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Republic of the PhilippinesSUPREME COURTManila

EN BANC

G.R. No. L-2880 December 4, 1906

FRANK S. BOURNS, plaintiff-appellee, vs.D. M. CARMAN, ET AL., defendants-appellants.

MAPA, J.:

The plaintiff in this action seeks to recover the sum of $437.50, United Stated currency, balance due on a contract for the sawing of lumber for the lumber yard of Lo-Chim-Lim. the contract relating to the said work was entered into by the said Lo-Chim-Lim, acting as in his own name with the plaintiff, and it appears that the said Lo-Chim-Lim personally agreed to pay for the work himself. The plaintiff, however, has brought this action against Lo-Chim-Lim and his codefendants jointly, alleging that, at the time the contract was made, they were the joint proprietors and operators of the said lumber yard engaged in the purchase and sale of lumber under the name and style of Lo-Chim-Lim. Apparently the plaintiff tries to show by the words above italicized that the other defendants were the partners of Lo-Chim-Lim in the said lumber-yard business.lawphil.net

The court below dismissed the action as to the defendants D. M. Carman and Fulgencio Tan-Tongco on the ground that they were not the partners of Lo-Chim-Lim, and rendered judgment against the other defendants for the amount claimed in the complaint with the costs of proceedings. Vicente Palanca and Go-Tauco only excepted to the said judgment, moved for a new trial, and have brought the case to this court by bill of exceptions.

The evidence of record shows, according to the judgment of the court, "That Lo-Chim-Lim had a certain lumber yard in Calle Lemery of the city of Manila, and that he was the manager of the same, having ordered the plaintiff to do some work for him at his sawmill in the city of Manila; and that Vicente Palanca was his partner, and had an interest in the said business as well as in the profits and losses thereof . . .," and that Go-Tuaco received part of the earnings of the lumber yard in the management of which he was interested.

The court below accordingly found that "Lo-Chim-Lim, Vicente Palanca, Go-Tuaco had a lumber yard in Calle Lemmery of the city of Manila in the year 1904, and participated in the profits and losses of business and that Lo-Chim-Lim was managing partner of the said lumber yard." In other words, coparticipants with the said Lo-Chim-Lim in the business in question.

Although the evidence upon this point as stated by the by the however, that is plainly and manifestly in conflict with the above finding of that court. Such finding should therefore be sustained. lawphil.net

The question thus raised is, therefore, purely one of law and reduces itself to determining the real legal nature of the participation which the appellants had in Lo-Chim-Lim's lumber yard, and consequently their liability toward the plaintiff, in connection with the transaction which gave rise to the present suit.

It seems that the alleged partnership between Lo-Chim-Lim and the appellants was formed by verbal agreement only. At least there is no evidence tending to show that the said agreement was reduced to writing, or that it was ever recorded in a public instrument.

Moreover, that partnership had no corporate name. The plaintiff himself alleges in his complaint that the partnership was engaged in business under the name and style of Lo-Chim-Lim only, which according to the evidence was the name of one of the defendants. On the other hand, and this is very important, it does not appear that there was any mutual agreement, between the parties, and if there were any,

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it has not been shown what the agreement was. As far as the evidence shows it seems that the business was conducted by Lo-Chim-Lim in his own name, although he gave to the appellants a share was has been shown with certainty. The contracts made with the plaintiff were made by Lo-Chim-Lim individually in his own name, and there is no evidence that the partnership over contracted in any other form. Under such circumstances we find nothing upon which to consider this partnership other than as a partnership of cuentas en participacion. It may be that, as a matter of fact, it is something different, but a simple business and scant evidence introduced by the partnership We see nothing, according to the evidence, but a simple business conducted by Lo-Chim-Lim exclusively, in his own name, the names of other persons interested in the profits and losses of the business nowhere appearing. A partnership constituted in such a manner, the existence of which was only known to those who had an interest in the same, being no mutual agreements between the partners and without a corporate name indicating to the public in some way that there were other people besides the one who ostensibly managed and conducted the business, is exactly the accidental partnership of cuentas en participacion defined in article 239 of the Code of Commerce.

Those who contract with the person under whose name the business of such partnership of cuentas en participacion is conducted, shall have only a right of action against such person and not against the other persons interested, and the latter, on the other hand, shall have no right of action against the third person who contracted with the manager unless such manager formally transfers his right to them. (Art 242 of the code Of Commerce.) It follows, therefore that the plaintiff has no right to demand from the appellants the payment of the amount claimed in the complaint, as Lo-Chim-Lim was the only one who contracted with him. the action of the plaintiff lacks, therefore, a legal foundation and should be accordingly dismissed.

The judgment appealed from this hereby reversed and the appellants are absolved of the complaint without express provisions as to the costs of both instances. After the expiration of twenty days let judgment be entered in accordance herewith, and ten days thereafter the cause be remanded to the court below for execution. So ordered.

Republic of the PhilippinesSUPREME COURTManila

EN BANC

G.R. No. L-37331             March 18, 1933

FRED M. HARDEN, J.D. HIGHSMITH, and JOHN C. HART, in their own behalf and in that all other stockholders of the Balatoc Mining Company, etc., plaintiffs-appellants, vs.BENGUET CONSOLIDATED MINING COMPANY, BALATOC MINING COMPANY, H. E. RENZ, JOHN W. JAUSSERMANN, and A. W. BEAM, defendants-appellees.

STREET, J.:

This action was originally instituted in the Court of First Instance of the City of Manila by F. M. Harden, acting in his own behalf and that of all other stockholders of the Balatoc Mining Co. who might join in the action and contribute to the expense of the suit. With the plaintiff Harden two others, J. D. Highsmith and John C. Hart, subsequently associated themselves. The defendants are the Benguet Consolidated Mining Co., the Balatoc Mining Co., H. E. Renz, John W. Haussermann, and A. W. Beam. The principal purpose of the original action was to annul a certificate covering 600,000 shares of the stock of the Balatoc Mining Co., which have been issued to the Benguet Consolidated Mining Co., and to secure to the Balatoc Mining Co., the restoration of a large sum of money alleged to have been unlawfully collected by the Benguet Consolidated Mining Co., with legal interest, after deduction therefrom of the amount expended by the latter company under a contract between the two companies, bearing date of March 9, 1927. The complaint was afterwards amended so as to include a prayer for the annulment of this contract. Shortly prior to the institution of this

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lawsuit, the Benguet Consolidated Mining Co., transferred to H. E. Renz, as trustee, the certificate for 600,000 shares of the Balatoc Mining Co. which constitute the principal subject matter of the action. This was done apparently to facilitate the splitting up to the shares in the course of the sale or distribution. To prevent this the plaintiffs, upon filing their original complaint, procured a preliminary injunction restraining the defendants, their agents and servants, from selling, assigning or transferring the 600,000 shares of the Balatoc Mining Co., or any part thereof, and from removing said shares from the Philippine Islands. This explains the connection of Renz with the case. The other individual defendants are made merely as officials of the Benguet Consolidated Mining Co. Upon hearing the cause the trial court dismissed the complaint and dissolved the preliminary injunction, with costs against the plaintiffs. From this judgment the plaintiffs appealed.

The facts which have given rise this lawsuit are simple, as the financial interests involve are immense. Briefly told these facts are as follows: The Benguet Consolidated Mining Co. was organized in June, 1903, as a sociedad anonima in conformity with the provisions of Spanish law; while the Balatoc Mining Co. was organized in December 1925, as a corporation, in conformity with the provisions of the Corporation Law (Act No. 1459). Both entities were organized for the purpose of engaging in the mining of gold in the Philippine Islands, and their respective properties are located only a few miles apart in the subprovince of Benguet. The capital stock of the Balatoc Mining Co. consists of one million shares of the par value of one peso (P1) each.

When the Balatoc Mining Co. was first organized the properties acquired by it were largely undeveloped; and the original stockholders were unable to supply the means needed for profitable operation. For this reason, the board of directors of the corporation ordered a suspension of all work, effective July 31, 1926. In November of the same year a general meeting of the company's stockholders appointed a committee for the purpose of interesting outside capital in the mine. Under the authority of this resolution the committee approached A. W. Beam, then president and general manager of the Benguet Company, to secure the capital necessary to the development of the Balatoc property. As a result of the negotiations thus begun, a contract, formally

authorized by the management of both companies, was executed on March 9, 1927, the principal features of which were that the Benguet Company was to proceed with the development and construct a milling plant for the Balatoc mine, of a capacity of 100 tons of ore per day, and with an extraction of at least 85 per cent of the gold content. The Benguet Company also agreed to erect an appropriate power plant, with the aerial tramlines and such other surface buildings as might be needed to operate the mine. In return for this it was agreed that the Benguet Company should receive from the treasurer of the Balatoc Company shares of a par value of P600,000, in payment for the first P600,000 be thus advanced to it by the Benguet Company.

The performance of this contract was speedily begun, and by May 31, 1929, the Benguet Company had spent upon the development the sum of P1,417,952.15. In compensation for this work a certificate for six hundred thousand shares of the stock of the Balatoc Company has been delivered to the Benguet Company, and the excess value of the work in the amount of P817,952.15 has been returned to the Benguet Company in cash. Meanwhile dividends of the Balatoc Company have been enriching its stockholders, and at the time of the filing of the complaint the value of its shares had increased in the market from a nominal valuation to more than eleven pesos per share. While the Benguet Company was pouring its million and a half into the Balatoc property, the arrangements made between the two companies appear to have been viewed by the plaintiff Harden with complacency, he being the owner of many thousands of the shares of the Balatoc Company. But as soon as the success of the development had become apparent, he began this litigation in which he has been joined by two others of the eighty shareholders of the Balatoc Company.

Briefly, the legal point upon which the action is planted is that it is unlawful for the Benguet Company to hold any interest in a mining corporation and that the contract by which the interest here in question was acquired must be annulled, with the consequent obliteration of the certificate issued to the Benguet Company and the corresponding enrichment of the shareholders of the Balatoc Company.

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When the Philippine Islands passed to the sovereignty of the United States, in the attention of the Philippine Commission was early drawn to the fact that there is no entity in Spanish law exactly corresponding to the notion of the corporation in English and American law; and in the Philippine Bill, approved July 1, 1902, the Congress of the United States inserted certain provisions, under the head of Franchises, which were intended to control the lawmaking power in the Philippine Islands in the matter of granting of franchises, privileges and concessions. These provisions are found in section 74 and 75 of the Act. The provisions of section 74 have been superseded by section 28 of the Act of Congress of August 29, 1916, but in section 75 there is a provision referring to mining corporations, which still remains the law, as amended. This provisions, in its original form, reads as follows: "... it shall be unlawful for any member of a corporation engaged in agriculture or mining and for any corporation organized for any purpose except irrigation to be in any wise interested in any other corporation engaged in agriculture or in mining."

Under the guidance of this and certain other provisions thus enacted by Congress, the Philippine Commission entered upon the enactment of a general law authorizing the creation of corporations in the Philippine Islands. This rather elaborate piece of legislation is embodied in what is called our Corporation Law (Act No. 1459 of the Philippine Commission). The evident purpose of the commission was to introduce the American corporation into the Philippine Islands as the standard commercial entity and to hasten the day when the sociedad anonima of the Spanish law would be obsolete. That statute is a sort of codification of American corporate law.

For the purposes general description only, it may be stated that the sociedad anonima is something very much like the English joint stock company, with features resembling those of both the partnership is shown in the fact that sociedad, the generic component of its name in Spanish, is the same word that is used in that language to designate other forms of partnership, and in its organization it is constructed along the same general lines as the ordinary partnership. It is therefore not surprising that for purposes of loose translation the expression sociedad anonima has not infrequently the other hand, the

affinity of this entity to the American corporation has not escaped notice, and the expression sociedad anonima is now generally translated by the word corporation. But when the word corporation is used in the sense of sociedad anonima and close discrimination is necessary, it should be associated with the Spanish expression sociedad anonima either in a parenthesis or connected by the word "or". This latter device was adopted in sections 75 and 191 of the Corporation Law.

In drafting the Corporation Law the Philippine Commission inserted bodily, in subsection (5) of section 13 of that Act (No. 1459) the words which we have already quoted from section 75 of the Act of Congress of July 1, 1902 (Philippine Bill); and it is of course obvious that whatever meaning originally attached to this provision in the Act of Congress, the same significance should be attached to it in section 13 of our Corporation Law.

As it was the intention of our lawmakers to stimulate the introduction of the American Corporation into Philippine law in the place of the sociedad anonima, it was necessary to make certain adjustments resulting from the continued co-existence, for a time, of the two forms of commercial entities. Accordingly, in section 75 of the Corporation Law, a provision is found making the sociedad anonima subject to the provisions of the Corporation Law "so far as such provisions may be applicable", and giving to the sociedades anonimas previously created in the Islands the option to continue business as such or to reform and organize under the provisions of the Corporation Law. Again, in section 191 of the Corporation Law, the Code of Commerce is repealed in so far as it relates to sociedades anonimas. The purpose of the commission in repealing this part of the Code of Commerce was to compel commercial entities thereafter organized to incorporate under the Corporation Law, unless they should prefer to adopt some form or other of the partnership. To this provision was added another to the effect that existing sociedades anonimas, which elected to continue their business as such, instead of reforming and reorganizing under the Corporation Law, should continue to be governed by the laws that were in force prior to the passage of this Act "in relation to their organization and method of transacting business and to the rights of members thereof as

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between themselves, but their relations to the public and public officials shall be governed by the provisions of this Act."

As already observed, the provision above quoted from section 75 of the Act Congress of July 1, 1902 (Philippine Bill), generally prohibiting corporations engaged in mining and members of such from being interested in any other corporation engaged in mining, was amended by section 7 of Act No. 3518 of the Philippine Legislature, approved by Congress March 1, 1929. The change in the law effected by this amendment was in the direction of liberalization. Thus, the inhibition contained in the original provision against members of a corporation engaged in agriculture or mining from being interested in other corporations engaged in agriculture or in mining was so modified as merely to prohibit any such member from holding more than fifteen per centum of the outstanding capital stock of another such corporation. Moreover, the explicit prohibition against the holding by any corporation (except for irrigation) of an interest in any other corporation engaged in agriculture or in mining was so modified as to limit the restriction to corporations organized for the purpose of engaging in agriculture or in mining.

As originally drawn, our Corporation Law (Act No. 1459) did not contain any appropriate clause directly penalizing the act of a corporation, a member of a corporation , in acquiring an interest contrary to paragraph (5) of section 13 of the Act. The Philippine Legislature undertook to remedy this situation in section 3 of Act No. 2792 of the Philippine Legislature, approved on February 18, 1919, but this provision was declared invalid by this court inGovernment of the Philippine Islands vs. El Hogar Filipino (50 Phil., 399), for lack of an adequate title to the Act. Subsequently the Legislature reenacted substantially the same penal provision in section 21 of Act No. 3518, under a title sufficiently broad to comprehend the subject matter. This part of Act No. 3518 became effective upon approval by the Governor-General, on December 3, 1928, and it was therefore in full force when the contract now in question was made.

This provision was inserted as a new section in the Corporation Law, forming section 1990 (A) of said Act as it now stands. Omitting the proviso, which seems not to be pertinent to the present controversy, said provision reads as follows:

SEC. 190 (A). Penalties. — The violation of any of the provisions of this Act and its amendments not otherwise penalized therein, shall be punished by a fine of not more than five thousand pesos and by imprisonment for not more than five years, in the discretion of the court. If the violation is committed by a corporation, the same shall, upon such violation being proved, be dissolved by quo warranto proceedings instituted by the Attorney-General or by any provincial fiscal by order of said Attorney-General: . . . .

Upon a survey of the facts sketched above it is obvious that there are two fundamental questions involved in this controversy. The first is whether the plaintiffs can maintain an action based upon the violation of law supposedly committed by the Benguet Company in this case. The second is whether, assuming the first question to be answered in the affirmative, the Benguet Company, which was organized as a sociedad anonima, is a corporation within the meaning of the language used by the Congress of the United States, and later by the Philippine Legislature, prohibiting a mining corporation from becoming interested in another mining corporation. It is obvious that, if the first question be answered in the negative, it will be unnecessary to consider the second question in this lawsuit.

Upon the first point it is at once obvious that the provision referred to was adopted by the lawmakers with a sole view to the public policy that should control in the granting of mining rights. Furthermore, the penalties imposed in what is now section 190 (A) of the Corporation Law for the violation of the prohibition in question are of such nature that they can be enforced only by a criminal prosecution or by an action of quo warranto. But these proceedings can be maintained only by the Attorney-General in representation of the Government.

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What room then is left for the private action which the plaintiffs seek to assert in this case? The defendant Benguet Company has committed no civil wrong against the plaintiffs, and if a public wrong has been committed, the directors of the Balatoc Company, and the plaintiff Harden himself, were the active inducers of the commission of that wrong. The contract, supposing it to have been unlawful in fact, has been performed on both sides, by the building of the Balatoc plant by the Benguet Company and the delivery to the latter of the certificate of 600,000 shares of the Balatoc Company. There is no possibility of really undoing what has been done. Nobody would suggest the demolition of the mill. The Balatoc Company is secure in the possession of that improvement, and talk about putting the parties in status quo ante by restoring the consideration with interest, while the Balatoc Company remains in possession of what it obtained by the use of that money, does not quite meet the case. Also, to mulct the Benguet Company in many millions of dollars in favor of individuals who have not the slightest equitable right to that money in a proposition to which no court can give a ready assent.

The most plausible presentation of the case of the plaintiffs proceeds on the assumption that only one of the contracting parties has been guilty of a misdemeanor, namely, the Benguet Company, and that the other party, the Balatoc Company, is wholly innocent to participation in that wrong. The plaintiffs would then have us apply the second paragraph of article 1305 of the Civil Code which declares that an innocent party to an illegal contract may recover anything he may have given, while he is not bound to fulfill any promise he may have made. But, supposing that the first hurdle can be safely vaulted, the general remedy supplied in article 1305 of the Civil Code cannot be invoked where an adequate special remedy is supplied in a special law. It has been so held by this court in Go Chioco vs. Martinez (45 Phil., 256, 280), where we refused to apply that article to a case of nullity arising upon a usurious loan. The reason given for the decision on this point was that the Usury Act, as amended, contains all the provisions necessary for the effectuation of its purposes, with the result that the remedy given in article 1305 of the Civil Code is unnecessary. Much more is that idea applicable to the situation now before us, where the special provisions give ample remedies for the enforcement of the law by action in the

name of the Government, and where no civil wrong has been done to the party here seeking redress.

