this definition of the term capital in determining
the extent of allowable foreign ownership in respondent Philippine Long Distance
Telephone Company, and if there is a violation of Section 11, Article XII of the
Constitution, to impose the appropriate sanctions under the law.
 
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
SPECIAL THIRD DIVISION
G.R. No. 195580               January 28, 2015
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND DEVELOPMENT,
INC., and McARTHUR MINING, INC., Petitioners, 
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.
RESOLUTION
VELASCO, JR., J.:
Before the Court is the Motion for Reconsideration of its April 21, 2014 Decision, which denied the
Petition for Review on Certiorari under Rule 45 jointly interposed by petitioners Narra Nickel and
Mining Development Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and McArthur
Mining Inc. (McArthur), and affirmed the October 1, 2010 Decision and February 15, 2011
Resolution of the Court of Appeals (CA) in CA-G.R. SP No. 109703.
Very simply, the challenged Decision sustained the appellate court's ruling that petitioners, being
foreign corporations, are not entitled to Mineral Production Sharing Agreements (MPSAs). In
reaching its conclusion, this Court upheld with approval the appellate court's finding that there was
doubt as to petitioners' nationality since a 100% Canadian-owned firm, MBMI Resources, Inc.
(MBMI), effectively owns 60% of the common stocks of the petitioners by owning equity interest of
petitioners' other majority corporate shareholders.
In a strongly worded Motion for Reconsideration dated June 5, 2014, petitioners-movants argued, in
the main, that the Court's Decision was not in accord with law and logic. In its September 2, 2014
Comment, on the other hand, respondent Redmont Consolidated Mines Corp. (Redmont) countered
that petitioners’ motion for reconsideration is nothing but a rehash of their arguments and should,
thus, be denied outright for being pro-forma. Petitioners have interposed on September 30, 2014
their Reply to the respondent’s Comment.
After considering the parties’ positions, as articulated in their respective submissions, We resolve to
deny the motion for reconsideration.
I.
The case has not been rendered moot and academic
Petitioners have first off criticized the Court for resolving in its Decision a substantive issue, which,as
argued, has supposedly been rendered moot by the fact that petitioners’ applications for MPSAs had
already been converted to an application for a Financial Technical Assistance Agreement (FTAA), as
petitioners have in fact been granted an FTAA. Further, the nationality issue, so petitioners presently
claim, had been rendered moribund by the fact that MBMI had already divested itself and sold all its
shareholdings in the petitioners, as well as in their corporate stockholders, to a Filipino corporation—
DMCI Mining Corporation (DMCI).
As a counterpoint, respondent Redmontavers that the present case has not been rendered moot by
the supposed issuance of an FTAA in petitioners’ favor as this FTAA was subsequently revoked by
the Office of the President (OP) and is currently a subject of a petition pending in the Court’s First
Division. Redmont likewise contends that the supposed sale of MBMI’s interest in the petitioners and
in their "holding companies" is a question of fact that is outside the Court’s province to verify in a
Rule 45 certiorari proceedings. In any case, assuming that the controversy has been rendered moot,
Redmont claims that its resolution on the merits is still justified by the fact that petitioners have
violated a constitutional provision, the violation is capable of repetition yet evading review, and the
present case involves a matter of public concern.
Indeed, as the Court clarified in its Decision, the conversion of the MPSA application to one for
FTAAs and the issuance by the OP of an FTAA in petitioners’ favor are irrelevant. The OP itself has
already cancelled and revoked the FTAA thusissued to petitioners. Petitioners curiously have
omitted this critical factin their motion for reconsideration. Furthermore, the supposed sale by MBMI
of its shares in the petition ercorporations and in their holding companies is not only a question of
fact that this Court is without authority toverify, it also does not negate any violation of the
Constitutional provisions previously committed before any such sale.
We can assume for the nonce that the controversy had indeed been rendered moot by these two
events. Asthis Court has time and again declared, the "moot and academic" principle is not a
magical formula that automatically dissuades courts in resolving a case.  The Court may still take
1

cognizance of an otherwise moot and academic case, if it finds that (a) there is a grave violation of
the Constitution;(b) the situation is of exceptional character and paramount public interest is
involved; (c) the constitutional issue raised requires formulation of controlling principles to guide the
bench, the bar, and the public; and (d) the case is capable of repetition yet evading review. The2

Court’s April 21, 2014 Decision explained in some detail that all four (4) of the foregoing
circumstances are present in the case. If only to stress a point, we will do so again. First, allowing
the issuance of MPSAs to applicants that are owned and controlled by a 100% foreign-owned
corporation, albeit through an intricate web of corporate layering involving alleged Filipino
corporations, is tantamount to permitting a blatant violation of Section 2, Article XII of the
Constitution. The Court simply cannot allow this breach and inhibit itself from resolving the
controversy on the facile pretext that the case had already been rendered academic.
Second, the elaborate corporate layering resorted to by petitioners so as to make it appear that there
is compliance with the minimum Filipino ownership in the Constitution is deftly exceptional in
character. More importantly, the case is of paramount public interest, as the corporate layering
employed by petitioners was evidently designed to circumvent the constitutional caveat allowing only
Filipino citizens and corporations 60%-owned by Filipino citizens to explore, develop, and use the
country’s natural resources.
Third, the facts of the case, involving as they do a web of corporate layering intended to go around
the Filipino ownership requirement in the Constitution and pertinent laws, requirethe establishment
of a definite principle that will ensure that the Constitutional provision reserving to Filipino citizens or
"corporations at least sixty per centum of whose capital is owned by such citizens" be effectively
enforced and complied with. The case, therefore, is an opportunity to establish a controlling principle
that will "guide the bench, the bar, and the public."
Lastly, the petitioners’ actions during the lifetime and existence of the instant case that gave rise to
the present controversy are capable of repetition yet evading review because, as shown by
petitioners’ actions, foreign corporations can easily utilize dummy Filipino corporations through
various schemes and stratagems to skirt the constitutional prohibition against foreign mining in
Philippine soil.
II.
The application of the Grandfather Ruleis justified by the circumstances of the case to determine the
nationality of petitioners.
To petitioners, the Court’s application of the Grandfather Rule to determine their nationality is
erroneous and allegedly without basis in the Constitution, the Foreign Investments Act of 1991 (FIA),
the Philippine Mining Act of 1995,3 and the Rules issued by the Securities and Exchange
Commission (SEC). These laws and rules supposedly espouse the application of the Control Test in
verifying the Philippine nationality of corporate entities for purposes of determining compliance
withSec. 2, Art. XII of the Constitution that only "corporations or associations at least sixty per
centum of whose capital is owned by such [Filipino] citizens" may enjoy certain rights and privileges,
like the exploration and development of natural resources.
The application of the Grandfather Rule in the present case does not eschew the Control Test.
Clearly, petitioners have misread, and failed to appreciate the clear import of, the Court’s April 21,
2014 Decision. Nowhere in that disposition did the Court foreclose the application of the Control Test
in determining which corporations may be considered as Philippine nationals. Instead, to borrow
Justice Leonen’s term, the Court used the Grandfather Rule as a "supplement" to the Control Test
so that the intent underlying the averted Sec. 2, Art. XII of the Constitution be given effect. The
following excerpts of the April 21, 2014 Decision cannot be clearer:
In ending, the "control test" is still the prevailing mode of determining whether or not a corporation is
a Filipino corporation, within the ambit of Sec. 2, Art. XII of the 1987 Constitution, entitled to
undertake the exploration, development and utilization of the natural resources of the Philippines.
When in the mind of the Court, there is doubt, based on the attendant facts and circumstances of the
case, in the 60-40 Filipino equity ownership in the corporation, then it may apply the "grandfather
rule." (emphasis supplied)
With that, the use of the Grandfather Rule as a "supplement" to the Control Test is not proscribed by
the Constitution or the Philippine Mining Act of 1995.
The Grandfather Rule implements the intent of the Filipinization provisions of the Constitution.
To reiterate, Sec. 2, Art. XII of the Constitution reserves the exploration, development, and utilization
of natural resources to Filipino citizens and "corporations or associations at least sixty per centum of
whose capital is owned by such citizens." Similarly, Section 3(aq) of the Philippine Mining Act of
1995 considers a "corporation x x x registered in accordance with law at least sixty per cent of the
capital of which is owned by citizens of the Philippines" as a person qualified to undertake a mining
operation. Consistent with this objective, the Grandfather Rulewas originally conceived to look into
the citizenshipof the individuals who ultimately own and control the shares of stock of a corporation
for purposes of determining compliance with the constitutional requirement of Filipino ownership. It
cannot, therefore, be denied that the framers of the Constitution have not foreclosed the Grandfather
Rule as a tool in verifying the nationality of corporations for purposes of ascertaining their right to
participate in nationalized or partly nationalized activities. The following excerpts from the Record of
the 1986 Constitutional Commission suggest as much:
MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign
equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.
MR. VILLEGAS: That is right.
xxxx
MR. NOLLEDO: Thank you.
With respect to an investment by one corporation in another corporation, say, a corporation with 60-
40 percent equity invests in another corporation which is permitted by the Corporation Code, does
the Committee adopt the grandfather rule?
MR. VILLEGAS: Yes, that is the understanding of the Committee.
As further defined by Dean Cesar Villanueva, the Grandfather Rule is "the method by which the
percentage of Filipino equity in a corporation engaged in nationalized and/or partly nationalized
areas of activities, provided for under the Constitution and other nationalization laws, is computed, in
cases where corporate shareholders are present, by attributing the nationality of the second or even
subsequent tier of ownership to determine the nationality of the corporate shareholder."  Thus, to
4

arrive at the actual Filipino ownership and control in a corporation, both the direct and indirect
shareholdings in the corporation are determined.
This concept of stock attribution inherent in the Grandfather Rule to determine the ultimate
ownership in a corporation is observed by the Bureau of Internal Revenue (BIR) in applying Section
127 (B)  of the National Internal Revenue Code on taxes imposed on closely held corporations, in
5

relation to Section 96 of the Corporation Code  on close corporations. Thus, in BIR Ruling No. 148-
6

10, Commissioner Kim Henares held:

In the case of a multi-tiered corporation, the stock attribution rule must be allowed to run
continuously along the chain of ownership until it finally reaches the individual stockholders. This is
in consonance with the "grandfather rule" adopted in the Philippines under Section 96 of the
Corporation Code(Batas Pambansa Blg. 68) which provides that notwithstanding the fact that all the
issued stock of a corporation are held by not more than twenty persons, among others, a corporation
is nonetheless not to be deemed a close corporation when at least two thirds of its voting stock or
voting rights is owned or controlled by another corporation which is not a close corporation. 7

In SEC-OGC Opinion No. 10-31 dated December 9, 2010 (SEC Opinion 10-31), the SEC applied the
Grandfather Rule even if the corporation engaged in mining operation passes the 60-40 requirement
of the Control Test, viz:
You allege that the structure of MML’s ownership in PHILSAGA is as follows: (1) MML owns 40%
equity in MEDC, while the 60% is ostensibly owned by Philippine individual citizens who are actually
MML’s controlled nominees; (2) MEDC, in turn, owns 60% equity in MOHC, while MML owns the
remaining 40%; (3) Lastly, MOHC owns 60% of PHILSAGA, while MML owns the remaining 40%.
You provide the following figure to illustrate this structure:
xxxx
We note that the Constitution and the statute use the concept "Philippine citizens." Article III, Section
1 of the Constitution provides who are Philippine citizens: x x x This enumeration is exhaustive. In
other words, there can be no other Philippine citizens other than those falling within the enumeration
provided by the Constitution. Obviously, only natural persons are susceptible of citizenship. Thus, for
purposes of the Constitutional and statutory restrictions on foreign participation in the exploitation of
mineral resources, a corporation investing in a mining joint venture can never be considered as a
Philippine citizen.
The Supreme Court En Banc confirms this [in]… Pedro R. Palting, vs. San Jose Petroleum [Inc.].
The Court held that a corporation investing in another corporation engaged ina nationalized activity
cannot be considered as a citizen for purposes of the Constitutional provision restricting foreign
exploitation of natural resources:
xxxx
Accordingly, we opine that we must look into the citizenship of the individual stockholders, i.e.
natural persons, of that investor-corporation in order to determine if the Constitutional and statutory
restrictions are complied with. If the shares of stock of the immediate investor corporation is in turn
held and controlled by another corporation, then we must look into the citizenship of the individual
stockholders of the latter corporation. In other words, if there are layers of intervening corporations
investing in a mining joint venture, we must delve into the citizenship of the individual stockholders of
each corporation. This is the strict application of the grandfather rule, which the Commission has
been consistently applying prior to the 1990s. Indeed, the framers of the Constitution intended for
the "grandfather rule" to apply in case a 60%-40% Filipino-Foreign equity corporation invests in
another corporation engaging in an activity where the Constitution restricts foreign participation.
xxxx
Accordingly, under the structure you represented, the joint mining venture is 87.04 % foreign owned,
while it is only 12.96% owned by Philippine citizens. Thus, the constitutional requirement of 60%
ownership by Philippine citizens isviolated. (emphasis supplied)
Similarly, in the eponymous Redmont Consolidated Mines Corporation v. McArthur Mining Inc., et
al.,  the SEC en bancapplied the Grandfather Rule despite the fact that the subject corporations
8

ostensibly have satisfied the 60-40 Filipino equity requirement. The SEC en bancheld that to attain
the Constitutional objective of reserving to Filipinos the utilization of natural resources, one should
not stop where the percentage of the capital stock is 60%.Thus:
[D]oubt, we believe, exists in the instant case because the foreign investor, MBMI, provided
practically all the funds of the remaining appellee-corporations. The records disclose that: (1)
Olympic Mines and Development Corporation ("OMDC"), a domestic corporation, and MBMI
subscribed to 6,663 and 3,331 shares, respectively, out of the authorized capital stock of
Madridejos; however, OMDC paid nothing for this subscription while MBMI paid ₱2,803,900.00 out
of its total subscription cost of ₱3,331,000.00; (2) Palawan Alpha South Resource Development
Corp. ("Palawan Alpha"), also a domestic corporation, and MBMI subscribed to 6,596 and 3,996
shares, respectively, out of the authorized capital stock of PatriciaLouise; however, Palawan Alpha
paid nothing for this subscription while MBMI paid ₱2,796,000.00 out of its total subscription cost of
₱3,996,000.00; (3) OMDC and MBMI subscribed to 6,663 and 3,331 shares, respectively, out of the
authorized capital stock of Sara Marie; however, OMDC paid nothing for this subscription while
MBMI paid ₱2,794,000.00 out of its total subscription cost of ₱3,331,000.00; and (4) Falcon Ridge
Resources Management Corp. ("Falcon Ridge"), another domestic corporation, and MBMI
subscribed to 5,997 and 3,998 shares, respectively, out of the authorized capital stock of San
Juanico; however, Falcon Ridge paid nothing for this subscription while MBMI paid ₱2,500,000.00
out of its total subscription cost of ₱3,998,000.00. Thus, pursuant to the afore-quoted DOJ Opinion,
the Grandfather Rule must be used.
xxxx
The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our
natural resources. Necessarily, therefore, the Rule interpreting the constitutional provision should not
diminish that right through the legal fiction of corporate ownership and control. But the constitutional
provision, as interpreted and practicedvia the 1967 SEC Rules, has favored foreigners contrary to
the command of the Constitution. Hence, the Grandfather Rule must be applied to accurately
determine the actual participation, both direct and indirect, of foreigners in a corporation engaged in
a nationalized activity or business.
The method employed in the Grandfather Rule of attributing the shareholdings of a given corporate
shareholder to the second or even the subsequent tier of ownership hews with the rule that the
"beneficial ownership" of corporations engaged in nationalized activities must reside in the hands of
Filipino citizens. Thus, even if the 60-40 Filipino equity requirement appears to have been satisfied,
the Department of Justice (DOJ), in its Opinion No. 144, S. of 1977, stated that an agreement that
may distort the actual economic or beneficial ownership of a mining corporation may be struck down
as violative of the constitutional requirement, viz:
In this connection, you raise the following specific questions:
1. Can a Philippine corporation with 30% equity owned by foreigners enter into a mining service
contract with a foreign company granting the latter a share of not morethan 40% from the proceeds
of the operations?
xxxx
By law, a mining lease may be granted only to a Filipino citizen, or to a corporation or partnership
registered with the [SEC] at least 60% of the capital of which is owned by Filipino citizens and
possessing x x x.The sixty percent Philippine equity requirement in mineral resource exploitation x x
xis intended to insure, among other purposes, the conservation of indigenous natural resources, for
Filipino posterityx x x. I think it is implicit in this provision, even if it refers merely to ownership of
stock in the corporation holding the mining concession, that beneficial ownership of the right to
dispose, exploit, utilize, and develop natural resources shall pertain to Filipino citizens, and that the
nationality requirementis not satisfied unless Filipinos are the principal beneficiaries in the
exploitation of the country’s natural resources. This criterion of beneficial ownership is tacitly
adopted in Section 44 of P.D. No. 463, above-quoted, which limits the service fee in service
contracts to 40% of the proceeds of the operation, thereby implying that the 60-40 benefit-sharing
ration is derived from the 60-40 equity requirement in the Constitution.
xxxx
It is obvious that while payments to a service contractor may be justified as a service fee, and
therefore, properly deductible from gross proceeds, the service contract could be employed as a
means of going about or circumventing the constitutional limit on foreign equity participation and the
obvious constitutional policy to insure that Filipinos retain beneficial ownership of our mineral
resources. Thus, every service contract scheme has to be evaluated in its entirety, on a case to case
basis, to determine reasonableness of the total "service fee" x x x like the options available tothe
contractor to become equity participant in the Philippine entity holding the concession, or to acquire
rights in the processing and marketing stages. x x x (emphasis supplied)
The "beneficial ownership" requirement was subsequently used in tandem with the "situs of control"
todetermine the nationality of a corporation in DOJ Opinion No. 84, S.of 1988, through the
Grandfather Rule, despite the fact that both the investee and investor corporations purportedly
satisfy the 60-40 Filipino equity requirement: 9

This refers to your request for opinion on whether or not there may be an investment in real estate
by a domestic corporation (the investing corporation) seventy percent (70%) of the capital stock of
which is owned by another domestic corporation withat least 60%-40% Filipino-Foreign Equity, while
the remaining thirty percent (30%) of the capital stock is owned by a foreign corporation.
xxxx
This Department has had the occasion to rule in several opinions that it is implicit in the
constitutional provisions, even if it refers merely to ownership of stock in the corporation holding the
land or natural resource concession, that the nationality requirement is not satisfied unless it meets
the criterion of beneficial ownership, i.e. Filipinos are the principal beneficiaries in the exploration of
natural resources(Op. No. 144, s. 1977; Op. No. 130, s. 1985), and that in applying the same "the
primordial consideration is situs of control, whether in a stock or nonstock corporation"(Op. No. 178,
s. 1974). As stated in the Register of Deeds vs. Ung Sui Si Temple (97 Phil. 58), obviously toinsure
that corporations and associations allowed to acquire agricultural land or to exploit natural resources
"shall be controlled by Filipinos." Accordingly, any arrangement which attempts to defeat the
constitutional purpose should be eschewed (Op. No 130, s. 1985).
We are informed that in the registration of corporations with the [SEC], compliance with the sixty per
centum requirement is being monitored by SEC under the "Grandfather Rule" a method by which the
percentage of Filipino equity in corporations engaged in nationalized and/or partly nationalized areas
of activities provided for under the Constitution and other national laws is accurately computed, and
the diminution if said equity prevented (SEC Memo, S. 1976). The "Grandfather Rule" is applied
specifically in cases where the corporation has corporate stockholders with alien stockholdings,
otherwise, if the rule is not applied, the presence of such corporate stockholders could diminish the
effective control of Filipinos.
Applying the "Grandfather Rule" in the instant case, the result is as follows: x x x the total foreign
equity in the investing corporation is 58% while the Filipino equity is only 42%, in the investing
corporation, subject of your query, is disqualified from investing in real estate, which is a nationalized
activity, as it does not meet the 60%-40% Filipino-Foreign equity requirement under the Constitution.
This pairing of the concepts "beneficial ownership" and the "situs of control" in determining what
constitutes"capital" has been adopted by this Court in Heirs of Gamboa v. Teves.  In its October 9,
10

2012 Resolution, the Court clarified, thus:

This is consistent with Section 3 of the FIA which provides that where 100% of the capital stock is
heldby "a trustee of funds for pension or other employee retirement or separation benefits," the
trustee is a Philippine national if "at least sixty percent (60%) of the fund will accrue to the benefit of
Philippine nationals." Likewise, Section 1(b) of the Implementing Rules of the FIA provides that "for
stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is
not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with
appropriate voting rights, is essential." (emphasis supplied)
In emphasizing the twin requirements of "beneficial ownership" and "control" in determining
compliance with the required Filipino equity in Gamboa, the en bancCourt explicitly cited with
approval the SEC en banc’s application in Redmont Consolidated Mines, Corp. v. McArthur Mining,
Inc., et al. of the Grandfather Rule, to wit:
Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue rules and
opinions on behalf of SEC, has adopted the Grandfather Rulein determining compliance with the 60-
40 ownership requirement in favor of Filipino citizens mandated by the Constitution for certain
economic activities. This prevailing SEC ruling, which the SEC correctly adopted to thwart any
circumvention of the required Filipino "ownership and control," is laid down in the 25 March 2010
SEC en banc ruling in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al. x x x
(emphasis supplied)
Applying Gamboa, the Court, in Express Investments III Private Ltd. v. Bayantel Communications,
Inc.,  denied the foreign creditors’ proposal to convert part of Bayantel’s debts to common shares of
11

the company at a rate of 77.7%. Supposedly, the conversion of the debts to common shares by the
foreign creditors would be done, both directly and indirectly, in order to meet the control test principle
under the FIA.Under the proposed structure, the foreign creditors would own 40% of the outstanding
capital stock of the telecommunications company on a direct basis, while the remaining 40% of
shares would be registered to a holding company that shall retain, on a direct basis, the other 60%
equity reserved for Filipino citizens. Nonetheless, the Court found the proposal non-compliant with
the Constitutional requirement of Filipino ownership as the proposed structure would give more than
60% of the ownership of the common shares of Bayantel to the foreign corporations, viz:
In its Rehabilitation Plan, among the material financial commitments made by respondent Bayantelis
that its shareholders shall relinquish the agreed-upon amount of common stock[s] as payment to
Unsecured Creditors as per the Term Sheet. Evidently, the parties intend to convert the
unsustainable portion of respondent’s debt into common stocks, which have voting rights. If we
indulge petitioners on their proposal, the Omnibus Creditors which are foreign corporations, shall
have control over 77.7% of Bayantel, a public utility company. This is precisely the scenario
proscribed by the Filipinization provision of the Constitution.Therefore, the Court of Appeals acted
correctly in sustaining the 40% debt-to-equity ceiling on conversion. (emphasis supplied) As shown
by the quoted legislative enactments, administrative rulings, opinions, and this Court’s decisions, the
Grandfather Rule not only finds basis, but more importantly, it implements the Filipino equity
requirement, in the Constitution.
Application of the Grandfather
Rule with the Control Test.
Admittedly, an ongoing quandary obtains as to the role of the Grandfather Rule in determining
compliance with the minimum Filipino equity requirement vis-à-vis the Control Test. This confusion
springs from the erroneous assumption that the use of one method forecloses the use of the other.
As exemplified by the above rulings, opinions, decisions and this Court’s April 21, 2014 Decision, the
Control Test can be, as it has been, applied jointly withthe Grandfather Rule to determine the
observance of foreign ownership restriction in nationalized economic activities. The Control Test and
the Grandfather Rule are not, as it were, incompatible ownership-determinant methods that canonly
be applied alternative to each other. Rather, these methodscan, if appropriate, be used cumulatively
in the determination of the ownership and control of corporations engaged in fully or partly
nationalized activities, as the mining operation involved in this case or the operation of public utilities
as in Gamboa or Bayantel.
The Grandfather Rule, standing alone, should not be used to determine the Filipino ownership and
control in a corporation, as it could result in an otherwise foreign corporation rendered qualified to
perform nationalized or partly nationalized activities. Hence, it is only when the Control Test is first
complied with that the Grandfather Rule may be applied. Put in another manner, if the subject
corporation’s Filipino equity falls below the threshold 60%, the corporation is immediately considered
foreign-owned, in which case, the needto resort to the Grandfather Rule disappears.
On the other hand, a corporation that complies with the 60-40 Filipino to foreign equity requirement
can be considered a Filipino corporation if there is no doubtas to who has the "beneficial ownership"
and "control" of the corporation. In that instance, there is no need fora dissection or further inquiry on
the ownership of the corporate shareholders in both the investing and investee corporation or the
application of the Grandfather Rule.  As a corollary rule, even if the 60-40 Filipino to foreign equity
12

ratio is apparently met by the subject or investee corporation, a resort to the Grandfather Rule is
necessary if doubt existsas to the locusof the "beneficial ownership" and "control." In this case, a
further investigation as to the nationality of the personalities with the beneficial ownership and
control of the corporate shareholders in both the investing and investee corporations is necessary.
As explained in the April 21,2012 Decision, the "doubt" that demands the application of the
Grandfather Rule in addition to or in tandem with the Control Test is not confined to, or more bluntly,
does not refer to the fact that the apparent Filipino ownership of the corporation’s equity falls below
the 60% threshold. Rather, "doubt" refers to various indicia that the "beneficial ownership" and
"control" of the corporation do not in fact reside in Filipino shareholders but in foreign stakeholders.
As provided in DOJ Opinion No. 165, Series of 1984, which applied the pertinent provisions of the
Anti-DummyLaw in relation to the minimum Filipino equity requirement in the Constitution,
"significant indicators of the dummy status" have been recognized in view of reports "that some
Filipino investors or businessmen are being utilized or [are] allowing themselves to be used as
dummies by foreign investors" specifically in joint ventures for national resource exploitation. These
indicators are:
1. That the foreign investors provide practically all the funds for the joint investment
undertaken by these Filipino businessmen and their foreign partner;
2. That the foreign investors undertake to provide practically all the technological support for
the joint venture;
3. That the foreign investors, while being minority stockholders, manage the company and
prepare all economic viability studies.
Thus, In the Matter of the Petition for Revocation of the Certificate of Registration of Linear Works
Realty Development Corporation,  the SEC held that when foreigners contribute more capital to an
13

enterprise, doubt exists as to the actual control and ownership of the subject corporation even if the
60% Filipino equity threshold is met. Hence, the SEC in that one ordered a further investigation, viz:
x x x The [SEC Enforcement and Prosecution Department (EPD)] maintained that the basis for
determining the level of foreign participation is the number of shares subscribed, regardless of the
par value. Applying such an interpretation, the EPD rules that the foreign equity participation in
Linear works Realty Development Corporation amounts to 26.41% of the corporation’s capital stock
since the amount of shares subscribed by foreign nationals is 1,795 only out of the 6,795 shares.
Thus, the subject corporation is compliant with the 40% limit on foreign equity participation.
Accordingly, the EPD dismissed the complaint, and did not pursue any investigation against the
subject corporation.
xxxx
x x x [I]n this respect we find no error in the assailed order made by the EPD. The EPD did not err
when it did not take into account the par value of shares in determining compliance with the
constitutional and statutory restrictionson foreign equity.
However, we are aware that some unscrupulous individuals employ schemes to circumvent the
constitutional and statutory restrictions on foreign equity. In the present case, the fact that the shares
of the Japanese nationals have a greater par value but only have similar rights to those held by
Philippine citizens having much lower par value, is highly suspicious. This is because a reasonable
investor would expect to have greater control and economic rights than other investors who invested
less capital than him. Thus, it is reasonable to suspectthat there may be secret arrangements
between the corporation and the stockholders wherein the Japanese nationals who subscribed to
the shares with greater par value actually have greater control and economic rights contrary to the
equality of shares based on the articles of incorporation.
With this in mind, we find it proper for the EPD to investigate the subject corporation. The EPD is
advised to avail of the Commission’s subpoena powers in order to gather sufficient evidence, and file
the necessary complaint.
As will be discussed, even if atfirst glance the petitioners comply with the 60-40 Filipino to foreign
equity ratio, doubt exists in the present case that gives rise to a reasonable suspicion that the
Filipino shareholders do not actually have the requisite number of control and beneficial ownership in
petitioners Narra, Tesoro, and McArthur. Hence, a further investigation and dissection of the extent
of the ownership of the corporate shareholders through the Grandfather Rule is justified.
Parenthetically, it is advanced that the application of the Grandfather Rule is impractical as tracing
the shareholdings to the point when natural persons hold rights to the stocks may very well lead to
an investigation ad infinitum. Suffice it to say in this regard that, while the Grandfather Rule was
originally intended to trace the shareholdings to the point where natural persons hold the shares, the
SEC had already set up a limit as to the number of corporate layers the attribution of the nationality
of the corporate shareholders may be applied.
In a 1977 internal memorandum, the SEC suggested applying the Grandfather Rule on two (2) levels
of corporate relations for publicly-held corporations or where the shares are traded in the stock
exchanges, and to three (3) levels for closely held corporations or the shares of which are not traded
in the stock exchanges.  These limits comply with the requirement in Palting v. San Jose Petroleum,
14

Inc.  that the application of the Grandfather Rule cannot go beyond the level of what is reasonable.
15

A doubt exists as to the extent of control and beneficial ownership of MBMI over the petitioners and
their investing corporate stockholders.
In the Decision subject of this recourse, the Court applied the Grandfather Rule to determine the
matter of true ownership and control over the petitioners as doubt exists as to the actual extent of
the participation of MBMI in the equity of the petitioners and their investing corporations.
We considered the following membership and control structures and like nuances:
Tesoro
Supposedly Filipino corporation Sara Marie Mining, Inc. (Sara Marie) holds 59.97% of the 10,000
commonshares of petitioner Tesoro while the Canadian-owned company, MBMI, holds 39.98% of its
shares.
Name Nationality Number of Amount Amount Paid
Shares Subscribed
Sara Marie Filipino 5,997 ₱5,997,000.00 ₱825,000.00
Mining, Inc.
MBMI Canadian 3,998 ₱3,998,000.00 ₱1,878,174.60
Resources, Inc. 16

Lauro L. Salazar Filipino 1 ₱1,000.00 ₱1,000.00

Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
Esguerra
Manuel A. Filipino 1 ₱1,000.00 ₱1,000.00
Agcaoili
Michael T. American 1 ₱1,000.00 ₱1,000.00
Mason
Kenneth Cawkel Canadian 1 ₱1,000.00 ₱1,000.00
  Total 10,000 ₱10,000,000.00 ₱2,708,174.60
In turn, the Filipino corporation Olympic Mines & Development Corp. (Olympic) holds 66.63% of
Sara Marie’s shares while the same Canadian company MBMI holds 33.31% of Sara Marie’s shares.
Nonetheless, it is admitted that Olympic did not pay a single peso for its shares. On the contrary,
MBMI paid for 99% of the paid-up capital of Sara Marie.
Name Nationality Number of Amount Amount Paid
Shares Subscribed
 Olympic Mines & Filipino 6,663 ₱6,663,000.00 P0.00
Development
Corp. 17

MBMI Canadian 3,331 ₱3,331,000.00 ₱2,794,000.00

Resources, Inc.
Amanti Limson Filipino 1 ₱1,000.00 ₱1,000.00
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
Esguerra
Lauro Salazar Filipino 1 ₱1,000.00 ₱1,000.00
Emmanuel G. Filipino 1 ₱1,000.00 ₱1,000.00
Hernando
Michael T. American 1 ₱1,000.00 ₱1,000.00
Mason
Kenneth Cawkel Canadian 1 ₱1,000.00 ₱1,000.00
  Total 10,000 ₱10,000,000.00 ₱2,800,000.00
The fact that MBMI had practically provided all the funds in Sara Marie and Tesoro creates
serious doubt as to the true extent of its (MBMI) control and ownership over both Sara Marie
and Tesoro since, as observed by the SEC, "a reasonable investor would expect to have greater
control and economic rights than other investors who invested less capital than him." The application
of the Grandfather Rule is clearly called for, and as shown below, the Filipinos’ control and economic
benefits in petitioner Tesoro (through Sara Marie) fallbelow the threshold 60%, viz:
Filipino participation in petitioner Tesoro: 40.01%
66.67
(Filipino equity in Sara Marie) x 59.97 (Sara Marie’s share in Tesoro) = 39.98%
100
39.98% + .03% (shares of individual Filipino shareholders [SHs] in Tesoro)
=40.01%
Foreign participation in petitioner Tesoro: 59.99%
33.33
(Foreign equity in Sara Marie) x 59.97 (Sara Marie’s share in Tesoro) = 19.99%
100
19.99% + 39.98% (MBMI’s direct participation in Tesoro) + .02% (shares of foreign individual
SHs in Tesoro)
= 59.99%
With only 40.01% Filipino ownership in petitioner Tesoro, as compared to 59.99% foreign ownership
of its shares, it is clear that petitioner Tesoro does not comply with the minimum Filipino equity
requirement imposed in Sec. 2, Art. XII of the Constitution. Hence, the appellate court’s observation
that Tesoro is a foreign corporation not entitled to an MPSA is apt.
McArthur
Petitioner McArthur follows the corporate layering structure of Tesoro, as 59.97% of its 10, 000
common shares is owned by supposedly Filipino Madridejos Mining Corporation (Madridejos), while
39.98% belonged to the Canadian MBMI.
 Name Nationality Number of Amount Amount Paid
Shares Subscribed
Madridejos Filipino 5,997 ₱5,997,000.00 ₱825,000.00
Mining
Corporation
MBMI Canadian 3,998 ₱3,998,000.0 ₱1,878,174.60
Resources, Inc. 18

Lauro L. Salazar Filipino 1 ₱1,000.00 ₱1,000.00

Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
Manuel A. Filipino 1 ₱1,000.00 ₱1,000.00
Agcaoili
Michael T. American 1 ₱1,000.00 ₱1,000.00
Mason
Kenneth Cawkel Canadian 1 ₱1,000.00 ₱1,000.00
  Total 10,000 ₱10,000,000.00 ₱2,708,174.60
In turn, 66.63% of Madridejos’ shares were held by Olympic while 33.31% of its shares belonged to
MBMI. Yet again, Olympic did not contribute to the paid-up capital of Madridejos and it was MBMI
that provided 99.79% of the paid-up capital of Madridejos.
Name Nationality Number of Amount Amount Paid
Shares Subscribed
Olympic Mines & Filipino 6,663 ₱6,663,000.00 P0.00
Development
Corp. 19

MBMI Canadian 3,331 ₱3,331,000.00 ₱2,803,900.00

Resources, Inc.
Amanti Limson Filipino 1 ₱1,000.00 ₱1,000.00
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
Esguerra
Lauro Salazar Filipino 1 ₱1,000.00 ₱1,000.00
Emmanuel G. Filipino 1 ₱1,000.00 ₱1,000.00
Hernando
Michael T. American 1 ₱1,000.00 ₱1,000.00
Mason
Kenneth Cawkel Canadian 1 ₱1,000.00 ₱1,000.00
  Total 10,000 ₱10,000,000.00 ₱2,809,900.00
Again, the fact that MBMI had practically provided all the funds in Madridejos and McArthur creates
serious doubt as to the true extent of its control and ownership of MBMI over both Madridejos and
McArthur. The application of the Grandfather Rule is clearly called for, and as will be shown below,
MBMI, along with the other foreign shareholders, breached the maximum limit of 40% ownership in
petitioner McArthur, rendering the petitioner disqualified to an MPSA:
 Filipino participation in petitioner McArthur: 40.01%
66.67
(Filipino equity in Madridejos) x 59.97 (Madridejos’ share in McArthur) = 39.98%
100
39.98% + .03% (shares of individual Filipino SHs in McArthur)
=40.01%
Foreign participation in petitioner McArthur: 59.99%
33.33
(Foreign equity in Madridejos) x 59.97 (Madridejos’ share in McArthur) = 19.99%

19.99% + 39.98% (MBMI’s direct participation inMcArthur) + .02% (shares of foreign

individual SHs in McArthur)
= 59.99%
As with petitioner Tesoro, with only 40.01% Filipino ownership in petitioner McArthur, as compared
to 59.99% foreign ownership of its shares, it is clear that petitioner McArthur does not comply with
the minimum Filipino equity requirement imposed in Sec. 2, Art. XII of the Constitution. Thus, the
appellate court did not err in holding that petitioner McArthur is a foreign corporation not entitled to
an MPSA.
Narra
As for petitioner Narra, 59.97% of its shares belonged to Patricia Louise Mining & Development
Corporation (PLMDC), while Canadian MBMI held 39.98% of its shares.
Name Nationality Number of Amount Amount Paid
Shares Subscribed
Patricia Lousie Filipino 5,997 ₱5,997,000.00 ₱1,677,000.00
Mining and
Development
Corp.
MBMI Canadian 3,996 ₱3,996,000.00 ₱1,116,000.00
Resources, Inc. 20