The view of the case presented above rest upon considerations arising upon our own statutes; and it would seem to be unnecessary to ransack the American decisions for analogies pertinent to the case. We may observe, however, that the situation involved is not unlike that which has frequently arisen in the United States under provisions of the National Bank Act prohibiting banks organized under that law from holding real property. It has been uniformly held that a trust deed or mortgaged conveying property of this kind to a bank, by way of security, is valid until the transaction is assailed in a direct proceeding instituted by the Government against the bank, and the illegality of such tenure supplies no basis for an action by the former private owner, or his creditor, to annul the conveyance. (National Bank vs. Matthews, 98 U. S., 621; Kerfoot vs. Farmers & M. Bank, 218 U. S., 281.) Other analogies point in the same direction. (South & Ala. R. Ginniss vs. B. & M. Consol. etc. Mining Co., 29 Mont., 428; Holmes & Griggs Mfg. Co. vs. Holmes & Wessell Metal Co., 127 N. Y., 252; Oelbermann vs. N. Y. & N. R. Co., 77 Hun., 332.)

Most suggestive perhaps of all the cases in Compañia Azucarera de Carolina vs. Registrar (19 Porto Rico, 143), for the reason that this case arose under a provision of the Foraker Act, a law analogous to our Philippine Bill. It appears that the registrar had refused to register two deeds in favor of the Compañia Azucarera on the ground that the land thereby conveyed was in excess of the area permitted by law to the company. The Porto Rican court reversed the ruling of the registrar and ordered the registration of the deeds, saying:

Thus it may be seen that a corporation limited by the law or by its charter has until the State acts every power and capacity that any other individual capable of acquiring lands, possesses. The corporation may exercise every act of ownership over such lands; it may sue in ejectment or unlawful detainer and it may demand specific performance. It has an absolute title against all the world except the State after a proper proceeding

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is begun in a court of law. ... The Attorney General is the exclusive officer in whom is confided the right to initiate proceedings for escheat or attack the right of a corporation to hold land.

Having shown that the plaintiffs in this case have no right of action against the Benguet Company for the infraction of law supposed to have been committed, we forego cny discussion of the further question whether a sociedad anonima created under Spanish law, such as the Benguet Company, is a corporation within the meaning of the prohibitory provision already so many times mentioned. That important question should, in our opinion, be left until it is raised in an action brought by the Government.

The judgment which is the subject of his appeal will therefore be affirmed, and it is so ordered, with costs against the appellants.

[G.R. No.L-7231.  March 28, 1956.]

BENGUET CONSOLIDATED MINING CO., Petitioner, vs. MARIANO PINEDA, in his capacity as Securities and Exchange Commissioner, Respondent. CONSOLIDATED MINES, INC., Intervenor.

 

D E C I S I O N

REYES, J. B. L., J.:

Appeal under Rule 43 from a decision of the Securities and Exchange Commissioner, denying the right of a sociedad anonima to extend its corporate existence by amendment of its original articles of association, or alternatively, to reform and continue existing under the Corporation Law (Act 1459) beyond the original period.

The Petitioner, the Benguet Consolidated Mining Co. (hereafter termed “Benguet” for short), was organized on June 24,1903, as a sociedad anonima regulated by Articles 151 et seq., of the Spanish Code of Commerce of 1886, then in force in the Philippines. The articles of

association expressly provided that it was organized for a term of fifty (50) years. In 1906, the governing Philippine Commission enacted Act 1459, commonly known as the Corporation Law, establishing in the islands the American type of juridical entities known as corporation, to take effect on April 1, 1906. Of its enactment, this Court said in its decision in Harden vs. Benguet Consolidated Mining Co., 58 Phil., 141, at pp. 145-146, and 147:chanroblesvirtuallawlibrary

“When the Philippine Islands passed to the sovereignty of the United States, the attention of the Philippine Commission was early drawn to the fact there is no entity in Spanish law exactly corresponding to the motion of the corporation in English and American law; chan roblesvirtualawlibraryand in the Philippine Bill, approved July 1, 1906, the Congress of the United States inserted certain provisions, under the head of Franchises, which were intended to control the lawmaking power in the Philippine Islands in the matter of granting of franchises, privileges and concessions. These provisions are found in sections 74 and 75 of the Act. The provisions of section 74 have been superseded by section 28 of the Act of Congress of August 29, 1916, but in section 75 there is a provision referring to mining corporations, which still remains the law, as amended. This provision, in its original form, reads as follows:chanroblesvirtuallawlibrary  cralaw it shall be unlawful for any member of a corporation engaged in agriculture or mining and for any corporation organized for any purpose except irrigation to be in any wise interested in any other corporation engaged in agriculture or in mining.

Under the guidance of this and certain other provisions thus enacted by Congress, the Philippine Commission entered upon the enactment of a general law authorizing the creation of corporations in the Philippine Islands. This rather elaborate piece of legislation is embodied in what is called our Corporation Law (Act No. 1459 of the Philippine Commission). The evident purpose of the commission was to introduce the American corporation into the Philippine Islands as the standard commercial entity and to hasten the day when the sociedad anonima of the Spanish law would be obsolete. That statute is a sort of codification of American corporate law.”

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“As it was the intention of our lawmakers to stimulate the introduction of the American corporation into the Philippine law in the place of the sociedad anonima, it was necessary to make certain adjustment resulting from the continued co-existence, for a time, of the two forms of commercial entities. Accordingly, in section 75 of the Corporation Law, a provision is found making the sociedad anonima subject to the provisions of the Corporation Law ‘so far as such provisions may be applicable’ and giving to the sociedades anonimas previously created in the Islands the option to continue business as such or to reform and organize under the provisions of the Corporation Law. Again, in section 191 of the Corporation Law, the Code of Commerce is repealed in so far as it relates to sociedades anonimas. The purpose of the commission in repealing this part of the Code of Commerce was to compel commercial entities thereafter organized to incorporate under the Corporation Law, unless they should prefer to adopt some form or other of the partnership. To this provision was added another to the effect that existing sociedades anonimas, which elected to continue their business as such, instead of reforming and reorganizing under the Corporation Law, should continue to be governed by the laws that were in force prior to the passage of this Act ‘in relation to their organization and method of transacting business and to the rights of members thereof as between themselves, but their relations to the public and public officials shall be governed by the provisions of this Act.’“

Specifically, the two sections of Act No. 1459 referring to sociedades anonimas then already existing, provide as follows:chanroblesvirtuallawlibrary

“SEC. 75.  Any corporation or a sociedad anonima formed, organized, and existing under the laws of the Philippines on the date of the passage of this Act, shall be subject to the provisions hereof so far as such provisions may be applicable and shall be entitled at its option either to continue business as such corporation or to reform and organize under and by virtue of the provisions of this Act, transferring all corporate interests to the new corporation which, if a stock corporation, is authorized to issue its shares of stock at par to the stockholders or members of the old corporation according to their interests.”

“SEC. 191.  The Code of Commerce, in so far as it relates to corporation or sociedades anonimas, and all other Acts or parts of Acts in conflict or inconsistent with this Act, are hereby repealed with the exception of Act Numbered fifty-two, entitled ‘An Act providing for examinations of banking institutions in the Philippines, and for reports by their officers,’ as amended, and Act Numbered Six hundred sixty-seven, entitled ‘An Act prescribing the method of applying to governments of municipalities, except the city of Manila and of provinces for franchises to contract and operate street railway, electric light and power and telephone lines, the conditions upon which the same may be granted, certain powers of the grantee of said franchises, and of grantees of similar franchises under special Act of the Commission, and for other purposes.’ Provided, however, That nothing in this Act contained shall be deemed to repeal the existing law relating to those classes of associations which are termed sociedades colectivas, and sociedades de cuentas en participacion, as to which association the existing law shall be deemed to be still in force; chan roblesvirtualawlibraryAnd provided, further, That existing corporations or sociedades anonimas, lawfully organized as such, which elect to continue their business as such sociedades anonimas instead of reforming and reorganizing under and by virtue of the provisions of this Act, shall continue to be governed by the laws that were in force prior to the passage of this Act in relation to their organization and method of transacting business and to the rights of members thereof as between themselves, but their relations to the public and public officials shall be governed by the provisions of this Act.”

As the expiration of its original 50 year term of existence approached, the Board of Directors of Benguet adopted in 1946 a resolution to extend its life for another 50 years from July 3, 1946 and submitted it for registration to the Respondent Securities and Exchange Commissioner. Upon advice of the Secretary of Justice (Op. No. 45, Ser. 1917) that such extension was contrary to law, the registration was denied. The matter was dropped, allegedly because the stockholders of Benguet did not approve of the Directors’ action.

Some six years later in 1953, the shareholders of Benguet adopted a resolution empowering the Director to “effectuate the extension of the Company’s business life for not less than 20 and not more than 50

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years, and this by either (1) an amendment to the Articles of Association or Charter of this Company or (2) by reforming and reorganizing the Company as a Philippine Corporation, or (3) by both or (4) by any other means.” Accordingly, the Board of Directors on May 27, 1953, adopted a resolution to the following effect —

“Be It

Resolved, that the Company be reformed, reorganized and organized under the provisions of section 75 and other provisions of the Philippine Corporation Law as a Philippine corporation with a corporate life and corporate powers as set forth in the Articles of Incorporation attached hereto as Schedule ‘I’ and made a part hereof by this reference; chan roblesvirtualawlibraryand

Be It

‘FURTHER RESOLVED, that any five or more of the following shareholders of the Company be and they hereby are authorized as instructed to act for and in behalf of the share holders of the Company and of the Company as Incorporators in the reformation, reorganization and organization of the Company under and in accordance with the provisions aforesaid of said Philippine Corporation Law, and in such capacity, they are hereby authorized and instructed to execute the aforesaid Articles of Incorporation attached to these Minutes as Schedule ‘I’ hereof, with such amendments, deletion and additions thereto as any five or more of those so acting shall deem necessary, proper, advisable or convenient to effect prompt registration of said Articles under Philippine Law; chan roblesvirtualawlibraryand five or more of said Incorporators are hereby further authorized and directed to do all things necessary, proper, advisable or convenient to effect such registration.”

In pursuance of such resolution, Benguet submitted in June, 1953, to the Securities and Exchange Commissioner, for alternative registration, two documents:chanroblesvirtuallawlibrary (1) Certification as to the Modification of (the articles of association of) the Benguet Consolidated Mining Company, extending the term of its existence to another fifty years from June 15, 1953; chan roblesvirtualawlibraryand (2) articles of incorporation, covering its reformation or reorganization as a

corporation in accordance with section 75 of the Philippine Corporation Law.

Relying mainly upon the adverse opinion of the Secretary of Justice (Op. No. 180, s. 1953), the Securities and Exchange Commissioner denied the registration and ruled:chanroblesvirtuallawlibrary

(1)  That the Benguet, as sociedad anonima, had no right to extend the original term of corporate existence stated in its Articles of Association, by subsequent amendment thereof adopted after enactment of the Corporation Law (Act No. 1459); chan roblesvirtualawlibraryand

(2)  That Benguet, by its conduct, had chosen to continue as sociedad anonima, under section 75 of Act No. 1459, and could no longer exercise the option to reform into a corporation, specially since it would indirectly produce the effect of extending its life.

This ruling is the subject of the present appeal.

Petitioner Benguet contends:chanroblesvirtuallawlibrary

(1)  That the proviso of section 18 of the Corporation Law to the effect —

“that the life of said corporation shall not be extended by amendment beyond the time fixed in the original articles.”

does not apply to sociedades anonimas already in existence at the passage of the law, likePetitioner herein;

(2)  That to apply the said restriction imposed by section 18 of the Corporation Law to sociedades anonimas already functioning when the said law was enacted would be in violation of constitutional inhibitions;

(3)  That even assuming that said restriction was applicable to it, Benguet could still exercise the option of reforming and reorganizing under section 75 of the Corporation Law, thereby prolonging its corporate existence, since the law is silent as to the time when such option may be exercised or availed of.

The first issue arises because the Code of Commerce of 1886 under which Benguet was organized, contains no prohibition (to extend the period of corporate existence), equivalent to that set forth in section 18

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of the Corporation Law. Neither does it expressly authorize the extension. But the text of Article 223, reading:chanroblesvirtuallawlibrary

“ART. 223.  After the termination of the period for which commercial associations are constituted, it shall not be understood as extended by the implied or presumed will of the members; chan roblesvirtualawlibraryand if the members desire to continue in association, they shall draw up new articles, subject to all the formalities prescribed for their creation as provided in Article 119.” (Code of Commerce.)

would seem to imply that the period of existence of the sociedad anonimas (or of any other commercial association for that matter) may be extended if the partners or members so agree before the expiration of the original period.

While the Code of Commerce, in so far as sociedades anonimas are concerned, was repealed by Act No 1459, Benguet claims that article 223 is still operative in its favor under the last proviso of section 191 of the Corporation law (ante, p. 4 to the effect that existing sociedades anonimas would continue to be governed by the law in force before Act 1459,

“in relation to their organization and method of transacting business and to the rights of members among themselves, but their relations to the public and public officials shall be governed by the provisions of this Act.”

Benguet contends that the period of corporate life relates to its organization and the rights of its members inter se, and not to its relations to the public or public officials.

We find this contention untenable.

The term of existence of association (partnership or sociedad anonima) is coterminous with their possession of an independent legal personality, distinct from that of their component members. When the period expires, the sociedad anonima loses the power to deal and enter into further legal relations with other persons; chan roblesvirtualawlibraryit is no longer possible for it to acquire new

rights or incur new obligations, have only as may be required by the process of liquidating and winding up its affairs. By the same token, its officers and agents can no longer represent it after the expiration of the life term prescribed, save for settling its business. Necessarily, therefore, third persons or strangers have an interest in knowing the duration of the juridical personality of the sociedad anonima, since the latter cannot be dealt with after that period; chan roblesvirtualawlibrarywherefore its prolongation or cessation is a matter directly involving the company’s relations to the public at large.

On the importance of the term of existence set in the articles of association of commercial companies under the Spanish Code of Commerce, D. Lorenzo Benito y Endar, professor of mercantile law in the Universidad Central de Madrid, has this to say:chanroblesvirtuallawlibrary

“La duracion de la Sociedad. — La necesidad de consignar este requisito en el contrato social tiene un valor analogo al que dijimos tenia el mismo al tratar de las compañias colectivas, aun cuando respecto de las anonimas no haya de tenerse en cuenta para nada lo que dijimos entonces acerca de la trascendencia que ello tiene para los socios; chan roblesvirtualawlibraryporque no existiendo en las anonimas la serie de responsibilidades de caracter personal que afectan a los socios colectivos, es claro que la duracion de la sociedad importa conocerla a los socios y los terceros, porque ella marca al limite natural del desenvolvimiento de la empresa constituida y el comienzo de la liquidacion de la sociedad.” (3 Benito, Derecho Mercantil, 292-293.)

“Interesa, pues, la fijacion de la vida de la compañia, desenvolviendose con normalidad y regularidad, tanto a los asociados como a los terceros. A aquellos, porque su libertad economica, en cierto modo limitada por la existencia del contrato de compañia, se recobra despues de realizada, mas o menos cumplidamente, la finalidad comun perseguida; chan roblesvirtualawlibraryy a los terceros, porque les advierte el momento en que, extinguida la compañia, no cabe y a la creacion con ella de nuevas relaciones juridicas, de que nazcan reciprocamente derechos y obligaciones, sino solo la liquidacion de los negocios hasta entonces

11

convenidos, sin otra excepcion que la que luego mas adelante habremos de señalar”. (3 Benito, Derecho Mercantil, p. 245.)

The State and its officers also have an obvious interest in the term of life of associations, since the conferment of juridical capacity upon them during such period is a privilege that is derived from statute. It is obvious that no agreement between associates can result in giving rise to a new and distinct personality, possessing independent rights and obligations, unless the law itself shall decree such result. And the State is naturally interested that this privilege be enjoyed only under the conditions and not beyond the period that it sees fit to grant; chan roblesvirtualawlibraryand, particularly, that it be not abused in fraud and to the detriment of other parties; chan roblesvirtualawlibraryand for this reason it has been ruled that “the limitation (of corporate existence) to a definite period is an exercise of control in the interest of the public” (Smith vs. Eastwood Wire Manufacturing Co., 43 Atl. 568).

We cannot assent to the thesis of Benguet that its period of corporate existence has relation to its “organization”. The latter term is defined in Webster’s International Dictionary as:chanroblesvirtuallawlibrary

“The executive structure of a business; chan roblesvirtualawlibrarythe personnel of management, with its several duties and places in administration; chan roblesvirtualawlibrarythe various persons who conduct a business, considered as a unit.”

The legal definitions of the term “organization” are concordant with that given above:chanroblesvirtuallawlibrary

“Organize or ‘organization,’ as used in reference to corporations, has a well-understood meaning, which is the election of officers, providing for the subscription and payment of the capital stock, the adoption of by-laws, and such other steps as are necessary to endow the legal entity with the capacity to transact the legitimate business for which it was created. Waltson vs. Oliver, 30 P. 172, 173, 49 Kan. 107, 33 Am. St. Rep. 355; chan roblesvirtualawlibraryTopeka Bridge Co. vs. Cummings, 3 Kan. 55, 77; chan roblesvirtualawlibraryHunt vs. Kansas & M. Bridge Co., 11 Kan. 412, 439; chan roblesvirtualawlibraryAspen Water & Light Co., vs. City of Aspen, 37 P. 728, 730, 6 Colo. App. 12; chan

roblesvirtualawlibraryNemaha Coal & Mining Co., vs. Settle 38 P. 483, 484, 54 Kan. 424.

Under a statute providing that, until articles of incorporation should be recorded, the corporation should transact no business except its own organization, it is held that the term “organization” means simply the process of forming and arranging into suitable disposition the parties who are to act together in, and defining the objects of, the compound body, and that this process, even when complete in all its parts, does not confer a franchise either valid or defective, but, on the contrary, it is only the act of the individuals, and something else must be done to secure the corporate franchise. Abbott vs. Omaha Smelting & Refining Co. 4 Neb. 416, 421.” (30 Words and Phrases, p. 282.)

It is apparent from the foregoing definitions that the term “organization” relates merely to the systematization and orderly arrangement of the internal and managerial affairs and organs of thePetitioner Benguet, and has nothing to do with the prorogation of its corporate life.

From the double fact that the duration of its corporate life (and juridical personality) has evident connection with the Petitioner’s relations to the public, and that it bears none to the Petitioner’s organization and method of transacting business, we derive the conclusion that the prohibition contained in section 18 of the Corporation Law (Act No. 1459) against extension of corporate life by amendment of the original articles was designed and intended to apply to “compañias anonimas” that, like Petitioner Benguet, were already existing at the passage of said law. This conclusion is reinforced by the avowed policy of the law to hasten the day when compañias anonimas would be extinct, and replace them with the American type of corporation (Harden vs. Benguet Consolidated Mining Co., supra), for the indefinite prorogation of the corporation life of sociedades anonimas would maintain the unnecessary duality of organizational types instead of reducing them to a single one; chan roblesvirtualawlibraryand what is more, it would confer upon these sociedades anonimas, whose obsolescence was sought, the advantageous privilege of perpetual existence that the new corporation could not possess.

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Of course, the retroactive application of the limitations on the terms of corporate existence could not be made in violation of constitutional inhibitions specially those securing equal protection of the laws and prohibiting impairment of the obligation of contracts. It needs no argument to show that if Act No. 1459 allowed existing compañias anonimas to be governed by the old law in respect to their organization, methods of transacting business and the rights of the members among themselves, it was precisely in deference to the vested rights already acquired by the entity and its members at the time the Corporation Law was enacted. But we do not agree withPetitioner Benguet (and here lies the second issue in this appeal) that the possibility to extend its corporate life under the Code of Commerce constituted a right already vested when Act No. 1459 was adopted. At that time, Benguet’s existence was well within the 50 years period set in its articles of association; chan roblesvirtualawlibraryand its members had not entered into any agreement that such period should be extended. It is safe to say that none of the members of Benguet anticipated in 1906 any need to reach an agreement to increase the term of its corporate life, barely three years after it had started. The prorogation was purely speculative; chan roblesvirtualawlibrarya mere possibility that could not be taken for granted. It was as yet conditional, depending upon the ultimate decision of the members and directors. They might agree to extend Benguet’s existence beyond the original 50 years; chan roblesvirtualawlibraryor again they might not. It must be remembered that in 1906, the success of Benguet in its mining ventures was by no means so certain as to warrant continuation of its operations beyond the 50 years set in its articles. The records of this Court show that Benguet ran into financial difficulties in the early part of its existence, to the extent that, as late as 1913, ten years after it was found, 301,100 shares of its capital stock (with a par value of $1 per share) were being offered for sale at 25 centavos per share in order to raise the sum of P75,000 that was needed to rehabilitate the company (Hanlon vs. Hausermann and Beam, 40 Phil., 796). Certainly the prolongation of the corporate existence of Benguet in 1906 was merely a possibility in futuro, a contingency that did not fulfill the requirements of a vested right entitled to constitutional protection, defined by this Court in

Balboa vs. Farrales, 51 Phil., 498, 502, as follows:chanroblesvirtuallawlibrary

“Vested right is ‘some right or interest in the property which has become fixed and established, and is no longer open to doubt or controversy,”

“A ‘vested’ right is defined to be an immediate fixed right of present or future enjoyment, and rights are ‘vested’ in contradistinction to being expectant or contingent” (Pearsall vs. Great Northern R. Co., 161 U. S. 646, 40 L. Ed. 838).

In Corpus Juris Secundum we find:chanroblesvirtuallawlibrary

“Rights are vested when the right to enjoyment, present or prospective, has become the property of some particular person or persons as a present interest. The right must be absolute, complete, and unconditional, independent of a contingency, and a mere expectancy of future benefit, or a contingent interest in property founded on anticipated continuance of existing laws, does not constitute a vested right. So, inchoate rights which have not been acted on are not vested.” (16C.J. S. 214-215.)

Since there was no agreement as yet to extend the period of Benguet’s corporate existence (beyond the original 50 years) when the Corporation Law was adopted in 1906, neither Benguet nor its members had any actual or vested right to such extension at that time. Therefore, when the Corporation Law, by section 18, forbade extensions of corporate life, neither Benguet nor its members were deprived of any actual or fixed right constitutionally protected.

To hold, as Petitioner Benguet asks, that the legislative power could not deprive Benguet or its members of the possibility to enter at some indefinite future time into an agreement to extend Benguet’s corporate life, solely because such agreements were authorized by the Code of Commerce, would be tantamount to saying that the said Code was irrepealable on that point. It is a well settled rule that no person has a vested interest in any rule of law entitling him to insist that it shall remain unchanged for his benefit. (New York C. R. Co. vs. White, 61 L. Ed (U.S.) 667; chan roblesvirtualawlibraryMondou vs. New York N. H. & H. R. Co., 56 L. Ed. 327; chan roblesvirtualawlibraryRainey vs. U. S., 58

13

L. Ed. 617; chan roblesvirtualawlibraryLilly Co. vs. Saunders, 125 ALR. 1308; chan roblesvirtualawlibraryShea vs. Olson, 111 ALR. 998).

“There can be no vested right in the continued existence of a statute or rule of the common law which precludes its change or repeal, nor in any omission to legislate on a particular matter or subject. Any right conferred by statute may be taken away by statute before it has become vested, but after a right has vested, repeal of the statute or ordinance which created the right does not and cannot affect much right.” (16 C.J. S. 222-223.)

It is a general rule of constitutional law that a person has no vested right in statutory privileges and exemptions” (Brearly School vs. Ward, 201 NY. 358, 40 LRA NS. 1215; chan roblesvirtualawlibraryalso, Cooley, Constitutional Limitations, 7th ed., p. 546).

It is not amiss to recall here that after Act No. 1459 the Legislature found it advisable to impress further restrictions upon the power of corporations to deal in public lands, or to hold real estate beyond a maximum area; chan roblesvirtualawlibraryand to prohibit any corporation from endeavouring to control or hold more than 15 per cent of the voting stock of an agricultural or mining corporation (Act No. 3518). These prohibitions are so closely integrated with our public policy that Commonwealth Act No. 219 sought to extend such restrictions to associations of all kinds. It would be subversive of that policy to enable Benguet to prolong its peculiar status of sociedad anonimas, and enable it to cast doubt and uncertainty on whether it is, or not, subject to those restrictions on corporate power, as it once endeavoured to do in the previous case of Harden vs. Benguet Mining Corp. 58 Phil., 149.

Stress has been laid upon the fact that the Compañia Maritima (like Benguet, a sociedad anonima established before the enactment of the Corporation Law) has been twice permitted to extend its corporate existence by amendment of its articles of association, without objection from the officers of the defunct Bureau of Commerce and Industry, then in charge of the enforcement of the Corporation Laws, although the exact question was never raised then. Be that as it may, it is a well established rule in this jurisdiction that the government is never estopped by mistake or error on the part of its agents” (Pineda vs.

Court of First Instance of Tayabas, 52 Phil., 803, 807), and that estopped cannot give validity to an act that is prohibited by law or is against public policy (Eugenio vs. Perdido, (97 Phil., 41, May 19, 1955; chan roblesvirtualawlibrary19 Am. Jur. 802); chan roblesvirtualawlibraryso that theRespondent, Securities and Exchange Commissioner, was not bound by the rulings of his predecessor if they be inconsistent with law. Much less could erroneous decisions of executive officers bind this Court and induce it to sanction an unwarranted interpretation or application of legal principles.

We now turn to the third and last issue of this appeal, concerning the exercise of the option granted by section 75 of the Corporation Law to every sociedad anonima “formed, organized and existing under the laws of the Philippines on the date of the passage of this Act” to either continue business as such sociedad anonima or to reform and organize under the provisions of the Corporation Law. Petitioner-Appellant Benguet contends that as the law does not determine the period within which such option may be exercised, Benguet may exercise it at any time during its corporate existence; chan roblesvirtualawlibraryand that in fact on June 22, 1953, it chose to reform itself into a corporation for a period of 50 years from that date, filing the corresponding papers and by-laws with the Respondent Commissioner of Securities and Exchange registration; chan roblesvirtualawlibrarybut the latter refused to accept them as belatedly made.

The Petitioner’s argument proceeds from the unexpressed assumption that Benguet, as sociedad anonima, had not exercised the option given by section 75 of the Corporation Law until 1953. This we find to be incorrect. Under that section, by continuing to do business as sociedad anonima, Benguet in fact rejected the alternative to reform as a corporation under Act No. 1459. It will be noted from the text of section 75 (quoted earlier in this opinion) that no special act or manifestation is required by the law from the existing sociedades anonimas that prefer to remain and continue as such. It is when they choose to reform and organize under the Corporation Law that they must, in the words of the section, “transfer all corporate interests to the new corporation”. Hence if they do not so transfer, the sociedades anonimas affected are

14

to be understood to have elected the alternative “to continue business as such corporation” (sociedad anonima) 2

The election of Benguet to remain a sociedad anonima after the enactment of the Corporation Law is evidence, not only by its failure, from 1906 to 1953, to adopt the alternative to transfer its corporate interests to a new corporation, as required by section 75; chan roblesvirtualawlibraryit also appears from positive acts. Thus around 1933, Benguet claimed and defended in court its acquisition of shares of the capital stock of the Balatoc Mining Company, on the ground that as a sociedad anonima it (Benguet) was not a corporation within the purview of the laws prohibiting a mining corporation from becoming interested in another mining corporation (Harden vs. Benguet Mining Corp., 58 Phil., p. 149). Even in the present proceedings, Benguet has urged its right to amend its original articles of association as “sociedad anonima” and extend its life as such under the provisions of the Spanish Code of Commerce. Such appeals to privileges as “sociedad anonima” under the Code of 1886 necessarily imply that Benguet has rejected the alternative of reforming under the Corporation Law. As Respondent Commissioner’s order, now under appeal, has stated —

“A sociedad anonima could not claim the benefit of both, but must have to choose one and discard the other. If it elected to become a corporation it could not continue as a sociedad anonima; chan roblesvirtualawlibraryand if it choose to remain as a sociedad anonima, it could not become a corporation.”

Having thus made its choice, Benguet may not now go back and seek to change its position and adopt the reformation that it had formerly repudiated. The election of one of several alternatives is irrevocable once made (as now expressly recognized in article 940 of the new Civil Code of the Philippines):chanroblesvirtuallawlibrary such rule is inherent in the nature of the choice, its purpose being to clarify and render definite the rights of the one exercising the option, so that other persons may act in consequence. While successive choices may be provided there is nothing in section 75 of the Corporation Law to show or hint that a sociedad anonima may make more than one choice thereunder, since only one option is provided for.

While no express period of time is fixed by the law within which sociedades anonimas may elect under section 75 of Act No. 1459 either to reform or to retain their status quo, there are powerful reasons to conclude that the legislature intended such choice to be made within a reasonable time from the effectivity of the Act. To enable a sociedad anonima to choose reformation when its stipulated period of existence is nearly ended, would be to allow it to enjoy a term of existence far longer than that granted to corporations organized under the Corporation Law; chan roblesvirtualawlibraryin Benguet’s case, 50 years as sociedad anonima, and another 50 years as an American type of corporation under Act 1459; chan roblesvirtualawlibrarya result incompatible with the avowed purpose of the Act to hasten the disappearance of the sociedades anonimas. Moreover, such belated election, if permitted, would enable sociedades anonimas to reap the full advantage of both types of organization. Finally, it would permit sociedades anonimas to prolong their corporate existence indirectly by belated reformation into corporations under Act No. 1459, when they could not do so directly by amending their articles of association.

Much stress is laid upon allegedly improper motives on the part of the intervenor, Consolidated Mines, Inc., in supporting the orders appealed from, on the ground that intervenor seeks to terminate Benguet’s operating contract and appropriate the profits that are the result of Benguet’s efforts in developing the mines of the intervenor. Suffice it to say that whatever such motives should be, they are wholly irrelevant to the issues in this appeal, that exclusively concern the legal soundness of the order of the Respondent Securities and Exchange Commissioner rejecting the claims of the Benguet Consolidated Mining Company to extend its corporate life.

Neither are we impressed by the prophesies of economic chaos that would allegedly ensure with the cessation of Benguet’s activities. If its mining properties are really susceptible of profitable operation, inexorable economic laws will ensure their exploitation; chan roblesvirtualawlibraryif, on the other hand, they can no longer be worked at a profit, then catastrophe becomes inevitable, whether or notPetitioner Benguet retains corporate existence.

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Sustaining the opinions of the Respondent Securities and Exchange Commissioner and of the Secretary of Justice, we rule that:chanroblesvirtuallawlibrary

(1)  The prohibition contained in section 18 of Act No. 1459, against extending the period of corporate existence by amendment of the original articles, was intended to apply, and does apply, to sociedades anonimas already formed, organized and existing at the time of the effectivity of the Corporation Law (Act No. 1459) in 1906;

(2)  The statutory prohibition is valid and impairs no vested rights or constitutional inhibition where no agreement to extend the original period of corporate life was perfected before the enactment of the Corporation Law;

(3)  A sociedad anonima, existing before the Corporation Law, that continues to do business as such for a reasonable time after its enactments, is deemed to have made its election and may not subsequently claim to reform into a corporation under section 75 of Act No. 1459.

In view of the foregoing, the order appealed from is affirmed. Costs against Petitioner-AppellantBenguet Consolidated Mining Company.

Padilla, Montemayor, Reyes, A. Labrador, Concepcion and Endencia, JJ., concur.

 

G.R. No. 175352              

DANTE V. LIBAN, REYNALDO M. BERNARDO, and SALVADOR M. VIARI, Petitioners, vs.RICHARD J. GORDON, Respondent.

D E C I S I O N

CARPIO, J.:

The Case

This is a petition to declare Senator Richard J. Gordon (respondent) as having forfeited his seat in the Senate.

The Facts

Petitioners Dante V. Liban, Reynaldo M. Bernardo, and Salvador M. Viari (petitioners) filed with this Court a Petition to Declare Richard J. Gordon as Having Forfeited His Seat in the Senate. Petitioners are officers of the Board of Directors of the Quezon City Red Cross Chapter while respondent is Chairman of the Philippine National Red Cross (PNRC) Board of Governors.

During respondent’s incumbency as a member of the Senate of the Philippines,1 he was elected Chairman of the PNRC during the 23 February 2006 meeting of the PNRC Board of Governors. Petitioners allege that by accepting the chairmanship of the PNRC Board of Governors, respondent has ceased to be a member of the Senate as provided in Section 13, Article VI of the Constitution, which reads:

SEC. 13. No Senator or Member of the House of Representatives may hold any other office or employment in the Government, or any subdivision, agency, or instrumentality thereof, including government-owned or controlled corporations or their subsidiaries, during his term without forfeiting his seat. Neither shall he be appointed to any office which may have been created or the emoluments thereof increased during the term for which he was elected.

Petitioners cite Camporedondo v. NLRC,2 which held that the PNRC is a government-owned or controlled corporation. Petitioners claim that in accepting and holding the position of Chairman of the PNRC Board of Governors, respondent has automatically forfeited his seat in the Senate, pursuant to Flores v. Drilon,3 which held that incumbent national legislators lose their elective posts upon their appointment to another government office.

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In his Comment, respondent asserts that petitioners have no standing to file this petition which appears to be an action for quo warranto, since the petition alleges that respondent committed an act which, by provision of law, constitutes a ground for forfeiture of his public office. Petitioners do not claim to be entitled to the Senate office of respondent. Under Section 5, Rule 66 of the Rules of Civil Procedure, only a person claiming to be entitled to a public office usurped or unlawfully held by another may bring an action for quo warranto in his own name. If the petition is one for quo warranto, it is already barred by prescription since under Section 11, Rule 66 of the Rules of Civil Procedure, the action should be commenced within one year after the cause of the public officer’s forfeiture of office. In this case, respondent has been working as a Red Cross volunteer for the past 40 years. Respondent was already Chairman of the PNRC Board of Governors when he was elected Senator in May 2004, having been elected Chairman in 2003 and re-elected in 2005.

Respondent contends that even if the present petition is treated as a taxpayer’s suit, petitioners cannot be allowed to raise a constitutional question in the absence of any claim that they suffered some actual damage or threatened injury as a result of the allegedly illegal act of respondent. Furthermore, taxpayers are allowed to sue only when there is a claim of illegal disbursement of public funds, or that public money is being diverted to any improper purpose, or where petitioners seek to restrain respondent from enforcing an invalid law that results in wastage of public funds.

Respondent also maintains that if the petition is treated as one for declaratory relief, this Court would have no jurisdiction since original jurisdiction for declaratory relief lies with the Regional Trial Court.

Respondent further insists that the PNRC is not a government-owned or controlled corporation and that the prohibition under Section 13, Article VI of the Constitution does not apply in the present case since volunteer service to the PNRC is neither an office nor an employment.

In their Reply, petitioners claim that their petition is neither an action for quo warranto nor an action for declaratory relief. Petitioners maintain that the present petition is a taxpayer’s suit questioning the unlawful disbursement of funds, considering that respondent has been drawing his salaries and other compensation as a Senator even if he is no longer entitled to his office. Petitioners point out that this Court has jurisdiction over this petition since it involves a legal or constitutional issue which is of transcendental importance.