Higinio C. Filipino 1 ₱1,000.00 ₱1,000.00

Mendoza,
Henry E. Filipino 1 ₱1,000.00 ₱1,000.00
Fernandez
Ma. Elena A. Filipino 1 ₱1,000.00 ₱1,000.00
Bocalan
Michael T. American 1 ₱1,000.00 ₱1,000.00
Mason
Robert L. Canadian 1 ₱1,000.00 ₱1,000.00
McCurdy
Manuel A. Filipino 1 ₱1,000.00 ₱1,000.00
Agcaoili
Bayani H. Agabin Filipino 1 ₱1,000.00 ₱1,000.00
  Total 10,000 ₱10,000,000.00 ₱2,800,000.00
PLMDC’s shares, in turn, were held by Palawan Alpha South Resources Development Corporation
(PASRDC), which subscribed to 65.96% of PLMDC’s shares, and the Canadian MBMI, which
subscribed to 33.96% of PLMDC’s shares.
Name Nationality Number of Amount Amount Paid
Shares Subscribed
Palawan Alpha Filipino 6,596 ₱6,596,000.00 P0
South Resource
Development
Corp.
MBMI Canadian 3,396 ₱3,396,000.00 ₱2,796,000.00
Resources, Inc. 21

Higinio C. Filipino 1 ₱1,000.00 ₱1,000.00

Mendoza, Jr.
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
Esguerra
Henry E. Filipino 1 ₱1,000.00 ₱1,000.00
Fernandez
Ma. Elena A. Filipino 1 ₱1,000.00 ₱1,000.00
Bocalan
Michael T. American 1 ₱1,000.00 ₱1,000.00
Mason
Robert L. Canadian 1 ₱1,000.00 ₱1,000.00
McCurdy
Manuel A. Filipino 1 ₱1,000.00 ₱1,000.00
Agcaoili
Bayani H, Agabin Filipino 1 ₱1,000.00 ₱1,000.00
  Total 10,000 ₱10,000,000.00 ₱2,804,000.00
Yet again, PASRDC did not pay for any of its subscribed shares, while MBMI contributed 99.75% of
PLMDC’s paid-up capital. This fact creates serious doubt as to the true extent of MBMI’s control and
ownership over both PLMDC and Narra since "a reasonable investor would expect to have greater
control and economic rights than other investors who invested less capital than him." Thus, the
application of the Grandfather Rule is justified. And as will be shown, it is clear that the Filipino
ownership in petitioner Narra falls below the limit prescribed in both the Constitution and the
Philippine Mining Act of 1995.
Filipino participation in petitioner Narra: 39.64%
66.02
(Filipino equity in PLMDC) x 59.97 (PLMDC’s share in Narra) = 39.59%
100
39.59% + .05% (shares of individual Filipino SHs in McArthur)
=39.64%
Foreign participation in petitioner Narra: 60.36%
33.98 (Foreign equity in PLMDC) x 59.97 (PLMDC’s share in Narra) = 20.38%
 100
20.38% + 39.96% (MBMI’s direct participation in Narra) + .02% (shares of foreign individual
SHs in McArthur)
= 60.36%
With 60.36% foreign ownership in petitioner Narra, as compared to only 39.64% Filipino ownership
of its shares, it is clear that petitioner Narra does not comply with the minimum Filipino equity
requirement imposed in Section 2, Article XII of the Constitution. Hence, the appellate court did not
err in holding that petitioner McArthur is a foreign corporation not entitled to an MPSA.
It must be noted that the foregoing determination and computation of petitioners’ Filipino equity
composition was based on their common shareholdings, not preferred or redeemable shares.
Section 6 of the Corporation Code of the Philippines explicitly provides that "no share may be
deprived of voting rights except those classified as ‘preferred’ or ‘redeemable’ shares." Further, as
Justice Leonen puts it, there is "no indication that any of the shares x x x do not have voting rights,
[thus] it must be assumed that all such shares have voting rights."  It cannot therefore be gain said
22

that the foregoing computation hewed with the pronouncements of Gamboa, as implemented by
SEC Memorandum Circular No. 8, Series of 2013, (SEC Memo No. 8)  Section 2 of which states:
23

Section 2. All covered corporations shall, at all times, observe the constitutional or statutory
requirement.  For purposes of determining compliance therewith, the required percentage of Filipino
1âwphi1

ownership shall be applied to BOTH (a) the total outstanding shares of stock entitled to vote in the
election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled
to vote in the election of directors.
In fact, there is no indication that herein petitioners issued any other class of shares besides the
10,000 common shares. Neither is it suggested that the common shares were further divided into
voting or non-voting common shares. Hence, for purposes of this case, items a) and b) in SEC
Memo No. 8 both refer to the 10,000 common shares of each of the petitioners, and there is no need
to separately apply the 60-40 ratio to any segment or part of the said common shares.
III.
In mining disputes, the POA has jurisdiction to pass upon the nationality of applications for MPSAs
Petitioners also scoffed at this Court’s decision to uphold the jurisdiction of the Panel of Arbitrators
(POA) of the Department of Environment and Natural Resources (DENR) since the POA’s
determination of petitioners’ nationalities is supposedly beyond its limited jurisdiction, as defined in
Gonzales v. Climax Mining Ltd.  and Philex Mining Corp. v. Zaldivia.
24 25

The April 21, 2014 Decision did not dilute, much less overturn, this Court’s pronouncements in either
Gonzales or Philex Mining that POA’s jurisdiction "is limited only to mining disputes which raise
questions of fact," and not judicial questions cognizable by regular courts of justice. However, to
properly recognize and give effect to the jurisdiction vested in the POA by Section 77 of the
Philippine Mining Act of 1995,  and in parallel with this Court’s ruling in Celestial Nickel Mining
26

Exploration Corporation v. Macroasia Corp.,  the Court has recognized in its Decision that in
27

resolving disputes "involving rights to mining areas" and "involving mineral agreements or permits,"
the POA has jurisdiction to make a preliminary finding of the required nationality of the corporate
applicant in order to determine its right to a mining area or a mineral agreement.
There is certainly nothing novel or aberrant in this approach. In ejectment and unlawful detainer
cases, where the subject of inquiry is possession de facto, the jurisdiction of the municipal trial
courts to make a preliminary adjudication regarding ownership of the real property involved is
allowed, but only for purposes of ruling on the determinative issue of material possession.
The present case arose from petitioners' MPSA applications, in which they asserted their respective
rights to the mining areas each applied for. Since respondent Redmont, itself an applicant for
exploration permits over the same mining areas, filed petitions for the denial of petitioners'
applications, it should be clear that there exists a controversy between the parties and it is POA's
jurisdiction to resolve the said dispute. POA's ruling on Redmont's assertion that petitioners are
foreign corporations not entitled to MPSA is but a necessary incident of its disposition of the mining
dispute presented before it, which is whether the petitioners are entitled to MPSAs.
Indeed, as the POA has jurisdiction to entertain "disputes involving rights to mining areas," it
necessarily follows that the POA likewise wields the authority to pass upon the nationality issue
involving petitioners, since the resolution of this issue is essential and indispensable in the resolution
of the main issue, i.e., the determination of the petitioners' right to the mining areas through MPSAs.
WHEREFORE, We DENY the motion for reconsideration WITH FINALITY. No further pleadings shall
be entertained. Let entry of judgment be made in due course.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-8527             March 30, 1914
WEST COAST LIFE INSURANCE CO., plaintiff, 
vs.
GEO N. HURD, Judge of Court of First Instance, defendant.
Southworth, Hargis & Springer for plaintiff.
Haussermann, Cohn & Fisher for defendant.
MORELAND, J.:
This is an action for the issuance of a writ of prohibition against the defendant "commanding the
defendant to desist or refrain from further proceedings in a criminal action pending in that court."
The petitioner is a foreign life-insurance corporation, duly organized under and by virtue of the laws
of the State of California, doing business regularly and legally in the Philippine Islands pursuant to its
laws.
On the 16th of December, 1912, the assistant prosecuting attorney of the city of Manila filed an
information in a criminal action in the Court of First Instance of that city against the plaintiff, said
corporation, and also against John Northcott and Manuel C. Grey, charging said corporation and
said individuals with the crime of libel. On the 17th day of December the defendant in his official
capacity as judge of the court of First Instance signed and issued a process directed to the plaintiff
and the other accused in said criminal action, which said process reads as follows:
UNITED STATES OF AMERICA,
PHILIPPINE ISLANDS.
In the Court of First Instance of the Judicial District of Manila.
THE UNITED STATES No. 9661
versus Libel.
WEST COAST LIFE INSURANCE CO., JOHN NORTHCOTT, AND MANUEL C. GREY.
To West Coast Life Insurance Co., John Northcott, and Manuel C. Grey, Manila.
SUMMONS.
You are hereby summoned to appear before the Court of First Instance of the city of Manila
P.I., on the 18th day of December, 1912, at the hour of 8 a.m., to answer the charge made
against you upon the information of F. H. Nesmith, assistant prosecuting attorney of the city
of Manila, for libel, as set forth in the said information filed in this copurt on December 16,
1912, a copy of which is hereto attached and herewith served upon you.
Dated at the city of Manila, P. I., this 17th day of December, 1912.
(Sgd.) GEO N. HURD,
Judge, Court of First Instance.
The information upon which said process was issued is as follows:
The undersigned accuses the West Coast Life Insurance Company, John Northcott, and
Manuel C. Grey of the crime of libel, committed as follows:
That on or about the 14th day of September, 1912, and continuously thereafter up to and
including the date of this complaint, in the city of Manila, P. I., the said defendant West Coast
Life Insurance Company was and has been a foreign corporation duly organized in the State
of California, United States of America, and registered and doing business in the Philippine
Islands; that the said defendant John Nortcott then and there was and has been the general
agent and manager for the Philippine Islands of the said defendant corporation West Coast
Life Insurance Company, and the said defendant Manuel C. Grey was and has been an
agent and employee of the said defendant corporation West Coast Life Insurance Company,
acting in the capacity of treasurer of the branch of the said defendant corporation in the
Philippine Islands; that on or about the said 14th day of September, 1912, and for some time
thereafter, to wit, during the months of September and October, 1912, in the city of Manila,
P.I., the said defendants West Coast Life Insurance Company, John Northcott, and Manuel
C. Grey, conspiring and confederating together, did then and there willfully, unlawfully, and
maliciously, and to the damage of the Insular Life Insurance Company, a domestic
corporation duly organized, registered, and doing business in the Philippine Islands, and with
intent o cause such damage and to expose the said Insular Life Insurance Company to
public hatred, contempt, and ridicule, compose and print, and cause to be printed a large
number of circulars, and, in numerous printings in the form of said circulars, did publish and
distribute, and cause to be published and distributed, among other persons, to policy holders
and prospective policy holders of the said Insular Life Insurance Company, among other
things, a malicious defamation and libel in the Spanish language, of the words and tenor
following:
"First. For some time past various rumors are current to the effect that the Insular Life
Insurance Company is not in as good a condition as i should be at the present time,
and that really it is in bad shape. Nevertheless, the investigations made by the
representative of the "Bulletin" have failed fully to confirm these rumors. It is known
that the Insular Auditor has examined the books of the company and has found that
its capital has diminished, and that by direction of said official the company has
decided to double the amount of its capital, and also to pay its reserve fund. All this is
true."
That the said circulars, and the matters therein contained hereinbefore set forth in this
information, tend to impeach and have impeached the honesty, virtue, and reputation of the
said Insular Life Insurance Company by exposing it to public hatred, contempt, and ridicule;
that by the matters printed in said circulars, and hereinbefore set forth in this information, the
said defendants West Coast Life Insurance Company, John Northcott, and Manuel C. Grey
meant and intended to state and represent to those to whom the said defendants delivered
said circulars as aforesaid, that the said Insular Life Insurance Company was then and there
in a dangerous financial condition and on the point of going into insolvency, to the detriment
of the policy holders of the said Insular Life Insurance Company, and of those with whom the
said Insular Life Insurance Company have and have had business transactions, and each
and all of said persons to whom the said defendants delivered said circulars, and all persons
as well who read said circulars understood the said matters in said circulars to have said
libelous sense and meaning. Contrary to law.
On the 20th day of December, 1912, the plaintiff, together with the other persons named as accused
in said process through their attorneys, served upon the prosecuting attorney and filed with the clerk
of the court a motion to quash said summons and the service thereof, on the ground that the court
had no jurisdiction over the said company, there being no authority in the court for the issuance of
the process, Exhibit B, the order under which it was issued being void. The court denied the motion
and directed plaintiff to appear before it on the 28th day of December, 1912, and to plead to the
information, to which order the plaintiff then and there duly excepted.
It is alleged in the complaint that "unless restrained by this Court the respondent will proceed to carry
out said void order and compel your petitioner to appear before his court and plead and submit to
criminal prosecution without having acquired any jurisdiction whatever over your petitioner."
The prayer of the complaint is, "your petitioner prays judgment for the issuance of a writ of
prohibition against the respondent, commanding the respondent absolutely to desist or refrain from
further proceedings against your petitioner in the said criminal action."
The basis of the action is that the Court of First Instance has no power or authority, under the laws of
the Philippine Islands, to proceed against a corporation, as such, criminally, to bring it into court for
the purpose of making it amenable to the criminal laws. It is contended that the court had no
jurisdiction to issue the process in evidence against the plaintiff corporation; that the issuance and
service thereof upon the plaintiff corporation were outside of the authority and jurisdiction of the
court, were authorized by no law, conferred no jurisdiction over said corporation, and that they were
absolutely void and without force or effect.
The plaintiff, further attacking said process, alleges that the process is a mixture of civil and criminal
process, that it is not properly signed, that it does not direct or require an arrest; that it s an order to
appear and answer on a date certain without restraint of the person, and that it is not in the form
required by law.
Section 5 of General Orders, No. 58, defines an information as "accusation in writing charging a
period with a public offense." Section 6 provide that a complaint or information is sufficient it if shows
"the name of the defendant, or if his name cannot be discovered, that he is described under a
fictitious name with a statement that his true name is unknown to the informant or official signing the
same. His true name may be inserted at any stage of the proceedings instituted against him,
whenever ascertained." These provisions, as well as those which relate to arraignment and counsel,
and to demurrers and pleas, indicate clearly that the maker of the Code of Criminal Procedure had
no intention or expectation that corporations would be included among those who would fall within
the provisions thereof. The only process known to the Code of Criminal Procedure, or which any
court is by that order authorized to issue, is an order of arrest. The Code of Criminal Procedure
provides that "if the magistrate be satisfied from the investigation that the crime complained of has
been committed, and there is reasonable ground to believe that the party charged has committed it,
he must issue an order for his arrest. If the offense be bailable, and the defendant offer a sufficient
security, he shall be admitted to bail; otherwise he shall be committed to prison." There is no
authority for the issuance of any other process than an order of arrest. As a necessary
consequence, the process issued in the case before us is without express authorization of statute.
The question remains as to whether or not he court may, of itself and on its own motion, create not
only a process but a procedure by which the process may be made effective.
We do not believe that the authority of the courts of the Philippine Islands extends so far. While
having the inherent powers which usually go with courts of general jurisdiction, we are of the opinion
that, under the circumstances of their creation, they have only such authority in criminal matters as is
expressly conferred upon them by statute or which it is necessary to imply from such authority in
order to carry out fully and adequately the express authority conferred. We do not feel that Courts of
First Instance have authority to create new procedure and new processes in criminal law. The
exercise of such power verges too closely on legislation. Even though it be admitted, a question we
do not now decide, that there are various penal laws in the Philippine Islands which corporation as
such may violate, still we do not believe that the courts are authorized to go to the extent of creating
special procedure and special processes for the purpose of carrying out those penal statutes, when
the legislature itself has neglected to do so. To bring a corporation into court criminally requires
many additions to the present criminal procedure. While it may be said to be the duty of courts to
see to it that criminals are punished, it is no less their duty to follow prescribed forms of procedure
and to go out upon unauthorized ways or act in an unauthorized manner.
There are many cases cited by counsel for the defendant which show that corporations have been
proceeded against criminally by indictment and otherwise and have been punished as malefactors
by the courts. Of this, of course, there can be no doubt; but it is clear that, in those cases, the
statute, by express words or by necessary intendment, included corporations within the persons who
could offend against the criminal laws; and the legislature, at the same time established a procedure
applicable to corporations. No case has been cited to us where a corporation has been proceeded
against under a criminal statute where the court did not exercise its common law powers or where
there was not in force a special procedure applicable to corporations.
The courts of the Philippine Islands are creatures of statute and, as we have said, have only those
powers conferred upon them by statute and those which are required to exercise that authority fully
and adequately. The courts here have no common law jurisdiction or powers. If they have any
powers not conferred by statute, expressly or impliedly, they would naturally come from Spanish and
not from common law sources. It is undoubted that, under the Spanish criminal law and procedure, a
corporation could not have been proceeded against criminally, as such, if such an entity as a
corporation in fact existed under the Spanish law, and as such it could not have committed a crime
in which a willful purpose or a malicious intent was required. Criminal actions would have been
restricted or limited, under that system, to the officials of such corporations and never would have
been directed against the corporation itself. This was the rule with relation to associations or
combinations of persons approaching, more or less, the corporation as it is now understood, and it
would undoubtedly have been the rue with corporations. From this source, then, the courts derive no
authority to bring corporations before them in criminal actions, nor to issue processes for that
purpose.
The case was submitted to this Court on an agreed statement of facts with a stipulation for a
decision upon the merits. We are of the opinion that the plaintiff is entitled, under that stipulation, to
the remedy prayed for.
It is adjudged that the Court of First Instance of the city of Manila be and it is hereby enjoined and
prohibited from proceeding further in the criminal cause which is before us in this proceeding,
entitled United States vs. West Coast Life Insurance Company, a corporation, John Northcott and
Manuel C. Grey, so far as said proceedings relate to the said West Coast Life Insurance Company,
a corporation, the plaintiff in the case.
Arellano, C.J. and Araullo, J., concur.
Carson, J., concurs in the result.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
 
G.R. No. 102970 May 13, 1993
LUZAN SIA, petitioner, 
vs.
COURT OF APPEALS and SECURITY BANK and TRUST COMPANY, respondents.
Asuncion Law Offices for petitioner.
Cauton, Banares, Carpio & Associates for private respondent.

DAVIDE, JR., J.:
The Decision of public respondent Court of Appeals in CA-G.R. CV No. 26737, promulgated on 21
August 1991, reversing and setting aside the Decision, dated 19 February 1990,   of Branch 47 of
1 2

the Regional Trial Court (RTC) of Manila in Civil Case No. 87-42601, entitled "LUZAN
SIA vs. SECURITY BANK and TRUST CO.," is challenged in this petition for review
on certiorari under Rule 45 of the Rules Court.
Civil Case No. 87-42601 is an action for damages arising out of the destruction or loss of the stamp
collection of the plaintiff (petitioner herein) contained in Safety Deposit Box No. 54 which had been
rented from the defendant pursuant to a contract denominated as a Lease Agreement.   Judgment
3

therein was rendered in favor of the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the
plaintiff and against the defendant, Security Bank & Trust Company, ordering the
defendant bank to pay the plaintiff the sum of —
a) Twenty Thousand Pesos (P20,000.00), Philippine Currency, as actual damages;
b) One Hundred Thousand Pesos (P100,000.00), Philippine Currency, as moral
damages; and
c) Five Thousand Pesos (P5,000.00), Philippine Currency, as attorney's fees and
legal expenses.
The counterclaim set up by the defendant are hereby dismissed for lack of merit.
No costs.
SO ORDERED. 4

The antecedent facts of the present controversy are summarized by the public respondent in its
challenged decision as follows:
The plaintiff rented on March 22, 1985 the Safety Deposit Box No. 54 of the
defendant bank at its Binondo Branch located at the Fookien Times Building, Soler
St., Binondo, Manila wherein he placed his collection of stamps. The said safety
deposit box leased by the plaintiff was at the bottom or at the lowest level of the
safety deposit boxes of the defendant bank at its aforesaid Binondo Branch.
During the floods that took place in 1985 and 1986, floodwater entered into the
defendant bank's premises, seeped into the safety deposit box leased by the plaintiff
and caused, according to the plaintiff, damage to his stamps collection. The
defendant bank rejected the plaintiff's claim for compensation for his damaged
stamps collection, so, the plaintiff instituted an action for damages against the
defendant bank.
The defendant bank denied liability for the damaged stamps collection of the plaintiff
on the basis of the "Rules and Regulations Governing the Lease of Safe Deposit
Boxes" (Exhs. "A-1", "1-A"), particularly paragraphs 9 and 13, which reads (sic):
"9. The liability of the Bank by reason of the lease, is limited to the exercise of the
diligence to prevent the opening of the safe by any person other than the Renter, his
authorized agent or legal representative;
xxx xxx xxx
"13. The Bank is not a depository of the contents of the safe and it has neither the
possession nor the control of the same. The Bank has no interest whatsoever in said
contents, except as herein provided, and it assumes absolutely no liability in
connection therewith."
The defendant bank also contended that its contract with the plaintiff over safety
deposit box No. 54 was one of lease and not of deposit and, therefore, governed by
the lease agreement (Exhs. "A", "L") which should be the applicable law; that the
destruction of the plaintiff's stamps collection was due to a calamity beyond
obligation on its part to notify the plaintiff about the floodwaters that inundated its
premises at Binondo branch which allegedly seeped into the safety deposit box
leased to the plaintiff.
The trial court then directed that an ocular inspection on (sic) the contents of the
safety deposit box be conducted, which was done on December 8, 1988 by its clerk
 of court in the presence of the parties and their counsels. A report thereon was then
submitted on December 12, 1988 (Records, p. 98-A) and confirmed in open court by
both parties thru counsel during the hearing on the same date (Ibid., p. 102) stating:
"That the Safety Box Deposit No. 54 was opened by both plaintiff
Luzan Sia and the Acting Branch Manager Jimmy B. Ynion in the
presence of the undersigned, plaintiff's and defendant's counsel. Said
Safety Box when opened contains two albums of different sizes and
thickness, length and width and a tin box with printed word 'Tai Ping
Shiang Roast Pork in pieces with Chinese designs and character."
Condition of the above-stated Items —
"Both albums are wet, moldy and badly damaged.
1. The first album measures 10 1/8 inches in length, 8 inches in width and 3/4 in
thick. The leaves of the album are attached to every page and cannot be lifted
without destroying it, hence the stamps contained therein are no longer visible.
2. The second album measure 12 1/2 inches in length, 9 3/4 in width 1 inch thick.
Some of its pages can still be lifted. The stamps therein can still be distinguished but
beyond restoration. Others have lost its original form.
3. The tin box is rusty inside. It contains an album with several pieces of papers stuck
up to the cover of the box. The condition of the album is the second abovementioned
album."
5

The SECURITY BANK AND TRUST COMPANY, hereinafter referred to as SBTC, appealed the trial
court's decision to the public respondent Court of Appeals. The appeal was docketed as CA-G.R. CV
No. 26737.
In urging the public respondent to reverse the decision of the trial court, SBTC contended that the
latter erred in (a) holding that the lease agreement is a contract of adhesion; (b) finding that the
defendant had failed to exercise the required diligence expected of a bank in maintaining the safety
deposit box; (c) awarding to the plaintiff actual damages in the amount of P20,000.00, moral
damages in the amount of P100,000.00 and attorney's fees and legal expenses in the amount of
P5,000.00; and (d) dismissing the counterclaim.
On 21 August 1991, the respondent promulgated its decision the dispositive portion of which reads:
WHEREFORE, the decision appealed from is hereby REVERSED and instead the
appellee's complaint is hereby DISMISSED. The appellant bank's counterclaim is
likewise DISMISSED. No costs. 6

In reversing the trial court's decision and absolving SBTC from liability, the public respondent found
and ruled that:
a) the fine print in the "Lease Agreement " (Exhibits "A" and "1" ) constitutes the terms and
conditions of the contract of lease which the appellee (now petitioner) had voluntarily and knowingly
executed with SBTC;
b) the contract entered into by the parties regarding Safe Deposit Box No. 54 was not a contract of
deposit wherein the bank became a depositary of the subject stamp collection; hence, as contended
by SBTC, the provisions of Book IV, Title XII of the Civil Code on deposits do not apply;
c) The following provisions of the questioned lease agreement of the safety deposit box limiting
SBTC's liability:
9. The liability of the bank by reason of the lease, is limited to the exercise of the
diligence to prevent the opening of the Safe by any person other than the Renter, his
authorized agent or legal representative.
xxx xxx xxx
13. The bank is not a depository of the contents of the Safe and it has neither the
possession nor the control of the same. The Bank has no interest whatsoever in said
 contents, except as herein provided, and it assumes absolutely no liability in
connection therewith.
are valid since said stipulations are not contrary to law, morals, good customs, public order or public
policy; and
d) there is no concrete evidence to show that SBTC failed to exercise the required diligence in
maintaining the safety deposit box; what was proven was that the floods of 1985 and 1986, which
were beyond the control of SBTC, caused the damage to the stamp collection; said floods were
fortuitous events which SBTC should not be held liable for since it was not shown to have
participated in the aggravation of the damage to the stamp collection; on the contrary, it offered its
services to secure the assistance of an expert in order to save most of the stamps, but the appellee
refused; appellee must then bear the lose under the principle of "res perit domino."
Unsuccessful in his bid to have the above decision reconsidered by the public
respondent,   petitioner filed the instant petition wherein he contends that:
7

I
IT WAS A GRAVE ERROR OR AN ABUSE OF DISCRETION ON THE PART OF
THE RESPONDENT COURT WHEN IT RULED THAT RESPONDENT SBTC DID
NOT FAIL TO EXERCISE THE REQUIRED DILIGENCE IN MAINTAINING THE
SAFETY DEPOSIT BOX OF THE PETITIONER CONSIDERING THAT
SUBSTANTIAL EVIDENCE EXIST (sic) PROVING THE CONTRARY.
II
THE RESPONDENT COURT SERIOUSLY ERRED IN EXCULPATING PRIVATE
RESPONDENT FROM ANY LIABILITY WHATSOEVER BY REASON OF THE
PROVISIONS OF PARAGRAPHS 9 AND 13 OF THE AGREEMENT (EXHS. "A"
AND "A-1").
III
THE RESPONDENT COURT SERIOUSLY ERRED IN NOT UPHOLDING THE
AWARDS OF THE TRIAL COURT FOR ACTUAL AND MORAL DAMAGES,
INCLUDING ATTORNEY'S FEES AND LEGAL EXPENSES, IN FAVOR OF THE
PETITIONER. 8

We subsequently gave due course the petition and required both parties to submit their respective
memoranda, which they complied with. 9

Petitioner insists that the trial court correctly ruled that SBTC had failed "to exercise the required
diligence expected of a bank maintaining such safety deposit box . . . in the light of the
environmental circumstance of said safety deposit box after the floods of 1985 and 1986." He argues
that such a conclusion is supported by the evidence on record, to wit: SBTC was fully cognizant of
the exact location of the safety deposit box in question; it knew that the premises were inundated by
floodwaters in 1985 and 1986 and considering that the bank is guarded twenty-four (24) hours a
day , it is safe to conclude that it was also aware of the inundation of the premises where the safety
deposit box was located; despite such knowledge, however, it never bothered to inform the petitioner
of the flooding or take any appropriate measures to insure the safety and good maintenance of the
safety deposit box in question.
SBTC does not squarely dispute these facts; rather, it relies on the rule that findings of facts of the
Court of Appeals, when supported by substantial exidence, are not reviewable on appeal
by certiorari.  10

The foregoing rule is, of course, subject to certain exceptions such as when there exists a disparity
between the factual findings and conclusions of the Court of Appeals and the trial court.   Such a
11

disparity obtains in the present case.

As We see it, SBTC's theory, which was upheld by the public respondent, is that the "Lease
Agreement " covering Safe Deposit Box No. 54 (Exhibit "A and "1") is just that — a contract of lease
— and not a contract of deposit, and that paragraphs 9 and 13 thereof, which expressly limit the
bank's liability as follows:
9. The liability of the bank by reason of the lease, is limited to the exercise of the
diligence to prevent the opening of the Safe by any person other than the Renter, his
autliorized agent or legal representative;
xxx xxx xxx
13. The bank is not a depository of the contents of the Safe and it has neither the
possession nor the control of the same. The Bank has no interest whatsoever said
contents, except as herein provided, and it assumes absolutely no liability in
connection therewith. 12

are valid and binding upon the parties. In the challenged decision, the public respondent further
avers that even without such a limitation of liability, SBTC should still be absolved from any
responsibility for the damage sustained by the petitioner as it appears that such damage was
occasioned by a fortuitous event and that the respondent bank was free from any participation in the
aggravation of the injury.
We cannot accept this theory and ratiocination. Consequently, this Court finds the petition to be
impressed with merit.
In the recent case CA Agro-Industrial Development Corp. vs. Court of Appeals,   this Court explicitly
13

rejected the contention that a contract for the use of a safety deposit box is a contract of lease
governed by Title VII, Book IV of the Civil Code. Nor did We fully subscribe to the view that it is a
contract of deposit to be strictly governed by the Civil Code provision on deposit;   it is, as We
14

declared, a special kind of deposit. The prevailing rule in American jurisprudence — that the relation
between a bank renting out safe deposit boxes and its customer with respect to the contents of the
box is that of a bailor and bailee, the bailment for hire and mutual benefit   — has been adopted in
15

this jurisdiction, thus:

In the context of our laws which authorize banking institutions to rent out safety
deposit boxes, it is clear that in this jurisdiction, the prevailing rule in the United
States has been adopted. Section 72 of the General Banking Act [R.A. 337, as
amended] pertinently provides:
"Sec. 72. In addition to the operations specifically authorized elsewhere in this Act,
banking institutions other than building and loan associations may perform the
following services:
(a) Receive in custody funds, documents, and valuable objects, and
rent safety deposit boxes for the safequarding of such effects.
xxx xxx xxx
The banks shall perform the services permitted under subsections (a), (b) and (c) of
this section as depositories or as agents. . . ."(emphasis supplied)
Note that the primary function is still found within the parameters of a contract
of deposit, i.e., the receiving in custody of funds, documents and other valuable
objects for safekeeping. The renting out of the safety deposit boxes is not
independent from, but related to or in conjunction with, this principal function. A
contract of deposit may be entered into orally or in writing (Art. 1969, Civil Code] and,
pursuant to Article 1306 of the Civil Code, the parties thereto 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. The
depositary's responsibility for the safekeeping of the objects deposited in the case at
bar is governed by Title I, Book IV of the Civil Code. Accordingly, the depositary
would be liable if, in performing its obligation, it is found guilty of fraud, negligence,
delay or contravention of the tenor of the agreement [Art. 1170, id.]. In the absence
of any stipulation prescribing the degree of diligence required, that of a good father of
a family is to be observed [Art. 1173, id.]. Hence, any stipulation exempting the
 depositary from any liability arising from the loss of the thing deposited on account of
fraud, negligence or delay would be void for being contrary to law and public policy.
In the instant case, petitioner maintains that conditions 13 and l4 of the questioned
contract of lease of the safety deposit box, which read:
"13. The bank is a depositary of the contents of the safe and it has neither the
possession nor control of the same.
"14. The bank has no interest whatsoever in said contents, except as herein
expressly provided, and it assumes absolutely no liability in connection therewith."
are void as they are contrary to law and public policy. We find Ourselves in
agreement with this proposition for indeed, said provisions are inconsistent with the
respondent Bank's responsibility as a depositary under Section 72 (a) of the General
Banking Act. Both exempt the latter from any liability except as contemplated in
condition 8 thereof which limits its duty to exercise reasonable diligence only with
respect to who shall be admitted to any rented safe, to wit:
"8. The Bank shall use due diligence that no unauthorized person
shall be admitted to any rented safe and beyond this, the Bank will
not be responsible for the contents of any safe rented from it."
Furthermore condition 13 stands on a wrong premise and is contrary to the actual
practice of the Bank. It is not correct to assert that the Bank has neither the
possession nor control of the contents of the box since in fact, the safety deposit box
itself is located in its premises and is under its absolute control; moreover, the
respondent Bank keeps the guard key to the said box. As stated earlier, renters
cannot open their respective boxes unless the Bank cooperates by presenting and
using this guard key. Clearly then, to the extent above stated, the foregoing
conditions in the contract in question are void and ineffective. It has been said:
"With respect to property deposited in a safe-deposit box by a
customer of a safe-deposit company, the parties, since the relation is
a contractual one, may by special contract define their respective
duties or provide for increasing or limiting the liability of the deposit
company, provided such contract is not in violation of law or public
policy. It must clearly appear that there actually was such a special
contract, however, in order to vary the ordinary obligations implied by
law from the relationship of the parties; liability of the deposit
company will not be enlarged or restricted by words of doubtful
meaning. The company, in renting safe-deposit boxes, cannot
exempt itself from liability for loss of the contents by its own fraud or
negligence or that, of its agents or servants, and if a provision of the
contract may be construed as an attempt to do so, it will be held
ineffective for the purpose. Although it has been held that the lessor
of a safe-deposit box cannot limit its liability for loss of the contents
thereof through its own negligence, the view has been taken that
such a lessor may limit its liability to some extent by agreement or
stipulation ."[10 AM JUR 2d., 466]. (citations omitted) 16
It must be noted that conditions No. 13 and No. 14 in the Contract of Lease of Safety Deposit Box
in CA Agro-Industrial Development Corp. are strikingly similar to condition No. 13 in the instant case.
On the other hand, both condition No. 8 in CA Agro-Industrial Development Corp. and condition No.
9 in the present case limit the scope of the exercise of due diligence by the banks involved to merely
seeing to it that only the renter, his authorized agent or his legal representative should open or have
access to the safety deposit box. In short, in all other situations, it would seem that SBTC is not
bound to exercise diligence of any kind at all. Assayed in the light of Our aforementioned
pronouncements in CA Agro-lndustrial Development Corp., it is not at all difficult to conclude that
both conditions No. 9 and No. 13 of the "Lease Agreement" covering the safety deposit box in
question (Exhibits "A" and "1") must be stricken down for being contrary to law and public policy as
they are meant to exempt SBTC from any liability for damage, loss or destruction of the contents of
the safety deposit box which may arise from its own or its agents' fraud, negligence or delay.
Accordingly, SBTC cannot take refuge under the said conditions.
Public respondent further postulates that SBTC cannot be held responsible for the destruction or
loss of the stamp collection because the flooding was a fortuitous event and there was no showing of
SBTC's participation in the aggravation of the loss or injury. It states:
Article 1174 of the Civil Code provides:
"Except in cases expressly specified by the law, or when it is
otherwise declared by stipulation, or when the nature of the obligation
requires the assumption of risk, no person shall be responsible for
those events which could not be foreseen, or which, though foreseen,
were inevitable.'
In its dissertation of the phrase "caso fortuito" the Enciclopedia Jurisdicada
Española   says: "In a legal sense and, consequently, also in relation to contracts, a "caso fortuito" prevents
17

(sic) 18 the following essential characteristics: (1) the cause of the unforeseen ands unexpected occurrence, or of the
failure of the debtor to comply with his obligation, must be independent of the human will; (2) it must be impossible to
foresee the event which constitutes the "caso fortuito," or if it can be foreseen, it must be impossible to avoid; (3) the
occurrence must be such as to render it impossible for one debtor to fulfill his obligation in a normal manner; and (4)
the obligor must be free from any participation in the aggravation of the injury resulting to the creditor." (cited in
Servando vs.Phil., Steam Navigation Co., supra). 19
Here, the unforeseen or unexpected inundating floods were independent of the will of
the appellant bank and the latter was not shown to have participated in aggravating
damage (sic) to the stamps collection of the appellee. In fact, the appellant bank
offered its services to secure the assistance of an expert to save most of the then
good stamps but the appelle refused and let (sic) these recoverable stamps inside
the safety deposit box until they were ruined.  20

Both the law and authority cited are clear enough and require no further elucidation. Unfortunately,
however, the public respondent failed to consider that in the instant case, as correctly held by the
trial court, SBTC was guilty of negligence. The facts constituting negligence are enumerated in the
petition and have been summarized in thisponencia. SBTC's negligence aggravated the injury or
damage to the stamp collection. SBTC was aware of the floods of 1985 and 1986; it also knew that
the floodwaters inundated the room where Safe Deposit Box No. 54 was located. In view thereof, it
should have lost no time in notifying the petitioner in order that the box could have been opened to
retrieve the stamps, thus saving the same from further deterioration and loss. In this respect, it failed
to exercise the reasonable care and prudence expected of a good father of a family, thereby
becoming a party to the aggravation of the injury or loss. Accordingly, the aforementioned fourth
characteristic of a fortuitous event is absent Article 1170 of the Civil Code, which reads:
Those who in the performance of their obligation are guilty of fraud, negligence, or
delay, and those who in any manner contravene the tenor thereof, are liable for
damages,
thus comes to the succor of the petitioner. The destruction or loss of the stamp collection which was,
in the language of the trial court, the "product of 27 years of patience and diligence"   caused the 21

petitioner pecuniary loss; hence, he must be compensated therefor.

We cannot, however, place Our imprimatur on the trial court's award of moral damages. Since the
relationship between the petitioner and SBTC is based on a contract, either of them may be held
liable for moral damages for breach thereof only if said party had acted fraudulently or in bad
faith.   There is here no proof of fraud or bad faith on the part of SBTC.
22

WHEREFORE, the instant petition is hereby GRANTED. The challenged Decision and Resolution of
the public respondent Court of Appeals of 21 August 1991 and 21 November 1991, respectively, in
CA-G.R. CV No. 26737, are hereby SET ASIDE and the Decision of 19 February 1990 of Branch 47
of the Regional Trial Court of Manila in Civil Case No. 87-42601 is hereby REINSTATED in full,
except as to the award of moral damages which is hereby set aside.
Costs against the private respondent.
SO ORDERED.