The Issues

Petitioners raise the following issues:

1. Whether the Philippine National Red Cross (PNRC) is a government- owned or controlled corporation;

2. Whether Section 13, Article VI of the Philippine Constitution applies to the case of respondent who is Chairman of the PNRC and at the same time a Member of the Senate;

3. Whether respondent should be automatically removed as a Senator pursuant to Section 13, Article VI of the Philippine Constitution; and

4. Whether petitioners may legally institute this petition against respondent.4

The substantial issue boils down to whether the office of the PNRC Chairman is a government office or an office in a government-owned or controlled corporation for purposes of the prohibition in Section 13, Article VI of the Constitution.

The Court’s Ruling

We find the petition without merit.

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Petitioners Have No Standing to File this Petition

A careful reading of the petition reveals that it is an action for quo warranto. Section 1, Rule 66 of the Rules of Court provides:

Section 1.Action by Government against individuals. – An action for the usurpation of a public office, position or franchise may be commenced by a verified petition brought in the name of the Republic of the Philippines against:

(a) A person who usurps, intrudes into, or unlawfully holds or exercises a public office, position or franchise;

(b) A public officer who does or suffers an act which by provision of law, constitutes a ground for the forfeiture of his office; or

(c) An association which acts as a corporation within the Philippines without being legally incorporated or without lawful authority so to act. (Emphasis supplied)

Petitioners allege in their petition that:

4. Respondent became the Chairman of the PNRC when he was elected as such during the First Regular Luncheon-Meeting of the Board of Governors of the PNRC held on February 23, 2006, the minutes of which is hereto attached and made integral part hereof as Annex "A."

5. Respondent was elected as Chairman of the PNRC Board of Governors, during his incumbency as a Member of the House of Senate of the Congress of the Philippines, having been elected as such during the national elections last May 2004.

6. Since his election as Chairman of the PNRC Board of Governors, which position he duly accepted, respondent has

been exercising the powers and discharging the functions and duties of said office, despite the fact that he is still a senator.

7. It is the respectful submission of the petitioner[s] that by accepting the chairmanship of the Board of Governors of the PNRC, respondent has ceased to be a Member of the House of Senate as provided in Section 13, Article VI of the Philippine Constitution, x x x

x x x x

10. It is respectfully submitted that in accepting the position of Chairman of the Board of Governors of the PNRC on February 23, 2006, respondent has automatically forfeited his seat in the House of Senate and, therefore, has long ceased to be a Senator, pursuant to the ruling of this Honorable Court in the case of FLORES, ET AL. VS. DRILON AND GORDON, G.R. No. 104732, x x x

11. Despite the fact that he is no longer a senator, respondent continues to act as such and still performs the powers, functions and duties of a senator, contrary to the constitution, law and jurisprudence.

12. Unless restrained, therefore, respondent will continue to falsely act and represent himself as a senator or member of the House of Senate, collecting the salaries, emoluments and other compensations, benefits and privileges appertaining and due only to the legitimate senators, to the damage, great and irreparable injury of the Government and the Filipino people.5 (Emphasis supplied)

Thus, petitioners are alleging that by accepting the position of Chairman of the PNRC Board of Governors, respondent has automatically forfeited his seat in the Senate. In short, petitioners filed an action for usurpation of public office against respondent, a public officer who allegedly committed an act which constitutes a ground for

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the forfeiture of his public office. Clearly, such an action is for quo warranto, specifically under Section 1(b), Rule 66 of the Rules of Court.

Quo warranto is generally commenced by the Government as the proper party plaintiff. However, under Section 5, Rule 66 of the Rules of Court, an individual may commence such an action if he claims to be entitled to the public office allegedly usurped by another, in which case he can bring the action in his own name. The person instituting quo warranto proceedings in his own behalf must claim and be able to show that he is entitled to the office in dispute, otherwise the action may be dismissed at any stage.6 In the present case, petitioners do not claim to be entitled to the Senate office of respondent. Clearly, petitioners have no standing to file the present petition.

Even if the Court disregards the infirmities of the petition and treats it as a taxpayer’s suit, the petition would still fail on the merits.

PNRC is a Private Organization Performing Public Functions

On 22 March 1947, President Manuel A. Roxas signed Republic Act No. 95,7 otherwise known as the PNRC Charter. The PNRC is a non-profit, donor-funded, voluntary, humanitarian organization, whose mission is to bring timely, effective, and compassionate humanitarian assistance for the most vulnerable without consideration of nationality, race, religion, gender, social status, or political affiliation.8 The PNRC provides six major services: Blood Services, Disaster Management, Safety Services, Community Health and Nursing, Social Services and Voluntary Service.9

The Republic of the Philippines, adhering to the Geneva Conventions, established the PNRC as a voluntary organization for the purpose contemplated in the Geneva Convention of 27 July 1929.10 The Whereas clauses of the PNRC Charter read:

WHEREAS, there was developed at Geneva, Switzerland, on August 22, 1864, a convention by which the nations of the world were invited to

join together in diminishing, so far lies within their power, the evils inherent in war;

WHEREAS, more than sixty nations of the world have ratified or adhered to the subsequent revision of said convention, namely the "Convention of Geneva of July 29 [sic], 1929 for the Amelioration of the Condition of the Wounded and Sick of Armies in the Field" (referred to in this Charter as the Geneva Red Cross Convention);

WHEREAS, the Geneva Red Cross Convention envisages the establishment in each country of a voluntary organization to assist in caring for the wounded and sick of the armed forces and to furnish supplies for that purpose;

WHEREAS, the Republic of the Philippines became an independent nation on July 4, 1946 and proclaimed its adherence to the Geneva Red Cross Convention on February 14, 1947, and by that action indicated its desire to participate with the nations of the world in mitigating the suffering caused by war and to establish in the Philippines a voluntary organization for that purpose as contemplated by the Geneva Red Cross Convention;

WHEREAS, there existed in the Philippines since 1917 a Charter of the American National Red Cross which must be terminated in view of the independence of the Philippines; and

WHEREAS, the volunteer organizations established in the other countries which have ratified or adhered to the Geneva Red Cross Convention assist in promoting the health and welfare of their people in peace and in war, and through their mutual assistance and cooperation directly and through their international organizations promote better understanding and sympathy among the peoples of the world. (Emphasis supplied)

The PNRC is a member National Society of the International Red Cross and Red Crescent Movement (Movement), which is composed of the International Committee of the Red Cross (ICRC), the International

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Federation of Red Cross and Red Crescent Societies (International Federation), and the National Red Cross and Red Crescent Societies (National Societies). The Movement is united and guided by its seven Fundamental Principles:

1. HUMANITY – The International Red Cross and Red Crescent Movement, born of a desire to bring assistance without discrimination to the wounded on the battlefield, endeavors, in its international and national capacity, to prevent and alleviate human suffering wherever it may be found. Its purpose is to protect life and health and to ensure respect for the human being. It promotes mutual understanding, friendship, cooperation and lasting peace amongst all peoples.

2. IMPARTIALITY – It makes no discrimination as to nationality, race, religious beliefs, class or political opinions. It endeavors to relieve the suffering of individuals, being guided solely by their needs, and to give priority to the most urgent cases of distress.

3. NEUTRALITY – In order to continue to enjoy the confidence of all, the Movement may not take sides in hostilities or engage at any time in controversies of a political, racial, religious or ideological nature.

4. INDEPENDENCE – The Movement is independent. The National Societies, while auxiliaries in the humanitarian services of their governments and subject to the laws of their respective countries, must always maintain their autonomy so that they may be able at all times to act in accordance with the principles of the Movement.

5. VOLUNTARY SERVICE – It is a voluntary relief movement not prompted in any manner by desire for gain.

6. UNITY – There can be only one Red Cross or one Red Crescent Society in any one country. It must be open to all. It must carry on its humanitarian work throughout its territory.

7. UNIVERSALITY – The International Red Cross and Red Crescent Movement, in which all Societies have equal status and share equal responsibilities and duties in helping each other, is worldwide. (Emphasis supplied)

The Fundamental Principles provide a universal standard of reference for all members of the Movement. The PNRC, as a member National Society of the Movement, has the duty to uphold the Fundamental Principles and ideals of the Movement. In order to be recognized as a National Society, the PNRC has to be autonomous and must operate in conformity with the Fundamental Principles of the Movement.11

The reason for this autonomy is fundamental. To be accepted by warring belligerents as neutral workers during international or internal armed conflicts, the PNRC volunteers must not be seen as belonging to any side of the armed conflict. In the Philippines where there is a communist insurgency and a Muslim separatist rebellion, the PNRC cannot be seen as government-owned or controlled, and neither can the PNRC volunteers be identified as government personnel or as instruments of government policy. Otherwise, the insurgents or separatists will treat PNRC volunteers as enemies when the volunteers tend to the wounded in the battlefield or the displaced civilians in conflict areas.

Thus, the PNRC must not only be, but must also be seen to be, autonomous, neutral and independent in order to conduct its activities in accordance with the Fundamental Principles. The PNRC must not appear to be an instrument or agency that implements government policy; otherwise, it cannot merit the trust of all and cannot effectively carry out its mission as a National Red Cross Society.12 It is imperative that the PNRC must be autonomous, neutral, and independent in relation to the State.

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To ensure and maintain its autonomy, neutrality, and independence, the PNRC cannot be owned or controlled by the government. Indeed, the Philippine government does not own the PNRC. The PNRC does not have government assets and does not receive any appropriation from the Philippine Congress.13 The PNRC is financed primarily by contributions from private individuals and private entities obtained through solicitation campaigns organized by its Board of Governors, as provided under Section 11 of the PNRC Charter:

SECTION 11. As a national voluntary organization, the Philippine National Red Cross shall be financed primarily by contributions obtained through solicitation campaigns throughout the year which shall be organized by the Board of Governors and conducted by the Chapters in their respective jurisdictions. These fund raising campaigns shall be conducted independently of other fund drives by other organizations. (Emphasis supplied)

The government does not control the PNRC. Under the PNRC Charter, as amended, only six of the thirty members of the PNRC Board of Governors are appointed by the President of the Philippines. Thus, twenty-four members, or four-fifths (4/5), of the PNRC Board of Governors are not appointed by the President. Section 6 of the PNRC Charter, as amended, provides:

SECTION 6. The governing powers and authority shall be vested in a Board of Governors composed of thirty members, six of whom shall be appointed by the President of the Philippines, eighteen shall be elected by chapter delegates in biennial conventions and the remaining six shall be selected by the twenty-four members of the Board already chosen. x x x.

Thus, of the twenty-four members of the PNRC Board, eighteen are elected by the chapter delegates of the PNRC, and six are elected by the twenty-four members already chosen — a select group where the private sector members have three-fourths majority. Clearly, an overwhelming majority of four-fifths of the PNRC Board are elected or chosen by the private sector members of the PNRC.

The PNRC Board of Governors, which exercises all corporate powers of the PNRC, elects the PNRC Chairman and all other officers of the PNRC. The incumbent Chairman of PNRC, respondent Senator Gordon, was elected, as all PNRC Chairmen are elected, by a private sector-controlled PNRC Board four-fifths of whom are private sector members of the PNRC. The PNRC Chairman is not appointed by the President or by any subordinate government official.

Under Section 16, Article VII of the Constitution,14 the President appoints all officials and employees in the Executive branch whose appointments are vested in the President by the Constitution or by law. The President also appoints those whose appointments are not otherwise provided by law. Under this Section 16, the law may also authorize the "heads of departments, agencies, commissions, or boards" to appoint officers lower in rank than such heads of departments, agencies, commissions or boards.15 In Rufino v. Endriga,16 the Court explained appointments under Section 16 in this wise:

Under Section 16, Article VII of the 1987 Constitution, the President appoints three groups of officers. The first group refers to the heads of the Executive departments, ambassadors, other public ministers and consuls, officers of the armed forces from the rank of colonel or naval captain, and other officers whose appointments are vested in the President by the Constitution. The second group refers to those whom the President may be authorized by law to appoint. The third group refers to all other officers of the Government whose appointments are not otherwise provided by law.

Under the same Section 16, there is a fourth group of lower-ranked officers whose appointments Congress may by law vest in the heads of departments, agencies, commissions, or boards. x x x

x x x

In a department in the Executive branch, the head is the Secretary. The law may not authorize the Undersecretary, acting as such

21

Undersecretary, to appoint lower-ranked officers in the Executive department. In an agency, the power is vested in the head of the agency for it would be preposterous to vest it in the agency itself. In a commission, the head is the chairperson of the commission. In a board, the head is also the chairperson of the board. In the last three situations, the law may not also authorize officers other than the heads of the agency, commission, or board to appoint lower-ranked officers.

x x x

The Constitution authorizes Congress to vest the power to appoint lower-ranked officers specifically in the "heads" of the specified offices, and in no other person. The word "heads" refers to the chairpersons of the commissions or boards and not to their members, for several reasons.

The President does not appoint the Chairman of the PNRC. Neither does the head of any department, agency, commission or board appoint the PNRC Chairman. Thus, the PNRC Chairman is not an official or employee of the Executive branch since his appointment does not fall under Section 16, Article VII of the Constitution. Certainly, the PNRC Chairman is not an official or employee of the Judiciary or Legislature. This leads us to the obvious conclusion that the PNRC Chairman is not an official or employee of the Philippine Government. Not being a government official or employee, the PNRC Chairman, as such, does not hold a government office or employment.

Under Section 17, Article VII of the Constitution,17 the President exercises control over all government offices in the Executive branch. If an office is legally not under the control of the President, then such office is not part of the Executive branch. In Rufino v. Endriga,18 the Court explained the President’s power of control over all government offices as follows:

Every government office, entity, or agency must fall under the Executive, Legislative, or Judicial branches, or must belong to one of the independent constitutional bodies, or must be a quasi-judicial body or

local government unit. Otherwise, such government office, entity, or agency has no legal and constitutional basis for its existence.

The CCP does not fall under the Legislative or Judicial branches of government. The CCP is also not one of the independent constitutional bodies. Neither is the CCP a quasi-judicial body nor a local government unit. Thus, the CCP must fall under the Executive branch. Under the Revised Administrative Code of 1987, any agency "not placed by law or order creating them under any specific department" falls "under the Office of the President."

Since the President exercises control over "all the executive departments, bureaus, and offices," the President necessarily exercises control over the CCP which is an office in the Executive branch. In mandating that the President "shall have control of all executive . . . offices," Section 17, Article VII of the 1987 Constitution does not exempt any executive office — one performing executive functions outside of the independent constitutional bodies — from the President’s power of control. There is no dispute that the CCP performs executive, and not legislative, judicial, or quasi-judicial functions.

The President’s power of control applies to the acts or decisions of all officers in the Executive branch. This is true whether such officers are appointed by the President or by heads of departments, agencies, commissions, or boards. The power of control means the power to revise or reverse the acts or decisions of a subordinate officer involving the exercise of discretion.

In short, the President sits at the apex of the Executive branch, and exercises "control of all the executive departments, bureaus, and offices." There can be no instance under the Constitution where an officer of the Executive branch is outside the control of the President. The Executive branch is unitary since there is only one President vested with executive power exercising control over the entire Executive branch. Any office in the Executive branch that is not under the control of the President is a lost command whose existence is without any legal or constitutional basis. (Emphasis supplied)

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An overwhelming four-fifths majority of the PNRC Board are private sector individuals elected to the PNRC Board by the private sector members of the PNRC. The PNRC Board exercises all corporate powers of the PNRC. The PNRC is controlled by private sector individuals. Decisions or actions of the PNRC Board are not reviewable by the President. The President cannot reverse or modify the decisions or actions of the PNRC Board. Neither can the President reverse or modify the decisions or actions of the PNRC Chairman. It is the PNRC Board that can review, reverse or modify the decisions or actions of the PNRC Chairman. This proves again that the office of the PNRC Chairman is a private office, not a government office.1avvphi1

Although the State is often represented in the governing bodies of a National Society, this can be justified by the need for proper coordination with the public authorities, and the government representatives may take part in decision-making within a National Society. However, the freely-elected representatives of a National Society’s active members must remain in a large majority in a National Society’s governing bodies.19

The PNRC is not government-owned but privately owned. The vast majority of the thousands of PNRC members are private individuals, including students. Under the PNRC Charter, those who contribute to the annual fund campaign of the PNRC are entitled to membership in the PNRC for one year. Thus, any one between 6 and 65 years of age can be a PNRC member for one year upon contributing P35, P100, P300, P500 or P1,000 for the year.20 Even foreigners, whether residents or not, can be members of the PNRC. Section 5 of the PNRC Charter, as amended by Presidential Decree No. 1264,21 reads:

SEC. 5. Membership in the Philippine National Red Cross shall be open to the entire population in the Philippines regardless of citizenship. Any contribution to the Philippine National Red Cross Annual Fund Campaign shall entitle the contributor to membership for one year and said contribution shall be deductible in full for taxation purposes.

Thus, the PNRC is a privately owned, privately funded, and privately run charitable organization. The PNRC is not a government-owned or controlled corporation.

Petitioners anchor their petition on the 1999 case of Camporedondo v. NLRC,22 which ruled that the PNRC is a government-owned or controlled corporation. In ruling that the PNRC is a government-owned or controlled corporation, the simple test used was whether the corporation was created by its own special charter for the exercise of a public function or by incorporation under the general corporation law. Since the PNRC was created under a special charter, the Court then ruled that it is a government corporation. However, the Camporedondoruling failed to consider the definition of a government-owned or controlled corporation as provided under Section 2(13) of the Introductory Provisions of the Administrative Code of 1987:

SEC. 2. General Terms Defined. – x x x

(13) Government-owned or controlled corporation refers to any agency organized as a stock or non-stock corporation, vested with functions relating to public needs whether governmental or proprietary in nature, and owned by the Government directly or through its instrumentalities either wholly, or where applicable as in the case of stock corporations, to the extent of at least fifty-one (51) percent of its capital stock: Provided, That government-owned or controlled corporations may be further categorized by the Department of the Budget, the Civil Service Commission, and the Commission on Audit for purposes of the exercise and discharge of their respective powers, functions and responsibilities with respect to such corporations.(Boldfacing and underscoring supplied)

A government-owned or controlled corporation must be owned by the government, and in the case of a stock corporation, at least a majority of its capital stock must be owned by the government. In the case of a non-stock corporation, by analogy at least a majority of the members must be government officials holding such membership by

23

appointment or designation by the government. Under this criterion, and as discussed earlier, the government does not own or control PNRC.

The PNRC Charter is Violative of the Constitutional Proscription against the Creation of Private Corporations by Special Law

The 1935 Constitution, as amended, was in force when the PNRC was created by special charter on 22 March 1947. Section 7, Article XIV of the 1935 Constitution, as amended, reads:

SEC. 7. The Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations, unless such corporations are owned or controlled by the Government or any subdivision or instrumentality thereof.

The subsequent 1973 and 1987 Constitutions contain similar provisions prohibiting Congress from creating private corporations except by general law. Section 1 of the PNRC Charter, as amended, creates the PNRC as a "body corporate and politic," thus:

SECTION 1. There is hereby created in the Republic of the Philippines a body corporate and politic to be the voluntary organization officially designated to assist the Republic of the Philippines in discharging the obligations set forth in the Geneva Conventions and to perform such other duties as are inherent upon a National Red Cross Society. The national headquarters of this Corporation shall be located in Metropolitan Manila. (Emphasis supplied)

In Feliciano v. Commission on Audit,23 the Court explained the constitutional provision prohibiting Congress from creating private corporations in this wise:

We begin by explaining the general framework under the fundamental law. The Constitution recognizes two classes of corporations. The first refers to private corporations created under a general law. The second

refers to government-owned or controlled corporations created by special charters. Section 16, Article XII of the Constitution provides:

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

The Constitution emphatically prohibits the creation of private corporations except by general law applicable to all citizens. The purpose of this constitutional provision is to ban private corporations created by special charters, which historically gave certain individuals, families or groups special privileges denied to other citizens.

In short, Congress cannot enact a law creating a private corporation with a special charter. Such legislation would be unconstitutional. Private corporations may exist only under a general law. If the corporation is private, it must necessarily exist under a general law. Stated differently, only corporations created under a general law can qualify as private corporations. Under existing laws, the general law is the Corporation Code, except that the Cooperative Code governs the incorporation of cooperatives.

The Constitution authorizes Congress to create government-owned or controlled corporations through special charters. Since private corporations cannot have special charters, it follows that Congress can create corporations with special charters only if such corporations are government-owned or controlled.24 (Emphasis supplied)

In Feliciano, the Court held that the Local Water Districts are government-owned or controlled corporations since they exist by virtue of Presidential Decree No. 198, which constitutes their special charter. The seed capital assets of the Local Water Districts, such as waterworks and sewerage facilities, were public property which were managed, operated by or under the control of the city, municipality or province before the assets were transferred to the Local Water

24

Districts. The Local Water Districts also receive subsidies and loans from the Local Water Utilities Administration (LWUA). In fact, under the 2009 General Appropriations Act,25 the LWUA has a budget amounting to P400,000,000 for its subsidy requirements.26 There is no private capital invested in the Local Water Districts. The capital assets and operating funds of the Local Water Districts all come from the government, either through transfer of assets, loans, subsidies or the income from such assets or funds.

The government also controls the Local Water Districts because the municipal or city mayor, or the provincial governor, appoints all the board directors of the Local Water Districts. Furthermore, the board directors and other personnel of the Local Water Districts are government employees subject to civil service laws and anti-graft laws. Clearly, the Local Water Districts are considered government-owned or controlled corporations not only because of their creation by special charter but also because the government in fact owns and controls the Local Water Districts.

Just like the Local Water Districts, the PNRC was created through a special charter. However, unlike the Local Water Districts, the elements of government ownership and control are clearly lacking in the PNRC. Thus, although the PNRC is created by a special charter, it cannot be considered a government-owned or controlled corporation in the absence of the essential elements of ownership and control by the government. In creating the PNRC as a corporate entity, Congress was in fact creating a private corporation. However, the constitutional prohibition against the creation of private corporations by special charters provides no exception even for non-profit or charitable corporations. Consequently, the PNRC Charter, insofar as it creates the PNRC as a private corporation and grants it corporate powers,27 is void for being unconstitutional. Thus, Sections 1,28 2,29 3,304(a),31 5,32 6,33 7,34 8,35 9,36 10,37 11,38 12,39 and 1340 of the PNRC Charter, as amended, are void.

The other provisions41 of the PNRC Charter remain valid as they can be considered as a recognition by the State that the unincorporated PNRC

is the local National Society of the International Red Cross and Red Crescent Movement, and thus entitled to the benefits, exemptions and privileges set forth in the PNRC Charter. The other provisions of the PNRC Charter implement the Philippine Government’s treaty obligations under Article 4(5) of the Statutes of the International Red Cross and Red Crescent Movement, which provides that to be recognized as a National Society, the Society must be "duly recognized by the legal government of its country on the basis of the Geneva Conventions and of the national legislation as a voluntary aid society, auxiliary to the public authorities in the humanitarian field."

In sum, we hold that the office of the PNRC Chairman is not a government office or an office in a government-owned or controlled corporation for purposes of the prohibition in Section 13, Article VI of the 1987 Constitution. However, since the PNRC Charter is void insofar as it creates the PNRC as a private corporation, the PNRC should incorporate under the Corporation Code and register with the Securities and Exchange Commission if it wants to be a private corporation.

WHEREFORE, we declare that the office of the Chairman of the Philippine National Red Cross is not a government office or an office in a government-owned or controlled corporation for purposes of the prohibition in Section 13, Article VI of the 1987 Constitution. We also declare that Sections 1, 2, 3, 4(a), 5, 6, 7, 8, 9, 10, 11, 12, and 13 of the Charter of the Philippine National Red Cross, or Republic Act No. 95, as amended by Presidential Decree Nos. 1264 and 1643, are VOID because they create the PNRC as a private corporation or grant it corporate powers.

SO ORDERED.

Republic of the PhilippinesSUPREME COURTManila

EN BANC

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G.R. No. L-23145      November 29, 1968

TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased. RENATO D. TAYAG, ancillary administrator-appellee, vs.BENGUET CONSOLIDATED, INC., oppositor-appellant.

FERNANDO, J.:

Confronted by an obstinate and adamant refusal of the domiciliary administrator, the County Trust Company of New York, United States of America, of the estate of the deceased Idonah Slade Perkins, who died in New York City on March 27, 1960, to surrender to the ancillary administrator in the Philippines the stock certificates owned by her in a Philippine corporation, Benguet Consolidated, Inc., to satisfy the legitimate claims of local creditors, the lower court, then presided by the Honorable Arsenio Santos, now retired, issued on May 18, 1964, an order of this tenor: "After considering the motion of the ancillary administrator, dated February 11, 1964, as well as the opposition filed by the Benguet Consolidated, Inc., the Court hereby (1) considers as lost for all purposes in connection with the administration and liquidation of the Philippine estate of Idonah Slade Perkins the stock certificates covering the 33,002 shares of stock standing in her name in the books of the Benguet Consolidated, Inc., (2) orders said certificates cancelled, and (3) directs said corporation to issue new certificates in lieu thereof, the same to be delivered by said corporation to either the incumbent ancillary administrator or to the Probate Division of this Court."1

From such an order, an appeal was taken to this Court not by the domiciliary administrator, the County Trust Company of New York, but by the Philippine corporation, the Benguet Consolidated, Inc. The appeal cannot possibly prosper. The challenged order represents a response and expresses a policy, to paraphrase Frankfurter, arising out of a specific problem, addressed to the attainment of specific ends by the use of specific remedies, with full and ample support from legal doctrines of weight and significance.

The facts will explain why. As set forth in the brief of appellant Benguet Consolidated, Inc., Idonah Slade Perkins, who died on March 27, 1960 in New York City, left among others, two stock certificates covering 33,002 shares of appellant, the certificates being in the possession of the County Trust Company of New York, which as noted, is the domiciliary administrator of the estate of the deceased.2 Then came this portion of the appellant's brief: "On August 12, 1960, Prospero Sanidad instituted ancillary administration proceedings in the Court of First Instance of Manila; Lazaro A. Marquez was appointed ancillary administrator, and on January 22, 1963, he was substituted by the appellee Renato D. Tayag. A dispute arose between the domiciary administrator in New York and the ancillary administrator in the Philippines as to which of them was entitled to the possession of the stock certificates in question. On January 27, 1964, the Court of First Instance of Manila ordered the domiciliary administrator, County Trust Company, to "produce and deposit" them with the ancillary administrator or with the Clerk of Court. The domiciliary administrator did not comply with the order, and on February 11, 1964, the ancillary administrator petitioned the court to "issue an order declaring the certificate or certificates of stocks covering the 33,002 shares issued in the name of Idonah Slade Perkins by Benguet Consolidated, Inc., be declared [or] considered as lost."3

It is to be noted further that appellant Benguet Consolidated, Inc. admits that "it is immaterial" as far as it is concerned as to "who is entitled to the possession of the stock certificates in question; appellant opposed the petition of the ancillary administrator because the said stock certificates are in existence, they are today in the possession of the domiciliary administrator, the County Trust Company, in New York, U.S.A...."4

It is its view, therefore, that under the circumstances, the stock certificates cannot be declared or considered as lost. Moreover, it would allege that there was a failure to observe certain requirements of its by-laws before new stock certificates could be issued. Hence, its appeal.

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As was made clear at the outset of this opinion, the appeal lacks merit. The challenged order constitutes an emphatic affirmation of judicial authority sought to be emasculated by the wilful conduct of the domiciliary administrator in refusing to accord obedience to a court decree. How, then, can this order be stigmatized as illegal?

As is true of many problems confronting the judiciary, such a response was called for by the realities of the situation. What cannot be ignored is that conduct bordering on wilful defiance, if it had not actually reached it, cannot without undue loss of judicial prestige, be condoned or tolerated. For the law is not so lacking in flexibility and resourcefulness as to preclude such a solution, the more so as deeper reflection would make clear its being buttressed by indisputable principles and supported by the strongest policy considerations.

It can truly be said then that the result arrived at upheld and vindicated the honor of the judiciary no less than that of the country. Through this challenged order, there is thus dispelled the atmosphere of contingent frustration brought about by the persistence of the domiciliary administrator to hold on to the stock certificates after it had, as admitted, voluntarily submitted itself to the jurisdiction of the lower court by entering its appearance through counsel on June 27, 1963, and filing a petition for relief from a previous order of March 15, 1963.

Thus did the lower court, in the order now on appeal, impart vitality and effectiveness to what was decreed. For without it, what it had been decided would be set at naught and nullified. Unless such a blatant disregard by the domiciliary administrator, with residence abroad, of what was previously ordained by a court order could be thus remedied, it would have entailed, insofar as this matter was concerned, not a partial but a well-nigh complete paralysis of judicial authority.

1. Appellant Benguet Consolidated, Inc. did not dispute the power of the appellee ancillary administrator to gain control and possession of all assets of the decedent within the jurisdiction of the Philippines. Nor could it. Such a power is inherent in his duty to settle her estate and satisfy the claims of local creditors.5 As Justice Tuason speaking for this

Court made clear, it is a "general rule universally recognized" that administration, whether principal or ancillary, certainly "extends to the assets of a decedent found within the state or country where it was granted," the corollary being "that an administrator appointed in one state or country has no power over property in another state or country."6

It is to be noted that the scope of the power of the ancillary administrator was, in an earlier case, set forth by Justice Malcolm. Thus: "It is often necessary to have more than one administration of an estate. When a person dies intestate owning property in the country of his domicile as well as in a foreign country, administration is had in both countries. That which is granted in the jurisdiction of decedent's last domicile is termed the principal administration, while any other administration is termed the ancillary administration. The reason for the latter is because a grant of administration does not ex proprio vigore have any effect beyond the limits of the country in which it is granted. Hence, an administrator appointed in a foreign state has no authority in the [Philippines]. The ancillary administration is proper, whenever a person dies, leaving in a country other than that of his last domicile, property to be administered in the nature of assets of the deceased liable for his individual debts or to be distributed among his heirs."7

It would follow then that the authority of the probate court to require that ancillary administrator's right to "the stock certificates covering the 33,002 shares ... standing in her name in the books of [appellant] Benguet Consolidated, Inc...." be respected is equally beyond question. For appellant is a Philippine corporation owing full allegiance and subject to the unrestricted jurisdiction of local courts. Its shares of stock cannot therefore be considered in any wise as immune from lawful court orders.

Our holding in Wells Fargo Bank and Union v. Collector of Internal Revenue8 finds application. "In the instant case, the actual situs of the shares of stock is in the Philippines, the corporation being domiciled [here]." To the force of the above undeniable proposition, not even

27

appellant is insensible. It does not dispute it. Nor could it successfully do so even if it were so minded.

2. In the face of such incontrovertible doctrines that argue in a rather conclusive fashion for the legality of the challenged order, how does appellant, Benguet Consolidated, Inc. propose to carry the extremely heavy burden of persuasion of precisely demonstrating the contrary? It would assign as the basic error allegedly committed by the lower court its "considering as lost the stock certificates covering 33,002 shares of Benguet belonging to the deceased Idonah Slade Perkins, ..."9 More specifically, appellant would stress that the "lower court could not "consider as lost" the stock certificates in question when, as a matter of fact, his Honor the trial Judge knew, and does know, and it is admitted by the appellee, that the said stock certificates are in existence and are today in the possession of the domiciliary administrator in New York."10

There may be an element of fiction in the above view of the lower court. That certainly does not suffice to call for the reversal of the appealed order. Since there is a refusal, persistently adhered to by the domiciliary administrator in New York, to deliver the shares of stocks of appellant corporation owned by the decedent to the ancillary administrator in the Philippines, there was nothing unreasonable or arbitrary in considering them as lost and requiring the appellant to issue new certificates in lieu thereof. Thereby, the task incumbent under the law on the ancillary administrator could be discharged and his responsibility fulfilled.

Any other view would result in the compliance to a valid judicial order being made to depend on the uncontrolled discretion of the party or entity, in this case domiciled abroad, which thus far has shown the utmost persistence in refusing to yield obedience. Certainly, appellant would not be heard to contend in all seriousness that a judicial decree could be treated as a mere scrap of paper, the court issuing it being powerless to remedy its flagrant disregard.

It may be admitted of course that such alleged loss as found by the lower court did not correspond exactly with the facts. To be more blunt,

the quality of truth may be lacking in such a conclusion arrived at. It is to be remembered however, again to borrow from Frankfurter, "that fictions which the law may rely upon in the pursuit of legitimate ends have played an important part in its development."11

Speaking of the common law in its earlier period, Cardozo could state fictions "were devices to advance the ends of justice, [even if] clumsy and at times offensive."12 Some of them have persisted even to the present, that eminent jurist, noting "the quasi contract, the adopted child, the constructive trust, all of flourishing vitality, to attest the empire of "as if" today."13 He likewise noted "a class of fictions of another order, the fiction which is a working tool of thought, but which at times hides itself from view till reflection and analysis have brought it to the light."14

What cannot be disputed, therefore, is the at times indispensable role that fictions as such played in the law. There should be then on the part of the appellant a further refinement in the catholicity of its condemnation of such judicial technique. If ever an occasion did call for the employment of a legal fiction to put an end to the anomalous situation of a valid judicial order being disregarded with apparent impunity, this is it. What is thus most obvious is that this particular alleged error does not carry persuasion.

3. Appellant Benguet Consolidated, Inc. would seek to bolster the above contention by its invoking one of the provisions of its by-laws which would set forth the procedure to be followed in case of a lost, stolen or destroyed stock certificate; it would stress that in the event of a contest or the pendency of an action regarding ownership of such certificate or certificates of stock allegedly lost, stolen or destroyed, the issuance of a new certificate or certificates would await the "final decision by [a] court regarding the ownership [thereof]."15

Such reliance is misplaced. In the first place, there is no such occasion to apply such by-law. It is admitted that the foreign domiciliary administrator did not appeal from the order now in question. Moreover, there is likewise the express admission of appellant that as

28

far as it is concerned, "it is immaterial ... who is entitled to the possession of the stock certificates ..." Even if such were not the case, it would be a legal absurdity to impart to such a provision conclusiveness and finality. Assuming that a contrariety exists between the above by-law and the command of a court decree, the latter is to be followed.

It is understandable, as Cardozo pointed out, that the Constitution overrides a statute, to which, however, the judiciary must yield deference, when appropriately invoked and deemed applicable. It would be most highly unorthodox, however, if a corporate by-law would be accorded such a high estate in the jural order that a court must not only take note of it but yield to its alleged controlling force.

The fear of appellant of a contingent liability with which it could be saddled unless the appealed order be set aside for its inconsistency with one of its by-laws does not impress us. Its obedience to a lawful court order certainly constitutes a valid defense, assuming that such apprehension of a possible court action against it could possibly materialize. Thus far, nothing in the circumstances as they have developed gives substance to such a fear. Gossamer possibilities of a future prejudice to appellant do not suffice to nullify the lawful exercise of judicial authority.

4. What is more the view adopted by appellant Benguet Consolidated, Inc. is fraught with implications at war with the basic postulates of corporate theory.

We start with the undeniable premise that, "a corporation is an artificial being created by operation of law...."16 It owes its life to the state, its birth being purely dependent on its will. As Berle so aptly stated: "Classically, a corporation was conceived as an artificial person, owing its existence through creation by a sovereign power."17As a matter of fact, the statutory language employed owes much to Chief Justice Marshall, who in the Dartmouth College decision defined a corporation precisely as "an artificial being, invisible, intangible, and existing only in contemplation of law."18

The well-known authority Fletcher could summarize the matter thus: "A corporation is not in fact and in reality a person, but the law treats it as though it were a person by process of fiction, or by regarding it as an artificial person distinct and separate from its individual stockholders.... It owes its existence to law. It is an artificial person created by law for certain specific purposes, the extent of whose existence, powers and liberties is fixed by its charter."19 Dean Pound's terse summary, a juristic person, resulting from an association of human beings granted legal personality by the state, puts the matter neatly.20

There is thus a rejection of Gierke's genossenchaft theory, the basic theme of which to quote from Friedmann, "is the reality of the group as a social and legal entity, independent of state recognition and concession."21 A corporation as known to Philippine jurisprudence is a creature without any existence until it has received the imprimatur of the state according to law. It is logically inconceivable therefore that it will have rights and privileges of a higher priority than that of its creator. More than that, it cannot legitimately refuse to yield obedience to acts of its state organs, certainly not excluding the judiciary, whenever called upon to do so.