SECOND DIVISION

[G.R. No. 131719. May 25, 2004]

THE EXECUTIVE SECRETARY, THE SECRETARY OF JUSTICE, THE

SECRETARY OF LABOR AND EMPLOYMENT, AND THE
SECRETARY OF FOREIGN AFFAIRS, OWWA ADMINISTRATOR,
and POEA ADMINISTRATOR, petitioners, vs. THE HON. COURT
OF APPEALS and ASIAN RECRUITMENT COUNCIL PHILIPPINE
CHAPTER (ARCO-PHIL.), INC., representing its members:
Worldcare Services Internationale, Inc., Steadfast International
Recruitment Corporation, Dragon International Manpower
Services Corporation, Verdant Manpower Mobilization
Corporation, Brent Overseas Personnel, Inc., ARL Manpower
Services, Inc., Dahlzhen International Services, Inc., Interworld
Placement Center, Inc., Lakas Tao Contract Services, Ltd. Co.,
and SSC Multiservices, respondents.

DECISION
CALLEJO, SR., J.:

In this petition for review on certiorari, the Executive Secretary of the

President of the Philippines, the Secretary of Justice, the Secretary of Foreign
Affairs, the Secretary of Labor and Employment, the POEA Administrator and
the OWWA Administrator, through the Office of the Solicitor General, assail
the Decision  of the Court of Appeals in CA-G.R. SP No. 38815 affirming the
[1]

Order  of the Regional Trial Court of Quezon City dated August 21, 1995 in
[2]

Civil Case No. Q-95-24401, granting the plea of the petitioners therein for a
writ of preliminary injunction and of the writ of preliminary injunction issued by
the trial court on August 24, 1995.

The Antecedents
 Republic Act No. 8042, otherwise known as the Migrant Workers and
Overseas Filipinos Act of 1995, took effect on July 15, 1995. The Omnibus
Rules and Regulations Implementing the Migrant Workers and Overseas
Filipino Act of 1995 was, thereafter, published in the April 7, 1996 issue of the
Manila Bulletin. However, even before the law took effect, the Asian
Recruitment Council Philippine Chapter, Inc. (ARCO-Phil.) filed, on July 17,
1995, a petition for declaratory relief under Rule 63 of the Rules of Court with
the Regional Trial Court of Quezon City to declare as unconstitutional Section
2, paragraph (g), Section 6, paragraphs (a) to (j), (l) and (m), Section 7,
paragraphs (a) and (b), and Sections 9 and 10 of the law, with a plea for the
issuance of a temporary restraining order and/or writ of preliminary injunction
enjoining the respondents therein from enforcing the assailed provisions of the
law.
In a supplement to its petition, the ARCO-Phil. alleged that Rep. Act No.
8042 was self-executory and that no implementing rules were needed. It
prayed that the court issue a temporary restraining order to enjoin the
enforcement of Section 6, paragraphs (a) to (m) on illegal recruitment, Section
7 on penalties for illegal recruitment, and Section 9 on venue of criminal
actions for illegal recruitments, viz:
Viewed in the light of the foregoing discussions, there appears to be urgent an
imperative need for this Honorable Court to maintain the status quo by enjoining the
implementation or effectivity of the questioned provisions of RA 8042, by way of a
restraining order otherwise, the member recruitment agencies of the petitioner will
suffer grave or irreparable damage or injury. With the effectivity of RA 8042, a great
majority of the duly licensed recruitment agencies have stopped or suspended their
operations for fear of being prosecuted under the provisions of a law that are unjust
and unconstitutional. This Honorable Court may take judicial notice of the fact that
processing of deployment papers of overseas workers for the past weeks have come to
a standstill at the POEA and this has affected thousands of workers everyday just
because of the enactment of RA 8042. Indeed, this has far reaching effects not only to
survival of the overseas manpower supply industry and the active participating
recruitment agencies, the countrys economy which has survived mainly due to the
dollar remittances of the overseas workers but more importantly, to the poor and the
needy who are in dire need of income-generating jobs which can only be obtained
from abroad. The loss or injury that the recruitment agencies will suffer will then be
immeasurable and irreparable. As of now, even foreign employers have already
reduced their manpower requirements from the Philippines due to their knowledge
that RA 8042 prejudiced and adversely affected the local recruitment agencies.[3]

On August 1, 1995, the trial court issued a temporary restraining order

effective for a period of only twenty (20) days therefrom.
 After the petitioners filed their comment on the petition, the ARCO-Phil.
filed an amended petition, the amendments consisting in the inclusion in the
caption thereof eleven (11) other corporations which it alleged were its
members and which it represented in the suit, and a plea for a temporary
restraining order enjoining the respondents from enforcing Section 6
subsection (i), Section 6 subsection (k) and paragraphs 15 and 16 thereof,
Section 8, Section 10, paragraphs 1 and 2, and Sections 11 and 40 of Rep.
Act No. 8042.
The respondent ARCO-Phil. assailed Section 2(g) and (i), Section 6
subsection (a) to (m), Section 7(a) to (b), and Section 10 paragraphs (1) and
(2), quoted as follows:
(g) THE STATE RECOGNIZES THAT THE ULTIMATE PROTECTION TO ALL
MIGRANT WORKERS IS THE POSSESSION OF SKILLS. PURSUANT TO THIS
AND AS SOON AS PRACTICABLE, THE GOVERNMENT SHALL DEPLOY
AND/OR ALLOW THE DEPLOYMENT ONLY OF SKILLED FILIPINO
WORKERS. [4]

Sec. 2 subsection (i, 2nd par.)

Nonetheless, the deployment of Filipino overseas workers, whether land-based or sea-
based, by local service contractors and manning agents employing them shall be
encourages (sic). Appropriate incentives may be extended to them.
II. ILLEGAL RECRUITMENT
SEC. 6. Definition. For purposes of this Act, illegal recruitment shall mean any act of
canvassing, enlisting, contracting, transporting, utilizing, hiring, or procuring workers
and includes referring, contract services, promising or advertising for employment
abroad, whether for profit or not, when undertaken by a non-licensee or non-holder of
authority contemplated under Article 13(f) of Presidential Decree No. 442, as
amended, otherwise known as the Labor Code of the Philippines: Provided, That any
such non-licensee or non-holder who, in any manner, offers or promises for a fee
employment abroad to two or more persons shall be deemed so engaged. It shall,
likewise, include the following acts, whether committed by any person, whether a
non-licensee, non-holder, licensee or holder of authority:
(a) To charge or accept directly or indirectly any amount greater than that specified in
the schedule of allowable fees prescribed by the Secretary of Labor and Employment,
or to make a worker pay any amount greater than that actually received by him as a
loan or advance;
(b) To furnish or publish any false notice or information or document in relation to
recruitment or employment;
(c) To give any false notice, testimony, information or document or commit any act of
misrepresentation for the purpose of securing a license or authority under the Labor
Code;
(d) To induce or attempt to induce a worker already employed to quit his employment
in order to offer him another unless the transfer is designed to liberate a worker from
oppressive terms and conditions of employment;
(e) To influence or attempt to influence any person or entity not to employ any worker
who has not applied for employment through his agency;
(f) To engage in the recruitment or placement of workers in jobs harmful to public
health or morality or to the dignity of the Republic of the Philippines;
(g) To obstruct or attempt to obstruct inspection by the Secretary of Labor and
Employment or by his duly authorized representative;
(h) To fail to submit reports on the status of employment, placement vacancies,
remittance of foreign exchange earnings, separation from jobs, departures and such
other matters or information as may be required by the Secretary of Labor and
Employment;
(i) To substitute or alter to the prejudice of the worker, employment contracts
approved and verified by the Department of Labor and Employment from the time of
actual signing thereof by the parties up to and including the period of the expiration of
the same without the approval of the Department of Labor and Employment;
(j) For an officer or agent of a recruitment or placement agency to become an officer
or member of the Board of any corporation engaged in travel agency or to be engaged
directly or indirectly in the management of a travel agency;
(k) To withhold or deny travel documents from applicant workers before departure for
monetary or financial considerations other than those authorized under the Labor
Code and its implementing rules and regulations;
(l) Failure to actually deploy without valid reason as determined by the Department of
Labor and Employment; and
(m) Failure to reimburse expenses incurred by the worker in connection with his
documentation and processing for purposes of deployment, in cases where the
deployment does not actually take place without the workers fault. Illegal recruitment
when committed by a syndicate or in large scale shall be considered an offense
involving economic sabotage.
Illegal recruitment is deemed committed by a syndicate if carried out by a group of
three (3) or more persons conspiring or confederating with one another. It is deemed
committed in large scale if committed against three (3) or more persons individually
or as a group.
The persons criminally liable for the above offenses are the principals, accomplices
and accessories. In case of juridical persons, the officers having control, management
or direction of their business shall be liable.
SEC. 7. Penalties.
(a) Any person found guilty of illegal recruitment shall suffer the penalty of
imprisonment of not less than six (6) years and one (1) day but not more than twelve
(12) years and a fine of not less than two hundred thousand pesos (P200,000.00) nor
more than five hundred thousand pesos (P500,000.00).
(b) The penalty of life imprisonment and a fine of not less than five hundred thousand
pesos (P500,000.00) nor more than one million pesos (P1,000,000.00) shall be
imposed if illegal recruitment constitutes economic sabotage as defined herein.
Provided, however, That the maximum penalty shall be imposed if the person illegally
recruited is less than eighteen (18) years of age or committed by a non-licensee or
non-holder of authority.
Sec. 8.
Prohibition on Officials and Employees. It shall be unlawful for any official or
employee of the Department of Labor and Employment, the Philippine Overseas
Employment Administration (POEA), or the Overseas Workers Welfare
Administration (OWWA), or the Department of Foreign Affairs, or other government
agencies involved in the implementation of this Act, or their relatives within the
fourth civil degree of consanguinity or affinity, to engage, directly or indirectly, in the
business of recruiting migrant workers as defined in this Act. The penalties provided
in the immediate preceding paragraph shall be imposed upon them. (underscoring
supplied)
Sec. 10, pars. 1 & 2.
Money Claims. Notwithstanding any provision of law to the contrary, the Labor
Arbiters of the National Labor Relations Commission (NLRC) shall have the original
and exclusive jurisdiction to hear and decide, within ninety (90) calendar days after
the filing of the complaint, the claims arising out of an employer-employee
relationship or by virtue of any law or contract involving Filipino workers for
overseas deployment including claims for actual, moral, exemplary and other forms of
damages.
The liability of the principal/employer and the recruitment/placement agency for any
and all claims under this section shall be joint and several. This provision shall be
incorporated in the contract for overseas employment and shall be a condition
precedent for its approval. The performance bond to be filed by the
recruitment/placement agency, as provided by law, shall be answerable for all money
claims or damages that may be awarded to the workers. If the recruitment/placement
agency is a juridical being, the corporate officers and directors and partners as the
case may be, shall themselves be jointly and solidarily liable with the corporation or
partnership for the aforesaid claims and damages.
SEC. 11. Mandatory Periods for Resolution of Illegal Recruitment Cases. The
preliminary investigations of cases under this Act shall be terminated within a period
of thirty (30) calendar days from the date of their filing.Where the preliminary
investigation is conducted by a prosecution officer and a prima facie case is
established, the corresponding information shall be filed in court within twenty-four
(24) hours from the termination of the investigation. If the preliminary investigation is
conducted by a judge and a prima facie case is found to exist, the corresponding
information shall be filed by the proper prosecution officer within forty-eight (48)
hours from the date of receipt of the records of the case.
The respondent averred that the aforequoted provisions of Rep. Act No.
8042 violate Section 1, Article III of the Constitution.  According to the
[5]

respondent, Section 6(g) and (i) discriminated against unskilled workers and
their families and, as such, violated the equal protection clause, as well as
Article II, Section 12  and Article XV, Sections 1  and 3(3) of the Constitution.
[6] [7]

 As the law encouraged the deployment of skilled Filipino workers, only
[8]

overseas skilled workers are granted rights. The respondent stressed that

unskilled workers also have the right to seek employment abroad. According
to the respondent, the right of unskilled workers to due process is violated
because they are prevented from finding employment and earning a living
abroad. It cannot be argued that skilled workers are immune from abuses by
employers, while unskilled workers are merely prone to such abuses. It was
pointed out that both skilled and unskilled workers are subjected to abuses by
foreign employers. Furthermore, the prohibition of the deployment of unskilled
workers abroad would only encourage fly-by-night illegal recruiters.
According to the respondent, the grant of incentives to service contractors
and manning agencies to the exclusion of all other licensed and authorized
recruiters is an invalid classification.Licensed and authorized recruiters are
thus deprived of their right to property and due process and to the equality of
the person. It is understandable for the law to prohibit illegal recruiters, but to
discriminate against licensed and registered recruiters is unconstitutional.
The respondent, likewise, alleged that Section 6, subsections (a) to (m) is
unconstitutional because licensed and authorized recruitment agencies are
placed on equal footing with illegal recruiters. It contended that while the
Labor Code distinguished between recruiters who are holders of licenses and
non-holders thereof in the imposition of penalties, Rep. Act No. 8042 does not
make any distinction. The penalties in Section 7(a) and (b) being based on an
invalid classification are, therefore, repugnant to the equal protection clause,
besides being excessive; hence, such penalties are violative of Section 19(1),
Article III of the Constitution.  It was also pointed out that the penalty for
[9]

officers/officials/employees of recruitment agencies who are found guilty of

economic sabotage or large-scale illegal recruitment under Rep. Act No. 8042
is life imprisonment. Since recruitment agencies usually operate with a
manpower of more than three persons, such agencies are forced to shut
down, lest their officers and/or employees be charged with large scale illegal
recruitment or economic sabotage and sentenced to life imprisonment. Thus,
the penalty imposed by law, being disproportionate to the prohibited acts,
discourages the business of licensed and registered recruitment agencies.
The respondent also posited that Section 6(m) and paragraphs (15) and
(16), Sections 8, 9 and 10, paragraph 2 of the law violate Section 22, Article III
of the Constitution  prohibiting ex-post facto laws and bills of attainder. This is
[10]

because the provisions presume that a licensed and registered recruitment

agency is guilty of illegal recruitment involving economic sabotage, upon a
finding that it committed any of the prohibited acts under the law. Furthermore,
officials, employees and their relatives are presumed guilty of illegal
recruitment involving economic sabotage upon such finding that they
committed any of the said prohibited acts.
The respondent further argued that the 90-day period in Section 10,
paragraph (1) within which a labor arbiter should decide a money claim is
relatively short, and could deprive licensed and registered recruiters of their
right to due process. The period within which the summons and the complaint
would be served on foreign employees and, thereafter, the filing of the answer
to the complaint would take more than 90 days. This would thereby shift on
local licensed and authorized recruiters the burden of proving the defense of
foreign employers. Furthermore, the respondent asserted, Section 10,
paragraph 2 of the law, which provides for the joint and several liability of the
officers and employees, is a bill of attainder and a violation of the right of the
said corporate officers and employees to due process. Considering that such
corporate officers and employees act with prior approval of the board of
directors of such corporation, they should not be liable, jointly and severally,
for such corporate acts.
The respondent asserted that the following provisions of the law are
unconstitutional:
SEC. 9. Venue. A criminal action arising from illegal recruitment as defined herein
shall be filed with the Regional Trial Court of the province or city where the offense
was committed or where the offended party actually resides at the time of the
commission of the offense: Provided, That the court where the criminal action is first
filed shall acquire jurisdiction to the exclusion of other courts: Provided, however,
That the aforestated provisions shall also apply to those criminal actions that have
already been filed in court at the time of the effectivity of this Act.
SEC. 10. Money Claims. Notwithstanding any provision of law to the contrary, the
Labor Arbiters of the National Labor Relations Commission (NLRC) shall have the
original and exclusive jurisdiction to hear and decide, within ninety (90) calendar days
after the filing of the complaint, the claims arising out of an employer-employee
relationship or by virtue of any law or contract involving Filipino workers for
overseas deployment including claims for actual, moral, exemplary and other forms of
damages.
Sec. 40.
The departments and agencies charged with carrying out the provisions of this Act
shall, within ninety (90) days after the effectiviy of this Act, formulate the necessary
rules and regulations for its effective implementation.
According to the respondent, the said provisions violate Section 5(5),
Article VIII of the Constitution  because they impair the power of the Supreme
[11]

Court to promulgate rules of procedure.

In their answer to the petition, the petitioners alleged, inter alia, that (a) the
respondent has no cause of action for a declaratory relief; (b) the petition was
premature as the rules implementing Rep. Act No. 8042 not having been
released as yet; (c) the assailed provisions do not violate any provisions of the
Constitution; and, (d) the law was approved by Congress in the exercise of the
police power of the State. In opposition to the respondents plea for injunctive
relief, the petitioners averred that:
As earlier shown, the amended petition for declaratory relief is devoid of merit for
failure of petitioner to demonstrate convincingly that the assailed law is
unconstitutional, apart from the defect and impropriety of the petition.One who
attacks a statute, alleging unconstitutionality must prove its invalidity beyond
reasonable doubt (Caleon v. Agus Development Corporation, 207 SCRA 748). All
reasonable doubts should be resolved in favor of the constitutionality of a statute
(People v. Vera, 65 Phil. 56). This presumption of constitutionality is based on the
doctrine of separation of powers which enjoin upon each department a becoming
respect for the acts of the other departments (Garcia vs. Executive Secretary, 204
SCRA 516 [1991]). Necessarily, the ancillary remedy of a temporary restraining order
and/or a writ of preliminary injunction prayed for must fall. Besides, an act of
legislature approved by the executive is presumed to be within constitutional bounds
(National Press Club v. Commission on Elections, 207 SCRA 1). [12]

After the respective counsels of the parties were heard on oral arguments,
the trial court issued on August 21, 1995, an order granting the petitioners
plea for a writ of preliminary injunction upon a bond of P50,000. The petitioner
posted the requisite bond and on August 24, 1995, the trial court issued a writ
of preliminary injunction enjoining the enforcement of the following provisions
of Rep. Act No. 8042 pending the termination of the proceedings:
Section 2, subsections (g) and (i, 2nd par.); Section 6, subsections (a) to (m), and pars.
15 & 16; Section 7, subsections (a) & (b); Section 8; Section 9; Section 10; pars. 1 &
2; Section 11; and Section 40 of Republic Act No. 8042, otherwise known as the
Migrant Workers and Overseas Filipinos Act of 1995.  [13]

The petitioners filed a petition for certiorari with the Court of Appeals

assailing the order and the writ of preliminary injunction issued by the trial
court on the following grounds:
1. Respondent ARCO-PHIL. had utterly failed to show its clear right/s or that of its
member-agencies to be protected by the injunctive relief and/or violation of said rights
by the enforcement of the assailed sections of R.A. 8042;
2. Respondent Judge fixed a P50,000 injunction bond which is grossly inadequate to
answer for the damage which petitioner-officials may sustain, should respondent
ARCO-PHIL. be finally adjudged as not being entitled thereto. [14]

The petitioners asserted that the respondent is not the real party-in-
interest as petitioner in the trial court. It is inconceivable how the respondent,
a non-stock and non-profit corporation, could sustain direct injury as a result
of the enforcement of the law. They argued that if, at all, any damage would
result in the implementation of the law, it is the licensed and registered
recruitment agencies and/or the unskilled Filipino migrant workers
discriminated against who would sustain the said injury or damage, not the
respondent. The respondent, as petitioner in the trial court, was burdened to
adduce preponderant evidence of such irreparable injury, but failed to do
so. The petitioners further insisted that the petition a quo was premature since
the rules and regulations implementing the law had yet to be promulgated
when such petition was filed. Finally, the petitioners averred that the
respondent failed to establish the requisites for the issuance of a writ of
preliminary injunction against the enforcement of the law and the rules and
regulations issued implementing the same.
On December 5, 1997, the appellate court came out with a four-page
decision dismissing the petition and affirming the assailed order and writ of
preliminary injunction issued by the trial court. The appellate court, likewise,
denied the petitioners motion for reconsideration of the said decision.
The petitioners now come to this Court in a petition for review
on certiorari on the following grounds:
1. Private respondent ARCO-PHIL. had utterly failed to show its clear right/s or that
of its member-agencies to be protected by the injunctive relief and/or violation of said
rights by the enforcement of the assailed sections of R.A. 8042;
2. The P50,000 injunction bond fixed by the court a quo and sustained by the Court of
Appeals is grossly inadequate to answer for the damage which petitioners-officials
may sustain, should private respondent ARCO-PHIL. be finally adjudged as not being
entitled thereto.
[15]

On February 16, 1998, this Court issued a temporary restraining order

enjoining the respondents from enforcing the assailed order and writ of
preliminary injunction.

The Issues

The core issue in this case is whether or not the trial court committed
grave abuse of its discretion amounting to excess or lack of jurisdiction in
issuing the assailed order and the writ of preliminary injunction on a bond of
only P50,000 and whether or not the appellate court erred in affirming the trial
courts order and the writ of preliminary injunction issued by it.
The petitioners contend that the respondent has no locus standi. It is a
non-stock, non-profit organization; hence, not the real party-in-interest as
petitioner in the action. Although the respondent filed the petition in the
Regional Trial Court in behalf of licensed and registered recruitment agencies,
it failed to adduce in evidence a certified copy of its Articles of Incorporation
and the resolutions of the said members authorizing it to represent the said
agencies in the proceedings. Neither is the suit of the respondent a class suit
so as to vest in it a personality to assail Rep. Act No. 8042; the respondent is
service-oriented while the recruitment agencies it purports to represent are
profit-oriented. The petitioners assert that the law is presumed constitutional
and, as such, the respondent was burdened to make a case strong enough to
overcome such presumption and establish a clear right to injunctive relief.
The petitioners bewail the P50,000 bond fixed by the trial court for the
issuance of a writ of preliminary injunction and affirmed by the appellate
court. They assert that the amount is grossly inadequate to answer for any
damages that the general public may suffer by reason of the non-enforcement
of the assailed provisions of the law. The trial court committed a grave abuse
of its discretion in granting the respondents plea for injunctive relief, and the
appellate court erred in affirming the order and the writ of preliminary
injunction issued by the trial court.
 The respondent, for its part, asserts that it has duly established its locus
standi and its right to injunctive relief as gleaned from its pleadings and the
appendages thereto. Under Section 5, Rule 58 of the Rules of Court, it was
incumbent on the petitioners, as respondents in the RTC, to show cause why
no injunction should issue. It avers that the injunction bond posted by the
respondent was more than adequate to answer for any injury or damage the
petitioners may suffer, if any, by reason of the writ of preliminary injunction
issued by the RTC. In any event, the assailed provisions of Rep. Act No. 8042
exposed its members to the immediate and irreparable damage of being
deprived of their right to a livelihood without due process, a property right
protected under the Constitution.
The respondent contends that the commendable purpose of the law to
eradicate illegal recruiters should not be done at the expense and to the
prejudice of licensed and authorized recruitment agencies. The writ of
preliminary injunction was necessitated by the great number of duly licensed
recruitment agencies that had stopped or suspended their business
operations for fear that their officers and employees would be indicted and
prosecuted under the assailed oppressive penal provisions of the law, and
meted excessive penalties. The respondent, likewise, urges that the Court
should take judicial notice that the processing of deployment papers of
overseas workers have come to a virtual standstill at the POEA.

The Courts Ruling

The petition is meritorious.

The Respondent Has Locus Standi

To File the Petition in the RTC in
Representation of the Eleven
Licensed and Registered
Recruitment Agencies Impleaded
in the Amended Petition

The modern view is that an association has standing to complain of

injuries to its members. This view fuses the legal identity of an association
with that of its members.  An association has standing to file suit for its
[16]

workers despite its lack of direct interest if its members are affected by the
action. An organization has standing to assert the concerns of its constituents.
[17]
 In Telecommunications and Broadcast Attorneys of the Philippines v.
Commission on Elections,  we held that standing jus tertii would be
[18]

recognized only if it can be shown that the party suing has some substantial
relation to the third party, or that the right of the third party would be diluted
unless the party in court is allowed to espouse the third partys constitutional
claims.
In this case, the respondent filed the petition for declaratory relief under
Rule 64 of the Rules of Court for and in behalf of its eleven (11) licensed and
registered recruitment agencies which are its members, and which approved
separate resolutions expressly authorizing the respondent to file the said suit
for and in their behalf. We note that, under its Articles of Incorporation, the
respondent was organized for the purposes inter alia of promoting and
supporting the growth and development of the manpower recruitment industry,
both in the local and international levels; providing, creating and exploring
employment opportunities for the exclusive benefit of its general membership;
enhancing and promoting the general welfare and protection of Filipino
workers; and, to act as the representative of any individual, company, entity or
association on matters related to the manpower recruitment industry, and to
perform other acts and activities necessary to accomplish the purposes
embodied therein. The respondent is, thus, the appropriate party to assert the
rights of its members, because it and its members are in every practical sense
identical. The respondent asserts that the assailed provisions violate the
constitutional rights of its members and the officers and employees
thereof. The respondent is but the medium through which its individual
members seek to make more effective the expression of their voices and the
redress of their grievances.[19]

However, the respondent has no locus standi to file the petition for and in
behalf of unskilled workers. We note that it even failed to implead any
unskilled workers in its petition. Furthermore, in failing to implead, as parties-
petitioners, the eleven licensed and registered recruitment agencies it claimed
to represent, the respondent failed to comply with Section 2 of Rule 63  of the
[20]

Rules of Court. Nevertheless, since the eleven licensed and registered

recruitment agencies for which the respondent filed the suit are specifically
named in the petition, the amended petition is deemed amended to avoid
multiplicity of suits.
[21]

The Assailed Order and Writ of

Preliminary Injunction Is Mooted
By Case Law
 The respondent justified its plea for injunctive relief on the allegation in its
amended petition that its members are exposed to the immediate and
irreparable danger of being deprived of their right to a livelihood and other
constitutional rights without due process, on its claim that a great number of
duly licensed recruitment agencies have stopped or suspended their
operations for fear that (a) their officers and employees would be prosecuted
under the unjust and unconstitutional penal provisions of Rep. Act No. 8042
and meted equally unjust and excessive penalties, including life imprisonment,
for illegal recruitment and large scale illegal recruitment without regard to
whether the recruitment agencies involved are licensed and/or authorized;
and, (b) if the members of the respondent, which are licensed and authorized,
decide to continue with their businesses, they face the stigma and the curse of
being labeled illegal recruiters. In granting the respondents plea for a writ of
preliminary injunction, the trial court held, without stating the factual and legal
basis therefor, that the enforcement of Rep. Act No. 8042, pendente lite,
would cause grave and irreparable injury to the respondent until the case is
decided on its merits.
We note, however, that since Rep. Act No. 8042 took effect on July 15,
1995, the Court had, in a catena of cases, applied the penal provisions in
Section 6, including paragraph (m) thereof, and the last two paragraphs
therein defining large scale illegal recruitment committed by officers and/or
employees of recruitment agencies by themselves and in connivance with
private individuals, and imposed the penalties provided in Section 7 thereof,
including the penalty of life imprisonment.  The Informations therein were filed
[22]

after preliminary investigations as provided for in Section 11 of Rep. Act No.

8042 and in venues as provided for in Section 9 of the said act. In People v.
Chowdury,  we held that illegal recruitment is a crime of economic sabotage
[23]

and must be enforced.

In People v. Diaz,  we held that Rep. Act No. 8042 is but an amendment
[24]

of the Labor Code of the Philippines and is not an ex-post facto law because it
is not applied retroactively. In JMM Promotion and Management, Inc. v. Court
of Appeals,  the issue of the extent of the police power of the State to
[25]

regulate a business, profession or calling vis--vis the equal protection clause

and the non-impairment clause of the Constitution were raised and we held,
thus:
A profession, trade or calling is a property right within the meaning of our
constitutional guarantees. One cannot be deprived of the right to work and the right to
make a living because these rights are property rights, the arbitrary and unwarranted
deprivation of which normally constitutes an actionable wrong.
Nevertheless, no right is absolute, and the proper regulation of a profession, calling,
business or trade has always been upheld as a legitimate subject of a valid exercise of
the police power by the state particularly when their conduct affects either the
execution of legitimate governmental functions, the preservation of the State, the
public health and welfare and public morals. According to the maxim, sic utere tuo ut
alienum non laedas, it must of course be within the legitimate range of legislative
action to define the mode and manner in which every one may so use his own
property so as not to pose injury to himself or others.
In any case, where the liberty curtailed affects at most the rights of property, the
permissible scope of regulatory measures is certainly much wider. To pretend that
licensing or accreditation requirements violates the due process clause is to ignore the
settled practice, under the mantle of the police power, of regulating entry to the
practice of various trades or professions. Professionals leaving for abroad are required
to pass rigid written and practical exams before they are deemed fit to practice their
trade. Seamen are required to take tests determining their seamanship. Locally, the
Professional Regulation Commission has begun to require previously licensed doctors
and other professionals to furnish documentary proof that they had either re-trained or
had undertaken continuing education courses as a requirement for renewal of their
licenses. It is not claimed that these requirements pose an unwarranted deprivation of
a property right under the due process clause. So long as professionals and other
workers meet reasonable regulatory standards no such deprivation exists.
Finally, it is a futile gesture on the part of petitioners to invoke the non-impairment
clause of the Constitution to support their argument that the government cannot enact
the assailed regulatory measures because they abridge the freedom to
contract. In Philippine Association of Service Exporters, Inc. vs. Drilon, we held that
[t]he non-impairment clause of the Constitution must yield to the loftier purposes
targeted by the government. Equally important, into every contract is read provisions
of existing law, and always, a reservation of the police power for so long as the
agreement deals with a subject impressed with the public welfare.
A last point. Petitioners suggest that the singling out of entertainers and performing
artists under the assailed department orders constitutes class legislation which violates
the equal protection clause of the Constitution. We do not agree.
The equal protection clause is directed principally against undue favor and individual
or class privilege. It is not intended to prohibit legislation which is limited to the
object to which it is directed or by the territory in which it is to operate. It does not
require absolute equality, but merely that all persons be treated alike under like
conditions both as to privileges conferred and liabilities imposed. We have held, time
and again, that the equal protection clause of the Constitution does not forbid
classification for so long as such classification is based on real and substantial
differences having a reasonable relation to the subject of the particular legislation. If
classification is germane to the purpose of the law, concerns all members of the class,
and applies equally to present and future conditions, the classification does not violate
the equal protection guarantee.[26]

The validity of Section 6 of R.A. No. 8042 which provides that employees
of recruitment agencies may be criminally liable for illegal recruitment has
been upheld in People v. Chowdury: [27]

As stated in the first sentence of Section 6 of RA 8042, the persons who may be held
liable for illegal recruitment are the principals, accomplices and accessories. An
employee of a company or corporation engaged in illegal recruitment may be held
liable as principal, together with his employer, if it is shown that he actively and
consciously participated in illegal recruitment. It has been held that the existence of
the corporate entity does not shield from prosecution the corporate agent who
knowingly and intentionally causes the corporation to commit a crime. The
corporation obviously acts, and can act, only by and through its human agents, and it
is their conduct which the law must deter. The employee or agent of a corporation
engaged in unlawful business naturally aids and abets in the carrying on of such
business and will be prosecuted as principal if, with knowledge of the business, its
purpose and effect, he consciously contributes his efforts to its conduct and
promotion, however slight his contribution may be.  [28]

By its rulings, the Court thereby affirmed the validity of the assailed penal
and procedural provisions of Rep. Act No. 8042, including the imposable
penalties therefor. Until the Court, by final judgment, declares that the said
provisions are unconstitutional, the enforcement of the said provisions cannot
be enjoined.

The RTC Committed Grave Abuse

of Its Discretion Amounting to
Excess or Lack of Jurisdiction in
Issuing the Assailed Order and the
Writ of Preliminary Injunction

The matter of whether to issue a writ of preliminary injunction or not is

addressed to the sound discretion of the trial court. However, if the court
commits grave abuse of its discretion in issuing the said writ amounting to
excess or lack of jurisdiction, the same may be nullified via a writ of certiorari
and prohibition.
In Social Security Commission v. Judge Bayona,  we ruled that a law is
[29]

presumed constitutional until otherwise declared by judicial interpretation. The

suspension of the operation of the law is a matter of extreme delicacy
because it is an interference with the official acts not only of the duly elected
representatives of the people but also of the highest magistrate of the land.
In Younger v. Harris, Jr.,  the Supreme Court of the United States
[30]

emphasized, thus:
Federal injunctions against state criminal statutes, either in their entirety or with
respect to their separate and distinct prohibitions, are not to be granted as a matter of
course, even if such statutes are unconstitutional. No citizen or member of the
community is immune from prosecution, in good faith, for his alleged criminal
acts. The imminence of such a prosecution even though alleged to be unauthorized
and, hence, unlawful is not alone ground for relief in equity which exerts its
extraordinary powers only to prevent irreparable injury to the plaintiff who seeks its
aid. 752 Beal v. Missouri Pacific Railroad Corp., 312 U.S. 45, 49, 61 S.Ct. 418, 420,
85 L.Ed. 577.
And similarly, in Douglas, supra, we made clear, after reaffirming this rule, that:
It does not appear from the record that petitioners have been threatened with any
injury other than that incidental to every criminal proceeding brought lawfully and in
good faith 319 U.S., at 164, 63 S.Ct., at 881.[31]

The possible unconstitutionality of a statute, on its face, does not of itself

justify an injunction against good faith attempts to enforce it, unless there is a
showing of bad faith, harassment, or any other unusual circumstance that
would call for equitable relief.  The on its face invalidation of statutes has
[32]

been described as manifestly strong medicine, to be employed sparingly and

only as a last resort, and is generally disfavored. [33]

To be entitled to a preliminary injunction to enjoin the enforcement of a law

assailed to be unconstitutional, the party must establish that it will suffer
irreparable harm in the absence of injunctive relief and must demonstrate
that it is likely to succeed on the merits, or that there are sufficiently serious
questions going to the merits and the balance of hardships tips decidedly in
its favor.  The higher standard reflects judicial deference toward legislation or
[34]

regulations developed through presumptively reasoned democratic processes.