As a matter of fact, a corporation once it comes into being, following American law still of persuasive authority in our jurisdiction, comes more often within the ken of the judiciary than the other two coordinate branches. It institutes the appropriate court action to enforce its right. Correlatively, it is not immune from judicial control in those instances, where a duty under the law as ascertained in an appropriate legal proceeding is cast upon it.

To assert that it can choose which court order to follow and which to disregard is to confer upon it not autonomy which may be conceded but license which cannot be tolerated. It is to argue that it may, when so minded, overrule the state, the source of its very existence; it is to contend that what any of its governmental organs may lawfully require could be ignored at will. So extravagant a claim cannot possibly merit approval.

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5. One last point. In Viloria v. Administrator of Veterans Affairs,22 it was shown that in a guardianship proceedings then pending in a lower court, the United States Veterans Administration filed a motion for the refund of a certain sum of money paid to the minor under guardianship, alleging that the lower court had previously granted its petition to consider the deceased father as not entitled to guerilla benefits according to a determination arrived at by its main office in the United States. The motion was denied. In seeking a reconsideration of such order, the Administrator relied on an American federal statute making his decisions "final and conclusive on all questions of law or fact" precluding any other American official to examine the matter anew, "except a judge or judges of the United States court."23 Reconsideration was denied, and the Administrator appealed.

In an opinion by Justice J.B.L. Reyes, we sustained the lower court. Thus: "We are of the opinion that the appeal should be rejected. The provisions of the U.S. Code, invoked by the appellant, make the decisions of the U.S. Veterans' Administrator final and conclusive when made on claims property submitted to him for resolution; but they are not applicable to the present case, where the Administrator is not acting as a judge but as a litigant. There is a great difference between actions against the Administrator (which must be filed strictly in accordance with the conditions that are imposed by the Veterans' Act, including the exclusive review by United States courts), and those actions where the Veterans' Administrator seeks a remedy from our courts and submits to their jurisdiction by filing actions therein. Our attention has not been called to any law or treaty that would make the findings of the Veterans' Administrator, in actions where he is a party, conclusive on our courts. That, in effect, would deprive our tribunals of judicial discretion and render them mere subordinate instrumentalities of the Veterans' Administrator."

It is bad enough as the Viloria decision made patent for our judiciary to accept as final and conclusive, determinations made by foreign governmental agencies. It is infinitely worse if through the absence of any coercive power by our courts over juridical persons within our jurisdiction, the force and effectivity of their orders could be made to depend on the whim or caprice of alien entities. It is difficult to imagine

of a situation more offensive to the dignity of the bench or the honor of the country.

Yet that would be the effect, even if unintended, of the proposition to which appellant Benguet Consolidated seems to be firmly committed as shown by its failure to accept the validity of the order complained of; it seeks its reversal. Certainly we must at all pains see to it that it does not succeed. The deplorable consequences attendant on appellant prevailing attest to the necessity of negative response from us. That is what appellant will get.

That is all then that this case presents. It is obvious why the appeal cannot succeed. It is always easy to conjure extreme and even oppressive possibilities. That is not decisive. It does not settle the issue. What carries weight and conviction is the result arrived at, the just solution obtained, grounded in the soundest of legal doctrines and distinguished by its correspondence with what a sense of realism requires. For through the appealed order, the imperative requirement of justice according to law is satisfied and national dignity and honor maintained.

WHEREFORE, the appealed order of the Honorable Arsenio Santos, the Judge of the Court of First Instance, dated May 18, 1964, is affirmed. With costs against oppositor-appelant Benguet Consolidated, Inc.

Republic of the PhilippinesSUPREME COURTManila

EN BANC

G.R. No. L-20214             March 17, 1923

G. C. ARNOLD, plaintiff-appellant, vs.WILLITS & PATTERSON, LTD., defendant-appellee.

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STATEMENT

For a number of years prior to the times alleged in the complaint, the plaintiff was in the employ of the International Banking Corporation of Manila, and it is conceded that he is a competent and experienced business man. July 31, 1916, C. D. Willits and I. L. Patterson were partners doing business in San Francisco, California, under the name of Willits & Patterson. The plaintiff was then in San Francisco, and as a result of negotiations the plaintiff and the firm entered into a written contract, known in the record as Exhibit A, by which the plaintiff was employed as the agent of the firm in the Philippine Islands for certain purposes for the period of five years at a minimum salary of $200 per month and travelling expenses. The plaintiff returned to Manila and entered on the discharge of his duties under the contract. As a result of plaintiff's employment and the world war conditions, the business of the firm in the Philippines very rapidly increased and grew beyond the fondest hopes of either party. A dispute arose between the plaintiff and the firm as to the construction of Exhibit A as to the amount which plaintiff should receive for his services. Meanwhile Patterson retired from the firm and Willits became the sole owner of its assets. For convenience of operation and to serve his own purpose, Willits organized a corporation under the laws of California with its principal office at San Francisco, in and by which he subscribed for, and became the exclusive owner of all the capital stock except a few shares for organization purposes only, and the name of the firm was used as the name of the corporation. A short time after that Willits came to Manila and organized a corporation here known as Willits & Patterson, Ltd., in and to which he again subscribed for all of the capital stock except the nominal shares necessary to qualify the directors. In legal effect, the San Francisco corporation took over and acquired all of the assets and liabilities of the Manila corporation. At the time that Willits was in Manila and while to all intents and purposes he was the sole owner of the stock of corporations, there was a conference between him and the plaintiff over the disputed construction of Exhibit A. As a result of which another instrument, known in the record as Exhibit B, was prepared in the form of a letter which the plaintiff addressed to Willits at Manila on November 10, 1919, the purpose of which was to more clearly define and specify the compensation which the plaintiff was to

receive for his services. Willits received and confirmed this letter by signing the name of Willits & Patterson, By C.d. Willits. At the time both corporations were legally organized, and there is nothing in the corporate minutes to show that Exhibit B was ever formally ratified or approved by either corporation. After its organization, the Manila corporation employed a regular accountant whose duty it was to audit the accounts of the company and render financial statements both for the use of the local banks and the local and parent corporations at San Francisco. From time to time and in the ordinary course of business such statements of account were prepared by the accountant and duly forwarded to the home office, and among other things was a statement of July 31, 1921, showing that there was due and owing the plaintiff under Exhibit B the sum of P106,277.50. A short time previous to that date, the San Francisco corporation became involved in financial trouble, and all of its assets were turned over to a "creditors' committee." When this statement was received, the "creditors' committee" immediately protested its allowance. An attempt was made without success to adjust the matter on a friendly basis and without litigation. January 10, 1922, the plaintiff brought this action to recover from the defendant the sum of P106,277.50 with legal interest and costs, and written instruments known in the record as Exhibits A and B were attached to, and made a part of, the complaint.

For answer, the defendant admits the formal parts of the complaint, the execution of Exhibit A and denies each and every other allegation, except as specifically admitted, and alleges that what is known as Exhibit B was signed by Willits without the authority of the defendant corporation or the firm of Willits & Patterson, and that it is not an agreement which was ever entered into with the plaintiff by the defendant or the firm, and, as a separate defense and counterclaim, it alleges that on the 30th of June, 1920, there was a balance due and owing the plaintiff from the defendant under the contract Exhibit A of the sum of P8,741.05. That his salary from June 30, 1920, to July 31, 1921, under Exhibit A was $400 per month, or a total of P10,400. That about July 6, 1921, the plaintiff wrongfully took P30,000 from the assets of the firm, and that he is now indebted to the firm in the sum of P10,858.95, with interest and costs, from which it prays judgement.

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The plaintiff admits that he withdrew the P30,000, but alleges that it was with the consent and authority of the defendant, and denies all other new matter in the answer.

Upon such issues a trial was had, and the lower court rendered judgment in favor of the defendant as prayed for in its counterclaim, from which the plaintiff appeals, contending that the trial court erred in not holding that the contract between the parties is that which is embodied in Exhibits A and B, and that the defendant assumed all partnership obligations, and in failing to render judgment for the plaintiff, as prayed for, and in dismissing his complaint, and denying plaintiff's motion for a new trial.

JOHNS, J.:

In their respective briefs opposing counsel agree that the important questions involved are "what was the contract under which the plaintiff rendered services for five years ending July 31, 1921," and "what is due the plaintiff under that contract." Plaintiff contends that his services were performed under Exhibits A and B, and that the defendant assumed all of the obligations of the original partnership under Exhibit A, and is now seeking to deny its liability under, and repudiate, Exhibit B. The defendant admits that Exhibit A was the original contract between Arnold and the firm of Willits & Patterson by which he came to the Philippine Islands, and that it was therein agreed that he was to be employed for a period of five years as the agent of Willits & Patterson in the Philippine Islands to operate a certain oil mill, and to do such other business as might be deemed advisable for which he was to receive, first, the travelling expenses of his wife and self from San Francisco to Manila, second, the minimum salary of $200 per month, third, a brokerage of 1 per cent upon all purchases and sales of merchandise, except for the account of the coconut oil mill, fourth, one-half of the profits on any transaction in the name of the firm or himself not provided for in the agreement. That the agreement also provided that if it be found that the business was operated at a loss, Arnold should receive a monthly salary of $400 during such period. That the business was operated at a loss from June 30, 1920, to July 31, 1921, and that for

such reason, he was entitled to nothing more than a salary of $400 per month, or for that period P10,400. Adding this amount to the P8,741.05, which the defendant admits he owed Arnold on June 30, 1920, makes a total of P19,141.05, leaving a balance due the defendant as set out in the counterclaim. In other words, that the plaintiff's compensation was measured by, and limited to, the above specified provisions in the contract Exhibit A, and that the defendant corporation is not bound by the terms or provisions of Exhibit B, which is as follows:

WILLITS & PATTERSON, LTD.

MANILA, P. I., Nov. 10, 1919.

CHAS. D. WILLITS, Esq.,

Present.

DEAR MR. WILLITS: My understanding of the intent of my agreement with Willits & Patterson is as under:

Commissions. Willits & Patterson, San Francisco, pay me a commission of one per cent on all purchases made for them in the Philippines or sales made to them by Manila and one per cent on all sales made for them in the Philippines, or purchases made from them by Manila. If such purchases or sales are on an f. o. b. basis the commission is on the f. o. b. price; if on a c. i. f. basis the commission is computed on the c. i. f. price

These commissions are credited to me in San Francisco.

I do not participate in any profits on business transacted between Willits & Patterson, San Francisco, and Willits & Patterson, Ltd., Manila.

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Profits. On all business transacted between Willits & Patterson, Ltd. and others than Willits & Patterson, San Francisco, half the profits are to be credited to my account and half to the Profit & Loss account of Willits & Patterson, Ltd., Manila.

On all other business, such as the Cooperative Coconut Products Co. account, or any other business we may undertake as agents or managers, half the profits are to be credited to my account and half to the Profit & Loss account of Willits & Patterson, Ltd., Manila.

Where Willits & Patterson, San Francisco, or Willits & Patterson, Ltd., Manila, have their own funds invested in the capital stock or a corporation, I of course do not participate in the earnings of such stock, any more than Willits & Patterson would participate in the earnings of stock held by me on my account.

If the foregoing conforms to your understanding of our agreement, please confirm below.

Yours faithfully,

(Sgd.) G. C. ARNOLD

Confirmed:

WILLITS & PATTERSON

By (Sgd.) CHAS. D. WILLITS

There is no dispute about any of the following facts: That at the inception C.D. Willits and I. L. Patterson constituted the firm of Willits & Patterson doing business in the City of San Francisco; that later Patterson retired from the firm, and Willits acquired all of his interests

and thereafter continued the business under the name and style of Willits & Patterson; that the original contract Exhibit A was made between the plaintiff and the old firm at San Francisco on July 31, 1916, to cover a period of five years from that date; that plaintiff entered upon the discharged of his duties and continued his services in the Philippine Islands to someone for the period of five years; that on November 10, 1919, and as a result of conferences between Willits and the plaintiff, Exhibit B was addressed and signed in the manner and form above stated in the City of Manila. A short time prior to that date Willits organized a corporation in San Francisco, in the State of California, which took over and acquired all of the assets of the firm's business in California then being conducted under the name and style of Willits & Patterson; that he subscribed for all of the capital stock of the corporation, and that in truth and in fact he was the owner of all of its capital stock. After this was done he caused a new corporation to be organized under the laws of the Philippine Islands with principal office at Manila, which took over and acquired all the business and assets of the firm of Willits & Patterson in the Philippine Islands, in and to which, in legal effect, he subscribed for all of its capital stock, and was the owner of all of its stock. After both corporations were organized the above letter was drafted and signed. The plaintiff contends that the signing of Exhibit B in the manner and under the conditions in which it was signed, and through the subsequent acts and conduct of the parties, was ratified and, in legal effect, became and is now binding upon the defendant.

It will be noted that Exhibit B was executed in Manila, and that at the time it was signed by Willits, he was to all intents and purposes the legal owner of all the stock in both corporations. It also appears from the evidence that the parent corporation at San Francisco took over and acquired all of the assets and liabilities of the local corporation at Manila. That after it was organized the Manila corporation kept separate records and account books of its own, and that from time to time financial statements were made and forwarded to the home office, from which it conclusively appears that plaintiff was basing his claim for services upon Exhibit A, as it was modified by Exhibit B. That at no time after Exhibit B was signed was there ever any dispute between plaintiff and Willits as to the compensation for plaintiff's services. That

33

is to say, as between the plaintiff and Willits, Exhibit B was approved, followed and at all times in force and effect, after it was signed November 10, 1919. It appears from an analysis of Exhibit B that it was for the mutual interest of both parties. From a small beginning, the business was then in a very flourishing conditions and growing fast, and the profits were very large and were running into big money.

Among other things, Exhibit A provided: "(a) That the net profits from said coconut oil business shall be divided in equal shares between the said parties hereto; (b) that Arnold should receive a brokerage of 1 per cent from all purchases and sales of merchandise, except for the account of the coconut mills; (c) that the net profits from all other business should be divided in equal half shares between the parties hereto."

Under the above provisions, the plaintiff might well contend that he was entitled to one-half of all the profits and a brokerage of 1 per cent from all purchases and sales, except those for the account of the coconut oil mills, which under the volume of business then existing would run into a very large sum of money. It was for such reason and after personal conferences between them, and to settle all disputed questions, that Exhibit B was prepared and signed.

The record recites that "the defendant admits that from July 31, 1916 to July 31, 1921, the plaintiff faithfully performed all the duties incumbent upon him under his contract of employment, it being understood, however, that this admission does not include an admission that the plaintiff placed a proper interpretation upon his right to remuneration under said contract of employment."

It being admitted that the plaintiff worked "under his contract of employment" for the period of five years, the question naturally arises, for whom was he working? His contract was made with the original firm of Willits & Patterson, and that firm was dissolved and it ceased to exist, and all of its assets were merged in, and taken over by, the parent corporation at San Francisco. In the very nature of things, after the corporation was formed, the plaintiff could not and did not continue to

work for the firm, and, yet, he continued his employment for the full period of five years. For whom did he work after the partnership was merged in the corporation and ceased to exist?

It is very apparent that, under the conditions then existing, the signing of Exhibit B was for the mutual interests of both parties, and that if the contract Exhibit A was to be enforced according to its terms, that Arnold might well contend for a much larger sum of money for his services. In truth and in fact Willits and both corporations recognized his employment and accepted the benefits of his services. He continued his employment and rendered his services after the corporation were organized and Exhibit B was signed just the same as he did before, and both corporations recognized and accepted his services. Although the plaintiff was president of the local corporation, the testimony is conclusive that both of them were what is known as a one man corporation, and Willits, as the owner of all of the stock, was the force and dominant power which controlled them. After Exhibit B was signed it was recognized by Willits that the plaintiff's services were to be performed and measured by its term and provisions, and there never was any dispute between plaintiff and Willits upon that question.

The controversy first arose after the corporation was in financial trouble and the appointment of what is known in the record as a "creditors' committee." There is no claim or pretense that there was any fraud or collusion between plaintiff and Willits, and it is very apparent that Exhibit B was to the mutual interest of both parties. It is elementary law that if Exhibit B is a binding contract between the plaintiff and Willits and the corporations, it is equally binding upon the creditors' committee. It would not have any higher or better legal right than the corporation itself, and could not make any defense which it could not make. It is very significant that the claim or defense which is now interposed by the creditors' committee was never made or asserted at any previous time by the defendant, and that it never was made by Willits, and it is very apparent that if he had remained in control of the corporation, it would never have made the defense which is now made by the creditors' committee. The record is conclusive that at the time he signed Exhibit B, Willits was, in legal effect, the owner and holder of all the stock in both corporations, and that he approved it

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in their interest, and to protect them from the plaintiff having and making a much larger claim under Exhibit A. As a matter of fact, it appears from the statement of Mr. Larkin, the accountant, in the record that if plaintiff's cause of action was now founded upon Exhibit A, he would have a claim for more than P160,000.

Thompson on Corporations, 2d ed., vol. I, section 10, says:

The proposition that a corporation has an existence separate and distinct from its membership has its limitations. It must be noted that this separate existence is for particular purposes. It must also be remembered that there can be no corporate existence without persons to compose it; there can be no association without associates. This separate existence is to a certain extent a legal fiction. Whenever necessary for the interests of the public or for the protection or enforcement of the rights of the membership, courts will disregard this legal fiction and operate upon both the corporation and the persons composing it.

In the same section, the author quotes from a decision in 49 Ohio State, 1371; 15 L. R. A., 145, in which the Supreme Court of Ohio says:

"So long as a proper use is made of the fiction that a corporation is an entity apart from its shareholders, it is harmless, and, because convenient, should not be called in question; but where it is urged to an end subversive of its policy, or such is the issue, the fiction must be ignored, and the question determined whether the act in question, though done by shareholders, — that is to say, by the persons uniting in one body, — was done simply as individuals, and with respect to their individual interest as shareholders, or was done ostensibly as such, but, as a matter of fact, to control the corporation, and affect the transaction of its business, in the same manner as if the act had been clothed with all the formalities of a corporate act. This must be so, because, the stockholders having a dual capacity, and capable of acting in

either, and a possible interest to conceal their character when acting in their corporate capacity, the absence of the formal evidence of the character of the act cannot preclude judicial inquiry on the subject. If it were otherwise, then in that department of the law fraud would enjoy an immunity awarded to it in no other."

Where the stock of a corporation is owned by one person whereby the corporation functions only for the benefit of such individual owner, the corporation and the individual should be deemed to be the same. (U. S. Gypsum Co. vs. Mackay Wall Plaster Co., 199 Pac., 249.)

Ruling Case Law, vol. 7, section 663, says:

While of course a corporation cannot ratify a contract which is strictly ultra vires, and which it in the first instance could not have made, it may by ratification render binding on it a contract, entered into on its behalf by its officers or agents without authority. As a general rule such ratification need not be manifested by any voted or formal resolution of the corporation or be authenticated by the corporate seal; no higher degree of evidence is requisite in establishing ratification on the part of a corporation, than is requisite in showing an antecedent authorization.

x x x           x x x           x x x

SEC. 666. The assent or approval of a corporation to acts done on its account may be inferred in the same manner that the absent of a natural person may be, and it is well settled that where a corporation with full knowledge of the unauthorized act of its officer or agents acquiesces in and consents to such acts, it thereby ratifies them, especially where the acquiescence results in prejudice to a third person.

x x x           x x x           x x x

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SEC. 669. So, when, in the usual course of business of a corporation, an officer has been allowed in his official capacity to manage its affair, his authority to represent the corporation may be inferred from the manner in which he has been permitted by the directors to transact its business.

SEC. 656. In accordance with a well-known rule of the law of agency, notice to corporate officers or agents within the scope or apparent scope of their authority is attributed to the corporation.

SEC. 667. As a general rule, if a corporation with knowledge of its agents unauthorized act received and enjoys the benefits thereof, it impliedly ratifies the unauthorized act if it is one capable of ratification by parol.

In its article on corporations, Corpus Juris, in section 2241 says:

Ratification by a corporation of a transaction not previously authorized is more easily inferred where the corporation receives and retains property under it, and as a general rule where a corporation, through its proper officers or board, takes and retains the benefits of the unauthorized act or contract of an officer or agent, with full knowledge of all the material facts, it thereby ratifies and becomes bound by such act of contract, together with all the liabilities and burdens resulting therefrom, and in some jurisdiction this rule is, in effect, declared by statute. Thus the corporation is liable on the ground of ratification where, with knowledge of the facts, it accepts the benefit of services rendered under an unauthorized contract of employment . . . .

Applying the law to the facts.

Mr. Larkin, an experienced accountant, was employed by the local corporation, and from time to time and in the ordinary course of business made and prepared financial statements showing its assets

and liabilities, true copies of which were sent to the home office in San Francisco. It appears upon their face that plaintiff's compensation was made and founded on Exhibit B, and that such statements were made and prepared by the accountant on the assumption that Exhibit B was in full force and effect as between the plaintiff and the defendant. In the course of business in the early part of 1920, plaintiff, as manager of the defendant, sold 500 tons of oil for future delivery at P740 per ton. Due to break in the market, plaintiff was able to purchase the oil at P380 per ton or a profit of P180,000.

It appears from Exhibit B under the heading of "Profits" that:

On all the business transacted between Willits & Patterson, Ltd. and others than Willits & Patterson, San Francisco, half the profit are to be credited to may account and half to the Profit & Loss account Willits & Patterson, Ltd., Manila.

The purchasers paid P105,000 on the contracts and gave their notes for P75,000, and it was agreed that all of the oil purchased should be held as security for the full payment of the purchase price. As a result, the defendant itself received the P105,000 in cash, P75,000 in notes, and still holds the 500 tons of oil as security for the balance of the purchase price. This transaction was shown in the semi-annual financial statement for the period ending December 31, 1920. That is to say, the business was transacted by and through the plaintiff, and the defendant received and accepted all of the profits on the deal, and the statement which was rendered gave him a credit for P90,737.88, or half the profit as provided in the contract Exhibit B, with interest.

Although the previous financial statements show upon their face that the account of plaintiff was credit with several small items on the same basis, it was not until the 23d of March, 1921, that any objection was ever made by anyone, and objection was made for the first time by the creditors' committee in a cable of that date.

As we analyze the facts Exhibit B was, in legal effect, ratified and approved and is now binding upon the defendant corporation, and the

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plaintiff is entitled to recover for his services on that writing as it modified the original contract Exhibit A.

It appears from the statement prepared by accountant Larkin founded upon Exhibit B that the plaintiff is entitled to recover P106,277.50. It is very apparent that his statement was based upon the assumption that there was a net profit of P180,000 on the 500 tons of oil, of which the plaintiff was entitled to one-half.

In the absence of any other proof, we have the right to assume that the 500 tons of oil was worth the amount which the defendant paid for them at the time of the purchase or P380 per ton, and the record shows that the defendant took and now has the possession of all of the oil secure the payment of the price at which it was sold. Hence, the profit on the deal to the defendant at the time of the sale would amount to the difference between what the defendant paid for the oil and the amount which it received for the oil at the time it sold the oil. It appears that at the time of the sale the defendant only received P105,000 in cash, and that it took and accepted the promissory notes of Cruz & Tan Chong Say, the purchasers, for P75,000 more which have been collected and may never be. Hence, it must follow that the amount evidence by the notes cannot now be deemed or treated as profits on the deal and cannot be until such times as the notes are paid.

The judgment of the lower court is reversed, and a money judgment will be entered here in favor of the plaintiff and against the defendant for the sum of P68,527.50, with thereon at the rate of 6 per cent per annum from the 10th day of January, 1922. In addition thereto, judgment will be rendered against the defendant in substance and to the effect that the plaintiff is the owner of an undivided one-half interest in the promissory notes for P75,000 which were executed by Cruz & Tan Chong Say, as a part of the purchase price of the oil, and that he is entitled to have and receive one-half of all the proceeds from the notes or either of them, and that also he have judgment against the defendant for costs. So ordered.

Araullo, C. J., Street, Malcolm, Avanceña, Ostrand, and Romualdez, JJ., concur.

Republic of the PhilippinesSUPREME COURTManila

THIRD DIVISION

G.R. No. 170689               March 17, 2009

PANTRANCO EMPLOYEES ASSOCIATION (PEA-PTGWO) and PANTRANCO RETRENCHED EMPLOYEES ASSOCIATION (PANREA), Petitioners, vs.NATIONAL LABOR RELATIONS COMMISSION (NLRC), PANTRANCO NORTH EXPRESS, INC. (PNEI), PHILIPPINE NATIONAL BANK (PNB), PHILIPPINE NATIONAL BANK-MANAGEMENT AND DEVELOPMENT CORPORATION (PNB-MADECOR), and MEGA PRIME REALTY AND HOLDINGS CORPORATION (MEGA PRIME), Respondents.

x - - - - - - - - - - - - - - - - - - - - - - -x

G.R. No. 170705               March 17, 2009

PHILIPPINE NATIONAL BANK, Petitioner, vs.PANTRANCO EMPLOYEES ASSOCIATION, INC. (PEA-PTGWO), PANTRANCO RETRENCHED EMPLOYEES ASSOCIATION (PANREA) AND PANTRANCO ASSOCIATION OF CONCERNED EMPLOYEES (PACE), ET AL., PHILIPPINE NATIONAL BANK-MANAGEMENT DEVELOPMENT CORPORATION (PNB-MADECOR), and MEGA PRIME REALTY HOLDINGS, INC., Respondents.

D E C I S I O N

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NACHURA, J.:

Before us are two consolidated petitions assailing the Court of Appeals (CA) Decision1 dated June 3, 2005 and its Resolution2 dated December 7, 2005 in CA-G.R. SP No. 80599.

In G.R. No. 170689, the Pantranco Employees Association (PEA) and Pantranco Retrenched Employees Association (PANREA) pray that the CA decision be set aside and a new one be entered, declaring the Philippine National Bank (PNB) and PNB Management and Development Corporation (PNB-Madecor) jointly and solidarily liable for the P722,727,150.22 National Labor Relations Commission (NLRC) judgment in favor of the Pantranco North Express, Inc. (PNEI) employees;3 while in G.R. No. 170705, PNB prays that the auction sale of the Pantranco properties be declared null and void.4

The facts of the case, as found by the CA,5 and established in Republic of the Phils. v. NLRC,6 Pantranco North Express, Inc. v. NLRC,7 and PNB MADECOR v. Uy,8 follow:

The Gonzales family owned two corporations, namely, the PNEI and Macris Realty Corporation (Macris). PNEI provided transportation services to the public, and had its bus terminal at the corner of Quezon and Roosevelt Avenues in Quezon City. The terminal stood on four valuable pieces of real estate (known as Pantranco properties) registered under the name of Macris.9 The Gonzales family later incurred huge financial losses despite attempts of rehabilitation and loan infusion. In March 1975, their creditors took over the management of PNEI and Macris. By 1978, full ownership was transferred to one of their creditors, the National Investment Development Corporation (NIDC), a subsidiary of the PNB.

Macris was later renamed as the National Realty Development Corporation (Naredeco) and eventually merged with the National Warehousing Corporation (Nawaco) to form the new PNB subsidiary, the PNB-Madecor.

In 1985, NIDC sold PNEI to North Express Transport, Inc. (NETI), a company owned by Gregorio Araneta III. In 1986, PNEI was among the several companies placed under sequestration by the Presidential Commission on Good Government (PCGG) shortly after the historic events in EDSA. In January 1988, PCGG lifted the sequestration order to pave the way for the sale of PNEI back to the private sector through the Asset Privatization Trust (APT). APT thus took over the management of PNEI.

In 1992, PNEI applied with the Securities and Exchange Commission (SEC) for suspension of payments. A management committee was thereafter created which recommended to the SEC the sale of the company through privatization. As a cost-saving measure, the committee likewise suggested the retrenchment of several PNEI employees. Eventually, PNEI ceased its operation. Along with the cessation of business came the various labor claims commenced by the former employees of PNEI where the latter obtained favorable decisions.

On July 5, 2002, the Labor Arbiter issued the Sixth Alias Writ of Execution10 commanding the NLRC Sheriffs to levy on the assets of PNEI in order to satisfy the P722,727,150.22 due its former employees, as full and final satisfaction of the judgment awards in the labor cases. The sheriffs were likewise instructed to proceed against PNB, PNB-Madecor and Mega Prime.11 In implementing the writ, the sheriffs levied upon the four valuable pieces of real estate located at the corner of Quezon and Roosevelt Avenues, on which the former Pantranco Bus Terminal stood. These properties were covered by Transfer Certificate of Title (TCT) Nos. 87881-87884, registered under the name of PNB-Madecor.12 Subsequently, Notice of Sale of the foregoing real properties was published in the newspaper and the sale was set on July 31, 2002. Having been notified of the auction sale, motions to quash the writ were separately filed by PNB-Madecor and Mega Prime, and PNB. They likewise filed their Third-Party Claims.13 PNB-Madecor anchored its motion on its right as the registered owner of the Pantranco properties, and Mega Prime as the successor-in-interest. For its part, PNB sought the nullification of the writ on the ground that it was not a party to the

38

labor case.14 In its Third-Party Claim, PNB alleged that PNB-Madecor was indebted to the former and that the Pantranco properties

would answer for such debt. As such, the scheduled auction sale of the aforesaid properties was not legally in order.15

On September 10, 2002, the Labor Arbiter declared that the subject Pantranco properties were owned by PNB-Madecor. It being a corporation with a distinct and separate personality, its assets could not answer for the liabilities of PNEI. Considering, however, that PNB-Madecor executed a promissory note in favor of PNEI forP7,884,000.00, the writ of execution to the extent of the said amount was concerned was considered valid.16

PNB’s third-party claim – to nullify the writ on the ground that it has an interest in the Pantranco properties being a creditor of PNB-Madecor, – on the other hand, was denied because it only had an inchoate interest in the properties.17

The dispositive portion of the Labor Arbiter’s September 10, 2002 Resolution is quoted hereunder:

WHEREFORE, the Third Party Claim of PNB Madecor and/or Mega Prime Holdings, Inc. is hereby GRANTED and concomitantly the levies made by the sheriffs of the NLRC on the properties of PNB Madecor should be as it (sic) is hereby LIFTED subject to the payment by PNB Madecor to the complainants the amount of P7,884,000.00.

The Motion to Quash and Third Party Claim of PNB is hereby DENIED.

The Motion to Quash of PNB Madecor and Mega Prime Holdings, Inc. is hereby PARTIALLY GRANTED insofar as the amount of the writ exceeds P7,884,000.00.

The Motion for Recomputation and Examination of Judgment Awards is hereby DENIED for want of merit.

The Motion to Expunge from the Records claimants/complainants Opposition dated August 3, 2002 is hereby DENIED for lack of merit.

SO ORDERED.18

On appeal to the NLRC, the same was denied and the Labor Arbiter’s disposition was affirmed.19 Specifically, the NLRC concluded as follows:

(1) PNB-Madecor and Mega Prime contended that it would be impossible for them to comply with the requirement of the labor arbiter to pay to the PNEI employees the amount of P7.8 million as a condition to the lifting of the levy on the properties, since the credit was already garnished by Gerardo Uy and other creditors of PNEI. The NLRC found no evidence that Uy had satisfied his judgment from the promissory note, and opined that even if the credit was in custodia legis, the claim of the PNEI employees should enjoy preference under the Labor Code.

(2) The PNEI employees contested the finding that PNB-Madecor was indebted to the PNEI for only P7.8 million without considering the accrual of interest. But the NLRC said that there was no evidence that demand was made as a basis for reckoning interest.

(3) The PNEI employees further argued that the labor arbiter may not properly conclude from a decision of Judge Demetrio Macapagal Jr. of the RTC of Quezon City that PNB-Madecor was the owner of the properties as his decision was reconsidered by the next presiding judge, nor from a decision of the Supreme Court that PNEI was a mere lessee of the properties, the fact being that the transfer of the properties to PNB-Madecor was done to avoid satisfaction of the claims of the employees with the NLRC and that as a result of a civil case filed by Mega Prime, the subsequent sale of the properties by PNB to Mega Prime was rescinded. The NLRC pointed out that while the Macapagal decision was set aside by Judge Bruselas and hence,

39

his findings could not be invoked by the labor arbiter, the titles of PNB-Madecor are conclusive and there is no evidence that PNEI had ever been an owner. The Supreme Court had observed in its decision that PNEI owed back rentals of P8.7 million to PNB-Madecor.

(4) The PNEI employees faulted the labor arbiter for not finding that PNEI, PNB, PNB-Madecor and Mega Prime were all jointly and severally liable for their claims. The NLRC underscored the fact that PNEI and Macris were subsidiaries of NIDC and had passed through and were under the Asset Privatization Trust (APT) when the labor claims accrued. The labor arbiter was correct in not granting PNB’s third-party claim because at the time the causes of action accrued, the PNEI was managed by a management committee appointed by the PNB as the new owner of PNRI (sic) and Macris through a deed of assignment or transfer of ownership. The NLRC says at length that the same is not true with PNB-Madecor which is now the registered owner of the properties.20

The parties’ separate motions for reconsideration were likewise denied.21 Thereafter, the matter was elevated to the CA by PANREA, PEA-PTGWO and the Pantranco Association of Concerned Employees. The latter group, however, later withdrew its petition. The former employees’ petition was docketed as CA-G.R. SP No. 80599.

PNB-Madecor and Mega Prime likewise filed their separate petition before the CA which was docketed as CA-G.R. SP No. 80737, but the same was dismissed.22

In view of the P7,884,000.00 debt of PNB-Madecor to PNEI, on June 23, 2004, an auction sale was conducted over the Pantranco properties to satisfy the claim of the PNEI employees, wherein CPAR Realty was adjudged as the highest bidder.23

On June 3, 2005, the CA rendered the assailed decision affirming the NLRC resolutions.

The appellate court pointed out that PNB, PNB-Madecor and Mega Prime are corporations with personalities separate and distinct from PNEI. As such, there being no cogent reason to pierce the veil of corporate fiction, the separate personalities of the above corporations should be maintained. The CA added that the Pantranco properties were never owned by PNEI; rather, their titles were registered under the name of PNB-Madecor. If PNB and PNB-Madecor could not answer for the liabilities of PNEI, with more reason should Mega Prime not be held liable being a mere successor-in-interest of PNB-Madecor.

Unsatisfied, PEA-PTGWO and PANREA filed their motion for reconsideration;24 while PNB filed its Partial Motion for Reconsideration.25 PNB pointed out that PNB-Madecor was made to answer for P7,884,000.00 to the PNEI employees by virtue of the promissory note it (PNB-Madecor) earlier executed in favor of PNEI. PNB, however, questioned the June 23, 2004 auction sale as the P7.8 million debt had already been satisfied pursuant to this Court’s decision in PNB MADECOR v. Uy.26

Both motions were denied by the appellate court.27

In two separate petitions, PNB and the former PNEI employees come up to this Court assailing the CA decision and resolution. The former PNEI employees raise the lone error, thus:

The Honorable Court of Appeals palpably departed from the established rules and jurisprudence in ruling that private respondents Pantranco North Express, Inc. (PNEI), Philippine National Bank (PNB), Philippine National Bank Management and Development Corporation (PNB-MADECOR), Mega Prime Realty and Holdings, Inc. (Mega Prime) are not jointly and severally answerable to the P722,727,150.22 Million NLRC money judgment awards in favor of the 4,000 individual members of the Petitioners.28

They claim that PNB, through PNB-Madecor, directly benefited from the operation of PNEI and had complete control over the funds of PNEI. Hence, they are solidarily answerable with PNEI for the unpaid money

40

claims of the employees.29 Citing A.C. Ransom Labor Union-CCLU v. NLRC,30 the employees insist that where the employer corporation ceases to exist and is no longer able to satisfy the judgment awards in favor of its employees, the owner of the employer corporation should be made jointly and severally liable.31 They added that malice or bad faith need not be proven to make the owners liable.