Moreover, an injunction will alter, rather than maintain, the status quo, or will
provide the movant with substantially all the relief sought and that relief cannot
be undone even if the defendant prevails at a trial on the merits.  Considering
[35]

that injunction is an exercise of equitable relief and authority, in assessing

whether to issue a preliminary injunction, the courts must sensitively assess
all the equities of the situation, including the public interest.  In litigations
[36]

between governmental and private parties, courts go much further both to give
and withhold relief in furtherance of public interest than they are accustomed
to go when only private interests are involved.  Before the plaintiff may be
[37]
entitled to injunction against future enforcement, he is burdened to show some
substantial hardship. [38]

The fear or chilling effect of the assailed penal provisions of the law on the
members of the respondent does not by itself justify prohibiting the State from
enforcing them against those whom the State believes in good faith to be
punishable under the laws:
Just as the incidental chilling effect of such statutes does not automatically render
them unconstitutional, so the chilling effect that admittedly can result from the very
existence of certain laws on the statute books does not in itself justify prohibiting the
State from carrying out the important and necessary task of enforcing these laws
against socially harmful conduct that the State believes in good faith to be punishable
under its laws and the Constitution. [39]

It must be borne in mind that subject to constitutional limitations, Congress

is empowered to define what acts or omissions shall constitute a crime and to
prescribe punishments therefor. The power is inherent in Congress and is
[40]

part of the sovereign power of the State to maintain peace and

order. Whatever views may be entertained regarding the severity of
punishment, whether one believes in its efficiency or its futility, these are
peculiarly questions of legislative policy.  The comparative gravity of crimes
[41]

and whether their consequences are more or less injurious are matters for the
State and Congress itself to determine.  Specification of penalties involves
[42]

questions of legislative policy. [43]

Due process prohibits criminal stability from shifting the burden of proof to
the accused, punishing wholly passive conduct, defining crimes in vague or
overbroad language and failing to grant fair warning of illegal conduct.  Class [44]

legislation is such legislation which denies rights to one which are accorded to
others, or inflicts upon one individual a more severe penalty than is imposed
upon another in like case offending.  Bills of attainder are legislative acts
[45]

which inflict punishment on individuals or members of a particular group

without a judicial trial. Essential to a bill of attainder are a specification of
certain individuals or a group of individuals, the imposition of a punishment,
penal or otherwise, and the lack of judicial trial. [46]

Penalizing unlicensed and licensed recruitment agencies and their officers

and employees and their relatives employed in government agencies charged
with the enforcement of the law for illegal recruitment and imposing life
imprisonment for those who commit large scale illegal recruitment is not
offensive to the Constitution. The accused may be convicted of illegal
recruitment and large scale illegal recruitment only if, after trial, the
prosecution is able to prove all the elements of the crime charged. [47]
 The possibility that the officers and employees of the recruitment
agencies, which are members of the respondent, and their relatives who are
employed in the government agencies charged in the enforcement of the law,
would be indicted for illegal recruitment and, if convicted sentenced to life
imprisonment for large scale illegal recruitment, absent proof of irreparable
injury, is not sufficient on which to base the issuance of a writ of preliminary
injunction to suspend the enforcement of the penal provisions of Rep. Act No.
8042 and avert any indictments under the law.  The normal course of criminal
[48]

prosecutions cannot be blocked on the basis of allegations which amount to

speculations about the future.[49]

There is no allegation in the amended petition or evidence adduced by the

respondent that the officers and/or employees of its members had been
threatened with any indictments for violations of the penal provisions of Rep.
Act No. 8042. Neither is there any allegation therein that any of its members
and/or their officers and employees committed any of the acts enumerated in
Section 6(a) to (m) of the law for which they could be indicted. Neither did the
respondent adduce any evidence in the RTC that any or all of its members or
a great number of other duly licensed and registered recruitment agencies
had to stop their business operations because of fear of indictments under
Sections 6 and 7 of Rep. Act No. 8042. The respondent merely speculated
and surmised that licensed and registered recruitment agencies would close
shop and stop business operations because of the assailed penal provisions
of the law. A writ of preliminary injunction to enjoin the enforcement of penal
laws cannot be based on such conjectures or speculations. The Court cannot
take judicial notice that the processing of deployment papers of overseas
workers have come to a virtual standstill at the POEA because of the assailed
provisions of Rep. Act No. 8042. The respondent must adduce evidence to
prove its allegation, and the petitioners accorded a chance to adduce
controverting evidence.
The respondent even failed to adduce any evidence to prove irreparable
injury because of the enforcement of Section 10(1)(2) of Rep. Act No.
8042. Its fear or apprehension that, because of time constraints, its members
would have to defend foreign employees in cases before the Labor Arbiter is
based on speculations. Even if true, such inconvenience or difficulty is hardly
irreparable injury.
The trial court even ignored the public interest involved in suspending the
enforcement of Rep. Act No. 8042 vis--vis the eleven licensed and registered
recruitment agencies represented by the respondent. In People v. Gamboa,
 we emphasized the primary aim of Rep. Act No. 8042:
[50]
Preliminarily, the proliferation of illegal job recruiters and syndicates preying on
innocent people anxious to obtain employment abroad is one of the primary
considerations that led to the enactment of The Migrant Workers and Overseas
Filipinos Act of 1995. Aimed at affording greater protection to overseas Filipino
workers, it is a significant improvement on existing laws in the recruitment and
placement of workers for overseas employment. Otherwise known as the Magna Carta
of OFWs, it broadened the concept of illegal recruitment under the Labor Code and
provided stiffer penalties thereto, especially those that constitute economic
sabotage, i.e., Illegal Recruitment in Large Scale and Illegal Recruitment Committed
by a Syndicate.[51]

By issuing the writ of preliminary injunction against the

petitioners sans any evidence, the trial court frustrated, albeit temporarily, the
prosecution of illegal recruiters and allowed them to continue victimizing
hapless and innocent people desiring to obtain employment abroad as
overseas workers, and blocked the attainment of the salutary
policies  embedded in Rep. Act No. 8042. It bears stressing that overseas
[52]

workers, land-based and sea-based, had been remitting to the Philippines

billions of dollars which over the years had propped the economy.
In issuing the writ of preliminary injunction, the trial court considered
paramount the interests of the eleven licensed and registered recruitment
agencies represented by the respondent, and capriciously overturned the
presumption of the constitutionality of the assailed provisions on the
barefaced claim of the respondent that the assailed provisions of Rep. Act No.
8042 are unconstitutional. The trial court committed a grave abuse of its
discretion amounting to excess or lack of jurisdiction in issuing the assailed
order and writ of preliminary injunction. It is for this reason that the Court
issued a temporary restraining order enjoining the enforcement of the writ of
preliminary injunction issued by the trial court.
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The
assailed decision of the appellate court is REVERSED AND SET ASIDE. The
Order of the Regional Trial Court dated August 21, 1995 in Civil Case No. Q-
95-24401 and the Writ of Preliminary Injunction issued by it in the said case
on August 24, 1995 are NULLIFIED. No costs.
SO ORDERED.

EN BANC

[G.R. No. 32652. March 15, 1930.]

THE PEOPLE OF THE PHILIPPINE ISLANDS, Plaintiff-Appellant, v. TAN BOON KONG, Defendant-

Appellee. 
 Attorney-General Jaranilla, for Appellant. 

Alejandro de Aboitiz Pinaga, for Appellee. 

SYLLABUS

1. CORPORATIONS; LIABILITY OF OFFICERS AND AGENTS. — A corporation can act only through its officers
and agents, and where the business itself involves a violation of the law, the correct rule is that all who
participate in it are liable. 

2. ID.; ID.; CRIMINAL LIABILITY. — The manager of a corporation who fails to make true return of the
corporation’s receipts and sales in violation of sections 1458 and 2723 of the Administrative Code, may be
held criminally liable.

DECISION

OSTRAND, J.:

This is an appeal from an order of the Judge of the Twenty-third Judicial District sustaining a demurrer to an
information charging the defendant Tan Boon Kong with the violation of section 1458 of Act No. 2711 as
amended. The information reads as follows: jgc:chanrobles.com.ph

"That on and during the four quarters of the year 1924, in the municipality of Iloilo, Province of Iloilo,
Philippine Islands, the said accused, as manager of the Visayan General Supply Co., Inc., a corporation
organized under the laws of the Philippine Islands and engaged in the purchase and sale of sugar, ’bayon,’
coprax, and other native products and as such subject to the payment of internal-revenue taxes upon its
sales, did then and there voluntarily, illegally, and criminally declare in 1924 for the purpose of taxation only
the sum of P2,352,761.94, when in truth and in fact, and the accused well knew that the total gross sales of
said corporation during that year amounted to P2,543,303.44, thereby failing to declare for the purpose of
taxation the amount of P190,541.50, and voluntarily and illegally not paying the Government as internal-
revenue percentage taxes the sum of P2,960.12, corresponding to 1½ per cent of said undeclared sales." cralaw virtua1aw library

The question to be decided is whether the information sets forth facts rendering the defendant, as manager
of the corporation liable criminally under section 2723 of the Act No. 2711 for violation of section 1458 of
the same Act for the benefit of said corporation. Sections 1458 and 2723 read as follows: jgc:chanrobles.com.ph

"SEC. 1458. Payment of percentage taxes — Quarterly report of earnings. — The percentage taxes on
business shall be payable at the end of each calendar quarter in the amount lawfully due on the business
transacted during each quarter; and it shall be the duty of every person conducting a business subject to
such tax, within the same period as is allowed for the payment of the quarterly installments of the fixed
taxes without penalty, to make a true and complete return of the amount of the receipts or earnings of his
business during the preceding quarter and pay the tax due thereon. . . ." (Act No. 2711.) 

"SEC. 2723. Failure to make true return of receipts and sales. — Any person who, being required by law to
make a return of the amount of his receipts, sales, or business, shall fail or neglect to make such return
within the time required, shall be punished by a fine not exceeding two thousand pesos or by imprisonment
for a term not exceeding one year, or both. 

"And any such person who shall make a false or fraudulent return shall be punished by a fine not exceeding
ten thousand pesos or by imprisonment for a term not exceeding two years, or both." (Act No. 2711.) 

Apparently, the court below based the appealed ruling on the ground that the offense charged must be
regarded as committed by the corporation and not by its officials or agents. This view is in direct conflict
with the great weight of authority. A corporation can act only through its officers and agents, and where the
business itself involves a violation of the law, the correct rule is that all who participate in it are liable (Grall
and Ostrander’s Case, 103 Va., 855, and authorities there cited). 

In case of State v. Burnam (71 Wash., 199), the court went so far as to hold that the manager of a dairy
corporation was criminally liable for the violation of a statute by the corporation though he was not present
when the offense was committed. 

In the present case the information or complaint alleges that the defendant was the manager of a
corporation which was engaged in business as a merchant, and as such manager, he made a false return,
for purposes of taxation, of the total amount of sales made by said corporation during the year 1924. As the
filing of such false return constitutes a violation of law, the defendant, as the author of the illegal act, must
necessarily answer for its consequences, provided that the allegations are proven. 

The ruling of the court below sustaining the demurrer to the complaint is therefore reversed, and the case
will be returned to said court for further proceedings not inconsistent with our view as hereinbefore stated.
Without costs. So ordered. 

Johnson, Malcolm, Villamor, Johns, Romualdez and Villa-Real, JJ., concur.

G. R. No. 164317             February 6, 2006

ALFREDO CHING, Petitioner, 
vs.
THE SECRETARY OF JUSTICE, ASST. CITY PROSECUTOR ECILYN BURGOS-VILLAVERT,
JUDGE EDGARDO SUDIAM of the Regional Trial Court, Manila, Branch 52; RIZAL
COMMERCIAL BANKING CORP. and THE PEOPLE OF THE PHILIPPINES, Respondents.
DECISION
CALLEJO, SR., J.:
Before the Court is a petition for review on certiorari of the Decision 1 of the Court of Appeals (CA) in
CA-G.R. SP No. 57169 dismissing the petition for certiorari, prohibition and mandamus filed by
petitioner Alfredo Ching, and its Resolution2 dated June 28, 2004 denying the motion for
reconsideration thereof.
Petitioner was the Senior Vice-President of Philippine Blooming Mills, Inc. (PBMI). Sometime in
September to October 1980, PBMI, through petitioner, applied with the Rizal Commercial Banking
Corporation (respondent bank) for the issuance of commercial letters of credit to finance its
importation of assorted goods.3
Respondent bank approved the application, and irrevocable letters of credit were issued in favor of
petitioner. The goods were purchased and delivered in trust to PBMI. Petitioner signed 13 trust
receipts4 as surety, acknowledging delivery of the following goods:
T/R Date Granted Maturity Date Principal Description of Goods
Nos.

1845 12-05-80 03-05-81 P1,596,470.05 79.9425 M/T "SDK" Brand

Synthetic Graphite
Electrode

1853 12-08-80 03-06-81 P198,150.67 3,000 pcs. (15 bundles)

Calorized Lance Pipes

1824 11-28-80 02-26-81 P707,879.71 One Lot High Fired

Refractory Tundish Bricks

1798 11-21-80 02-19-81 P835,526.25 5 cases spare parts for

CCM
 1808 11-21-80 02-19-81 P370,332.52 200 pcs. ingot moulds

2042 01-30-81 04-30-81 P469,669.29 High Fired Refractory

Nozzle Bricks

1801 11-21-80 02-19-81 P2,001,715.17 Synthetic Graphite

Electrode [with] tapered
pitch filed nipples

1857 12-09-80 03-09-81 P197,843.61 3,000 pcs. (15 bundles

calorized lance pipes [)]

1895 12-17-80 03-17-81 P67,652.04 Spare parts for

Spectrophotometer

1911 12-22-80 03-20-81 P91,497.85 50 pcs. Ingot moulds

2041 01-30-81 04-30-81 P91,456.97 50 pcs. Ingot moulds

2099 02-10-81 05-11-81 P66,162.26 8 pcs. Kubota Rolls for

rolling mills

2100 02-10-81 05-12-81 P210,748.00 Spare parts for

Lacolaboratory
Equipment5
Under the receipts, petitioner agreed to hold the goods in trust for the said bank, with authority to sell
but not by way of conditional sale, pledge or otherwise; and in case such goods were sold, to turn
over the proceeds thereof as soon as received, to apply against the relative acceptances and
payment of other indebtedness to respondent bank. In case the goods remained unsold within the
specified period, the goods were to be returned to respondent bank without any need of demand.
Thus, said "goods, manufactured products or proceeds thereof, whether in the form of money or
bills, receivables, or accounts separate and capable of identification" were respondent bank’s
property.
When the trust receipts matured, petitioner failed to return the goods to respondent bank, or to return
their value amounting to ₱6,940,280.66 despite demands. Thus, the bank filed a criminal complaint
for estafa6 against petitioner in the Office of the City Prosecutor of Manila.
After the requisite preliminary investigation, the City Prosecutor found probable cause estafa under
Article 315, paragraph 1(b) of the Revised Penal Code, in relation to Presidential Decree (P.D.) No.
115, otherwise known as the Trust Receipts Law. Thirteen (13) Informations were filed against the
petitioner before the Regional Trial Court (RTC) of Manila. The cases were docketed as Criminal
Cases No. 86-42169 to 86-42181, raffled to Branch 31 of said court.
Petitioner appealed the resolution of the City Prosecutor to the then Minister of Justice. The appeal
was dismissed in a Resolution7 dated March 17, 1987, and petitioner moved for its reconsideration.
On December 23, 1987, the Minister of Justice granted the motion, thus reversing the previous
resolution finding probable cause against petitioner. 8 The City Prosecutor was ordered to move for
the withdrawal of the Informations.
This time, respondent bank filed a motion for reconsideration, which, however, was denied on
February 24, 1988.9The RTC, for its part, granted the Motion to Quash the Informations filed by
petitioner on the ground that the material allegations therein did not amount to estafa. 10
In the meantime, the Court rendered judgment in Allied Banking Corporation v. Ordoñez, 11 holding
that the penal provision of P.D. No. 115 encompasses any act violative of an obligation covered by
the trust receipt; it is not limited to transactions involving goods which are to be sold (retailed),
reshipped, stored or processed as a component of a product ultimately sold. The Court also ruled
that "the non-payment of the amount covered by a trust receipt is an act violative of the obligation of
the entrustee to pay."12
On February 27, 1995, respondent bank re-filed the criminal complaint for estafa against petitioner
before the Office of the City Prosecutor of Manila. The case was docketed as I.S. No. 95B-07614.
Preliminary investigation ensued. On December 8, 1995, the City Prosecutor ruled that there was no
probable cause to charge petitioner with violating P.D. No. 115, as petitioner’s liability was only civil,
not criminal, having signed the trust receipts as surety. 13 Respondent bank appealed the resolution
to the Department of Justice (DOJ) via petition for review, alleging that the City Prosecutor erred in
ruling:
1. That there is no evidence to show that respondent participated in the misappropriation of
the goods subject of the trust receipts;
2. That the respondent is a mere surety of the trust receipts; and
3. That the liability of the respondent is only civil in nature. 14
On July 13, 1999, the Secretary of Justice issued Resolution No. 250 15 granting the petition and
reversing the assailed resolution of the City Prosecutor. According to the Justice Secretary, the
petitioner, as Senior Vice-President of PBMI, executed the 13 trust receipts and as such, was the
one responsible for the offense. Thus, the execution of said receipts is enough to indict the petitioner
as the official responsible for violation of P.D. No. 115. The Justice Secretary also declared that
petitioner could not contend that P.D. No. 115 covers only goods ultimately destined for sale, as this
issue had already been settled in Allied Banking Corporation v. Ordoñez, 16where the Court ruled that
P.D. No. 115 is "not limited to transactions in goods which are to be sold (retailed), reshipped, stored
or processed as a component of a product ultimately sold but covers failure to turn over the
proceeds of the sale of entrusted goods, or to return said goods if unsold or not otherwise disposed
of in accordance with the terms of the trust receipts."
The Justice Secretary further stated that the respondent bound himself under the terms of the trust
receipts not only as a corporate official of PBMI but also as its surety; hence, he could be proceeded
against in two (2) ways: first, as surety as determined by the Supreme Court in its decision in Rizal
Commercial Banking Corporation v. Court of Appeals; 17 and second, as the corporate official
responsible for the offense under P.D. No. 115, via criminal prosecution. Moreover, P.D. No. 115
explicitly allows the prosecution of corporate officers "without prejudice to the civil liabilities arising
from the criminal offense." Thus, according to the Justice Secretary, following Rizal Commercial
Banking Corporation, the civil liability imposed is clearly separate and distinct from the criminal
liability of the accused under P.D. No. 115.
Conformably with the Resolution of the Secretary of Justice, the City Prosecutor filed 13
Informations against petitioner for violation of P.D. No. 115 before the RTC of Manila. The cases
were docketed as Criminal Cases No. 99-178596 to 99-178608 and consolidated for trial before
Branch 52 of said court. Petitioner filed a motion for reconsideration, which the Secretary of Justice
denied in a Resolution18 dated January 17, 2000.
Petitioner then filed a petition for certiorari, prohibition and mandamus with the CA, assailing the
resolutions of the Secretary of Justice on the following grounds:
1. THE RESPONDENTS ARE ACTING WITH AN UNEVEN HAND AND IN FACT, ARE
ACTING OPPRESSIVELY AGAINST ALFREDO CHING WHEN THEY ALLOWED HIS
PROSECUTION DESPITE THE FACT THAT NO EVIDENCE HAD BEEN PRESENTED TO
PROVE HIS PARTICIPATION IN THE ALLEGED TRANSACTIONS.
2. THE RESPONDENT SECRETARY OF JUSTICE COMMITTED AN ACT IN GRAVE
ABUSE OF DISCRETION AND IN EXCESS OF HIS JURISDICTION WHEN THEY
CONTINUED PROSECUTION OF THE PETITIONER DESPITE THE LENGTH OF TIME
INCURRED IN THE TERMINATION OF THE PRELIMINARY INVESTIGATION THAT
SHOULD JUSTIFY THE DISMISSAL OF THE INSTANT CASE.
3. THE RESPONDENT SECRETARY OF JUSTICE AND ASSISTANT CITY PROSECUTOR
ACTED IN GRAVE ABUSE OF DISCRETION AMOUNTING TO AN EXCESS OF
 JURISDICTION WHEN THEY CONTINUED THE PROSECUTION OF THE PETITIONER
DESPITE LACK OF SUFFICIENT BASIS.19
In his petition, petitioner incorporated a certification stating that "as far as this Petition is concerned,
no action or proceeding in the Supreme Court, the Court of Appeals or different divisions thereof, or
any tribunal or agency. It is finally certified that if the affiant should learn that a similar action or
proceeding has been filed or is pending before the Supreme Court, the Court of Appeals, or different
divisions thereof, of any other tribunal or agency, it hereby undertakes to notify this Honorable Court
within five (5) days from such notice."20
In its Comment on the petition, the Office of the Solicitor General alleged that -
A.
THE HONORABLE SECRETARY OF JUSTICE CORRECTLY RULED THAT PETITIONER
ALFREDO CHING IS THE OFFICER RESPONSIBLE FOR THE OFFENSE CHARGED AND
THAT THE ACTS OF PETITIONER FALL WITHIN THE AMBIT OF VIOLATION OF P.D.
[No.] 115 IN RELATION TO ARTICLE 315, PAR. 1(B) OF THE REVISED PENAL CODE.
B.
THERE IS NO MERIT IN PETITIONER’S CONTENTION THAT EXCESSIVE DELAY HAS
MARRED THE CONDUCT OF THE PRELIMINARY INVESTIGATION OF THE CASE,
JUSTIFYING ITS DISMISSAL.
C.
THE PRESENT SPECIAL CIVIL ACTION FOR CERTIORARI, PROHIBITION AND
MANDAMUS IS NOT THE PROPER MODE OF REVIEW FROM THE RESOLUTION OF
THE DEPARTMENT OF JUSTICE. THE PRESENT PETITION MUST THEREFORE BE
DISMISSED.21
On April 22, 2004, the CA rendered judgment dismissing the petition for lack of merit, and on
procedural grounds. On the procedural issue, it ruled that (a) the certification of non-forum shopping
executed by petitioner and incorporated in the petition was defective for failure to comply with the
first two of the three-fold undertakings prescribed in Rule 7, Section 5 of the Revised Rules of Civil
Procedure; and (b) the petition for certiorari, prohibition and mandamus was not the proper remedy
of the petitioner.
On the merits of the petition, the CA ruled that the assailed resolutions of the Secretary of Justice
were correctly issued for the following reasons: (a) petitioner, being the Senior Vice-President of
PBMI and the signatory to the trust receipts, is criminally liable for violation of P.D. No. 115; (b) the
issue raised by the petitioner, on whether he violated P.D. No. 115 by his actuations, had already
been resolved and laid to rest in Allied Bank Corporation v. Ordoñez; 22 and (c) petitioner was
estopped from raising the
City Prosecutor’s delay in the final disposition of the preliminary investigation because he failed to do
so in the DOJ.
Thus, petitioner filed the instant petition, alleging that:
I
THE COURT OF APPEALS ERRED WHEN IT DISMISSED THE PETITION ON THE
GROUND THAT THE CERTIFICATION OF NON-FORUM SHOPPING INCORPORATED
THEREIN WAS DEFECTIVE.
II
THE COURT OF APPEALS ERRED WHEN IT RULED THAT NO GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WAS COMMITTED
BY THE SECRETARY OF JUSTICE IN COMING OUT WITH THE ASSAILED
RESOLUTIONS.23
The Court will delve into and resolve the issues seriatim.
The petitioner avers that the CA erred in dismissing his petition on a mere technicality. He claims
that the rules of procedure should be used to promote, not frustrate, substantial justice. He insists
that the Rules of Court should be construed liberally especially when, as in this case, his substantial
rights are adversely affected; hence, the deficiency in his certification of non-forum shopping should
not result in the dismissal of his petition.
The Office of the Solicitor General (OSG) takes the opposite view, and asserts that indubitably, the
certificate of non-forum shopping incorporated in the petition before the CA is defective because it
failed to disclose essential facts about pending actions concerning similar issues and parties. It
asserts that petitioner’s failure to comply with the Rules of Court is fatal to his petition. The OSG
cited Section 2, Rule 42, as well as the ruling of this Court in Melo v. Court of Appeals. 24
We agree with the ruling of the CA that the certification of non-forum shopping petitioner
incorporated in his petition before the appellate court is defective. The certification reads:
It is further certified that as far as this Petition is concerned, no action or proceeding in the Supreme
Court, the Court of Appeals or different divisions thereof, or any tribunal or agency.
It is finally certified that if the affiant should learn that a similar action or proceeding has been filed or
is pending before the Supreme Court, the Court of Appeals, or different divisions thereof, of any
other tribunal or agency, it hereby undertakes to notify this Honorable Court within five (5) days from
such notice.25
Under Section 1, second paragraph of Rule 65 of the Revised Rules of Court, the petition should be
accompanied by a sworn certification of non-forum shopping, as provided in the third paragraph of
Section 3, Rule 46 of said Rules. The latter provision reads in part:
SEC. 3. Contents and filing of petition; effect of non-compliance with requirements. — The petition
shall contain the full names and actual addresses of all the petitioners and respondents, a concise
statement of the matters involved, the factual background of the case and the grounds relied upon
for the relief prayed for.
xxx
The petitioner shall also submit together with the petition a sworn certification that he has not
theretofore commenced any other action involving the same issues in the Supreme Court, the Court
of Appeals or different divisions thereof, or any other tribunal or agency; if there is such other action
or proceeding, he must state the status of the same; and if he should thereafter learn that a similar
action or proceeding has been filed or is pending before the Supreme Court, the Court of Appeals, or
different divisions thereof, or any other tribunal or agency, he undertakes to promptly inform the
aforesaid courts and other tribunal or agency thereof within five (5) days therefrom. xxx
Compliance with the certification against forum shopping is separate from and independent of the
avoidance of forum shopping itself. The requirement is mandatory. The failure of the petitioner to
comply with the foregoing requirement shall be sufficient ground for the dismissal of the petition
without prejudice, unless otherwise provided.26
Indubitably, the first paragraph of petitioner’s certification is incomplete and unintelligible. Petitioner
failed to certify that he "had not heretofore commenced any other action involving the same issues in
the Supreme Court, the Court of Appeals or the different divisions thereof or any other tribunal or
agency" as required by paragraph 4, Section 3, Rule 46 of the Revised Rules of Court.
We agree with petitioner’s contention that the certification is designed to promote and facilitate the
orderly administration of justice, and therefore, should not be interpreted with absolute literalness. In
his works on the Revised Rules of Civil Procedure, former Supreme Court Justice Florenz Regalado
states that, with respect to the contents of the certification which the pleader may prepare, the rule of
substantial compliance may be availed of.27 However, there must be a special circumstance or
compelling reason which makes the strict application of the requirement clearly unjustified. The
instant petition has not alleged any such extraneous circumstance. Moreover, as worded, the
certification cannot even be regarded as substantial compliance with the procedural requirement.
Thus, the CA was not informed whether, aside from the petition before it, petitioner had commenced
any other action involving the same issues in other tribunals.
On the merits of the petition, the CA ruled that the petitioner failed to establish that the Secretary of
Justice committed grave abuse of discretion in finding probable cause against the petitioner for
violation of estafa under Article 315, paragraph 1(b) of the Revised Penal Code, in relation to P.D.
No. 115. Thus, the appellate court ratiocinated:
Be that as it may, even on the merits, the arguments advanced in support of the petition are not
persuasive enough to justify the desired conclusion that respondent Secretary of Justice gravely
abused its discretion in coming out with his assailed Resolutions. Petitioner posits that, except for his
being the Senior Vice-President of the PBMI, there is no iota of evidence that he was a participes
crimines in violating the trust receipts sued upon; and that his liability, if at all, is purely civil because
he signed the said trust receipts merely as a xxx surety and not as the entrustee. These assertions
are, however, too dull that they cannot even just dent the findings of the respondent Secretary, viz:
"x x x it is apropos to quote section 13 of PD 115 which states in part, viz:
‘xxx If the violation or offense is committed by a corporation, partnership, association or other judicial
entities, the penalty provided for in this Decree shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for the offense, without prejudice to the
civil liabilities arising from the criminal offense.’
"There is no dispute that it was the respondent, who as senior vice-president of PBM, executed the
thirteen (13) trust receipts. As such, the law points to him as the official responsible for the offense.
Since a corporation cannot be proceeded against criminally because it cannot commit crime in which
personal violence or malicious intent is required, criminal action is limited to the corporate agents
guilty of an act amounting to a crime and never against the corporation itself (West Coast Life Ins.
Co. vs. Hurd, 27 Phil. 401; Times, [I]nc. v. Reyes, 39 SCRA 303). Thus, the execution by respondent
of said receipts is enough to indict him as the official responsible for violation of PD 115.
"Parenthetically, respondent is estopped to still contend that PD 115 covers only goods which are
ultimately destined for sale and not goods, like those imported by PBM, for use in manufacture. This
issue has already been settled in the Allied Banking Corporation case, supra, where he was also a
party, when the Supreme Court ruled that PD 115 is ‘not limited to transactions in goods which are to
be sold (retailed), reshipped, stored or processed as a component or a product ultimately sold’ but
‘covers failure to turn over the proceeds of the sale of entrusted goods, or to return said goods if
unsold or disposed of in accordance with the terms of the trust receipts.’
"In regard to the other assigned errors, we note that the respondent bound himself under the terms
of the trust receipts not only as a corporate official of PBM but also as its surety. It is evident that
these are two (2) capacities which do not exclude the other. Logically, he can be proceeded against
in two (2) ways: first, as surety as determined by the Supreme Court in its decision in RCBC vs.
Court of Appeals, 178 SCRA 739; and, secondly, as the corporate official responsible for the offense
under PD 115, the present case is an appropriate remedy under our penal law.
"Moreover, PD 115 explicitly allows the prosecution of corporate officers ‘without prejudice to the civil
liabilities arising from the criminal offense’ thus, the civil liability imposed on respondent in RCBC vs.
Court of Appeals case is clearly separate and distinct from his criminal liability under PD 115.’" 28
Petitioner asserts that the appellate court’s ruling is erroneous because (a) the transaction between
PBMI and respondent bank is not a trust receipt transaction; (b) he entered into the transaction and
was sued in his capacity as PBMI Senior Vice-President; (c) he never received the goods as an
entrustee for PBMI, hence, could not have committed any dishonesty or abused the confidence of
respondent bank; and (d) PBMI acquired the goods and used the same in operating its machineries
and equipment and not for resale.
The OSG, for its part, submits a contrary view, to wit:
34. Petitioner further claims that he is not a person responsible for the offense allegedly because
"[b]eing charged as the Senior Vice-President of Philippine Blooming Mills (PBM), petitioner cannot
be held criminally liable as the transactions sued upon were clearly entered into in his capacity as an
officer of the corporation" and that [h]e never received the goods as an entrustee for PBM as he
never had or took possession of the goods nor did he commit dishonesty nor "abuse of confidence in
transacting with RCBC." Such argument is bereft of merit.
35. Petitioner’s being a Senior Vice-President of the Philippine Blooming Mills does not exculpate
him from any liability. Petitioner’s responsibility as the corporate official of PBM who received the
goods in trust is premised on Section 13 of P.D. No. 115, which provides:
Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of the
goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt or to return said goods, documents or instruments if they
were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the
crime of estafa, punishable under the provisions of Article Three hundred and fifteen, paragraph one
(b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as
the Revised Penal Code. If the violation or offense is committed by a corporation, partnership,
association or other juridical entities, the penalty provided for in this Decree shall be imposed upon
the directors, officers, employees or other officials or persons therein responsible for the offense,
without prejudice to the civil liabilities arising from the criminal offense. (Emphasis supplied)
36. Petitioner having participated in the negotiations for the trust receipts and having received the
goods for PBM, it was inevitable that the petitioner is the proper corporate officer to be proceeded
against by virtue of the PBM’s violation of P.D. No. 115. 29
The ruling of the CA is correct.
In Mendoza-Arce v. Office of the Ombudsman (Visayas), 30 this Court held that the acts of a quasi-
judicial officer may be assailed by the aggrieved party via a petition for certiorari and enjoined (a)
when necessary to afford adequate protection to the constitutional rights of the accused; (b) when
necessary for the orderly administration of justice; (c) when the acts of the officer are without or in
excess of authority; (d) where the charges are manifestly false and motivated by the lust for
vengeance; and (e) when there is clearly no prima facie case against the accused. 31 The Court also
declared that, if the officer conducting a preliminary investigation (in that case, the Office of the
Ombudsman) acts without or in excess of his authority and resolves to file an Information despite the
absence of probable cause, such act may be nullified by a writ of certiorari. 32
Indeed, under Section 4, Rule 112 of the 2000 Rules of Criminal Procedure, 33 the Information shall
be prepared by the Investigating Prosecutor against the respondent only if he or she finds probable
cause to hold such respondent for trial. The Investigating Prosecutor acts without or in excess of his
authority under the Rule if the Information is filed against the respondent despite absence of
evidence showing probable cause therefor. 34 If the Secretary of Justice reverses the Resolution of
the Investigating Prosecutor who found no probable cause to hold the respondent for trial, and
orders such prosecutor to file the Information despite the absence of probable cause, the Secretary
of Justice acts contrary to law, without authority and/or in excess of authority. Such resolution may
likewise be nullified in a petition for certiorari under Rule 65 of the Revised Rules of Civil
Procedure.35
A preliminary investigation, designed to secure the respondent against hasty, malicious and
oppressive prosecution, is an inquiry to determine whether (a) a crime has been committed; and (b)
whether there is probable cause to believe that the accused is guilty thereof. It is a means of
discovering the person or persons who may be reasonably charged with a crime. Probable cause
need not be based on clear and convincing evidence of guilt, as the investigating officer acts upon
probable cause of reasonable belief. Probable cause implies probability of guilt and requires more
than bare suspicion but less than evidence which would justify a conviction. A finding of probable
cause needs only to rest on evidence showing that more likely than not, a crime has been committed
by the suspect.36
However, while probable cause should be determined in a summary manner, there is a need to
examine the evidence with care to prevent material damage to a potential accused’s constitutional
right to liberty and the guarantees of freedom and fair play 37 and to protect the State from the burden
of unnecessary expenses in prosecuting alleged offenses and holding trials arising from false,
fraudulent or groundless charges.38
In this case, petitioner failed to establish that the Secretary of Justice committed grave abuse of
discretion in issuing the assailed resolutions. Indeed, he acted in accord with law and the evidence.
Section 4 of P.D. No. 115 defines a trust receipt transaction, thus:
Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the meaning
of this Decree, is any transaction by and between a person referred to in this Decree as the
entruster, and another person referred to in this Decree as entrustee, whereby the entruster, who
owns or holds absolute title or security interests over certain specified goods, documents or
instruments, releases the same to the possession of the entrustee upon the latter’s execution and
delivery to the entruster of a signed document called a "trust receipt" wherein the entrustee binds
himself to hold the designated goods, documents or instruments in trust for the entruster and to sell
or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the
entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in
the trust receipt or the goods, documents or instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt, or
for other purposes substantially equivalent to any of the following:
1. In case of goods or documents, (a) to sell the goods or procure their sale; or (b) to
manufacture or process the goods with the purpose of ultimate sale; Provided, That, in the
case of goods delivered under trust receipt for the purpose of manufacturing or processing
before its ultimate sale, the entruster shall retain its title over the goods whether in its original
or processed form until the entrustee has complied fully with his obligation under the trust
receipt; or (c) to load, unload, ship or otherwise deal with them in a manner preliminary or
necessary to their sale; or
2. In the case of instruments a) to sell or procure their sale or exchange; or b) to deliver them
to a principal; or c) to effect the consummation of some transactions involving delivery to a
depository or register; or d) to effect their presentation, collection or renewal.
The sale of goods, documents or instruments by a person in the business of selling goods,
documents or instruments for profit who, at the outset of the transaction, has, as against the buyer,
general property rights in such goods, documents or instruments, or who sells the same to the buyer
on credit, retaining title or other interest as security for the payment of the purchase price, does not
constitute a trust receipt transaction and is outside the purview and coverage of this Decree.
An entrustee is one having or taking possession of goods, documents or instruments under a trust
receipt transaction, and any successor in interest of such person for the purpose of payment
specified in the trust receipt agreement.39 The entrustee is obliged to: (1) hold the goods, documents
or instruments in trust for the entruster and shall dispose of them strictly in accordance with the
terms and conditions of the trust receipt; (2) receive the proceeds in trust for the entruster and turn
over the same to the entruster to the extent of the amount owing to the entruster or as appears on
the trust receipt; (3) insure the goods for their total value against loss from fire, theft, pilferage or
other casualties; (4) keep said goods or proceeds thereof whether in money or whatever form,
separate and capable of identification as property of the entruster; (5) return the goods, documents
or instruments in the event of non-sale or upon demand of the entruster; and (6) observe all other
terms and conditions of the trust receipt not contrary to the provisions of the decree. 40
The entruster shall be entitled to the proceeds from the sale of the goods, documents or instruments
released under a trust receipt to the entrustee to the extent of the amount owing to the entruster or
as appears in the trust receipt, or to the return of the goods, documents or instruments in case of
non-sale, and to the enforcement of all other rights conferred on him in the trust receipt; provided,
such are not contrary to the provisions of the document. 41
In the case at bar, the transaction between petitioner and respondent bank falls under the trust
receipt transactions envisaged in P.D. No. 115. Respondent bank imported the goods and entrusted
the same to PBMI under the trust receipts signed by petitioner, as entrustee, with the bank as
entruster. The agreement was as follows:
And in consideration thereof, I/we hereby agree to hold said goods in trust for the said BANK as its
property with liberty to sell the same within ____days from the date of the execution of this Trust
Receipt and for the Bank’s account, but without authority to make any other disposition whatsoever
of the said goods or any part thereof (or the proceeds) either by way of conditional sale, pledge or
otherwise.
I/we agree to keep the said goods insured to their full value against loss from fire, theft, pilferage or
other casualties as directed by the BANK, the sum insured to be payable in case of loss to the
BANK, with the understanding that the BANK is, not to be chargeable with the storage premium or
insurance or any other expenses incurred on said goods.
In case of sale, I/we further agree to turn over the proceeds thereof as soon as received to the
BANK, to apply against the relative acceptances (as described above) and for the payment of any
other indebtedness of mine/ours to the BANK. In case of non-sale within the period specified herein,
I/we agree to return the goods under this Trust Receipt to the BANK without any need of demand.
I/we agree to keep the said goods, manufactured products or proceeds thereof, whether in the form
of money or bills, receivables, or accounts separate and capable of identification as property of the
BANK.42
It must be stressed that P.D. No. 115 is a declaration by legislative authority that, as a matter of
public policy, the failure of person to turn over the proceeds of the sale of the goods covered by a
trust receipt or to return said goods, if not sold, is a public nuisance to be abated by the imposition of
penal sanctions.43
The Court likewise rules that the issue of whether P.D. No. 115 encompasses transactions involving
goods procured as a component of a product ultimately sold has been resolved in the affirmative in
Allied Banking Corporation v. Ordoñez.44 The law applies to goods used by the entrustee in the
operation of its machineries and equipment. The non-payment of the amount covered by the trust
receipts or the non-return of the goods covered by the receipts, if not sold or otherwise not disposed
of, violate the entrustee’s obligation to pay the amount or to return the goods to the entruster.
In Colinares v. Court of Appeals,45 the Court declared that there are two possible situations in a trust
receipt transaction. The first is covered by the provision which refers to money received under the
obligation involving the duty to deliver it (entregarla) to the owner of the merchandise sold. The
second is covered by the provision which refers to merchandise received under the obligation to
return it (devolvera) to the owner.46 Thus, failure of the entrustee to turn over the proceeds of the
sale of the goods covered by the trust receipts to the entruster or to return said goods if they were
not disposed of in accordance with the terms of the trust receipt is a crime under P.D. No. 115,
without need of proving intent to defraud. The law punishes dishonesty and abuse of confidence in
the handling of money or goods to the prejudice of the entruster, regardless of whether the latter is
the owner or not. A mere failure to deliver the proceeds of the sale of the goods, if not sold,
constitutes a criminal offense that causes prejudice, not only to another, but more to the public
interest.47
The Court rules that although petitioner signed the trust receipts merely as Senior Vice-President of
PBMI and had no physical possession of the goods, he cannot avoid prosecution for violation of P.D.
No. 115.
The penalty clause of the law, Section 13 of P.D. No. 115 reads:
Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of the
goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt or to return said goods, documents or instruments if they
were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the
crime of estafa, punishable under the provisions of Article Three hundred and fifteen, paragraph one
(b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as
the Revised Penal Code.  If the violation or offense is committed by a corporation, partnership,
1âwphi1
association or other juridical entities, the penalty provided for in this Decree shall be imposed upon
the directors, officers, employees or other officials or persons therein responsible for the offense,
without prejudice to the civil liabilities arising from the criminal offense.
The crime defined in P.D. No. 115 is malum prohibitum but is classified as estafa under paragraph
1(b), Article 315 of the Revised Penal Code, or estafa with abuse of confidence. It may be committed
by a corporation or other juridical entity or by natural persons. However, the penalty for the crime is
imprisonment for the periods provided in said Article 315, which reads:
ARTICLE 315. Swindling (estafa). – Any person who shall defraud another by any of the means
mentioned hereinbelow shall be punished by:
1st. The penalty of prision correccional in its maximum period to prision mayor in its
minimum period, if the amount of the fraud is over 12,000 pesos but does not exceed 22,000
pesos; and if such amount exceeds the latter sum, the penalty provided in this paragraph
shall be imposed in its maximum period, adding one year for each additional 10,000 pesos;
but the total penalty which may be imposed shall not exceed twenty years. In such cases,
and in connection with the accessory penalties which may be imposed and for the purpose
of the other provisions of this Code, the penalty shall be termed prision mayor or reclusion
temporal, as the case may be;
2nd. The penalty of prision correccional in its minimum and medium periods, if the amount of
the fraud is over 6,000 pesos but does not exceed 12,000 pesos;
3rd. The penalty of arresto mayor in its maximum period to prision correccional in its
minimum period, if such amount is over 200 pesos but does not exceed 6,000 pesos; and
4th. By arresto mayor in its medium and maximum periods, if such amount does not exceed 200
pesos, provided that in the four cases mentioned, the fraud be committed by any of the following
means; xxx
Though the entrustee is a corporation, nevertheless, the law specifically makes the officers,
employees or other officers or persons responsible for the offense, without prejudice to the civil
liabilities of such corporation and/or board of directors, officers, or other officials or employees
responsible for the offense. The rationale is that such officers or employees are vested with the
authority and responsibility to devise means necessary to ensure compliance with the law and, if
they fail to do so, are held criminally accountable; thus, they have a responsible share in the
violations of the law.48
If the crime is committed by a corporation or other juridical entity, the directors, officers, employees
or other officers thereof responsible for the offense shall be charged and penalized for the crime,
precisely because of the nature of the crime and the penalty therefor. A corporation cannot be
arrested and imprisoned; hence, cannot be penalized for a crime punishable by
imprisonment.49 However, a corporation may be charged and prosecuted for a crime if the imposable
penalty is fine. Even if the statute prescribes both fine and imprisonment as penalty, a corporation
may be prosecuted and, if found guilty, may be fined. 50
A crime is the doing of that which the penal code forbids to be done, or omitting to do what it
commands. A necessary part of the definition of every crime is the designation of the author of the
crime upon whom the penalty is to be inflicted. When a criminal statute designates an act of a
corporation or a crime and prescribes punishment therefor, it creates a criminal offense which,
otherwise, would not exist and such can be committed only by the corporation. But when a penal
statute does not expressly apply to corporations, it does not create an offense for which a
corporation may be punished. On the other hand, if the State, by statute, defines a crime that may
be committed by a corporation but prescribes the penalty therefor to be suffered by the officers,
directors, or employees of such corporation or other persons responsible for the offense, only such
individuals will suffer such penalty. 51 Corporate officers or employees, through whose act, default or
omission the corporation commits a crime, are themselves individually guilty of the crime. 52
The principle applies whether or not the crime requires the consciousness of wrongdoing. It applies
to those corporate agents who themselves commit the crime and to those, who, by virtue of their
managerial positions or other similar relation to the corporation, could be deemed responsible for its
commission, if by virtue of their relationship to the corporation, they had the power to prevent the
act.53 Moreover, all parties active in promoting a crime, whether agents or not, are
principals.54 Whether such officers or employees are benefited by their delictual acts is not a
touchstone of their criminal liability. Benefit is not an operative fact.
In this case, petitioner signed the trust receipts in question. He cannot, thus, hide behind the cloak of
the separate corporate personality of PBMI. In the words of Chief Justice Earl Warren, a corporate
officer cannot protect himself behind a corporation where he is the actual, present and efficient
actor.55
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. Costs against the
petitioner.
SO ORDERED.

[G.R. No. 138569. September 11, 2003]

THE CONSOLIDATED BANK and TRUST CORPORATION, petitioner,

vs. COURT OF APPEALS and L.C. DIAZ and COMPANY,
CPAs, respondents.

DECISION
CARPIO, J.:

The Case

Before us is a petition for review of the Decision  of the Court of Appeals
[1]

dated 27 October 1998 and its Resolution dated 11 May 1999. The assailed
decision reversed the Decision  of the Regional Trial Court of Manila, Branch
[2]

8, absolving petitioner Consolidated Bank and Trust Corporation, now known

as Solidbank Corporation (Solidbank), of any liability. The questioned
resolution of the appellate court denied the motion for reconsideration of
Solidbank but modified the decision by deleting the award of exemplary
damages, attorneys fees, expenses of litigation and cost of suit.

The Facts

Solidbank is a domestic banking corporation organized and existing under

Philippine laws. Private respondent L.C. Diaz and Company, CPAs (L.C.
Diaz), is a professional partnership engaged in the practice of accounting.
 Sometime in March 1976, L.C. Diaz opened a savings account with
Solidbank, designated as Savings Account No. S/A 200-16872-6.
On 14 August 1991, L.C. Diaz through its cashier, Mercedes Macaraya
(Macaraya), filled up a savings (cash) deposit slip for P990 and a savings
(checks) deposit slip for P50. Macaraya instructed the messenger of L.C.
Diaz, Ismael Calapre (Calapre), to deposit the money with Solidbank.
Macaraya also gave Calapre the Solidbank passbook.
Calapre went to Solidbank and presented to Teller No. 6 the two deposit
slips and the passbook. The teller acknowledged receipt of the deposit by
returning to Calapre the duplicate copies of the two deposit slips. Teller No. 6
stamped the deposit slips with the words DUPLICATE and SAVING TELLER
6 SOLIDBANK HEAD OFFICE. Since the transaction took time and Calapre
had to make another deposit for L.C. Diaz with Allied Bank, he left the
passbook with Solidbank. Calapre then went to Allied Bank. When Calapre
returned to Solidbank to retrieve the passbook, Teller No. 6 informed him that
somebody got the passbook.  Calapre went back to L.C. Diaz and reported
[3]

the incident to Macaraya.

Macaraya immediately prepared a deposit slip in duplicate copies with a
check of P200,000. Macaraya, together with Calapre, went to Solidbank and
presented to Teller No. 6 the deposit slip and check. The teller stamped the
words DUPLICATE and SAVING TELLER 6 SOLIDBANK HEAD OFFICE on
the duplicate copy of the deposit slip. When Macaraya asked for the
passbook, Teller No. 6 told Macaraya that someone got the passbook but she
could not remember to whom she gave the passbook. When Macaraya asked
Teller No. 6 if Calapre got the passbook, Teller No. 6 answered that someone
shorter than Calapre got the passbook. Calapre was then standing beside
Macaraya.
Teller No. 6 handed to Macaraya a deposit slip dated 14 August 1991 for
the deposit of a check for P90,000 drawn on Philippine Banking Corporation
(PBC). This PBC check of L.C. Diaz was a check that it had long closed.
 PBC subsequently dishonored the check because of insufficient funds and
[4]

because the signature in the check differed from PBCs specimen

signature.Failing to get back the passbook, Macaraya went back to her office
and reported the matter to the Personnel Manager of L.C. Diaz, Emmanuel
Alvarez.
The following day, 15 August 1991, L.C. Diaz through its Chief Executive
Officer, Luis C. Diaz (Diaz), called up Solidbank to stop any transaction using
the same passbook until L.C. Diaz could open a new account.  On the same
[5]

day, Diaz formally wrote Solidbank to make the same request. It was also on
the same day that L.C. Diaz learned of the unauthorized withdrawal the day
before, 14 August 1991, of P300,000 from its savings account. The withdrawal
slip for the P300,000 bore the signatures of the authorized signatories of L.C.
Diaz, namely Diaz and Rustico L. Murillo. The signatories, however, denied
signing the withdrawal slip. A certain Noel Tamayo received the P300,000.
In an Information  dated 5 September 1991, L.C. Diaz charged its
[6]

messenger, Emerano Ilagan (Ilagan) and one Roscon Verdazola with Estafa
through Falsification of Commercial Document. The Regional Trial Court of
Manila dismissed the criminal case after the City Prosecutor filed a Motion to
Dismiss on 4 August 1992.
On 24 August 1992, L.C. Diaz through its counsel demanded from
Solidbank the return of its money. Solidbank refused.
On 25 August 1992, L.C. Diaz filed a Complaint  for Recovery of a Sum of
[7]

Money against Solidbank with the Regional Trial Court of Manila, Branch
8. After trial, the trial court rendered on 28 December 1994 a decision
absolving Solidbank and dismissing the complaint.
L.C. Diaz then appealed  to the Court of Appeals. On 27 October 1998,
[8]

the Court of Appeals issued its Decision reversing the decision of the trial
court.
On 11 May 1999, the Court of Appeals issued its Resolution denying the
motion for reconsideration of Solidbank. The appellate court, however,
modified its decision by deleting the award of exemplary damages and
attorneys fees.

The Ruling of the Trial Court

In absolving Solidbank, the trial court applied the rules on savings account
written on the passbook. The rules state that possession of this book shall
raise the presumption of ownership and any payment or payments made by
the bank upon the production of the said book and entry therein of the
withdrawal shall have the same effect as if made to the depositor personally. [9]

At the time of the withdrawal, a certain Noel Tamayo was not only in
possession of the passbook, he also presented a withdrawal slip with the
signatures of the authorized signatories of L.C. Diaz. The specimen
signatures of these persons were in the signature cards. The teller stamped
the withdrawal slip with the words Saving Teller No. 5. The teller then passed
on the withdrawal slip to Genere Manuel (Manuel) for authentication. Manuel
verified the signatures on the withdrawal slip. The withdrawal slip was then
given to another officer who compared the signatures on the withdrawal slip
with the specimen on the signature cards. The trial court concluded that
Solidbank acted with care and observed the rules on savings account when it
allowed the withdrawal of P300,000 from the savings account of L.C. Diaz.
The trial court pointed out that the burden of proof now shifted to L.C. Diaz
to prove that the signatures on the withdrawal slip were forged. The trial court
admonished L.C. Diaz for not offering in evidence the National Bureau of
Investigation (NBI) report on the authenticity of the signatures on the
withdrawal slip for P300,000. The trial court believed that L.C. Diaz did not
offer this evidence because it is derogatory to its action.
Another provision of the rules on savings account states that the depositor
must keep the passbook under lock and key.  When another person presents
[10]

the passbook for withdrawal prior to Solidbanks receipt of the notice of loss of
the passbook, that person is considered as the owner of the passbook. The
trial court ruled that the passbook presented during the questioned transaction
was now out of the lock and key and presumptively ready for a business
transaction.[11]

Solidbank did not have any participation in the custody and care of the
passbook. The trial court believed that Solidbanks act of allowing the
withdrawal of P300,000 was not the direct and proximate cause of the loss.
The trial court held that L.C. Diazs negligence caused the unauthorized
withdrawal. Three facts establish L.C. Diazs negligence: (1) the possession of
the passbook by a person other than the depositor L.C. Diaz; (2) the
presentation of a signed withdrawal receipt by an unauthorized person; and
(3) the possession by an unauthorized person of a PBC check long closed by
L.C. Diaz, which check was deposited on the day of the fraudulent withdrawal.
The trial court debunked L.C. Diazs contention that Solidbank did not
follow the precautionary procedures observed by the two parties whenever
L.C. Diaz withdrew significant amounts from its account. L.C. Diaz claimed
that a letter must accompany withdrawals of more than P20,000. The letter
must request Solidbank to allow the withdrawal and convert the amount to a
managers check. The bearer must also have a letter authorizing him to
withdraw the same amount. Another person driving a car must accompany the
bearer so that he would not walk from Solidbank to the office in making the
withdrawal. The trial court pointed out that L.C. Diaz disregarded these
precautions in its past withdrawal. On 16 July 1991, L.C. Diaz
withdrew P82,554 without any separate letter of authorization or any
communication with Solidbank that the money be converted into a managers
check.
The trial court further justified the dismissal of the complaint by holding
that the case was a last ditch effort of L.C. Diaz to recover P300,000 after the
dismissal of the criminal case against Ilagan.
The dispositive portion of the decision of the trial court reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered DISMISSING the
complaint.
The Court further renders judgment in favor of defendant bank pursuant to its
counterclaim the amount of Thirty Thousand Pesos (P30,000.00) as attorneys fees.
With costs against plaintiff.
SO ORDERED. [12]

The Ruling of the Court of Appeals

The Court of Appeals ruled that Solidbanks negligence was the proximate
cause of the unauthorized withdrawal of P300,000 from the savings account
of L.C. Diaz. The appellate court reached this conclusion after applying the
provision of the Civil Code on quasi-delict, to wit:
Article 2176. Whoever by act or omission causes damage to another, there being fault
or negligence, is obliged to pay for the damage done. Such fault or negligence, if there
is no pre-existing contractual relation between the parties, is called a quasi-delict and
is governed by the provisions of this chapter.
The appellate court held that the three elements of a quasi-delict are present
in this case, namely: (a) damages suffered by the plaintiff; (b) fault or
negligence of the defendant, or some other person for whose acts he must
respond; and (c) the connection of cause and effect between the fault or
negligence of the defendant and the damage incurred by the plaintiff.
The Court of Appeals pointed out that the teller of Solidbank who received
the withdrawal slip for P300,000 allowed the withdrawal without making the
necessary inquiry. The appellate court stated that the teller, who was not
presented by Solidbank during trial, should have called up the depositor
because the money to be withdrawn was a significant amount. Had the teller
called up L.C. Diaz, Solidbank would have known that the withdrawal was
unauthorized. The teller did not even verify the identity of the impostor who
made the withdrawal. Thus, the appellate court found Solidbank liable for its
negligence in the selection and supervision of its employees.
 The appellate court ruled that while L.C. Diaz was also negligent in
entrusting its deposits to its messenger and its messenger in leaving the
passbook with the teller, Solidbank could not escape liability because of the
doctrine of last clear chance. Solidbank could have averted the injury suffered
by L.C. Diaz had it called up L.C. Diaz to verify the withdrawal.
The appellate court ruled that the degree of diligence required from
Solidbank is more than that of a good father of a family. The business and
functions of banks are affected with public interest. Banks are obligated to
treat the accounts of their depositors with meticulous care, always having in
mind the fiduciary nature of their relationship with their clients. The Court of
Appeals found Solidbank remiss in its duty, violating its fiduciary relationship
with L.C. Diaz.
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, premises considered, the decision appealed from is hereby
REVERSED and a new one entered.
1. Ordering defendant-appellee Consolidated Bank and Trust Corporation to
pay plaintiff-appellant the sum of Three Hundred Thousand Pesos
(P300,000.00), with interest thereon at the rate of 12% per annum from
the date of filing of the complaint until paid, the sum of P20,000.00 as
exemplary damages, and P20,000.00 as attorneys fees and expenses of
litigation as well as the cost of suit; and
2. Ordering the dismissal of defendant-appellees counterclaim in the amount
of P30,000.00 as attorneys fees.
SO ORDERED. [13]

Acting on the motion for reconsideration of Solidbank, the appellate court

affirmed its decision but modified the award of damages. The appellate court
deleted the award of exemplary damages and attorneys fees. Invoking Article
2231  of the Civil Code, the appellate court ruled that exemplary damages
[14]

could be granted if the defendant acted with gross negligence. Since

Solidbank was guilty of simple negligence only, the award of exemplary
damages was not justified. Consequently, the award of attorneys fees was
also disallowed pursuant to Article 2208 of the Civil Code.The expenses of
litigation and cost of suit were also not imposed on Solidbank.
The dispositive portion of the Resolution reads as follows:
WHEREFORE, foregoing considered, our decision dated October 27, 1998 is
affirmed with modification by deleting the award of exemplary damages and attorneys
fees, expenses of litigation and cost of suit.
SO ORDERED. [15]
 Hence, this petition.

The Issues

Solidbank seeks the review of the decision and resolution of the Court of
Appeals on these grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER
BANK SHOULD SUFFER THE LOSS BECAUSE ITS TELLER
SHOULD HAVE FIRST CALLED PRIVATE RESPONDENT BY
TELEPHONE BEFORE IT ALLOWED THE WITHDRAWAL
OF P300,000.00 TO RESPONDENTS MESSENGER EMERANO
ILAGAN, SINCE THERE IS NO AGREEMENT BETWEEN THE
PARTIES IN THE OPERATION OF THE SAVINGS ACCOUNT,
NOR IS THERE ANY BANKING LAW, WHICH MANDATES THAT
A BANK TELLER SHOULD FIRST CALL UP THE DEPOSITOR
BEFORE ALLOWING A WITHDRAWAL OF A BIG AMOUNT IN A
SAVINGS ACCOUNT.
II. THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE
OF LAST CLEAR CHANCE AND IN HOLDING THAT
PETITIONER BANKS TELLER HAD THE LAST OPPORTUNITY
TO WITHHOLD THE WITHDRAWAL WHEN IT IS UNDISPUTED
THAT THE TWO SIGNATURES OF RESPONDENT ON THE
WITHDRAWAL SLIP ARE GENUINE AND PRIVATE
RESPONDENTS PASSBOOK WAS DULY PRESENTED, AND
CONTRARIWISE RESPONDENT WAS NEGLIGENT IN THE
SELECTION AND SUPERVISION OF ITS MESSENGER EMERANO
ILAGAN, AND IN THE SAFEKEEPING OF ITS CHECKS AND
OTHER FINANCIAL DOCUMENTS.
III. THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE
INSTANT CASE IS A LAST DITCH EFFORT OF PRIVATE
RESPONDENT TO RECOVER ITS P300,000.00 AFTER FAILING IN
ITS EFFORTS TO RECOVER THE SAME FROM ITS EMPLOYEE
EMERANO ILAGAN.
IV. THE COURT OF APPEALS ERRED IN NOT MITIGATING THE
DAMAGES AWARDED AGAINST PETITIONER UNDER ARTICLE
2197 OF THE CIVIL CODE, NOTWITHSTANDING ITS FINDING
THAT PETITIONER BANKS NEGLIGENCE WAS ONLY
CONTRIBUTORY. [16]
 The Ruling of the Court

The petition is partly meritorious.

Solidbanks Fiduciary Duty under the Law

The rulings of the trial court and the Court of Appeals conflict on the
application of the law. The trial court pinned the liability on L.C. Diaz based on
the provisions of the rules on savings account, a recognition of the contractual
relationship between Solidbank and L.C. Diaz, the latter being a depositor of
the former. On the other hand, the Court of Appeals applied the law on quasi-
delict to determine who between the two parties was ultimately negligent. The
law on quasi-delict or culpa aquiliana is generally applicable when there is no
pre-existing contractual relationship between the parties.
We hold that Solidbank is liable for breach of contract due to negligence,
or culpa contractual.
The contract between the bank and its depositor is governed by the
provisions of the Civil Code on simple loan.  Article 1980 of the Civil Code
[17]

expressly provides that x x x savings x x x deposits of money in banks and

similar institutions shall be governed by the provisions concerning simple
loan. There is a debtor-creditor relationship between the bank and its
depositor. The bank is the debtor and the depositor is the creditor. The
depositor lends the bank money and the bank agrees to pay the depositor on
demand. The savings deposit agreement between the bank and the depositor
is the contract that determines the rights and obligations of the parties.
The law imposes on banks high standards in view of the fiduciary nature of
banking. Section 2 of Republic Act No. 8791 (RA 8791),  which took effect on
[18]

13 June 2000, declares that the State recognizes the fiduciary nature of
banking that requires high standards of integrity and performance.  This new
[19]

provision in the general banking law, introduced in 2000, is a statutory

affirmation of Supreme Court decisions, starting with the 1990 case of Simex
International v. Court of Appeals,  holding that the bank is under obligation
[20]

to treat the accounts of its depositors with meticulous care, always having in

mind the fiduciary nature of their relationship.
[21]

This fiduciary relationship means that the banks obligation to observe high
standards of integrity and performance is deemed written into every deposit
agreement between a bank and its depositor. The fiduciary nature of banking
requires banks to assume a degree of diligence higher than that of a good
father of a family. Article 1172 of the Civil Code states that the degree of
diligence required of an obligor is that prescribed by law or contract, and
absent such stipulation then the diligence of a good father of a family.
 Section 2 of RA 8791 prescribes the statutory diligence required from banks
[22]

that banks must observe high standards of integrity and performance in

servicing their depositors. Although RA 8791 took effect almost nine years
after the unauthorized withdrawal of the P300,000 from L.C. Diazs savings
account, jurisprudence  at the time of the withdrawal already imposed on
[23]

banks the same high standard of diligence required under RA No. 8791.
However, the fiduciary nature of a bank-depositor relationship does not
convert the contract between the bank and its depositors from a simple loan to
a trust agreement, whether express or implied. Failure by the bank to pay the
depositor is failure to pay a simple loan, and not a breach of trust.  The law
[24]

simply imposes on the bank a higher standard of integrity and performance

in complying with its obligations under the contract of simple loan, beyond
those required of non-bank debtors under a similar contract of simple loan.
The fiduciary nature of banking does not convert a simple loan into a trust
agreement because banks do not accept deposits to enrich depositors but to
earn money for themselves. The law allows banks to offer the lowest possible
interest rate to depositors while charging the highest possible interest rate on
their own borrowers. The interest spread or differential belongs to the bank
and not to the depositors who are not cestui que trust of banks. If depositors
are cestui que trust of banks, then the interest spread or income belongs to
the depositors, a situation that Congress certainly did not intend in enacting
Section 2 of RA 8791.

Solidbanks Breach of its Contractual Obligation

Article 1172 of the Civil Code provides that responsibility arising from
negligence in the performance of every kind of obligation is demandable. For
breach of the savings deposit agreement due to negligence, or culpa
contractual, the bank is liable to its depositor.
Calapre left the passbook with Solidbank because the transaction took
time and he had to go to Allied Bank for another transaction. The passbook
was still in the hands of the employees of Solidbank for the processing of the
deposit when Calapre left Solidbank. Solidbanks rules on savings account
require that the deposit book should be carefully guarded by the depositor and
kept under lock and key, if possible. When the passbook is in the possession
of Solidbanks tellers during withdrawals, the law imposes on Solidbank and its
tellers an even higher degree of diligence in safeguarding the passbook.
Likewise, Solidbanks tellers must exercise a high degree of diligence in
insuring that they return the passbook only to the depositor or his authorized
representative. The tellers know, or should know, that the rules on savings
account provide that any person in possession of the passbook is
presumptively its owner. If the tellers give the passbook to the wrong person,
they would be clothing that person presumptive ownership of the passbook,
facilitating unauthorized withdrawals by that person. For failing to return the
passbook to Calapre, the authorized representative of L.C. Diaz, Solidbank
and Teller No. 6 presumptively failed to observe such high degree of diligence
in safeguarding the passbook, and in insuring its return to the party authorized
to receive the same.
In culpa contractual, once the plaintiff proves a breach of contract, there is
a presumption that the defendant was at fault or negligent. The burden is on
the defendant to prove that he was not at fault or negligent. In contrast,
in culpa aquiliana the plaintiff has the burden of proving that the defendant
was negligent. In the present case, L.C. Diaz has established that Solidbank
breached its contractual obligation to return the passbook only to the
authorized representative of L.C. Diaz. There is thus a presumption that
Solidbank was at fault and its teller was negligent in not returning the
passbook to Calapre. The burden was on Solidbank to prove that there was
no negligence on its part or its employees.
Solidbank failed to discharge its burden. Solidbank did not present to the
trial court Teller No. 6, the teller with whom Calapre left the passbook and who
was supposed to return the passbook to him. The record does not indicate
that Teller No. 6 verified the identity of the person who retrieved the
passbook. Solidbank also failed to adduce in evidence its standard procedure
in verifying the identity of the person retrieving the passbook, if there is such a
procedure, and that Teller No. 6 implemented this procedure in the present
case.
Solidbank is bound by the negligence of its employees under the principle
of respondeat superior or command responsibility. The defense of exercising
the required diligence in the selection and supervision of employees is not a
complete defense in culpa contractual, unlike in culpa aquiliana. [25]

The bank must not only exercise high standards of integrity and
performance, it must also insure that its employees do likewise because this is
the only way to insure that the bank will comply with its fiduciary
duty. Solidbank failed to present the teller who had the duty to return to
Calapre the passbook, and thus failed to prove that this teller exercised the
high standards of integrity and performance required of Solidbanks
employees.

Proximate Cause of the Unauthorized Withdrawal

Another point of disagreement between the trial and appellate courts is the
proximate cause of the unauthorized withdrawal. The trial court believed that
L.C. Diazs negligence in not securing its passbook under lock and key was
the proximate cause that allowed the impostor to withdraw the P300,000. For
the appellate court, the proximate cause was the tellers negligence in
processing the withdrawal without first verifying with L.C. Diaz. We do not
agree with either court.
Proximate cause is that cause which, in natural and continuous sequence,
unbroken by any efficient intervening cause, produces the injury and without
which the result would not have occurred.  Proximate cause is determined by
[26]

the facts of each case upon mixed considerations of logic, common sense,
policy and precedent. [27]

L.C. Diaz was not at fault that the passbook landed in the hands of the
impostor. Solidbank was in possession of the passbook while it was
processing the deposit. After completion of the transaction, Solidbank had the
contractual obligation to return the passbook only to Calapre, the authorized
representative of L.C. Diaz. Solidbank failed to fulfill its contractual obligation
because it gave the passbook to another person.
Solidbanks failure to return the passbook to Calapre made possible the
withdrawal of the P300,000 by the impostor who took possession of the
passbook. Under Solidbanks rules on savings account, mere possession of
the passbook raises the presumption of ownership. It was the negligent act of
Solidbanks Teller No. 6 that gave the impostor presumptive ownership of the
passbook. Had the passbook not fallen into the hands of the impostor, the
loss of P300,000 would not have happened. Thus, the proximate cause of the
unauthorized withdrawal was Solidbanks negligence in not returning the
passbook to Calapre.
We do not subscribe to the appellate courts theory that the proximate
cause of the unauthorized withdrawal was the tellers failure to call up L.C.
Diaz to verify the withdrawal. Solidbank did not have the duty to call up L.C.
Diaz to confirm the withdrawal. There is no arrangement between Solidbank
and L.C. Diaz to this effect. Even the agreement between Solidbank and L.C.
Diaz pertaining to measures that the parties must observe whenever
withdrawals of large amounts are made does not direct Solidbank to call up
L.C. Diaz.
There is no law mandating banks to call up their clients whenever their
representatives withdraw significant amounts from their accounts. L.C. Diaz
therefore had the burden to prove that it is the usual practice of Solidbank to
call up its clients to verify a withdrawal of a large amount of money. L.C. Diaz
failed to do so.
Teller No. 5 who processed the withdrawal could not have been put on
guard to verify the withdrawal. Prior to the withdrawal of P300,000, the
impostor deposited with Teller No. 6 the P90,000 PBC check, which later
bounced. The impostor apparently deposited a large amount of money to
deflect suspicion from the withdrawal of a much bigger amount of money. The
appellate court thus erred when it imposed on Solidbank the duty to call up
L.C. Diaz to confirm the withdrawal when no law requires this from banks and
when the teller had no reason to be suspicious of the transaction.
Solidbank continues to foist the defense that Ilagan made the
withdrawal. Solidbank claims that since Ilagan was also a messenger of L.C.
Diaz, he was familiar with its teller so that there was no more need for the
teller to verify the withdrawal. Solidbank relies on the following statements in
the Booking and Information Sheet of Emerano Ilagan:
xxx Ilagan also had with him (before the withdrawal) a forged check of PBC and
indicated the amount of P90,000 which he deposited in favor of L.C. Diaz and
Company. After successfully withdrawing this large sum of money, accused Ilagan
gave alias Rey (Noel Tamayo) his share of the loot. Ilagan then hired a taxicab in the
amount of P1,000 to transport him (Ilagan) to his home province at Bauan,
Batangas. Ilagan extravagantly and lavishly spent his money but a big part of his loot
was wasted in cockfight and horse racing. Ilagan was apprehended and meekly
admitted his guilt.  (Emphasis supplied.)
[28]

L.C. Diaz refutes Solidbanks contention by pointing out that the person
who withdrew the P300,000 was a certain Noel Tamayo. Both the trial and
appellate courts stated that this Noel Tamayo presented the passbook with
the withdrawal slip.
We uphold the finding of the trial and appellate courts that a certain Noel
Tamayo withdrew the P300,000. The Court is not a trier of facts. We find no
justifiable reason to reverse the factual finding of the trial court and the Court
of Appeals. The tellers who processed the deposit of the P90,000 check and
the withdrawal of the P300,000 were not presented during trial to substantiate
Solidbanks claim that Ilagan deposited the check and made the questioned
withdrawal. Moreover, the entry quoted by Solidbank does not categorically
state that Ilagan presented the withdrawal slip and the passbook.

Doctrine of Last Clear Chance

The doctrine of last clear chance states that where both parties are
negligent but the negligent act of one is appreciably later than that of the
other, or where it is impossible to determine whose fault or negligence caused
the loss, the one who had the last clear opportunity to avoid the loss but failed
to do so, is chargeable with the loss.  Stated differently, the antecedent
[29]

negligence of the plaintiff does not preclude him from recovering damages
caused by the supervening negligence of the defendant, who had the last fair
chance to prevent the impending harm by the exercise of due diligence. [30]

We do not apply the doctrine of last clear chance to the present

case. Solidbank is liable for breach of contract due to negligence in the
performance of its contractual obligation to L.C. Diaz. This is a case of culpa
contractual, where neither the contributory negligence of the plaintiff nor his
last clear chance to avoid the loss, would exonerate the defendant from
liability.  Such contributory negligence or last clear chance by the plaintiff
[31]

merely serves to reduce the recovery of damages by the plaintiff but does not
exculpate the defendant from his breach of contract. [32]

Mitigated Damages

Under Article 1172, liability (for culpa contractual) may be regulated by the

courts, according to the circumstances. This means that if the defendant
exercised the proper diligence in the selection and supervision of its
employee, or if the plaintiff was guilty of contributory negligence, then the
courts may reduce the award of damages. In this case, L.C. Diaz was guilty of
contributory negligence in allowing a withdrawal slip signed by its authorized
signatories to fall into the hands of an impostor. Thus, the liability of Solidbank
should be reduced.
In Philippine Bank of Commerce v. Court of Appeals,  where the Court
[33]

held the depositor guilty of contributory negligence, we allocated the damages

between the depositor and the bank on a 40-60 ratio. Applying the same
ruling to this case, we hold that L.C. Diaz must shoulder 40% of the actual
damages awarded by the appellate court. Solidbank must pay the other 60%
of the actual damages.
WHEREFORE, the decision of the Court of Appeals
is AFFIRMED with MODIFICATION. Petitioner Solidbank Corporation shall
pay private respondent L.C. Diaz and Company, CPAs only 60% of the actual
damages awarded by the Court of Appeals. The remaining 40% of the actual
damages shall be borne by private respondent L.C. Diaz and Company,
CPAs. Proportionate costs.
SO ORDERED.

EN BANC
 
PROFESSIONAL SERVICES, G.R. No. 126297
INC.,
Petitioner, Present:
PUNO, C.J.,
CARPIO,
CORONA,
CARPIO MORALES,
VELASCO, JR.,
NACHURA,
- v e r s u s - LEONARDO-DE CASTRO,
BRION,
PERALTA,
BERSAMIN,*
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ and
MENDOZA, JJ.*
THE COURT OF APPEALS
and NATIVIDAD and ENRIQUE
AGANA,
Respondents.
 
x-------------------x
NATIVIDAD [substituted by her G.R. No. 126467
children Marcelino Agana III,
Enrique Agana, Jr.,
Emma Agana-Andaya,
Jesus Agana and Raymund
Agana] and ENRIQUE AGANA,
Petitioners,
 
 
-         v e r s u s -
 
THE COURT OF APPEALS and JUAN
FUENTES,
Respondents.
 
x-------------------x
MIGUEL AMPIL, G.R. No. 127590
Petitioner,
 
 
- v e r s u s -
 
 
NATIVIDAD and ENRIQUE
AGANA,
Respondents.
Promulgated:
February 2, 2010
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
 
RESOLUTION
CORONA, J.:
 

With prior leave of court,[1] petitioner Professional Services, Inc. (PSI)

filed a second motion for reconsideration[2] urging referral thereof to the Court en

banc and seeking modification of the decision dated January 31, 2007 and

resolution dated February 11, 2008 which affirmed its vicarious and direct liability
for damages to respondents Enrique Agana and the heirs of Natividad Agana

(Aganas).
 
Manila Medical Services, Inc. (MMSI),[3] Asian Hospital, Inc. (AHI),[4] and Private
Hospital Association of the Philippines (PHAP)[5] all sought to intervene in these
casesinvoking the common ground that, unless modified, the assailed decision and
resolution will jeopardize the financial viability of private hospitals and jack up the
cost of health care.
 
The Special First Division of the Court granted the motions for intervention
of MMSI, AHI and PHAP (hereafter intervenors),[6] and referred en consulta to the
Court en banc the motion for prior leave of court and the second motion for
reconsideration of PSI.[7]
 
Due to paramount public interest, the Court en banc accepted the
referral[8] and heard the parties on oral arguments on one particular issue: whether a
hospital may be held liable for the negligence of physicians-consultants allowed to
practice in its premises.[9]
 
To recall the salient facts, PSI, together with Dr. Miguel Ampil (Dr. Ampil)
and Dr. Juan Fuentes (Dr. Fuentes), was impleaded by Enrique Agana and
Natividad Agana (later substituted by her heirs), in a complaint[10] for damages
filed in the Regional Trial Court (RTC) of Quezon City, Branch 96, for the injuries
suffered by Natividad when Dr. Ampil and Dr. Fuentes neglected to remove from
her body two gauzes[11] which were used in the surgery they performed on her on
April 11, 1984 at the Medical City General Hospital. PSI was impleaded as owner,
operator and manager of the hospital.
In a decision[12] dated March 17, 1993, the RTC held PSI solidarily liable with Dr.
Ampil and Dr. Fuentes for damages.[13] On appeal, the Court of Appeals (CA),
absolved Dr. Fuentes but affirmed the liability of Dr. Ampil and PSI, subject to the
right of PSI to claim reimbursement from Dr. Ampil.[14]
 
On petition for review, this Court, in its January 31, 2007 decision, affirmed the
CA decision.[15] PSI filed a motion for reconsideration[16] but the Court denied it in
a resolution dated February 11, 2008.[17]
 
The Court premised the direct liability of PSI to the Aganas on the following
facts and law:
 

First, there existed between PSI and Dr. Ampil an employer-employee relationship

as contemplated in the December 29, 1999 decision in Ramos v. Court of

Appeals[18] that for purposes of allocating responsibility in medical negligence

cases, an employer-employee relationship exists between hospitals and their

consultants.[19] Although the Court in Ramos later issued a Resolution dated April

11, 2002[20] reversing its earlier finding on the existence of an employment

relationship between hospital and doctor, a similar reversal was not warranted in

the present case because the defense raised by PSI consisted of a mere general

denial of control or responsibility over the actions of Dr. Ampil.[21]

 

Second, by accrediting Dr. Ampil and advertising his qualifications, PSI

created the public impression that he was its agent.[22] Enrique testified that it was

on account of Dr. Ampil's accreditation with PSI that he conferred with said doctor

about his wife's (Natividad's) condition.[23] After his meeting with Dr. Ampil,
Enrique asked Natividad to personally consult Dr. Ampil.[24] In effect, when

Enrigue and Natividad engaged the services of Dr. Ampil, at the back of their

minds was that the latter was a staff member of a prestigious hospital. Thus, under

the doctrine of apparent authority applied in Nogales, et al.

v. Capitol Medical Center, et al.,[25] PSI was liable for the negligence of Dr.

Ampil.
 

Finally, as owner and operator of Medical City General Hospital, PSI was

bound by its duty to provide comprehensive medical services to Natividad Agana,

to exercise reasonable care to protect her from harm,[26] to oversee or supervise all

persons who practiced medicine within its walls, and to take active steps in fixing

any form of negligence committed within its premises.[27] PSI committed a serious

breach of its corporate duty when it failed to conduct an immediate investigation

into the reported missing gauzes.[28]

 
PSI is now asking this Court to reconsider the foregoing rulings for these
reasons:
I
 
The declaration in the 31 January 2007 Decision vis-a-vis the 11 February
2009 Resolution that the ruling in Ramos vs. Court of Appeals (G.R. No.
134354, December 29, 1999) that an employer-employee relations exists
between hospital and their consultants stays should be set aside for being
inconsistent with or contrary to the import of the resolution granting the
hospital's motion for reconsideration in Ramos vs. Court of Appeals (G.R.
No. 134354, April 11, 2002), which is applicable to PSI since the Aganas
failed to prove an employer-employee relationship between PSI and Dr.
Ampil and PSI proved that it has no control over Dr. Ampil. In fact, the
 trial court has found that there is no employer-employee relationship in
this case and that the doctor's are independent contractors.
 
II
 
Respondents Aganas engaged Dr. Miguel Ampil as their doctor and did
not primarily and specifically look to the Medical City Hospital (PSI) for
medical care and support; otherwise stated, respondents Aganas did not
select Medical City Hospital (PSI) to provide medical care because of any
apparent authority of Dr. Miguel Ampil as its agent since the latter was
chosen primarily and specifically based on his qualifications and being
friend and neighbor.
 
III
 
PSI cannot be liable under doctrine of corporate negligence since the
proximate cause of Mrs. Agana's injury was the negligence of Dr. Ampil,
which is an element of the principle of corporate negligence.[29]

In their respective memoranda, intervenors raise parallel arguments that the

Court's ruling on the existence of an employer-employee relationship between

private hospitals and consultants will force a drastic and complex alteration in the

long-established and currently prevailing relationships among patient, physician

and hospital, with burdensome operational and financial consequences and adverse

effects on all three parties.[30]

 

The Aganas comment that the arguments of PSI need no longer be

entertained for they have all been traversed in the assailed decision and resolution.
[31]

 
After gathering its thoughts on the issues, this Court holds that PSI is liable to the
Aganas, not under the principle of respondeat superior for lack of evidence of an
employment relationship with Dr. Ampil but under the principle of ostensible
agency for the negligence of Dr. Ampil and, pro hac vice, under the principle of
corporate negligence for its failure to perform its duties as a hospital.
While in theory a hospital as a juridical entity cannot practice medicine,[32] in
reality it utilizes doctors, surgeons and medical practitioners in the conduct of its
business of facilitating medical and surgical treatment.[33] Within that reality, three
legal relationships crisscross: (1) between the hospital and the doctor practicing
within its premises; (2) between the hospital and the patient being treated or
examined within its premises and (3) between the patient and the doctor. The exact
nature of each relationship determines the basis and extent of the liability of the
hospital for the negligence of the doctor.
 

Where an employment relationship exists, the hospital may be held

vicariously liable under Article 2176[34] in relation to Article 2180[35] of the Civil

Code or the principle of respondeat superior. Even when no employment

relationship exists but it is shown that the hospital holds out to the patient that the

doctor is its agent, the hospital may still be vicariously liable under Article 2176 in

relation to Article 1431[36] and Article 1869[37] of the Civil Code or the principle of

apparent authority.[38] Moreover, regardless of its relationship with the doctor, the

hospital may be held directly liable to the patient for its own negligence or failure

to follow established standard of conduct to which it should conform as a

corporation.[39]
 
 This Court still employs the control test to determine the existence of an
employer-employee relationship between hospital and doctor. In Calamba Medical
Center, Inc. v. National Labor Relations Commission, et al.[40] it held:
 
Under the "control test", an employment relationship exists between a
physician and a hospital if the hospital controls both the means and the
details of the process by which the physician is to accomplish his task.
 
xx xx xx
As priorly stated, private respondents maintained specific work-
schedules, as determined by petitioner through its medical director, which
consisted of 24-hour shifts totaling forty-eight hours each week and
which were strictly to be observed under pain of administrative sanctions.
 
That petitioner exercised control over respondents gains light
from the undisputed fact that in the emergency room, the operating
room, or any department or ward for that matter, respondents' work
is monitored through its nursing supervisors, charge nurses and
orderlies. Without the approval or consent of petitioner or its
medical director, no operations can be undertaken in those areas. For
control test to apply, it is not essential for the employer to actually
supervise the performance of duties of the employee, it being enough
that it has the right to wield the power. (emphasis supplied)
 
 
Even in its December 29, 1999 decision[41] and April 11,

2002 resolution[42] in Ramos, the Court found the control test decisive.

 
In the present case, it appears to have escaped the Court's attention that both
the RTC and the CA found no employment relationship between PSI and Dr.
Ampil, and thatthe Aganas did not question such finding. In its March 17,
1993 decision, the RTC found that defendant doctors were not employees of PSI in
its hospital, they being merely consultants without any employer-employee
relationship and in the capacity of independent contractors.[43] The Aganas never
questioned such finding.
 
PSI, Dr. Ampil and Dr. Fuentes appealed[44] from the RTC decision but only
on the issues of negligence, agency and corporate liability. In its September 6,
1996 decision, the CA mistakenly referred to PSI and Dr. Ampil as employer-
employee, but it was clear in its discussion on the matter that it viewed their
relationship as one of mere apparent agency.[45]
 
The Aganas appealed from the CA decision, but only to question the exoneration
of Dr. Fuentes.[46] PSI also appealed from the CA decision, and it was then that the
issue of employment, though long settled, was unwittingly resurrected.
 
In fine, as there was no dispute over the RTC finding that PSI and Dr. Ampil
had no employer-employee relationship, such finding became final and conclusive
even to this Court.[47] There was no reason for PSI to have raised it as an issue in its
petition. Thus, whatever discussion on the matter that may have ensued was purely
academic.
 
Nonetheless, to allay the anxiety of the intervenors, the Court holds that, in this
particular instance, the concurrent finding of the RTC and the CA that PSI was not
the employer of Dr. Ampil is correct. Control as a determinative factor in testing
the employer-employee relationship between doctor and hospital under which the
hospital could be held vicariously liable to a patient in medical negligence cases is
a requisite fact to be established by preponderance of evidence. Here, there was
insufficient evidence that PSI exercised the power of control or wielded such
power over the means and the details of the specific process by which Dr. Ampil
applied his skills in the treatment of Natividad.Consequently, PSI cannot be held
vicariously liable for the negligence of Dr. Ampil under the principle
of respondeat superior.
There is, however, ample evidence that the hospital (PSI) held out to the
patient (Natividad)[48] that the doctor (Dr. Ampil) was its agent. Present are the two
factors that determine apparent authority: first, the hospital's implied manifestation
to the patient which led the latter to conclude that the doctor was the hospital's
agent; and second, the patients reliance upon the conduct of the hospital and the
doctor, consistent with ordinary care and prudence.[49]
 
Enrique testified that on April 2, 1984, he consulted Dr. Ampil regarding the
condition of his wife; that after the meeting and as advised by Dr. Ampil,
he asked [his] wife to go to Medical City to be examined by [Dr. Ampil]; and that
the next day, April 3, he told his daughter to take her mother to Dr. Ampil.[50] This
timeline indicates that it was Enrique who actually made the decision on whom
Natividad should consult and where, and that the latter merely acceded to it. It
explains the testimony of Natividad that she consulted Dr. Ampil at the instigation
of her daughter.[51]
 
Moreover, when asked what impelled him to choose Dr. Ampil, Enrique testified:
Atty. Agcaoili
 
On that particular occasion, April 2, 1984, what was your reason for
choosing Dr. Ampil to contact with in connection with your wife's
illness?
 
A. First, before that, I have known him to be a specialist on that part of
the body as a surgeon, second, I have known him to be a staff member of
the Medical City which is a prominent and knownhospital. And third,
because he is a neighbor, I expect more than the usual medical service to
be given to us, than his ordinary patients.[52] (emphasis supplied)
 
 Clearly, the decision made by Enrique for Natividad to consult Dr. Ampil
was significantly influenced by the impression that Dr. Ampil was a staff member
of Medical CityGeneral Hospital, and that said hospital was well known and
prominent. Enrique looked upon Dr. Ampil not as independent of but as integrally
related to Medical City.
 
PSI's acts tended to confirm and reinforce, rather than negate, Enrique's view. It is
of record that PSI required a consent for hospital care[53] to be signed preparatory to
the surgery of Natividad. The form reads:
 
Permission is hereby given to the medical, nursing and laboratory staff of
the Medical City General Hospital to perform such diagnostic procedures
and to administer such medications and treatments as may be deemed
necessary or advisable by the physicians of this hospital for and during
the confinement of xxx. (emphasis supplied)
By such statement, PSI virtually reinforced the public impression that Dr. Ampil
was a physician of its hospital, rather than one independently practicing in it; that
the medications and treatments he prescribed were necessary and desirable; and
that the hospital staff was prepared to carry them out.
 
PSI pointed out in its memorandum that Dr. Ampil's hospital affiliation was
not the exclusive basis of the Aganas decision to have Natividad treated
in Medical City GeneralHospital, meaning that, had Dr. Ampil been affiliated with
another hospital, he would still have been chosen by the Aganas as Natividad's
surgeon.[54]
 
The Court cannot speculate on what could have been behind the Aganas decision
but would rather adhere strictly to the fact that, under the circumstances at that
time, Enriquedecided to consult Dr. Ampil for he believed him to be a staff
member of a prominent and known hospital. After his meeting with Dr. Ampil,
Enrique advised his wife Natividad to go to the Medical City General Hospital to
be examined by said doctor, and the hospital acted in a way that fortified Enrique's
belief.
 
This Court must therefore maintain the ruling that PSI is vicariously liable
for the negligence of Dr. Ampil as its ostensible agent.
 
Moving on to the next issue, the Court notes that PSI made the following
admission in its Motion for Reconsideration:
 
51. Clearly, not being an agent or employee of petitioner PSI, PSI [sic] is
not liable for Dr. Ampil's acts during the operation. Considering further
that Dr. Ampil was personally engaged as a doctor by Mrs. Agana, it is
incumbent upon Dr. Ampil, as Captain of the Ship, and as the Agana's
doctor to advise her on what to do with her situation vis-a-vis the two
missing gauzes. In addition to noting the missing gauzes, regular
check-ups were made and no signs of complications were exhibited
during her stay at the hospital, which could have alerted petitioner
PSI's hospital to render and provide post-operation services to and
tread on Dr. Ampil's role as the doctor of Mrs. Agana. The absence of
negligence of PSI from the patient's admission up to her discharge is
borne by the finding of facts in this case. Likewise evident therefrom
is the absence of any complaint from Mrs. Agana after her discharge
from the hospital which had she brought to the hospital's attention,
could have alerted petitioner PSI to act accordingly and bring the
matter to Dr. Ampil's attention. But this was not the case. Ms. Agana
complained ONLY to Drs. Ampil and Fuentes, not the hospital. How
then could PSI possibly do something to fix the negligence committed
by Dr. Ampil when it was not informed about it at all.[55] (emphasis
supplied)
 
PSI reiterated its admission when it stated that had Natividad Agana
informed the hospital of her discomfort and pain, the hospital would have
been obliged to act on it.[56]
 
 The significance of the foregoing statements is critical.
First, they constitute judicial admission by PSI that while it had no power to
control the means or method by which Dr. Ampil conducted the surgery on
Natividad Agana, it had the power to review or cause the review of what may
have irregularly transpired within its walls strictly for the purpose of determining
whether some form of negligence may have attended any procedure done inside its
premises, with the ultimate end of protecting its patients.
 
Second, it is a judicial admission that, by virtue of the nature of its business
as well as its prominence[57] in the hospital industry, it assumed a duty to tread on
the captain of the ship role of any doctor rendering services within its premises for
the purpose of ensuring the safety of the patients availing themselves of its services
and facilities.
 
Third, by such admission, PSI defined the standards of its corporate conduct
under the circumstances of this case, specifically: (a) that it had a corporate duty to
Natividad even after her operation to ensure her safety as a patient; (b) that its
corporate duty was not limited to having its nursing staff note or record the two
missing gauzes and (c) that its corporate duty extended to determining Dr. Ampil's
role in it, bringing the matter to his attention, and correcting his negligence.
 
And finally, by such admission, PSI barred itself from arguing in its second
motion for reconsideration that the concept of corporate responsibility was not yet
in existence at the time Natividad underwent treatment;[58] and that if it had any
corporate responsibility, the same was limited to reporting the missing gauzes and
did not include taking an active step in fixing the negligence committed.
[59]
 An admission made in the pleading cannot be controverted by the party making
such admission and is conclusive as to him, and all proofs submitted by him
contrary thereto or inconsistent therewith should be ignored, whether or not
objection is interposed by a party.[60]
 
Given the standard of conduct that PSI defined for itself, the next relevant
inquiry is whether the hospital measured up to it.
 
PSI excuses itself from fulfilling its corporate duty on the ground that Dr. Ampil
assumed the personal responsibility of informing Natividad about the two missing
gauzes.[61] Dr. Ricardo Jocson, who was part of the group of doctors that attended
to Natividad, testified that toward the end of the surgery, their group talked about
the missing gauzes but Dr. Ampil assured them that he would personally notify the
patient about it.[62] Furthermore, PSI claimed that there was no reason for it to act
on the report on the two missing gauzes because Natividad Agana showed no signs
of complications. She did not even inform the hospital about her discomfort.[63]
 
The excuses proffered by PSI are totally unacceptable.
 
To begin with, PSI could not simply wave off the problem and nonchalantly
delegate to Dr. Ampil the duty to review what transpired during the operation. The
purpose of such review would have been to pinpoint when, how and by whom two
surgical gauzes were mislaid so that necessary remedial measures could be taken to
avert any jeopardy to Natividads recovery. Certainly, PSI could not have expected
that purpose to be achieved by merely hoping that the person likely to have mislaid
the gauzes might be able to retrace his own steps. By its own standard of corporate
conduct, PSI's duty to initiate the review was non-delegable.
 
While Dr. Ampil may have had the primary responsibility of notifying Natividad
about the missing gauzes, PSI imposed upon itself the separate and independent
responsibility of initiating the inquiry into the missing gauzes. The purpose of the
first would have been to apprise Natividad of what transpired during her surgery,
while the purpose of the second would have been to pinpoint any lapse in
procedure that led to the gauze count discrepancy, so as to prevent a recurrence
thereof and to determine corrective measures that would ensure the safety of
Natividad. That Dr. Ampil negligently failed to notify Natividad did not release
PSI from its self-imposed separate responsibility.
 
Corollary to its non-delegable undertaking to review potential incidents of
negligence committed within its premises, PSI had the duty to take notice of
medical records prepared by its own staff and submitted to its custody, especially
when these bear earmarks of a surgery gone awry. Thus, the record taken during
the operation of Natividad which reported a gauze count discrepancy should have
given PSI sufficient reason to initiate a review. It should not have waited for
Natividad to complain.
 
As it happened, PSI took no heed of the record of operation and
consequently did not initiate a review of what transpired during Natividads
operation. Rather, it shirked its responsibility and passed it on to others to Dr.
Ampil whom it expected to inform Natividad, and to Natividad herself to complain
before it took any meaningful step. By its inaction, therefore, PSI failed its own
standard of hospital care. It committed corporate negligence.
 
It should be borne in mind that the corporate negligence ascribed to PSI is
different from the medical negligence attributed to Dr. Ampil. The duties of the
hospital are distinct from those of the doctor-consultant practicing within its
premises in relation to the patient; hence, the failure of PSI to fulfill its duties as a
hospital corporation gave rise to a direct liability to the Aganas distinct from that
of Dr. Ampil.
 
All this notwithstanding, we make it clear that PSIs hospital liability based
on ostensible agency and corporate negligence applies only to this case, pro hac
vice. It is not intended to set a precedent and should not serve as a basis to hold
hospitals liable for every form of negligence of their doctors-consultants under any
and all circumstances. The ruling is unique to this case, for the liability of PSI
arose from an implied agency with Dr. Ampil and an admitted corporate duty to
Natividad.[64]
Other circumstances peculiar to this case warrant this ruling,[65] not the least
of which being that the agony wrought upon the Aganas has gone on for 26 long
years, with Natividad coming to the end of her days racked in pain and
agony. Such wretchedness could have been avoided had PSI simply done what was
logical: heed the report of a guaze count discrepancy, initiate a review of what
went wrong and take corrective measures to ensure the safety of Nativad. Rather,
for 26 years, PSI hemmed and hawed at every turn, disowning any such
responsibility to its patient. Meanwhile, the options left to the Aganas have all but
dwindled, for the status of Dr. Ampil can no longer be ascertained.[66]
 
Therefore, taking all the equities of this case into consideration, this Court
believes P15 million would be a fair and reasonable liability of PSI, subject to 12%
p.a. interest from the finality of this resolution to full satisfaction.
 
WHEREFORE, the second motion for reconsideration is DENIED and the
motions for intervention are NOTED.
 
Professional Services, Inc. is ORDERED pro hac vice to pay Natividad
(substituted by her children Marcelino Agana III, Enrique Agana, Jr., Emma
Agana-Andaya, Jesus Agana and Raymund Agana) and Enrique Agana the total
amount of P15 million, subject to 12% p.a. interest from the finality of this
resolution to full satisfaction.
 
No further pleadings by any party shall be entertained in this case.
 
Let the long-delayed entry of judgment be made in this case upon receipt by all
concerned parties of this resolution.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 15574           September 17, 1919
SMITH, BELL & COMPANY (LTD.), petitioner, 
vs.
JOAQUIN NATIVIDAD, Collector of Customs of the port of Cebu, respondent.
Ross and Lawrence for petitioner. 
Attorney-General Paredes for respondent.
MALCOLM, J.:
A writ of mandamus is prayed for by Smith, Bell & Co. (Ltd.), against Joaquin Natividad, Collector of
Customs of the port of Cebu, Philippine Islands, to compel him to issue a certificate of Philippine
registry to the petitioner for its motor vessel Bato. The Attorney-General, acting as counsel for
respondent, demurs to the petition on the general ground that it does not state facts sufficient to
constitute a cause of action. While the facts are thus admitted, and while, moreover, the pertinent
provisions of law are clear and understandable, and interpretative American jurisprudence is found
in abundance, yet the issue submitted is not lightly to be resolved. The question, flatly presented, is,
whether Act. No. 2761 of the Philippine Legislature is valid — or, more directly stated, whether the
Government of the Philippine Islands, through its Legislature, can deny the registry of vessels in its
coastwise trade to corporations having alien stockholders.
FACTS.
Smith, Bell & Co., (Ltd.), is a corporation organized and existing under the laws of the Philippine
Islands. A majority of its stockholders are British subjects. It is the owner of a motor vessel known as
the Bato built for it in the Philippine Islands in 1916, of more than fifteen tons gross The Bato was
brought to Cebu in the present year for the purpose of transporting plaintiff's merchandise between
ports in the Islands. Application was made at Cebu, the home port of the vessel, to the Collector of
Customs for a certificate of Philippine registry. The Collector refused to issue the certificate, giving
as his reason that all the stockholders of Smith, Bell & Co., Ltd., were not citizens either of the
United States or of the Philippine Islands. The instant action is the result.
LAW.
The Act of Congress of April 29, 1908, repealing the Shipping Act of April 30, 1906 but reenacting a
portion of section 3 of this Law, and still in force, provides in its section 1:
That until Congress shall have authorized the registry as vessels of the United States of
vessels owned in the Philippine Islands, the Government of the Philippine Islands is hereby
authorized to adopt, from time to time, and enforce regulations governing the transportation
of merchandise and passengers between ports or places in the Philippine Archipelago. (35
Stat. at L., 70; Section 3912, U. S. Comp Stat. [1916]; 7 Pub. Laws, 364.)
The Act of Congress of August 29, 1916, commonly known as the Jones Law, still in force, provides
in section 3, (first paragraph, first sentence), 6, 7, 8, 10, and 31, as follows.
SEC. 3. That no law shall be enacted in said Islands which shall deprive any person of life,
liberty, or property without due process of law, or deny to any person therein the equal
protection of the laws. . . .
SEC. 6. That the laws now in force in the Philippines shall continue in force and effect,
except as altered, amended, or modified herein, until altered, amended, or repealed by the
legislative authority herein provided or by Act of Congress of the United States.
SEC. 7. That the legislative authority herein provided shall have power, when not
inconsistent with this Act, by due enactment to amend, alter modify, or repeal any law, civil or
criminal, continued in force by this Act as it may from time to time see fit
This power shall specifically extend with the limitation herein provided as to the tariff to all
laws relating to revenue provided as to the tariff to all laws relating to revenue and taxation in
effect in the Philippines.
SEC. 8. That general legislative power, except as otherwise herein provided, is hereby
granted to the Philippine Legislature, authorized by this Act.
SEC. 10. That while this Act provides that the Philippine government shall have the authority
to enact a tariff law the trade relations between the islands and the United States shall
continue to be governed exclusively by laws of the Congress of the United States: Provided,
That tariff acts or acts amendatory to the tariff of the Philippine Islands shall not become law
until they shall receive the approval of the President of the United States, nor shall any act of
the Philippine Legislature affecting immigration or the currency or coinage laws of the
Philippines become a law until it has been approved by the President of the United
States: Provided further, That the President shall approve or disapprove any act mentioned
in the foregoing proviso within six months from and after its enactment and submission for
his approval, and if not disapproved within such time it shall become a law the same as if it
had been specifically approved.
SEC. 31. That all laws or parts of laws applicable to the Philippines not in conflict with any of
the provisions of this Act are hereby continued in force and effect." (39 Stat at L., 546.)
On February 23, 1918, the Philippine Legislature enacted Act No. 2761. The first section of this law
amended section 1172 of the Administrative Code to read as follows:
SEC. 1172. Certificate of Philippine register. — Upon registration of a vessel of domestic
ownership, and of more than fifteen tons gross, a certificate of Philippine register shall be
issued for it. If the vessel is of domestic ownership and of fifteen tons gross or less, the
taking of the certificate of Philippine register shall be optional with the owner.
 "Domestic ownership," as used in this section, means ownership vested in some one or
more of the following classes of persons: (a) Citizens or native inhabitants of the Philippine
Islands; (b) citizens of the United States residing in the Philippine Islands; (c) any
corporation or company composed wholly of citizens of the Philippine Islands or of the
United States or of both, created under the laws of the United States, or of any State thereof,
or of thereof, or the managing agent or master of the vessel resides in the Philippine Islands
Any vessel of more than fifteen gross tons which on February eighth, nineteen hundred and
eighteen, had a certificate of Philippine register under existing law, shall likewise be deemed
a vessel of domestic ownership so long as there shall not be any change in the ownership
thereof nor any transfer of stock of the companies or corporations owning such vessel to
person not included under the last preceding paragraph.
Sections 2 and 3 of Act No. 2761 amended sections 1176 and 1202 of the Administrative Code to
read as follows:
SEC. 1176. Investigation into character of vessel. — No application for a certificate of
Philippine register shall be approved until the collector of customs is satisfied from an
inspection of the vessel that it is engaged or destined to be engaged in legitimate trade
and that it is of domestic ownership as such ownership is defined in section eleven hundred
and seventy-two of this Code.
The collector of customs may at any time inspect a vessel or examine its owner, master,
crew, or passengers in order to ascertain whether the vessel is engaged in legitimate trade
and is entitled to have or retain the certificate of Philippine register.
SEC. 1202. Limiting number of foreign officers and engineers on board vessels. — No
Philippine vessel operating in the coastwise trade or on the high seas shall be permitted to
have on board more than one master or one mate and one engineer who are not citizens of
the United States or of the Philippine Islands, even if they hold licenses under section one
thousand one hundred and ninety-nine hereof. No other person who is not a citizen of the
United States or of the Philippine Islands shall be an officer or a member of the crew of such
vessel. Any such vessel which fails to comply with the terms of this section shall be required
to pay an additional tonnage tax of fifty centavos per net ton per month during the
continuance of said failure.
ISSUES.
Predicated on these facts and provisions of law, the issues as above stated recur, namely, whether
Act No 2761 of the Philippine Legislature is valid in whole or in part — whether the Government of
the Philippine Islands, through its Legislature, can deny the registry of vessel in its coastwise trade
to corporations having alien stockholders .
OPINION.
1. Considered from a positive standpoint, there can exist no measure of doubt as to the power of the
Philippine Legislature to enact Act No. 2761. The Act of Congress of April 29, 1908, with its specific
delegation of authority to the Government of the Philippine Islands to regulate the transportation of
merchandise and passengers between ports or places therein, the liberal construction given to the
provisions of the Philippine Bill, the Act of Congress of July 1, 1902, by the courts, and the grant by
the Act of Congress of August 29, 1916, of general legislative power to the Philippine Legislature,
are certainly superabundant authority for such a law. While the Act of the local legislature may in a
way be inconsistent with the Act of Congress regulating the coasting trade of the Continental United
States, yet the general rule that only such laws of the United States have force in the Philippines as
are expressly extended thereto, and the abnegation of power by Congress in favor of the Philippine
Islands would leave no starting point for convincing argument. As a matter of fact, counsel for
petitioner does not assail legislative action from this direction (See U. S. vs. Bull [1910], 15 Phil., 7;
Sinnot vs. Davenport [1859] 22 How., 227.)
2. It is from the negative, prohibitory standpoint that counsel argues against the constitutionality of
Act No. 2761. The first paragraph of the Philippine Bill of Rights of the Philippine Bill, repeated again
in the first paragraph of the Philippine Bill of Rights as set forth in the Jones Law, provides "That no
law shall be enacted in said Islands which shall deprive any person of life, liberty, or property without
due process of law, or deny to any person therein the equal protection of the laws." Counsel says
that Act No. 2761 denies to Smith, Bell & Co., Ltd., the equal protection of the laws because it, in
effect, prohibits the corporation from owning vessels, and because classification of corporations
based on the citizenship of one or more of their stockholders is capricious, and that Act No. 2761
deprives the corporation of its properly without due process of law because by the passage of the
law company was automatically deprived of every beneficial attribute of ownership in the Bato and
left with the naked title to a boat it could not use .
The guaranties extended by the Congress of the United States to the Philippine Islands have been
used in the same sense as like provisions found in the United States Constitution. While the "due
process of law and equal protection of the laws" clause of the Philippine Bill of Rights is couched in
slightly different words than the corresponding clause of the Fourteenth Amendment to the United
States Constitution, the first should be interpreted and given the same force and effect as the latter.
(Kepner vs. U.S. [1904], 195 U. S., 100; Sierra vs. Mortiga [1907], 204 U. S.,.470; U. S. vs. Bull
[1910], 15 Phil., 7.) The meaning of the Fourteenth Amendment has been announced in classic
decisions of the United States Supreme Court. Even at the expense of restating what is so well
known, these basic principles must again be set down in order to serve as the basis of this decision.
The guaranties of the Fourteenth Amendment and so of the first paragraph of the Philippine Bill of
Rights, are universal in their application to all person within the territorial jurisdiction, without regard
to any differences of race, color, or nationality. The word "person" includes aliens. (Yick Wo vs.
Hopkins [1886], 118 U. S., 356; Truax vs. Raich [1915], 239 U. S., 33.) Private corporations,
likewise, are "persons" within the scope of the guaranties in so far as their property is concerned.
(Santa Clara County vs. Southern Pac. R. R. Co. [1886], 118.U. S., 394; Pembina Mining
Co. vs. Pennsylvania [1888],.125 U. S., 181 Covington & L. Turnpike Road Co. vs. Sandford [1896],
164 U. S., 578.) Classification with the end in view of providing diversity of treatment may be made
among corporations, but must be based upon some reasonable ground and not be a mere arbitrary
selection (Gulf, Colorado & Santa Fe Railway Co. vs. Ellis [1897],.165 U. S., 150.) Examples of laws
held unconstitutional because of unlawful discrimination against aliens could be cited. Generally,
these decisions relate to statutes which had attempted arbitrarily to forbid aliens to engage in
ordinary kinds of business to earn their living. (State vs.Montgomery [1900], 94 Maine, 192, peddling
— but see. Commonwealth vs. Hana [1907], 195 Mass., 262; Templar vs. Board of Examiners of
Barbers [1902], 131 Mich., 254, barbers; Yick Wo vs. Hopkins [1886], 118 U. S.,.356, discrimination
against Chinese; Truax vs. Raich [1915], 239 U. S., 33; In re Parrott [1880], 1 Fed , 481;
Fraser vs.McConway & Torley Co. [1897], 82 Fed , 257; Juniata Limestone Co. vs. Fagley [1898],
187 Penn., 193, all relating to the employment of aliens by private corporations.)
A literal application of general principles to the facts before us would, of course, cause the inevitable
deduction that Act No. 2761 is unconstitutional by reason of its denial to a corporation, some of
whole members are foreigners, of the equal protection of the laws. Like all beneficient propositions,
deeper research discloses provisos. Examples of a denial of rights to aliens notwithstanding the
provisions of the Fourteenth Amendment could be cited. (Tragesser vs. Gray [1890], 73 Md., 250,
licenses to sell spirituous liquors denied to persons not citizens of the United States;
Commonwealth vs. Hana [1907], 195 Mass , 262, excluding aliens from the right to peddle;
Patsone vs. Commonwealth of Pennsylvania [1914], 232 U. S. , 138, prohibiting the killing of any
wild bird or animal by any unnaturalized foreign-born resident; Ex parte Gilleti [1915], 70 Fla., 442,
discriminating in favor of citizens with reference to the taking for private use of the common property
in fish and oysters found in the public waters of the State; Heim vs. McCall [1915], 239 U. S.,.175,
and Crane vs. New York [1915], 239 U. S., 195, limiting employment on public works by, or for, the
State or a municipality to citizens of the United States.)
One of the exceptions to the general rule, most persistent and far reaching in influence is, that
neither the Fourteenth Amendment to the United States Constitution, broad and comprehensive as it
is, nor any other amendment, "was designed to interfere with the power of the State, sometimes
termed its `police power,' to prescribe regulations to promote the health, peace, morals, education,
and good order of the people, and legislate so as to increase the industries of the State, develop its
resources and add to its wealth and prosperity. From the very necessities of society, legislation of a
special character, having these objects in view, must often be had in certain districts."
(Barbier vs. Connolly [1884], 113 U.S., 27; New Orleans Gas Co. vs. Lousiana Light Co. [1885], 115
U.S., 650.) This is the same police power which the United States Supreme Court say "extends to so
dealing with the conditions which exist in the state as to bring out of them the greatest welfare in of
its people." (Bacon vs.Walker [1907], 204 U.S., 311.) For quite similar reasons, none of the provision
of the Philippine Organic Law could could have had the effect of denying to the Government of the
Philippine Islands, acting through its Legislature, the right to exercise that most essential, insistent,
and illimitable of powers, the sovereign police power, in the promotion of the general welfare and the
public interest. (U. S. vs. Toribio [1910], 15 Phil., 85; Churchill and Tait vs.Rafferty [1915], 32 Phil.,
580; Rubi vs. Provincial Board of Mindoro [1919], 39 Phil., 660.) Another notable exception permits
of the regulation or distribution of the public domain or the common property or resources of the
people of the State, so that use may be limited to its citizens. (Ex parte Gilleti [1915], 70 Fla., 442;
McCready vs.Virginia [1876], 94 U. S., 391; Patsone vs. Commonwealth of Pennsylvania [1914],
232U. S., 138.) Still another exception permits of the limitation of employment in the construction of
public works by, or for, the State or a municipality to citizens of the United States or of the State.
(Atkin vs. Kansas [1903],191 U. S., 207; Heim vs.McCall [1915], 239 U.S., 175; Crane vs. New York
[1915], 239 U. S., 195.) Even as to classification, it is admitted that a State may classify with
reference to the evil to be prevented; the question is a practical one, dependent upon experience.
(Patsone vs. Commonwealth of Pennsylvania [1914], 232 U. S., 138.)
To justify that portion of Act no. 2761 which permits corporations or companies to obtain a certificate
of Philippine registry only on condition that they be composed wholly of citizens of the Philippine
Islands or of the United States or both, as not infringing Philippine Organic Law, it must be done
under some one of the exceptions here mentioned This must be done, moreover, having particularly
in mind what is so often of controlling effect in this jurisdiction — our local experience and our
peculiar local conditions.
To recall a few facts in geography, within the confines of Philippine jurisdictional limits are found
more than three thousand islands. Literally, and absolutely, steamship lines are, for an Insular
territory thus situated, the arteries of commerce. If one be severed, the life-blood of the nation is lost.
If on the other hand these arteries are protected, then the security of the country and the promotion
of the general welfare is sustained. Time and again, with such conditions confronting it, has the
executive branch of the Government of the Philippine Islands, always later with the sanction of the
judicial branch, taken a firm stand with reference to the presence of undesirable foreigners. The
Government has thus assumed to act for the all-sufficient and primitive reason of the benefit and
protection of its own citizens and of the self-preservation and integrity of its dominion. (In
re Patterson [1902], 1 Phil., 93; Forbes vs. Chuoco, Tiaco and Crossfield [1910], 16 Phil., 534;.228
U.S., 549; In re McCulloch Dick [1918], 38 Phil., 41.) Boats owned by foreigners, particularly by such
solid and reputable firms as the instant claimant, might indeed traverse the waters of the Philippines
for ages without doing any particular harm. Again, some evilminded foreigner might very easily take
advantage of such lavish hospitality to chart Philippine waters, to obtain valuable information for
unfriendly foreign powers, to stir up insurrection, or to prejudice Filipino or American commerce.
Moreover, under the Spanish portion of Philippine law, the waters within the domestic jurisdiction are
deemed part of the national domain, open to public use. (Book II, Tit. IV, Ch. I, Civil Code; Spanish
Law of Waters of August 3, 1866, arts 1, 2, 3.) Common carriers which in the Philippines as in the
United States and other countries are, as Lord Hale said, "affected with a public interest," can only
be permitted to use these public waters as a privilege and under such conditions as to the
representatives of the people may seem wise. (See De Villata vs. Stanley [1915], 32 Phil., 541.)
In Patsone vs. Commonwealth of Pennsylvania ([1913], 232 U.S., 138), a case herein before
mentioned, Justice Holmes delivering the opinion of the United States Supreme Court said:
 This statute makes it unlawful for any unnaturalized foreign-born resident to kill any wild bird
or animal except in defense of person or property, and `to that end' makes it unlawful for
such foreign-born person to own or be possessed of a shotgun or rifle; with a penalty of $25
and a forfeiture of the gun or guns. The plaintiff in error was found guilty and was sentenced
to pay the abovementioned fine. The judgment was affirmed on successive appeals. (231
Pa., 46; 79 Atl., 928.) He brings the case to this court on the ground that the statute is
contrary to the 14th Amendment and also is in contravention of the treaty between the
United States and Italy, to which latter country the plaintiff in error belongs .
Under the 14th Amendment the objection is twofold; unjustifiably depriving the alien of
property, and discrimination against such aliens as a class. But the former really depends
upon the latter, since it hardly can be disputed that if the lawful object, the protection of wild
life (Geer vs. Connecticut, 161 U.S., 519; 40 L. ed., 793; 16 Sup. Ct. Rep., 600), warrants
the discrimination, the, means adopted for making it effective also might be adopted. . . .
The discrimination undoubtedly presents a more difficult question. But we start with
reference to the evil to be prevented, and that if the class discriminated against is or
reasonably might be considered to define those from whom the evil mainly is to be feared, it
properly may be picked out. A lack of abstract symmetry does not matter. The question is a
practical one, dependent upon experience. . . .
The question therefore narrows itself to whether this court can say that the legislature of
Pennsylvania was not warranted in assuming as its premise for the law that resident
unnaturalized aliens were the peculiar source of the evil that it desired to prevent.
(Barrett vs. Indiana,. 229 U.S., 26, 29; 57 L. ed., 1050, 1052; 33 Sup. Ct. Rep., 692.)
Obviously the question, so stated, is one of local experience, on which this court ought to be
very slow to declare that the state legislature was wrong in its facts (Adams vs. Milwaukee,
228 U.S., 572, 583; 57 L. ed., 971,.977; 33 Sup. Ct. Rep., 610.) If we might trust popular
speech in some states it was right; but it is enough that this court has no such knowledge of
local conditions as to be able to say that it was manifestly wrong. . . .
Judgment affirmed.
We are inclined to the view that while Smith, Bell & Co. Ltd., a corporation having alien stockholders,
is entitled to the protection afforded by the due-process of law and equal protection of the laws
clause of the Philippine Bill of Rights, nevertheless, Act No. 2761 of the Philippine Legislature, in
denying to corporations such as Smith, Bell &. Co. Ltd., the right to register vessels in the Philippines
coastwise trade, does not belong to that vicious species of class legislation which must always be
condemned, but does fall within authorized exceptions, notably, within the purview of the police
power, and so does not offend against the constitutional provision.
This opinion might well be brought to a close at this point. It occurs to us, however, that the
legislative history of the United States and the Philippine Islands, and, probably, the legislative
history of other countries, if we were to take the time to search it out, might disclose similar attempts
at restriction on the right to enter the coastwise trade, and might thus furnish valuable aid by which
to ascertain and, if possible, effectuate legislative intention.
3. The power to regulate commerce, expressly delegated to the Congress by the
Constitution, includes the power to nationalize ships built and owned in the United States by
registries and enrollments, and the recording of the muniments of title of American vessels.
The Congress "may encourage or it may entirely prohibit such commerce, and it may
regulate in any way it may see fit between these two extremes." (U.S. vs.Craig [1886], 28
Fed., 795; Gibbons vs. Ogden [1824], 9 Wheat., 1; The Passenger Cases [1849], 7 How.,
283.)
Acting within the purview of such power, the first Congress of the United States had not been long
convened before it enacted on September 1, 1789, "An Act for Registering and Clearing Vessels,
Regulating the Coasting Trade, and for other purposes." Section 1 of this law provided that for any
ship or vessel to obtain the benefits of American registry, it must belong wholly to a citizen or citizens
of the United States "and no other." (1 Stat. at L., 55.) That Act was shortly after repealed, but the
same idea was carried into the Acts of Congress of December 31, 1792 and February 18, 1793. (1
Stat. at L., 287, 305.).Section 4 of the Act of 1792 provided that in order to obtain the registry of any
vessel, an oath shall be taken and subscribed by the owner, or by one of the owners thereof, before
the officer authorized to make such registry, declaring, "that there is no subject or citizen of any
foreign prince or state, directly or indirectly, by way of trust, confidence, or otherwise, interested in
such vessel, or in the profits or issues thereof." Section 32 of the Act of 1793 even went so far as to
say "that if any licensed ship or vessel shall be transferred to any person who is not at the time of
such transfer a citizen of and resident within the United States, ... every such vessel with her tackle,
apparel, and furniture, and the cargo found on board her, shall be forefeited." In case of alienation to
a foreigner, Chief Justice Marshall said that all the privileges of an American bottom were ipso
facto forfeited. (U.S. vs. Willings and Francis [1807], 4 Cranch, 48.) Even as late as 1873, the
Attorney-General of the United States was of the opinion that under the provisions of the Act of
December 31, 1792, no vessel in which a foreigner is directly or indirectly interested can lawfully be
registered as a vessel of the United. States. (14 Op. Atty.-Gen. [U.S.], 340.)
These laws continued in force without contest, although possibly the Act of March 3, 1825, may have
affected them, until amended by the Act of May 28, 1896 (29 Stat. at L., 188) which extended the
privileges of registry from vessels wholly owned by a citizen or citizens of the United States to
corporations created under the laws of any of the states thereof. The law, as amended, made
possible the deduction that a vessel belonging to a domestic corporation was entitled to registry or
enrollment even though some stock of the company be owned by aliens. The right of ownership of
stock in a corporation was thereafter distinct from the right to hold the property by the corporation
(Humphreys vs. McKissock [1890], 140 U.S., 304; Queen vs. Arnaud [1846], 9 Q. B., 806; 29 Op.
Atty.-Gen. [U.S.],188.)
On American occupation of the Philippines, the new government found a substantive law in
operation in the Islands with a civil law history which it wisely continued in force Article fifteen of the
Spanish Code of Commerce permitted any foreigner to engage in Philippine trade if he had legal
capacity to do so under the laws of his nation. When the Philippine Commission came to enact the
Customs Administrative Act (No. 355) in 1902, it returned to the old American policy of limiting the
protection and flag of the United States to vessels owned by citizens of the United States or by
native inhabitants of the Philippine Islands (Sec. 117.) Two years later, the same body reverted to
the existing Congressional law by permitting certification to be issued to a citizen of the United
States or to a corporation or company created under the laws of the United States or of any state
thereof or of the Philippine Islands (Act No. 1235, sec. 3.) The two administration codes repeated the
same provisions with the necessary amplification of inclusion of citizens or native inhabitants of the
Philippine Islands (Adm. Code of 1916, sec. 1345; Adm. Code of 1917, sec. 1172). And now Act No.
2761 has returned to the restrictive idea of the original Customs Administrative Act which in turn was
merely a reflection of the statutory language of the first American Congress.
Provisions such as those in Act No. 2761, which deny to foreigners the right to a certificate of
Philippine registry, are thus found not to be as radical as a first reading would make them appear.
Without any subterfuge, the apparent purpose of the Philippine Legislature is seen to be to enact an
anti-alien shipping act. The ultimate purpose of the Legislature is to encourage Philippine ship-
building. This, without doubt, has, likewise, been the intention of the United States Congress in
passing navigation or tariff laws on different occasions. The object of such a law, the United States
Supreme Court once said, was to encourage American trade, navigation, and ship-building by giving
American ship-owners exclusive privileges. (Old Dominion Steamship Co. vs. Virginia [1905], 198
U.S., 299; Kent's Commentaries, Vol. 3, p. 139.)
In the concurring opinion of Justice Johnson in Gibbons vs. Ogden ([1824], 9 Wheat., 1) is found the
following:
Licensing acts, in fact, in legislation, are universally restraining acts; as, for example, acts
licensing gaming houses, retailers of spirituous liquors, etc. The act, in this instance, is
distinctly of that character, and forms part of an extensive system, the object of which is to
 encourage American shipping, and place them on an equal footing with the shipping of other
nations. Almost every commercial nation reserves to its own subjects a monopoly of its
coasting trade; and a countervailing privilege in favor of American shipping is contemplated,
in the whole legislation of the United States on this subject. It is not to give the vessel an
American character, that the license is granted; that effect has been correctly attributed to
the act of her enrollment. But it is to confer on her American privileges, as
contradistinguished from foreign; and to preserve the. Government from fraud by foreigners,
in surreptitiously intruding themselves into the American commercial marine, as well as
frauds upon the revenue in the trade coastwise, that this whole system is projected.
The United States Congress in assuming its grave responsibility of legislating wisely for a new
country did so imbued with a spirit of Americanism. Domestic navigation and trade, it decreed, could
only be carried on by citizens of the United States. If the representatives of the American people
acted in this patriotic manner to advance the national policy, and if their action was accepted without
protest in the courts, who can say that they did not enact such beneficial laws under the all-
pervading police power, with the prime motive of safeguarding the country and of promoting its
prosperity? Quite similarly, the Philippine Legislature made up entirely of Filipinos, representing the
mandate of the Filipino people and the guardian of their rights, acting under practically autonomous
powers, and imbued with a strong sense of Philippinism, has desired for these Islands safety from
foreign interlopers, the use of the common property exclusively by its citizens and the citizens of the
United States, and protection for the common good of the people. Who can say, therefore, especially
can a court, that with all the facts and circumstances affecting the Filipino people before it, the
Philippine Legislature has erred in the enactment of Act No. 2761?
Surely, the members of the judiciary are not expected to live apart from active life, in monastic
seclusion amidst dusty tomes and ancient records, but, as keen spectators of passing events and
alive to the dictates of the general — the national — welfare, can incline the scales of their decisions
in favor of that solution which will most effectively promote the public policy. All the presumption is in
favor of the constitutionally of the law and without good and strong reasons, courts should not
attempt to nullify the action of the Legislature. "In construing a statute enacted by the Philippine
Commission (Legislature), we deem it our duty not to give it a construction which would be
repugnant to an Act of Congress, if the language of the statute is fairly susceptible of another
construction not in conflict with the higher law." (In re Guariña [1913], 24. Phil., 36; U.S. vs. Ten Yu
[1912], 24 Phil., 1.) That is the true construction which will best carry legislative intention into effect.
With full consciousness of the importance of the question, we nevertheless are clearly of the opinion
that the limitation of domestic ownership for purposes of obtaining a certificate of Philippine registry
in the coastwise trade to citizens of the Philippine Islands, and to citizens of the United States, does
not violate the provisions of paragraph 1 of section 3 of the Act of Congress of August 29, 1916 No
treaty right relied upon Act No. 2761 of the Philippine Legislature is held valid and constitutional .
The petition for a writ of mandamus is denied, with costs against the petitioner. So ordered.
Arellano, C.J., Torres, Johnson, Araullo, Street, Avanceña and Moir, JJ., concur.

The Lawphil Project - Arellano Law Foundation

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 75885 May 27, 1987
BATAAN SHIPYARD & ENGINEERING CO., INC. (BASECO), petitioner, 
vs.
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, CHAIRMAN JOVITO SALONGA,
COMMISSIONER MARY CONCEPCION BAUTISTA, COMMISSIONER RAMON DIAZ,
COMMISSIONER RAUL R. DAZA, COMMISSIONER QUINTIN S. DOROMAL, CAPT. JORGE B.
SIACUNCO, et al., respondents.
Apostol, Bernas, Gumaru, Ona and Associates for petitioner.
Vicente G. Sison for intervenor A.T. Abesamis.

NARVASA, J.:
Challenged in this special civil action of certiorari and prohibition by a private corporation known as
the Bataan Shipyard and Engineering Co., Inc. are: (1) Executive Orders Numbered 1 and 2,
promulgated by President Corazon C. Aquino on February 28, 1986 and March 12, 1986,
respectively, and (2) the sequestration, takeover, and other orders issued, and acts done, in
accordance with said executive orders by the Presidential Commission on Good Government and/or
its Commissioners and agents, affecting said corporation.
1. The Sequestration, Takeover, and Other Orders Complained of
a. The Basic Sequestration Order
The sequestration order which, in the view of the petitioner corporation, initiated all its misery was
issued on April 14, 1986 by Commissioner Mary Concepcion Bautista. It was addressed to three of
the agents of the Commission, hereafter simply referred to as PCGG. It reads as follows:
RE: SEQUESTRATION ORDER
By virtue of the powers vested in the Presidential Commission on Good Government,
by authority of the President of the Philippines, you are hereby directed to sequester
the following companies.
1. Bataan Shipyard and Engineering Co., Inc. (Engineering Island
Shipyard and Mariveles Shipyard)
2. Baseco Quarry
3. Philippine Jai-Alai Corporation
4. Fidelity Management Co., Inc.
5. Romson Realty, Inc.
6. Trident Management Co.
7. New Trident Management
8. Bay Transport
9. And all affiliate companies of Alfredo "Bejo" Romualdez
You are hereby ordered:
1. To implement this sequestration order with a minimum disruption of these
companies' business activities.
2. To ensure the continuity of these companies as going concerns, the care and
maintenance of these assets until such time that the Office of the President through
the Commission on Good Government should decide otherwise.
3. To report to the Commission on Good Government periodically.
Further, you are authorized to request for Military/Security Support from the
Military/Police authorities, and such other acts essential to the achievement of this
sequestration order. 1
b. Order for Production of Documents
On the strength of the above sequestration order, Mr. Jose M. Balde, acting for the PCGG,
addressed a letter dated April 18, 1986 to the President and other officers of petitioner firm,
reiterating an earlier request for the production of certain documents, to wit:
1. Stock Transfer Book
2. Legal documents, such as:
 2.1. Articles of Incorporation
2.2. By-Laws
2.3. Minutes of the Annual Stockholders Meeting from 1973 to 1986
2.4. Minutes of the Regular and Special Meetings of the Board of
Directors from 1973 to 1986
2.5. Minutes of the Executive Committee Meetings from 1973 to 1986
2.6. Existing contracts with suppliers/contractors/others.
3. Yearly list of stockholders with their corresponding share/stockholdings from 1973
to 1986 duly certified by the Corporate Secretary.
4. Audited Financial Statements such as Balance Sheet, Profit & Loss and others
from 1973 to December 31, 1985.
5. Monthly Financial Statements for the current year up to March 31, 1986.
6. Consolidated Cash Position Reports from January to April 15, 1986.
7. Inventory listings of assets up dated up to March 31, 1986.
8. Updated schedule of Accounts Receivable and Accounts Payable.
9. Complete list of depository banks for all funds with the authorized signatories for
withdrawals thereof.
10. Schedule of company investments and placements.  2

The letter closed with the warning that if the documents were not submitted within five days, the
officers would be cited for "contempt in pursuance with Presidential Executive Order Nos. 1 and 2."
c. Orders Re Engineer Island
(1) Termination of Contract for Security Services
A third order assailed by petitioner corporation, hereafter referred to simply as BASECO, is that
issued on April 21, 1986 by a Capt. Flordelino B. Zabala, a member of the task force assigned to
carry out the basic sequestration order. He sent a letter to BASECO's Vice-President for
Finance,   terminating the contract for security services within the Engineer Island compound
3

between BASECO and "Anchor and FAIRWAYS" and "other civilian security agencies," CAPCOM
military personnel having already been assigned to the area,
(2) Change of Mode of Payment of Entry Charges
On July 15, 1986, the same Capt. Zabala issued a Memorandum addressed to "Truck Owners and
Contractors," particularly a "Mr. Buddy Ondivilla National Marine Corporation," advising of the
amendment in part of their contracts with BASECO in the sense that the stipulated charges for use
of the BASECO road network were made payable "upon entry and not anymore subject to monthly
billing as was originally agreed upon." 
4

d. Aborted Contract for Improvement of Wharf at Engineer Island

On July 9, 1986, a PCGG fiscal agent, S. Berenguer, entered into a contract in behalf of BASECO
with Deltamarine Integrated Port Services, Inc., in virtue of which the latter undertook to introduce
improvements costing approximately P210,000.00 on the BASECO wharf at Engineer Island,
allegedly then in poor condition, avowedly to "optimize its utilization and in return maximize the
revenue which would flow into the government coffers," in consideration of Deltamarine's being
granted "priority in using the improved portion of the wharf ahead of anybody" and exemption "from
the payment of any charges for the use of wharf including the area where it may install its bagging
equipments" "until the improvement remains in a condition suitable for port operations."   It seems
5

however that this contract was never consummated. Capt. Jorge B. Siacunco, "Head- (PCGG)
BASECO Management Team," advised Deltamarine by letter dated July 30, 1986 that "the new
management is not in a position to honor the said contract" and thus "whatever improvements * *
(may be introduced) shall be deemed unauthorized * * and shall be at * * (Deltamarine's) own risk."  6

e. Order for Operation of Sesiman Rock Quarry, Mariveles, Bataan

By Order dated June 20, 1986, Commissioner Mary Bautista first directed a PCGG agent, Mayor
Melba O. Buenaventura, "to plan and implement progress towards maximizing the continuous
operation of the BASECO Sesiman Rock Quarry * * by conventional methods;" but afterwards,
Commissioner Bautista, in representation of the PCGG, authorized another party, A.T. Abesamis, to
operate the quarry, located at Mariveles, Bataan, an agreement to this effect having been executed
by them on September 17, 1986.  7

f. Order to Dispose of Scrap, etc.

By another Order of Commissioner Bautista, this time dated June 26, 1986, Mayor Buenaventura
was also "authorized to clean and beautify the Company's compound," and in this connection, to
dispose of or sell "metal scraps" and other materials, equipment and machineries no longer usable,
subject to specified guidelines and safeguards including audit and verification. 8

g. The TAKEOVER Order

By letter dated July 14, 1986, Commissioner Ramon A. Diaz decreed the provisional takeover by the
PCGG of BASECO, "the Philippine Dockyard Corporation and all their affiliated companies."   Diaz
9

invoked the provisions of Section 3 (c) of Executive Order No. 1, empowering the Commission —
* * To provisionally takeover in the public interest or to prevent its disposal or
dissipation, business enterprises and properties taken over by the government of the
Marcos Administration or by entities or persons close to former President Marcos,
until the transactions leading to such acquisition by the latter can be disposed of by
the appropriate authorities.
A management team was designated to implement the order, headed by Capt. Siacunco, and was
given the following powers:
1. Conducts all aspects of operation of the subject companies;
2. Installs key officers, hires and terminates personnel as necessary;
3. Enters into contracts related to management and operation of the companies;
4. Ensures that the assets of the companies are not dissipated and used effectively
and efficiently; revenues are duly accounted for; and disburses funds only as may be
necessary;
5. Does actions including among others, seeking of military support as may be
necessary, that will ensure compliance to this order;
6. Holds itself fully accountable to the Presidential Commission on Good Government
on all aspects related to this take-over order.
h. Termination of Services of BASECO Officers
Thereafter, Capt. Siacunco, sent letters to Hilario M. Ruiz, Manuel S. Mendoza, Moises M. Valdez,
Gilberto Pasimanero, and Benito R. Cuesta I, advising of the termination of their services by the
PCGG. 10
2. Petitioner's Plea and Postulates
It is the foregoing specific orders and acts of the PCGG and its members and agents which, to
repeat, petitioner BASECO would have this Court nullify. More particularly, BASECO prays that this
Court-
1) declare unconstitutional and void Executive Orders Numbered 1 and 2;
2) annul the sequestration order dated April- 14, 1986, and all other orders subsequently issued and
acts done on the basis thereof, inclusive of the takeover order of July 14, 1986 and the termination
of the services of the BASECO executives. 11
a. Re Executive Orders No. 1 and 2, and the Sequestration and Takeover Orders
While BASECO concedes that "sequestration without resorting to judicial action, might be made
within the context of Executive Orders Nos. 1 and 2 before March 25, 1986 when the Freedom
Constitution was promulgated, under the principle that the law promulgated by the ruler under a
revolutionary regime is the law of the land, it ceased to be acceptable when the same ruler opted to
promulgate the Freedom Constitution on March 25, 1986 wherein under Section I of the same,
Article IV (Bill of Rights) of the 1973 Constitution was adopted providing, among others, that "No
person shall be deprived of life, liberty and property without due process of law." (Const., Art. I V,
Sec. 1)." 12
It declares that its objection to the constitutionality of the Executive Orders "as well as the Sequestration Order * * and Takeover Order * *
issued purportedly under the authority of said Executive Orders, rests on four fundamental considerations: First, no notice and hearing was
accorded * * (it) before its properties and business were taken over; Second, the PCGG is not a court, but a purely investigative agency and
therefore not competent to act as prosecutor and judge in the same cause; Third, there is nothing in the issuances which envisions any
proceeding, process or remedy by which petitioner may expeditiously challenge the validity of the takeover after the same has been effected;
and Fourthly, being directed against specified persons, and in disregard of the constitutional presumption of innocence and general rules and
procedures, they constitute a Bill of Attainder." 13
b. Re Order to Produce Documents
It argues that the order to produce corporate records from 1973 to 1986, which it has apparently
already complied with, was issued without court authority and infringed its constitutional right against
self-incrimination, and unreasonable search and seizure. 14
c. Re PCGG's Exercise of Right of Ownership and Management
BASECO further contends that the PCGG had unduly interfered with its right of dominion and
management of its business affairs by —
1) terminating its contract for security services with Fairways & Anchor, without the consent and
against the will of the contracting parties; and amending the mode of payment of entry fees
stipulated in its Lease Contract with National Stevedoring & Lighterage Corporation, these acts
being in violation of the non-impairment clause of the constitution; 15
2) allowing PCGG Agent Silverio Berenguer to enter into an "anomalous contract" with Deltamarine Integrated Port Services, Inc., giving the
latter free use of BASECO premises; 16
3) authorizing PCGG Agent, Mayor Melba Buenaventura, to manage and operate its rock quarry at
Sesiman, Mariveles; 17
4) authorizing the same mayor to sell or dispose of its metal scrap, equipment, machinery and other materials; 18
5) authorizing the takeover of BASECO, Philippine Dockyard Corporation, and all their affiliated companies;
6) terminating the services of BASECO executives: President Hilario M. Ruiz; EVP Manuel S.
Mendoza; GM Moises M. Valdez; Finance Mgr. Gilberto Pasimanero; Legal Dept. Mgr. Benito R.
Cuesta I; 19
7) planning to elect its own Board of Directors; 20
8) allowing willingly or unwillingly its personnel to take, steal, carry away from petitioner's premises
at Mariveles * * rolls of cable wires, worth P600,000.00 on May 11, 1986;  21

9) allowing "indiscriminate diggings" at Engineer Island to retrieve gold bars supposed to have been
buried therein.  22

3. Doubts, Misconceptions regarding Sequestration, Freeze and Takeover Orders

Many misconceptions and much doubt about the matter of sequestration, takeover and freeze orders
have been engendered by misapprehension, or incomplete comprehension if not indeed downright
ignorance of the law governing these remedies. It is needful that these misconceptions and doubts
be dispelled so that uninformed and useless debates about them may be avoided, and arguments
tainted b sophistry or intellectual dishonesty be quickly exposed and discarded. Towards this end,
this opinion will essay an exposition of the law on the matter. In the process many of the objections
raised by BASECO will be dealt with.
4. The Governing Law
a. Proclamation No. 3
The impugned executive orders are avowedly meant to carry out the explicit command of the
Provisional Constitution, ordained by Proclamation No. 3,   that the President-in the exercise of
23

legislative power which she was authorized to continue to wield "(until a legislature is elected and
convened under a new Constitution" — "shall give priority to measures to achieve the mandate of
the people," among others to (r)ecover ill-gotten properties amassed by the leaders and supporters
of the previous regime and protect the interest of the people through orders of sequestration or
freezing of assets or accounts."  24
 b. Executive Order No. 1
Executive Order No. 1 stresses the "urgent need to recover all ill-gotten wealth," and postulates that
"vast resources of the government have been amassed by former President Ferdinand E. Marcos,
his immediate family, relatives, and close associates both here and abroad."   Upon these premises,
25

the Presidential Commission on Good Government was created,   "charged with the task of
26

assisting the President in regard to (certain specified) matters," among which was precisely-
* * The recovery of all in-gotten wealth accumulated by former President Ferdinand
E. Marcos, his immediate family, relatives, subordinates and close associates,
whether located in the Philippines or abroad, including the takeover or
sequestration of all business enterprises and entities owned or controlled by them,
during his administration, directly or through nominees, by taking undue advantage of
their public office and/or using their powers, authority, influence, connections or
relationship. 
27

In relation to the takeover or sequestration that it was authorized to undertake in the fulfillment of its

mission, the PCGG was granted "power and authority" to do the following particular acts, to wit:
1. To sequester or place or cause to be placed under its control or possession any
building or office wherein any ill-gotten wealth or properties may be found, and any
records pertaining thereto, in order to prevent their destruction, concealment or
disappearance which would frustrate or hamper the investigation or otherwise
prevent the Commission from accomplishing its task.
2. To provisionally take over in the public interest or to prevent the disposal or
dissipation, business enterprises and properties taken over by the government of the
Marcos Administration or by entities or persons close to former President Marcos,
until the transactions leading to such acquisition by the latter can be disposed of by
the appropriate authorities.
3. To enjoin or restrain any actual or threatened commission of acts by any person or
entity that may render moot and academic, or frustrate or otherwise make ineffectual
the efforts of the Commission to carry out its task under this order. 
28

So that it might ascertain the facts germane to its objectives, it was granted power to conduct
investigations; require submission of evidence by subpoenae ad testificandum and duces
tecum; administer oaths; punish for contempt.   It was given power also to promulgate such rules
29

and regulations as may be necessary to carry out the purposes of * * (its creation).  30

c. Executive Order No. 2

Executive Order No. 2 gives additional and more specific data and directions respecting "the
recovery of ill-gotten properties amassed by the leaders and supporters of the previous regime." It
declares that:
1) * * the Government of the Philippines is in possession of evidence showing that
there are assets and properties purportedly pertaining to former Ferdinand E.
Marcos, and/or his wife Mrs. Imelda Romualdez Marcos, their close relatives,
subordinates, business associates, dummies, agents or nominees which had been or
were acquired by them directly or indirectly, through or as a result of the improper or
illegal use of funds or properties owned by the government of the Philippines or any
of its branches, instrumentalities, enterprises, banks or financial institutions, or by
taking undue advantage of their office, authority, influence, connections or
relationship, resulting in their unjust enrichment and causing grave damage and
prejudice to the Filipino people and the Republic of the Philippines:" and
2) * * said assets and properties are in the form of bank accounts, deposits, trust
accounts, shares of stocks, buildings, shopping centers, condominiums, mansions,
residences, estates, and other kinds of real and personal properties in the Philippines
and in various countries of the world." 
31

Upon these premises, the President-

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

d. Executive Order No. 14

A third executive order is relevant: Executive Order No. 14,   by which the PCGG is empowered,
33

"with the assistance of the Office of the Solicitor General and other government agencies, * * to file
and prosecute all cases investigated by it * * as may be warranted by its findings."   All such cases,
34

whether civil or criminal, are to be filed "with the Sandiganbayan which shall have exclusive and
original jurisdiction thereof."   Executive Order No. 14 also pertinently provides that civil suits for
35

restitution, reparation of damages, or indemnification for consequential damages, forfeiture

proceedings provided for under Republic Act No. 1379, or any other civil actions under the Civil
Code or other existing laws, in connection with * * (said Executive Orders Numbered 1 and 2) may
be filed separately from and proceed independently of any criminal proceedings and may be proved
by a preponderance of evidence;" and that, moreover, the "technical rules of procedure and
evidence shall not be strictly applied to* * (said)civil cases." 
36

5. Contemplated Situations
The situations envisaged and sought to be governed are self-evident, these being:
1) that "(i)ll-gotten properties (were) amassed by the leaders and supporters of the
previous regime"; 
37

a) more particularly, that ill-gotten wealth (was) accumulated by former President

Ferdinand E. Marcos, his immediate family, relatives, subordinates and close
associates, * * located in the Philippines or abroad, * * (and) business enterprises
and entities (came to be) owned or controlled by them, during * * (the Marcos)
administration, directly or through nominees, by taking undue advantage of their
public office and/or using their powers, authority, influence, Connections or
relationship; 
38

b) otherwise stated, that "there are assets and properties purportedly pertaining to
former President Ferdinand E. Marcos, and/or his wife Mrs. Imelda Romualdez
Marcos, their close relatives, subordinates, business associates, dummies, agents or
nominees which had been or were acquired by them directly or indirectly, through or
as a result of the improper or illegal use of funds or properties owned by the
 Government of the Philippines or any of its branches, instrumentalities, enterprises,
banks or financial institutions, or by taking undue advantage of their office, authority,
influence, connections or relationship, resulting in their unjust enrichment and
causing grave damage and prejudice to the Filipino people and the Republic of the
Philippines"; 
39

c) that "said assets and properties are in the form of bank accounts. deposits, trust.
accounts, shares of stocks, buildings, shopping centers, condominiums, mansions,
residences, estates, and other kinds of real and personal properties in the Philippines
and in various countries of the world;"   and
40

2) that certain "business enterprises and properties (were) taken over by the
government of the Marcos Administration or by entities or persons close to former
President Marcos. 41

6. Government's Right and Duty to Recover All Ill-gotten Wealth

There can be no debate about the validity and eminent propriety of the Government's plan "to
recover all ill-gotten wealth."
Neither can there be any debate about the proposition that assuming the above described factual
premises of the Executive Orders and Proclamation No. 3 to be true, to be demonstrable by
competent evidence, the recovery from Marcos, his family and his dominions of the assets and
properties involved, is not only a right but a duty on the part of Government.
But however plain and valid that right and duty may be, still a balance must be sought with the
equally compelling necessity that a proper respect be accorded and adequate protection assured,
the fundamental rights of private property and free enterprise which are deemed pillars of a free
society such as ours, and to which all members of that society may without exception lay claim.
* * Democracy, as a way of life enshrined in the Constitution, embraces as its
necessary components freedom of conscience, freedom of expression, and freedom
in the pursuit of happiness. Along with these freedoms are included economic
freedom and freedom of enterprise within reasonable bounds and under proper
control. * * Evincing much concern for the protection of property, the Constitution
distinctly recognizes the preferred position which real estate has occupied in law for
ages. Property is bound up with every aspect of social life in a democracy as
democracy is conceived in the Constitution. The Constitution realizes the
indispensable role which property, owned in reasonable quantities and used
legitimately, plays in the stimulation to economic effort and the formation and growth
of a solid social middle class that is said to be the bulwark of democracy and the
backbone of every progressive and happy country.  42

a. Need of Evidentiary Substantiation in Proper Suit

Consequently, the factual premises of the Executive Orders cannot simply be assumed. They will
have to be duly established by adequate proof in each case, in a proper judicial proceeding, so that
the recovery of the ill-gotten wealth may be validly and properly adjudged and consummated;
although there are some who maintain that the fact-that an immense fortune, and "vast resources of
the government have been amassed by former President Ferdinand E. Marcos, his immediate
family, relatives, and close associates both here and abroad," and they have resorted to all sorts of
clever schemes and manipulations to disguise and hide their illicit acquisitions-is within the realm of
judicial notice, being of so extensive notoriety as to dispense with proof thereof, Be this as it may,
the requirement of evidentiary substantiation has been expressly acknowledged, and the procedure
to be followed explicitly laid down, in Executive Order No. 14.
b. Need of Provisional Measures to Collect and Conserve Assets Pending Suits
Nor may it be gainsaid that pending the institution of the suits for the recovery of such "ill-gotten
wealth" as the evidence at hand may reveal, there is an obvious and imperative need for preliminary,
provisional measures to prevent the concealment, disappearance, destruction, dissipation, or loss of
the assets and properties subject of the suits, or to restrain or foil acts that may render moot and
academic, or effectively hamper, delay, or negate efforts to recover the same.
7. Provisional Remedies Prescribed by Law
To answer this need, the law has prescribed three (3) provisional remedies. These are: (1)
sequestration; (2) freeze orders; and (3) provisional takeover.
Sequestration and freezing are remedies applicable generally to unearthed instances of "ill-gotten
wealth." The remedy of "provisional takeover" is peculiar to cases where "business enterprises and
properties (were) taken over by the government of the Marcos Administration or by entities or
persons close to former President Marcos."  43

a. Sequestration
By the clear terms of the law, the power of the PCGG to sequester property claimed to be "ill-gotten"
means to place or cause to be placed under its possession or control said property, or any building
or office wherein any such property and any records pertaining thereto may be found, including
"business enterprises and entities,"-for the purpose of preventing the destruction, concealment or
dissipation of, and otherwise conserving and preserving, the same-until it can be determined,
through appropriate judicial proceedings, whether the property was in truth will- gotten," i.e.,
acquired through or as a result of improper or illegal use of or the conversion of funds belonging to
the Government or any of its branches, instrumentalities, enterprises, banks or financial institutions,
or by taking undue advantage of official position, authority relationship, connection or influence,
resulting in unjust enrichment of the ostensible owner and grave damage and prejudice to the
State.   And this, too, is the sense in which the term is commonly understood in other jurisdictions. 
44 45

b. "Freeze Order"
A "freeze order" prohibits the person having possession or control of property alleged to constitute
"ill-gotten wealth" "from transferring, conveying, encumbering or otherwise depleting or concealing
such property, or from assisting or taking part in its transfer, encumbrance, concealment, or
dissipation."   In other words, it commands the possessor to hold the property and conserve it
46

subject to the orders and disposition of the authority decreeing such freezing. In this sense, it is akin
to a garnishment by which the possessor or ostensible owner of property is enjoined not to deliver,
transfer, or otherwise dispose of any effects or credits in his possession or control, and thus
becomes in a sense an involuntary depositary thereof.  47

c. Provisional Takeover
In providing for the remedy of "provisional takeover," the law acknowledges the apparent distinction
between "ill gotten" "business enterprises and entities" (going concerns, businesses in actual
operation), generally, as to which the remedy of sequestration applies, it being necessarily inferred
that the remedy entails no interference, or the least possible interference with the actual
management and operations thereof; and "business enterprises which were taken over by the
government government of the Marcos Administration or by entities or persons close to him," in
particular, as to which a "provisional takeover" is authorized, "in the public interest or to prevent
disposal or dissipation of the enterprises."   Such a "provisional takeover" imports something more
48

than sequestration or freezing, more than the placing of the business under physical possession and
control, albeit without or with the least possible interference with the management and carrying on of
the business itself. In a "provisional takeover," what is taken into custody is not only the physical
assets of the business enterprise or entity, but the business operation as well. It is in fine the
assumption of control not only over things, but over operations or on- going activities. But, to repeat,
such a "provisional takeover" is allowed only as regards "business enterprises * * taken over by the
government of the Marcos Administration or by entities or persons close to former President
Marcos."
d. No Divestment of Title Over Property Seized
It may perhaps be well at this point to stress once again the provisional, contingent character of the
remedies just described. Indeed the law plainly qualifies the remedy of take-over by the adjective,
"provisional." These remedies may be resorted to only for a particular exigency: to prevent in the
public interest the disappearance or dissipation of property or business, and conserve it pending
adjudgment in appropriate proceedings of the primary issue of whether or not the acquisition of title
or other right thereto by the apparent owner was attended by some vitiating anomaly. None of the
remedies is meant to deprive the owner or possessor of his title or any right to the property
sequestered, frozen or taken over and vest it in the sequestering agency, the Government or other
person. This can be done only for the causes and by the processes laid down by law.
That this is the sense in which the power to sequester, freeze or provisionally take over is to be
understood and exercised, the language of the executive orders in question leaves no doubt.
Executive Order No. 1 declares that the sequestration of property the acquisition of which is suspect
shall last "until the transactions leading to such acquisition * * can be disposed of by the appropriate
authorities."   Executive Order No. 2 declares that the assets or properties therein mentioned shall
49

remain frozen "pending the outcome of appropriate proceedings in the Philippines to determine

whether any such assets or properties were acquired" by illegal means. Executive Order No. 14
makes clear that judicial proceedings are essential for the resolution of the basic issue of whether or
not particular assets are "ill-gotten," and resultant recovery thereof by the Government is warranted.
e. State of Seizure Not To Be Indefinitely Maintained; The Constitutional Command
There is thus no cause for the apprehension voiced by BASECO   that sequestration, freezing or
50

provisional takeover is designed to be an end in itself, that it is the device through which persons
may be deprived of their property branded as "ill-gotten," that it is intended to bring about a
permanent, rather than a passing, transitional state of affairs. That this is not so is quite explicitly
declared by the governing rules.
Be this as it may, the 1987 Constitution should allay any lingering fears about the duration of these
provisional remedies. Section 26 of its Transitory Provisions,   lays down the relevant rule in plain
51

terms, apart from extending ratification or confirmation (although not really necessary) to the
institution by presidential fiat of the remedy of sequestration and freeze orders:
SEC. 26. The authority to issue sequestration or freeze orders under Proclamation
No. 3 dated March 25, 1986 in relation to the recovery of ill-gotten wealth shag
remain operative for not more than eighteen months after the ratification of this
Constitution. However, in the national interest, as certified by the President,
the Congress may extend said period.
A sequestration or freeze order shall be issued only upon showing of a prima
facie case. The order and the list of the sequestered or frozen properties shall
forthwith be registered with the proper court. For orders issued before the ratification
of this Constitution, the corresponding judicial action or proceeding shall be filed
within six months from its ratification. For those issued after such ratification, the
judicial action or proceeding shall be commenced within six months from the
issuance thereof.
The sequestration or freeze order is deemed automatically lifted if no judicial action
or proceeding is commenced as herein provided.  52

f. Kinship to Attachment Receivership

As thus described, sequestration, freezing and provisional takeover are akin to the provisional
remedy of preliminary attachment, or receivership.   By attachment, a sheriff seizes property of a
53

defendant in a civil suit so that it may stand as security for the satisfaction of any judgment that may
be obtained, and not disposed of, or dissipated, or lost intentionally or otherwise, pending the
action.   By receivership, property, real or personal, which is subject of litigation, is placed in the
54

possession and control of a receiver appointed by the Court, who shall conserve it pending final
determination of the title or right of possession over it.   All these remedies — sequestration,
55

freezing, provisional, takeover, attachment and receivership — are provisional, temporary, designed
for-particular exigencies, attended by no character of permanency or finality, and always subject to
the control of the issuing court or agency.
g. Remedies, Non-Judicial
Parenthetically, that writs of sequestration or freeze or takeover orders are not issued by a court is of
no moment. The Solicitor General draws attention to the writ of distraint and levy which since 1936
the Commissioner of Internal Revenue has been by law authorized to issue against property of a
delinquent taxpayer.   BASECO itself declares that it has not manifested "a rigid insistence on
56

sequestration as a purely judicial remedy * * (as it feels) that the law should not be ossified to a point
that makes it insensitive to change." What it insists on, what it pronounces to be its "unyielding
position, is that any change in procedure, or the institution of a new one, should conform to due
process and the other prescriptions of the Bill of Rights of the Constitution."   It is, to be sure, a
57

proposition on which there can be no disagreement.

h. Orders May Issue Ex Parte
Like the remedy of preliminary attachment and receivership, as well as delivery of personal property
in replevin suits, sequestration and provisional takeover writs may issue ex parte.   And as in
58

preliminary attachment, receivership, and delivery of personality, no objection of any significance

may be raised to the ex parte issuance of an order of sequestration, freezing or takeover, given its
fundamental character of temporariness or conditionality; and taking account specially of the
constitutionally expressed "mandate of the people to recover ill-gotten properties amassed by the
leaders and supporters of the previous regime and protect the interest of the people;"   as well as
59

the obvious need to avoid alerting suspected possessors of "ill-gotten wealth" and thereby cause
that disappearance or loss of property precisely sought to be prevented, and the fact, just as self-
evident, that "any transfer, disposition, concealment or disappearance of said assets and properties
would frustrate, obstruct or hamper the efforts of the Government" at the just recovery thereof.  60

8. Requisites for Validity

What is indispensable is that, again as in the case of attachment and receivership, there exist a
prima facie factual foundation, at least, for the sequestration, freeze or takeover order, and adequate
and fair opportunity to contest it and endeavor to cause its negation or nullification.  61

Both are assured under the executive orders in question and the rules and regulations promulgated
by the PCGG.
a. Prima Facie Evidence as Basis for Orders
Executive Order No. 14 enjoins that there be "due regard to the requirements of fairness and due
process."  Executive Order No. 2 declares that with respect to claims on allegedly "ill-gotten" assets
62

and properties, "it is the position of the new democratic government that President Marcos * * (and
other parties affected) be afforded fair opportunity to contest these claims before appropriate
Philippine authorities."   Section 7 of the Commission's Rules and Regulations provides that
63

sequestration or freeze (and takeover) orders issue upon the authority of at least two
commissioners, based on the affirmation or complaint of an interested party, or motu proprio when
the Commission has reasonable grounds to believe that the issuance thereof is warranted.   A 64

similar requirement is now found in Section 26, Art. XVIII of the 1987 Constitution, which requires
that a "sequestration or freeze order shall be issued only upon showing of a prima facie case."  65

b. Opportunity to Contest
And Sections 5 and 6 of the same Rules and Regulations lay down the procedure by which a party
may seek to set aside a writ of sequestration or freeze order, viz:
SECTION 5. Who may contend.-The person against whom a writ of sequestration or
freeze or hold order is directed may request the lifting thereof in writing, either
personally or through counsel within five (5) days from receipt of the writ or order, or
in the case of a hold order, from date of knowledge thereof.
SECTION 6. Procedure for review of writ or order.-After due hearing or motu proprio
for good cause shown, the Commission may lift the writ or order unconditionally or
subject to such conditions as it may deem necessary, taking into consideration the
evidence and the circumstance of the case. The resolution of the commission may
be appealed by the party concerned to the Office of the President of the Philippines
within fifteen (15) days from receipt thereof.
Parenthetically, even if the requirement for a prima facie showing of "ill- gotten wealth" were not
expressly imposed by some rule or regulation as a condition to warrant the sequestration or freezing
of property contemplated in the executive orders in question, it would nevertheless be exigible in this
jurisdiction in which the Rule of Law prevails and official acts which are devoid of rational basis in
fact or law, or are whimsical and capricious, are condemned and struck down.  66

9. Constitutional Sanction of Remedies

If any doubt should still persist in the face of the foregoing considerations as to the validity and
propriety of sequestration, freeze and takeover orders, it should be dispelled by the fact that these
particular remedies and the authority of the PCGG to issue them have received constitutional
approbation and sanction. As already mentioned, the Provisional or "Freedom" Constitution
recognizes the power and duty of the President to enact "measures to achieve the mandate of the
people to * * * (recover ill- gotten properties amassed by the leaders and supporters of the previous
regime and protect the interest of the people through orders of sequestration or freezing of assets or
accounts." And as also already adverted to, Section 26, Article XVIII of the 1987 Constitution   treats
67

of, and ratifies the "authority to issue sequestration or freeze orders under Proclamation No. 3 dated
March 25, 1986."
The institution of these provisional remedies is also premised upon the State's inherent police power,
regarded, as t lie power of promoting the public welfare by restraining and regulating the use of
liberty and property,"   and as "the most essential, insistent and illimitable of powers * * in the
68

promotion of general welfare and the public interest,"   and said to be co-extensive with self-
69

protection and * * not inaptly termed (also) the'law of overruling necessity." "
70

10. PCGG not a "Judge"; General Functions

It should also by now be reasonably evident from what has thus far been said that the PCGG is not,
and was never intended to act as, a judge. Its general function is to conduct investigations in order
to collect evidenceestablishing instances of "ill-gotten wealth;" issue sequestration, and such
orders as may be warranted by the evidence thus collected and as may be necessary to preserve
and conserve the assets of which it takes custody and control and prevent their disappearance, loss
or dissipation; and eventually file and prosecute in the proper court of competent jurisdiction all
cases investigated by it as may be warranted by its findings. It does not try and decide, or hear and
determine, or adjudicate with any character of finality or compulsion, cases involving the essential
issue of whether or not property should be forfeited and transferred to the State because "ill-gotten"
within the meaning of the Constitution and the executive orders. This function is reserved to the
designated court, in this case, the Sandiganbayan.   There can therefore be no serious regard
71

accorded to the accusation, leveled by BASECO,   that the PCGG plays the perfidious role of
72

prosecutor and judge at the same time.

11. Facts Preclude Grant of Relief to Petitioner
Upon these premises and reasoned conclusions, and upon the facts disclosed by the record,
hereafter to be discussed, the petition cannot succeed. The writs of certiorari and prohibition prayed
for will not be issued.
The facts show that the corporation known as BASECO was owned or controlled by President
Marcos "during his administration, through nominees, by taking undue advantage of his public office
and/or using his powers, authority, or influence, " and that it was by and through the same means,
that BASECO had taken over the business and/or assets of the National Shipyard and Engineering
Co., Inc., and other government-owned or controlled entities.
12. Organization and Stock Distribution of BASECO
BASECO describes itself in its petition as "a shiprepair and shipbuilding company * * incorporated as
a domestic private corporation * * (on Aug. 30, 1972) by a consortium of Filipino shipowners and
shipping executives. Its main office is at Engineer Island, Port Area, Manila, where its Engineer
Island Shipyard is housed, and its main shipyard is located at Mariveles Bataan."   Its Articles of
73

Incorporation disclose that its authorized capital stock is P60,000,000.00 divided into 60,000 shares,
of which 12,000 shares with a value of P12,000,000.00 have been subscribed, and on said
subscription, the aggregate sum of P3,035,000.00 has been paid by the incorporators.  The same
74

articles Identify the incorporators, numbering fifteen (15), as follows: (1) Jose A. Rojas, (2) Anthony
P. Lee, (3) Eduardo T. Marcelo, (4) Jose P. Fernandez, (5) Generoso Tanseco, (6) Emilio T. Yap, (7)
Antonio M. Ezpeleta, (8) Zacarias Amante, (9) Severino de la Cruz, (10) Jose Francisco, (11)
Dioscoro Papa, (12) Octavio Posadas, (13) Manuel S. Mendoza, (14) Magiliw Torres, and (15)
Rodolfo Torres.
By 1986, however, of these fifteen (15) incorporators, six (6) had ceased to be stockholders, namely:
(1) Generoso Tanseco, (2) Antonio Ezpeleta, (3) Zacarias Amante, (4) Octavio Posadas, (5) Magiliw
Torres, and (6) Rodolfo Torres. As of this year, 1986, there were twenty (20) stockholders listed in
BASECO's Stock and Transfer Book.   Their names and the number of shares respectively held by
75

them are as follows:

1. Jose A. Rojas 1,248 shares

2. Severino G. de 1,248 shares

la Cruz

3. Emilio T. Yap 2,508 shares

4. Jose 1,248 shares

Fernandez

5. Jose Francisco 128 shares

6. Manuel S. 96 shares
Mendoza

7. Anthony P. Lee 1,248 shares

8. Hilario M. Ruiz 32 shares

9. Constante L. 8 shares
Fariñas

10. Fidelity 65,882

Management, Inc. shares

11. Trident 7,412 shares

Management

12. United Phil. 1,240 shares

Lines

13. Renato M. 8 shares

Tanseco

14. Fidel Ventura 8 shares

15. Metro Bay 136,370

Drydock shares

16. Manuel Jacela 1 share

17. Jonathan G. 1 share

Lu
 18. Jose J. 1 share
Tanchanco

19. Dioscoro 128 shares

Papa

20. Edward T. 4 shares

Marcelo

TOTAL 218,819
shares.
13 Acquisition of NASSCO by BASECO
Barely six months after its incorporation, BASECO acquired from National Shipyard & Steel
Corporation, or NASSCO, a government-owned or controlled corporation, the latter's shipyard at
Mariveles, Bataan, known as the Bataan National Shipyard (BNS), and — except for NASSCO's
Engineer Island Shops and certain equipment of the BNS, consigned for future negotiation — all its
structures, buildings, shops, quarters, houses, plants, equipment and facilities, in stock or in transit.
This it did in virtue of a "Contract of Purchase and Sale with Chattel Mortgage" executed on
February 13, 1973. The price was P52,000,000.00. As partial payment thereof, BASECO delivered
to NASSCO a cash bond of P11,400,000.00, convertible into cash within twenty-four (24) hours from
completion of the inventory undertaken pursuant to the contract. The balance of P41,600,000.00,
with interest at seven percent (7%) per annum, compounded semi-annually, was stipulated to be
paid in equal semi-annual installments over a term of nine (9) years, payment to commence after a
grace period of two (2) years from date of turnover of the shipyard to BASECO.  76

14. Subsequent Reduction of Price; Intervention of Marcos

Unaccountably, the price of P52,000,000.00 was reduced by more than one-half, to P24,311,550.00,
about eight (8) months later. A document to this effect was executed on October 9, 1973, entitled
"Memorandum Agreement," and was signed for NASSCO by Arturo Pacificador, as Presiding Officer
of the Board of Directors, and David R. Ines, as General Manager.   This agreement bore, at the top
77

right corner of the first page, the word "APPROVED" in the handwriting of President
Marcos, followed by his usual full signature. The document recited that a down payment of
P5,862,310.00 had been made by BASECO, and the balance of P19,449,240.00 was payable in
equal semi-annual installments over nine (9) years after a grace period of two (2) years, with interest
at 7% per annum.
15. Acquisition of 300 Hectares from Export Processing Zone Authority
On October 1, 1974, BASECO acquired three hundred (300) hectares of land in Mariveles from the
Export Processing Zone Authority for the price of P10,047,940.00 of which, as set out in the
document of sale, P2,000.000.00 was paid upon its execution, and the balance stipulated to be
payable in installments. 78

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

Some nine months afterwards, or on July 15, 1975, to be precise, BASECO, again with the
intervention of President Marcos, acquired ownership of the rest of the assets of NASSCO which
had not been included in the first two (2) purchase documents. This was accomplished by a deed
entitled "Contract of Purchase and Sale,"  which, like the Memorandum of Agreement dated October
79

9, 1973 supra also bore at the upper right-hand corner of its first page, the handwritten notation
of President Marcos reading, "APPROVED, July 29, 1973," and underneath it, his usual full
signature. Transferred to BASECO were NASSCO's "ownership and all its titles, rights and interests
over all equipment and facilities including structures, buildings, shops, quarters, houses, plants and
expendable or semi-expendable assets, located at the Engineer Island, known as the Engineer
Island Shops, including all the equipment of the Bataan National Shipyards (BNS) which were
excluded from the sale of NBS to BASECO but retained by BASECO and all other selected
equipment and machineries of NASSCO at J. Panganiban Smelting Plant." In the same deed,
NASSCO committed itself to cooperate with BASECO for the acquisition from the National
Government or other appropriate Government entity of Engineer Island. Consideration for the sale
was set at P5,000,000.00; a down payment of P1,000,000.00 appears to have been made, and the
balance was stipulated to be paid at 7% interest per annum in equal semi annual installments over a
term of nine (9) years, to commence after a grace period of two (2) years. Mr. Arturo Pacificador
again signed for NASSCO, together with the general manager, Mr. David R. Ines.
17. Loans Obtained
It further appears that on May 27, 1975 BASECO obtained a loan from the NDC, taken from "the last
available Japanese war damage fund of $19,000,000.00," to pay for "Japanese made heavy
equipment (brand new)."   On September 3, 1975, it got another loan also from the NDC in the
80

amount of P30,000,000.00 (id.). And on January 28, 1976, it got still another loan, this time from the
GSIS, in the sum of P12,400,000.00.   The claim has been made that not a single centavo has been
81

paid on these loans. 82

18. Reports to President Marcos

In September, 1977, two (2) reports were submitted to President Marcos regarding BASECO. The
first was contained in a letter dated September 5, 1977 of Hilario M. Ruiz, BASECO president.   The
83

second was embodied in a confidential memorandum dated September 16, 1977 of Capt. A.T.
Romualdez.   They further disclose the fine hand of Marcos in the affairs of BASECO, and that of a
84

Romualdez, a relative by affinity.

a. BASECO President's Report
In his letter of September 5, 1977, BASECO President Ruiz reported to Marcos that there had been
"no orders or demands for ship construction" for some time and expressed the fear that if that state
of affairs persisted, BASECO would not be able to pay its debts to the Government, which at the
time stood at the not inconsiderable amount of P165,854,000.00.   He suggested that, to "save the
85

situation," there be a "spin-off (of their) shipbuilding activities which shall be handled exclusively by
an entirely new corporation to be created;" and towards this end, he informed Marcos that BASECO
was —
* * inviting NDC and LUSTEVECO to participate by converting the NDC shipbuilding
loan to BASECO amounting to P341.165M and assuming and converting a portion of
BASECO's shipbuilding loans from REPACOM amounting to P52.2M or a total of
P83.365M as NDC's equity contribution in the new corporation. LUSTEVECO will
participate by absorbing and converting a portion of the REPACOM loan of Bay
Shipyard and Drydock, Inc., amounting to P32.538M. 86

b. Romualdez' Report
Capt. A.T. Romualdez' report to the President was submitted eleven (11) days later. It opened with
the following caption:
MEMORANDUM:
FOR : The President
SUBJECT: An Evaluation and Re-assessment of a Performance of a Mission
FROM: Capt. A.T. Romualdez.
Like Ruiz, Romualdez wrote that BASECO faced great difficulties in meeting its loan obligations due
chiefly to the fact that "orders to build ships as expected * * did not materialize."
He advised that five stockholders had "waived and/or assigned their holdings inblank," these being:
(1) Jose A. Rojas, (2) Severino de la Cruz, (3) Rodolfo Torres, (4) Magiliw Torres, and (5) Anthony
P. Lee. Pointing out that "Mr. Magiliw Torres * * is already dead and Mr. Jose A. Rojas had a major
heart attack," he made the following quite revealing, and it may be added, quite cynical and indurate
recommendation, to wit:
 * * (that) their replacements (be effected) so we can register their names in the stock
book prior to the implementation of your instructions to pass a board resolution to
legalize the transfers under SEC regulations;
2. By getting their replacements, the families cannot question us later on; and
3. We will owe no further favors from them. 87

He also transmitted to Marcos, together with the report, the following documents:  88

1. Stock certificates indorsed and assigned in blank with assignments and waivers;  89

2. The articles of incorporation, the amended articles, and the by-laws of BASECO;
3. Deed of Sales, wherein NASSCO sold to BASECO four (4) parcels of land in
"Engineer Island", Port Area, Manila;
4. Transfer Certificate of Title No. 124822 in the name of BASECO, covering
"Engineer Island";
5. Contract dated October 9, 1973, between NASSCO and BASECO re-structure and
equipment at Mariveles, Bataan;
6. Contract dated July 16, 1975, between NASSCO and BASECO re-structure and
equipment at Engineer Island, Port Area Manila;
7. Contract dated October 1, 1974, between EPZA and BASECO re 300 hectares of
land at Mariveles, Bataan;
8. List of BASECO's fixed assets;
9. Loan Agreement dated September 3, 1975, BASECO's loan from NDC of
P30,000,000.00;
10. BASECO-REPACOM Agreement dated May 27, 1975;
11. GSIS loan to BASECO dated January 28, 1976 of P12,400,000.00 for the
housing facilities for BASECO's rank-and-file employees.  90

Capt. Romualdez also recommended that BASECO's loans be restructured "until such period when
BASECO will have enough orders for ships in order for the company to meet loan obligations," and
that —
An LOI may be issued to government agencies using floating equipment, that a
linkage scheme be applied to a certain percent of BASECO's net profit as part of
BASECO's amortization payments to make it justifiable for you, Sir.  91

It is noteworthy that Capt. A.T. Romualdez does not appear to be a stockholder or officer of
BASECO, yet he has presented a report on BASECO to President Marcos, and his report
demonstrates intimate familiarity with the firm's affairs and problems.
19. Marcos' Response to Reports
President Marcos lost no time in acting on his subordinates' recommendations, particularly as
regards the "spin-off" and the "linkage scheme" relative to "BASECO's amortization payments."
a. Instructions re "Spin-Off"
Under date of September 28, 1977, he addressed a Memorandum to Secretary Geronimo Velasco
of the Philippine National Oil Company and Chairman Constante Fariñas of the National
Development Company, directing them "to participate in the formation of a new corporation resulting
from the spin-off of the shipbuilding component of BASECO along the following guidelines:
a. Equity participation of government shall be through LUSTEVECO and NDC in the
amount of P115,903,000 consisting of the following obligations of BASECO which
are hereby authorized to be converted to equity of the said new corporation, to wit:
1. NDC P83,865,000 (P31.165M loan & P52.2M Reparation)
2. LUSTEVECO P32,538,000 (Reparation)
b. Equity participation of government shall be in the form of non- voting shares.
For immediate compliance.  92
Mr. Marcos' guidelines were promptly complied with by his subordinates. Twenty-two (22) days after
receiving their president's memorandum, Messrs. Hilario M. Ruiz, Constante L. Fariñas and
Geronimo Z. Velasco, in representation of their respective corporations, executed a PRE-
INCORPORATION AGREEMENT dated October 20, 1977.   In it, they undertook to form a
93

shipbuilding corporation to be known as "PHIL-ASIA SHIPBUILDING CORPORATION," to bring to

realization their president's instructions. It would seem that the new corporation ultimately formed
was actually named "Philippine Dockyard Corporation (PDC)."  94

b. Letter of Instructions No. 670

Mr. Marcos did not forget Capt. Romualdez' recommendation for a letter of instructions. On February
14, 1978, he issued Letter of Instructions No. 670 addressed to the Reparations Commission
REPACOM the Philippine National Oil Company (PNOC), the Luzon Stevedoring Company
(LUSTEVECO), and the National Development Company (NDC). What is commanded therein is
summarized by the Solicitor General, with pithy and not inaccurate observations as to the effects
thereof (in italics), as follows:
* * 1) the shipbuilding equipment procured by BASECO through reparations be
transferred to NDC subject to reimbursement by NDC to BASECO (of) the amount of
s allegedly representing the handling and incidental expenses incurred by BASECO
in the installation of said equipment (so instead of NDC getting paid on its loan to
BASECO, it was made to pay BASECO instead the amount of P18.285M); 2) the
shipbuilding equipment procured from reparations through EPZA, now in the
possession of BASECO and BSDI (Bay Shipyard & Drydocking, Inc.) be transferred
to LUSTEVECO through PNOC; and 3) the shipbuilding equipment (thus) transferred
be invested by LUSTEVECO, acting through PNOC and NDC, as the government's
equity participation in a shipbuilding corporation to be established in partnership with
the private sector.
xxx xxx xxx
And so, through a simple letter of instruction and memorandum, BASECO's loan
obligation to NDC and REPACOM * * in the total amount of P83.365M and BSD's
REPACOM loan of P32.438M were wiped out and converted into non-voting
preferred shares. 
95

20. Evidence of Marcos'

Ownership of BASECO
It cannot therefore be gainsaid that, in the context of the proceedings at bar, the actuality of the
control by President Marcos of BASECO has been sufficiently shown.
Other evidence submitted to the Court by the Solicitor General proves that President Marcos not
only exercised control over BASECO, but also that he actually owns well nigh one hundred percent
of its outstanding stock.
It will be recalled that according to petitioner- itself, as of April 23, 1986, there were 218,819 shares
of stock outstanding, ostensibly owned by twenty (20) stockholders.   Four of these twenty are
96

juridical persons: (1) Metro Bay Drydock, recorded as holding 136,370 shares; (2) Fidelity

Management, Inc., 65,882 shares; (3) Trident Management, 7,412 shares; and (4) United Phil.
Lines, 1,240 shares. The first three corporations, among themselves, own an aggregate of 209,664
shares of BASECO stock, or 95.82% of the outstanding stock.
Now, the Solicitor General has drawn the Court's attention to the intriguing circumstance that found
in Malacanang shortly after the sudden flight of President Marcos, were certificates corresponding to
more than ninety-five percent (95%) of all the outstanding shares of stock of BASECO, endorsed in
blank, together with deeds of assignment of practically all the outstanding shares of stock of the
three (3) corporations above mentioned (which hold 95.82% of all BASECO stock), signed by the
owners thereof although not notarized.  97

More specifically, found in Malacanang (and now in the custody of the PCGG) were:
 1) the deeds of assignment of all 600 outstanding shares of Fidelity Management
Inc. — which supposedly owns as aforesaid 65,882 shares of BASECO stock;
2) the deeds of assignment of 2,499,995 of the 2,500,000 outstanding shares of
Metro Bay Drydock Corporation — which allegedly owns 136,370 shares of
BASECO stock;
3) the deeds of assignment of 800 outstanding shares of Trident Management Co.,
Inc. — which allegedly owns 7,412 shares of BASECO stock, assigned in
blank;   and 98

4) stock certificates corresponding to 207,725 out of the 218,819 outstanding shares

of BASECO stock; that is, all but 5 % — all endorsed in blank.  99

While the petitioner's counsel was quick to dispute this asserted fact, assuring this Court that the
BASECO stockholders were still in possession of their respective stock certificates and had "never
endorsed * * them in blank or to anyone else," 100 that denial is exposed by his own prior and subsequent recorded
statements as a mere gesture of defiance rather than a verifiable factual declaration.
By resolution dated September 25, 1986, this Court granted BASECO's counsel a period of 10 days
"to SUBMIT, as undertaken by him, * * the certificates of stock issued to the stockholders of * *
BASECO as of April 23, 1986, as listed in Annex 'P' of the petition.' 101 Counsel thereafter moved for extension;
and in his motion dated October 2, 1986, he declared inter alia that "said certificates of stock are in the possession of third parties, among
whom being the respondents themselves * * and petitioner is still endeavoring to secure copies thereof from them." 102 On the same day he
filed another motion praying that he be allowed "to secure copies of the Certificates of Stock in the name of Metro Bay Drydock, Inc., and of
all other Certificates, of Stock of petitioner's stockholders in possession of respondents." 103
In a Manifestation dated October 10, 1986,, 104 the Solicitor General not unreasonably argued that counsel's aforestated motion to secure
copies of the stock certificates "confirms the fact that stockholders of petitioner corporation are not in possession of * * (their) certificates of
stock," and the reason, according to him, was "that 95% of said shares * * have been endorsed in blank and found in Malacañang after the
former President and his family fled the country." To this manifestation BASECO's counsel replied on November 5, 1986, as already
mentioned, Stubbornly insisting that the firm's stockholders had not really assigned their stock. 105
In view of the parties' conflicting declarations, this Court resolved on November 27, 1986 among other things "to require * * the petitioner * *
to deposit upon proper receipt with Clerk of Court Juanito Ranjo the originals of the stock certificates alleged to be in its possession or
accessible to it, mentioned and described in Annex 'P' of its petition, (and other pleadings) * * within ten (10) days from notice." 106 In a
motion filed on December 5, 1986, 107BASECO's counsel made the statement, quite surprising in the premises, that "it will negotiate with
the owners (of the BASECO stock in question) to allow petitioner to borrow from them, if available, the certificates referred to" but that "it
needs a more sufficient time therefor" (sic). BASECO's counsel however eventually had to confess inability to produce the originals of the
stock certificates, putting up the feeble excuse that while he had "requested the stockholders to allow * * (him) to borrow said certificates, * *
some of * * (them) claimed that they had delivered the certificates to third parties by way of pledge and/or to secure performance of
obligations, while others allegedly have entrusted them to third parties in view of last national emergency." 108 He has conveniently omitted,
nor has he offered to give the details of the transactions adverted to by him, or to explain why he had not impressed on the supposed
stockholders the primordial importance of convincing this Court of their present custody of the originals of the stock, or if he had done so,
why the stockholders are unwilling to agree to some sort of arrangement so that the originals of their certificates might at the very least be
exhibited to the Court. Under the circumstances, the Court can only conclude that he could not get the originals from the stockholders for the
simple reason that, as the Solicitor General maintains, said stockholders in truth no longer have them in their possession, these having
already been assigned in blank to then President Marcos.
21. Facts Justify Issuance of Sequestration and Takeover Orders
In the light of the affirmative showing by the Government that, prima facie at least, the stockholders
and directors of BASECO as of April, 1986 109 were mere "dummies," nominees or alter egos of President Marcos; at any
rate, that they are no longer owners of any shares of stock in the corporation, the conclusion cannot be avoided that said stockholders and
directors have no basis and no standing whatever to cause the filing and prosecution of the instant proceeding; and to grant relief to
BASECO, as prayed for in the petition, would in effect be to restore the assets, properties and business sequestered and taken over by the
PCGG to persons who are "dummies," nominees or alter egos of the former president.
From the standpoint of the PCGG, the facts herein stated at some length do indeed show that the
private corporation known as BASECO was "owned or controlled by former President Ferdinand E.
Marcos * * during his administration, * * through nominees, by taking advantage of * * (his) public
office and/or using * * (his) powers, authority, influence * *," and that NASSCO and other property of
the government had been taken over by BASECO; and the situation justified the sequestration as
well as the provisional takeover of the corporation in the public interest, in accordance with the terms
of Executive Orders No. 1 and 2, pending the filing of the requisite actions with the Sandiganbayan
to cause divestment of title thereto from Marcos, and its adjudication in favor of the Republic
pursuant to Executive Order No. 14.
As already earlier stated, this Court agrees that this assessment of the facts is correct; accordingly, it
sustains the acts of sequestration and takeover by the PCGG as being in accord with the law, and,
in view of what has thus far been set out in this opinion, pronounces to be without merit the theory
that said acts, and the executive orders pursuant to which they were done, are fatally defective in not
according to the parties affected prior notice and hearing, or an adequate remedy to impugn, set
aside or otherwise obtain relief therefrom, or that the PCGG had acted as prosecutor and judge at
the same time.
22. Executive Orders Not a Bill of Attainder
Neither will this Court sustain the theory that the executive orders in question are a bill of
attainder. 110 "A bill of attainder is a legislative act which inflicts punishment without judicial trial." 111 "Its essence is the substitution of a
legislative for a judicial determination of guilt." 112
In the first place, nothing in the executive orders can be reasonably construed as a determination or declaration of guilt. On the contrary, the
executive orders, inclusive of Executive Order No. 14, make it perfectly clear that any judgment of guilt in the amassing or acquisition of "ill-
gotten wealth" is to be handed down by a judicial tribunal, in this case, the Sandiganbayan, upon complaint filed and prosecuted by the
PCGG. In the second place, no punishment is inflicted by the executive orders, as the merest glance at their provisions will immediately
make apparent. In no sense, therefore, may the executive orders be regarded as a bill of attainder.
23. No Violation of Right against Self-Incrimination and Unreasonable Searches and Seizures
BASECO also contends that its right against self incrimination and unreasonable searches and
seizures had been transgressed by the Order of April 18, 1986 which required it "to produce
corporate records from 1973 to 1986 under pain of contempt of the Commission if it fails to do so."
The order was issued upon the authority of Section 3 (e) of Executive Order No. 1, treating of the
PCGG's power to "issue subpoenas requiring * * the production of such books, papers, contracts,
records, statements of accounts and other documents as may be material to the investigation
conducted by the Commission, " and paragraph (3), Executive Order No. 2 dealing with its power to
"require all persons in the Philippines holding * * (alleged "ill-gotten") assets or properties, whether
located in the Philippines or abroad, in their names as nominees, agents or trustees, to make full
disclosure of the same * *." The contention lacks merit.
It is elementary that the right against self-incrimination has no application to juridical persons.
While an individual may lawfully refuse to answer incriminating questions unless
protected by an immunity statute, it does not follow that a corporation, vested with
special privileges and franchises, may refuse to show its hand when charged with an
abuse ofsuchprivileges * * 113
Relevant jurisprudence is also cited by the Solicitor General. 114
* * corporations are not entitled to all of the constitutional protections which private
individuals have. * * They are not at all within the privilege against self-
incrimination, although this court more than once has said that the privilege runs very
closely with the 4th Amendment's Search and Seizure provisions. It is also settled
that an officer of the company cannot refuse to produce its records in its possession
upon the plea that they will either incriminate him or may incriminate it." (Oklahoma
Press Publishing Co. v. Walling, 327 U.S. 186; emphasis, the Solicitor General's).
* * The corporation is a creature of the state. It is presumed to be incorporated for the
benefit of the public. It received certain special privileges and franchises, and holds
them subject to the laws of the state and the limitations of its charter. Its powers are
limited by law. It can make no contract not authorized by its charter. Its rights to act
as a corporation are only preserved to it so long as it obeys the laws of its creation.
There is a reserve right in the legislature to investigate its contracts and find out
whether it has exceeded its powers. It would be a strange anomaly to hold that a
state, having chartered a corporation to make use of certain franchises, could not, in
the exercise of sovereignty, inquire how these franchises had been employed, and
whether they had been abused, and demand the production of the corporate books
and papers for that purpose. The defense amounts to this, that an officer of the
corporation which is charged with a criminal violation of the statute may plead the
criminality of such corporation as a refusal to produce its books. To state this
proposition is to answer it. While an individual may lawfully refuse to answer
incriminating questions unless protected by an immunity statute, it does not follow
 that a corporation, vested with special privileges and franchises may refuse to show
its hand when charged with an abuse of such privileges. (Wilson v. United States, 55
Law Ed., 771, 780 [emphasis, the Solicitor General's])
At any rate, Executive Order No. 14-A, amending Section 4 of Executive Order No. 14 assures
protection to individuals required to produce evidence before the PCGG against any possible
violation of his right against self-incrimination. It gives them immunity from prosecution on the basis
of testimony or information he is compelled to present. As amended, said Section 4 now provides
that —
xxx xxx xxx
The witness may not refuse to comply with the order on the basis of his privilege
against self-incrimination; but no testimony or other information compelled under the
order (or any information directly or indirectly derived from such testimony, or other
information) may be used against the witness in any criminal case, except a
prosecution for perjury, giving a false statement, or otherwise failing to comply with
the order.
The constitutional safeguard against unreasonable searches and seizures finds no application to the
case at bar either. There has been no search undertaken by any agent or representative of the
PCGG, and of course no seizure on the occasion thereof.
24. Scope and Extent of Powers of the PCGG
One other question remains to be disposed of, that respecting the scope and extent of the powers
that may be wielded by the PCGG with regard to the properties or businesses placed under
sequestration or provisionally taken over. Obviously, it is not a question to which an answer can be
easily given, much less one which will suffice for every conceivable situation.
a. PCGG May Not Exercise Acts of Ownership
One thing is certain, and should be stated at the outset: the PCGG cannot exercise acts of
dominion over property sequestered, frozen or provisionally taken over. AS already earlier stressed
with no little insistence, the act of sequestration; freezing or provisional takeover of property does not
import or bring about a divestment of title over said property; does not make the PCGG the owner
thereof. In relation to the property sequestered, frozen or provisionally taken over, the PCGG is a
conservator, not an owner. Therefore, it can not perform acts of strict ownership; and this is specially
true in the situations contemplated by the sequestration rules where, unlike cases of receivership, for
example, no court exercises effective supervision or can upon due application and hearing, grant
authority for the performance of acts of dominion.
Equally evident is that the resort to the provisional remedies in question should entail the least
possible interference with business operations or activities so that, in the event that the accusation of
the business enterprise being "ill gotten" be not proven, it may be returned to its rightful owner as far
as possible in the same condition as it was at the time of sequestration.
b. PCGG Has Only Powers of Administration
The PCGG may thus exercise only powers of administration over the property or business
sequestered or provisionally taken over, much like a court-appointed receiver, 115 such as to bring and
defend actions in its own name; receive rents; collect debts due; pay outstanding debts; and generally do such other acts and things as may
be necessary to fulfill its mission as conservator and administrator. In this context, it may in addition enjoin or restrain any actual or
threatened commission of acts by any person or entity that may render moot and academic, or frustrate or otherwise make ineffectual its
efforts to carry out its task; punish for direct or indirect contempt in accordance with the Rules of Court; and seek and secure the assistance
of any office, agency or instrumentality of the government. 116 In the case of sequestered businesses generally (i.e., going concerns,
businesses in current operation), as in the case of sequestered objects, its essential role, as already discussed, is that of conservator,
caretaker, "watchdog" or overseer. It is not that of manager, or innovator, much less an owner.
c. Powers over Business Enterprises Taken Over by Marcos or Entities or Persons
Close to him; Limitations Thereon
Now, in the special instance of a business enterprise shown by evidence to have been "taken over
by the government of the Marcos Administration or by entities or persons close to former President
Marcos," 117 the PCGG is given power and authority, as already adverted to, to "provisionally take (it) over in the public interest or to
prevent * * (its) disposal or dissipation;" and since the term is obviously employed in reference to going concerns, or business enterprises in
operation, something more than mere physical custody is connoted; the PCGG may in this case exercise some measure of control in the
operation, running, or management of the business itself. But even in this special situation, the intrusion into management should be
restricted to the minimum degree necessary to accomplish the legislative will, which is "to prevent the disposal or dissipation" of the business
enterprise. There should be no hasty, indiscriminate, unreasoned replacement or substitution of management officials or change of policies,
particularly in respect of viable establishments. In fact, such a replacement or substitution should be avoided if at all possible, and
undertaken only when justified by demonstrably tenable grounds and in line with the stated objectives of the PCGG. And it goes without
saying that where replacement of management officers may be called for, the greatest prudence, circumspection, care and attention - should
accompany that undertaking to the end that truly competent, experienced and honest managers may be recruited. There should be no role to
be played in this area by rank amateurs, no matter how wen meaning. The road to hell, it has been said, is paved with good intentions. The
business is not to be experimented or played around with, not run into the ground, not driven to bankruptcy, not fleeced, not ruined. Sight
should never be lost sight of the ultimate objective of the whole exercise, which is to turn over the business to the Republic, once judicially
established to be "ill-gotten." Reason dictates that it is only under these conditions and circumstances that the supervision, administration
and control of business enterprises provisionally taken over may legitimately be exercised.
d. Voting of Sequestered Stock; Conditions Therefor
So, too, it is within the parameters of these conditions and circumstances that the PCGG may
properly exercise the prerogative to vote sequestered stock of corporations, granted to it by the
President of the Philippines through a Memorandum dated June 26, 1986. That Memorandum
authorizes the PCGG, "pending the outcome of proceedings to determine the ownership of * *
(sequestered) shares of stock," "to vote such shares of stock as it may have sequestered in
corporations at all stockholders' meetings called for the election of directors, declaration of
dividends, amendment of the Articles of Incorporation, etc." The Memorandum should be construed
in such a manner as to be consistent with, and not contradictory of the Executive Orders earlier
promulgated on the same matter. There should be no exercise of the right to vote simply because
the right exists, or because the stocks sequestered constitute the controlling or a substantial part of
the corporate voting power. The stock is not to be voted to replace directors, or revise the articles or
by-laws, or otherwise bring about substantial changes in policy, program or practice of the
corporation except for demonstrably weighty and defensible grounds, and always in the context of
the stated purposes of sequestration or provisional takeover, i.e., to prevent the dispersion or undue
disposal of the corporate assets. Directors are not to be voted out simply because the power to do
so exists. Substitution of directors is not to be done without reason or rhyme, should indeed be
shunned if at an possible, and undertaken only when essential to prevent disappearance or wastage
of corporate property, and always under such circumstances as assure that the replacements are
truly possessed of competence, experience and probity.
In the case at bar, there was adequate justification to vote the incumbent directors out of office and
elect others in their stead because the evidence showed prima facie that the former were just tools
of President Marcos and were no longer owners of any stock in the firm, if they ever were at all. This
is why, in its Resolution of October 28, 1986; 118 this Court declared that —
Petitioner has failed to make out a case of grave abuse or excess of jurisdiction in
respondents' calling and holding of a stockholders' meeting for the election of
directors as authorized by the Memorandum of the President * * (to the PCGG) dated
June 26, 1986, particularly, where as in this case, the government can, through its
designated directors, properly exercise control and management over what appear to
be properties and assets owned and belonging to the government itself and over
which the persons who appear in this case on behalf of BASECO have failed to show
any right or even any shareholding in said corporation.
It must however be emphasized that the conduct of the PCGG nominees in the BASECO Board in
the management of the company's affairs should henceforth be guided and governed by the norms
herein laid down. They should never for a moment allow themselves to forget that they are
conservators, not owners of the business; they are fiduciaries, trustees, of whom the highest degree
of diligence and rectitude is, in the premises, required.
25. No Sufficient Showing of Other Irregularities
As to the other irregularities complained of by BASECO, i.e., the cancellation or revision, and the
execution of certain contracts, inclusive of the termination of the employment of some of its
executives, 119 this Court cannot, in the present state of the evidence on record, pass upon them. It is not necessary to do so. The
issues arising therefrom may and will be left for initial determination in the appropriate action. But the Court will state that absent any showing
of any important cause therefor, it will not normally substitute its judgment for that of the PCGG in these individual transactions. It is clear
however, that as things now stand, the petitioner cannot be said to have established the correctness of its submission that the acts of the
PCGG in question were done without or in excess of its powers, or with grave abuse of discretion.
WHEREFORE, the petition is dismissed. The temporary restraining order issued on October 14,
1986 is lifted.
Yap, Fernan, Paras, Gancayco and Sarmiento, JJ., concur.