On the other hand, PNB anchors its petition on this sole assignment of error, viz.:

THE AUCTION SALE OF THE PROPERTY COVERED BY TCT NO. 87884 INTENDED TO PARTIALLY SATISFY THE CLAIMS OF FORMER WORKERS OF PNEI IN THE AMOUNT OFP7,884,000.00 (THE AMOUNT OF PNB-MADECOR’S PROMISSORY NOTE IN FAVOR OF PNEI) IS NOT IN ORDER AS THE SAID PROPERTY IS NOT OWNED BY PNEI. FURTHER, THE SAID PROMISSORY NOTE HAD ALREADY BEEN GARNISHED IN FAVOR OF GERARDO C. UY WHICH LED TO THREE (3) PROPERTIES UNDER THE NAME OF PNB-MADECOR, NAMELY TCT NOS. 87881, 87882 AND 87883, BEING LEVIED AND SOLD ON EXECUTION IN THE "PNB-MADECOR VS. UY" CASE (363 SCRA 128 [2001]) AND "GERARDO C. UY VS.PNEI" (CIVIL CASE NO. 95-72685, RTC MANILA, BRANCH 38).32

PNB insists that the Pantranco properties could no longer be levied upon because the promissory note for which the Labor Arbiter held PNB-Madecor liable to PNEI, and in turn to the latter’s former employees, had already been satisfied in favor of Gerardo C. Uy. It added that the properties were in fact awarded to the highest bidder. Besides, says PNB, the subject properties were not owned by PNEI, hence, the execution sale thereof was not validly effected.33

Both petitions must fail.

G.R. No. 170689

Stripped of the non-essentials, the sole issue for resolution raised by the former PNEI employees is whether they can attach the properties

(specifically the Pantranco properties) of PNB, PNB-Madecor and Mega Prime to satisfy their unpaid labor claims against PNEI.

We answer in the negative.

First, the subject property is not owned by the judgment debtor, that is, PNEI. Nowhere in the records was it shown that PNEI owned the Pantranco properties. Petitioners, in fact, never alleged in any of their pleadings the fact of such ownership. What was established, instead, in PNB MADECOR v. Uy34 and PNB v. Mega Prime Realty and Holdings Corporation/Mega Prime Realty and Holdings Corporation v. PNB35 was that the properties were owned by Macris, the predecessor of PNB-Madecor. Hence, they cannot be pursued against by the creditors of PNEI.

We would like to stress the settled rule that the power of the court in executing judgments extends only to properties unquestionably belonging to the judgment debtor alone.36 To be sure, one man’s goods shall not be sold for another man’s debts.37 A sheriff is not authorized to attach or levy on property not belonging to the judgment debtor, and even incurs liability if he wrongfully levies upon the property of a third person.38

Second, PNB, PNB-Madecor and Mega Prime are corporations with personalities separate and distinct from that of PNEI. PNB is sought to be held liable because it acquired PNEI through NIDC at the time when PNEI was suffering financial reverses. PNB-Madecor is being made to answer for petitioners’ labor claims as the owner of the subject Pantranco properties and as a subsidiary of PNB. Mega Prime is also included for having acquired PNB’s shares over PNB-Madecor.

The general rule is that a corporation has a personality separate and distinct from those of its stockholders and other corporations to which it may be connected.39 This is a fiction created by law for convenience and to prevent injustice.40 Obviously, PNB, PNB-Madecor, Mega Prime, and PNEI are corporations with their own personalities. The "separate personalities" of the first three corporations had been recognized by

41

this Court in PNB v. Mega Prime Realty and Holdings Corporation/Mega Prime Realty and Holdings Corporation v. PNB41 where we stated that PNB was only a stockholder of PNB-Madecor which later sold its shares to Mega Prime; and that PNB-Madecor was the owner of the Pantranco properties. Moreover, these corporations are registered as separate entities and, absent any valid reason, we maintain their separate identities and we cannot treat them as one.

Neither can we merge the personality of PNEI with PNB simply because the latter acquired the former. Settled is the rule that where one corporation sells or otherwise transfers all its assets to another corporation for value, the latter is not, by that fact alone, liable for the debts and liabilities of the transferor.42

Lastly, while we recognize that there are peculiar circumstances or valid grounds that may exist to warrant the piercing of the corporate veil, 43 none applies in the present case whether between PNB and PNEI; or PNB and PNB-Madecor.

Under the doctrine of "piercing the veil of corporate fiction," the court looks at the corporation as a mere collection of individuals or an aggregation of persons undertaking business as a group, disregarding the separate juridical personality of the corporation unifying the group.44 Another formulation of this doctrine is that when two business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third parties, disregard the legal fiction that two corporations are distinct entities and treat them as identical or as one and the same.45

Whether the separate personality of the corporation should be pierced hinges on obtaining facts appropriately pleaded or proved. However, any piercing of the corporate veil has to be done with caution, albeit the Court will not hesitate to disregard the corporate veil when it is misused or when necessary in the interest of justice. After all, the concept of corporate entity was not meant to promote unfair objectives.46

As between PNB and PNEI, petitioners want us to disregard their separate personalities, and insist that because the company, PNEI, has already ceased operations and there is no other way by which the judgment in favor of the employees can be satisfied, corporate officers can be held jointly and severally liable with the company. Petitioners rely on the pronouncement of this Court in A.C. Ransom Labor Union-CCLU v. NLRC47 and subsequent cases.48

This reliance fails to persuade. We find the aforesaid decisions inapplicable to the instant case.

For one, in the said cases, the persons made liable after the company’s cessation of operations were the officers and agents of the corporation. The rationale is that, since the corporation is an artificial person, it must have an officer who can be presumed to be the employer, being the person acting in the interest of the employer. The corporation, only in the technical sense, is the employer.49 In the instant case, what is being made liable is another corporation (PNB) which acquired the debtor corporation (PNEI).

Moreover, in the recent cases Carag v. National Labor Relations Commission50 and McLeod v. National Labor Relations Commission,51 the Court explained the doctrine laid down in AC Ransom relative to the personal liability of the officers and agents of the employer for the debts of the latter. In AC Ransom, the Court imputed liability to the officers of the corporation on the strength of the definition of an employer in Article 212(c) (now Article 212[e]) of the Labor Code. Under the said provision, employer includes any person acting in the interest of an employer, directly or indirectly, but does not include any labor organization or any of its officers or agents except when acting as employer. It was clarified in Carag and McLeod that Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally liable for the debts of the corporation. It added that the governing law on personal liability of directors or officers for debts of the corporation is still Section 3152 of the Corporation Code.

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More importantly, as aptly observed by this Court in AC Ransom, it appears that Ransom, foreseeing the possibility or probability of payment of backwages to its employees, organized Rosario to replace Ransom, with the latter to be eventually phased out if the strikers win their case. The execution could not be implemented against Ransom because of the disposition posthaste of its leviable assets evidently in order to evade its just and due obligations.53 Hence, the Court sustained the piercing of the corporate veil and made the officers of Ransom personally liable for the debts of the latter.

Clearly, what can be inferred from the earlier cases is that the doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.54 In the absence of malice, bad faith, or a specific provision of law making a corporate officer liable, such corporate officer cannot be made personally liable for corporate liabilities.55

Applying the foregoing doctrine to the instant case, we quote with approval the CA disposition in this wise:

It would not be enough, then, for the petitioners in this case, the PNEI employees, to rest on their laurels with evidence that PNB was the owner of PNEI. Apart from proving ownership, it is necessary to show facts that will justify us to pierce the veil of corporate fiction and hold PNB liable for the debts of PNEI. The burden undoubtedly falls on the petitioners to prove their affirmative allegations. In line with the basic jurisprudential principles we have explored, they must show that PNB was using PNEI as a mere adjunct or instrumentality or has exploited or misused the corporate privilege of PNEI.

We do not see how the burden has been met. Lacking proof of a nexus apart from mere ownership, the petitioners have not provided us with the legal basis to reach the assets of corporations separate and distinct from PNEI.56

Assuming, for the sake of argument, that PNB may be held liable for the debts of PNEI, petitioners still cannot proceed against the Pantranco properties, the same being owned by PNB-Madecor, notwithstanding the fact that PNB-Madecor was a subsidiary of PNB. The general rule remains that PNB-Madecor has a personality separate and distinct from PNB. The mere fact that a corporation owns all of the stocks of another corporation, taken alone, is not sufficient to justify their being treated as one entity. If used to perform legitimate functions, a subsidiary’s separate existence shall be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective businesses.57

In PNB v. Ritratto Group, Inc.,58 we outlined the circumstances which are useful in the determination of whether a subsidiary is but a mere instrumentality of the parent-corporation, to wit:

1. The parent corporation owns all or most of the capital stock of the subsidiary;

2. The parent and subsidiary corporations have common directors or officers;

3. The parent corporation finances the subsidiary;

4. The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation;

5. The subsidiary has grossly inadequate capital;

6. The parent corporation pays the salaries and other expenses or losses of the subsidiary;

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7. The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation;

8. In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or division of the parent corporation, or its business or financial responsibility is referred to as the parent corporation’s own;

9. The parent corporation uses the property of the subsidiary as its own;

10. The directors or executives of the subsidiary do not act independently in the interest of the subsidiary, but take their orders from the parent corporation;

11. The formal legal requirements of the subsidiary are not observed.

None of the foregoing circumstances is present in the instant case. Thus, piercing of PNB-Madecor’s corporate veil is not warranted. Being a mere successor-in-interest of PNB-Madecor, with more reason should no liability attach to Mega Prime.

G.R. No. 170705

In its petition before this Court, PNB seeks the annulment of the June 23, 2004 execution sale of the Pantranco properties on the ground that the judgment debtor (PNEI) never owned said lots. It likewise contends that the levy and the eventual sale on execution of the subject properties was null and void as the promissory note on which PNB-Madecor was made liable had already been satisfied.

It has been repeatedly stated that the Pantranco properties which were the subject of execution sale were owned by Macris and later, the PNB-Madecor. They were never owned by PNEI or PNB. Following our

earlier discussion on the separate personalities of the different corporations involved in the instant case, the only entity which has the right and interest to question the execution sale and the eventual right to annul the same, if any, is PNB-Madecor or its successor-in-interest. Settled is the rule that proceedings in court must be instituted by the real party in interest.

A real party in interest is the party who stands to be benefited or injured by the judgment in the suit, or the party entitled to the avails of the suit.59 "Interest" within the meaning of the rule means material interest, an interest in issue and to be affected by the decree, as distinguished from mere interest in the question involved, or a mere incidental interest.60 The interest of the party must also be personal and not one based on a desire to vindicate the constitutional right of some third and unrelated party.61 Real interest, on the other hand, means a present substantial interest, as distinguished from a mere expectancy or a future, contingent, subordinate, or consequential interest.62

Specifically, in proceedings to set aside an execution sale, the real party in interest is the person who has an interest either in the property sold or the proceeds thereof. Conversely, one who is not interested or is not injured by the execution sale cannot question its validity.63

In justifying its claim against the Pantranco properties, PNB alleges that Mega Prime, the buyer of its entire stockholdings in PNB-Madecor was indebted to it (PNB). Considering that said indebtedness remains unpaid, PNB insists that it has an interest over PNB-Madecor and Mega Prime’s assets.

Again, the contention is bereft of merit. While PNB has an apparent interest in Mega Prime’s assets being the creditor of the latter for a substantial amount, its interest remains inchoate and has not yet ripened into a present substantial interest, which would give it the standing to maintain an action involving the subject properties. As aptly observed by the Labor Arbiter, PNB only has an inchoate right to the properties of Mega Prime in case the latter would not be able to pay its indebtedness. This is especially true in the instant case, as the debt

44

being claimed by PNB is secured by the accessory contract of pledge of the entire stockholdings of Mega Prime to PNB-Madecor.64

The Court further notes that the Pantranco properties (or a portion thereof ) were sold on execution to satisfy the unpaid obligation of PNB-Madecor to PNEI. PNB-Madecor was thus made liable to the former PNEI employees as the judgment debtor of PNEI. It has long been established in PNB-Madecor v. Uy and other similar cases that PNB-Madecor had an unpaid obligation to PNEI amounting to more or less P7 million which could be validly pursued by the creditors of the latter. Again, this strengthens the proper parties’ right to question the validity of the execution sale, definitely not PNB.

Besides, the issue of whether PNB has a substantial interest over the Pantranco properties has already been laid to rest by the Labor Arbiter.65 It is noteworthy that in its Resolution dated September 10, 2002, the Labor Arbiter denied PNB’s Third-Party Claim primarily because PNB only has an inchoate right over the Pantranco properties.66 Such conclusion was later affirmed by the NLRC in its Resolution dated June 30, 2003.67Notwithstanding said conclusion, PNB did not elevate the matter to the CA via a petition for review. Hence it is presumed to be satisfied with the adjudication therein.68 That decision of the NLRC has become final as against PNB and can no longer be reviewed, much less reversed, by this Court.69 This is in accord with the doctrine that a party who has not appealed cannot obtain from the appellate court any affirmative relief other than the ones granted in the appealed decision.70

WHEREFORE, premises considered, the petitions are hereby DENIED for lack of merit.

SO ORDERED.

FIRST DIVISION  

RUPERTO SULDAO, G.R. No. 171392Petitioner,Present:Panganiban, C.J. (Chairperson),- versus - Ynares-Santiago,Austria-Martinez,

Callejo, Sr., andChico-

Nazario, JJ.CIMECH SYSTEM CONSTRUCTION,INC. and ENGR. RODOLFO S. Promulgated:LABUCAY,Respondents. October 30, 2006 x ---------------------------------------------------------------------------------------- x DECISION YNARES-SANTIAGO, J.: 

 

This petition for review on certiorari assails the

Decision[1] dated June 23, 2005 of the Court of Appeals in CA-G.R. SP No.

83963, which reversed and set aside the February 27, 2004

Resolution[2] of the National Labor Relations Commission (NLRC) in

NLRC CA No. 036963-03 and the August 5, 2003 Decision of the Labor

Arbiter finding petitioner to have been constructively dismissed. Also

assailed is the January 10, 2006 Resolution[3] denying petitioners

motion for reconsideration.

 

45

The facts are as follows:

 

Respondent Cimech Systems Construction, Inc. employed the

services of petitioner Ruperto Suldao on August 31, 2001 as a

machinist with a daily wage of P300.00 on a contractual status for a

period of five months. AfterJanuary 31, 2002, respondent continued to

engage the services of petitioner as a machinist until he became a

permanent employee.

 

Petitioner alleged that owing to a dearth in projects being

handled by the respondent, he was ordered by Ms. Elsa Labocay to take

a leave of absence from November 1 to 6, 2002. He reported for work

on November 7, 2002 but was again ordered to take a leave of absence

from November 7 to 14, 2002. On November 15, 2002, he was

purportedly ordered to make a letter-request for field work transfer

which he complied. The following day, he failed to report back for work

because he was sick. On November 17, 2002, he reported for work but

was allegedly barred from entering by the security guard on

duty. On November 21, 2002, he was again barred from entering the

premises, hence he filed the instant complaint[4] for constructive

dismissal.[5]

 

Respondent alleged that due to lack of available work in the

machine shop, petitioner was temporarily transferred to its fabrication

department sometime in November 2002. Petitioner refused to accept

the transfer and insisted to work as a machinist. Because of petitioners

arrogant and unruly behavior, he was led away by a guard. When

petitioner returned for work, he purportedly demanded a salary

increase and wages for the days that he did not work.Respondent

considered the actuations of petitioner tantamount to insubordination,

hence, it suspended[6] the petitioner for six days. 

After his suspension on November 28, 2002, petitioner

accepted his transfer to the fabrication department but worked for only

one day. During the companys Christmas party on December 21, 2002,

petitioner came and asked for his 13th month pay. On January 13, 2003,

petitioner demanded to get his one day salary deposit but was told to

secure a clearance which he failed to comply. Thereafter, petitioner

filed the instant complaint for illegal dismissal.

 

On August 5, 2003, Labor Arbiter Melquiades Sol D. Del Rosario

rendered a decision, the dispositive portion of which reads:

46

CONFORMABLY WITH THE FOREGOING, judgment is hereby rendered finding complainant to have been illegally dismissed constructively. Consequently, he should be reinstated to his former position and paid his backwages which has accumulated as ofJuly 17, 2003 in the sum of P62,400.00 plus his one month separation pay of P7,800.00.

 SO ORDERED.[7]

 

The NLRC concurred with the findings of the Labor Arbiter that

petitioner was constructively dismissed.

 

Hence, respondent filed a petition for certiorari[8] which was granted by

the Court of Appeals. In its assailed June 23, 2005 decision, the Court of

Appeals reversed the NLRC by declaring:

 WHEREFORE, premises considered, the

Petition is hereby given DUE COURSE, and the February 27, 2004 Decision of the NLRC is hereby REVERSED and SET ASIDE. The December 20, 2002 Complaint is hereby DISMISSED.

 SO ORDERED.[9]

 

Hence, this petition raising the sole issue of: WHETHER THE COURT OF APPEALS COMMITED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK

OR EXCESS OF JURISDICTION IN REVERSING THE DECISION OF THE LABOR ARBITER AND THE NLRC THAT THE PETITIONER WAS CONSTRUCTIVELY DISMISSED.

 

As a general rule, a petition for review on certiorari under Rule

45 of the Rules of Court is limited to questions of law. However, this

rule admits of exceptions,[10] such as in this case where the findings of

the Labor Arbiter and the NLRC vary from the findings of the Court of

Appeals.

 

The petition is impressed with merit.

 

After a painstaking review of the records, we uphold the

findings of the Labor Arbiter and of the NLRC that petitioner was

constructively dismissed. Constructive dismissal or a constructive

discharge has been defined as quitting because continued employment

is rendered impossible, unreasonable or unlikely, as an offer involving a

demotion in rank and a diminution in pay.[11] In the instant case, there is

constructive dismissal because the continued employment of petitioner

is rendered impossible so as to foreclose any choice on his part except

to resign from such employment.[12]

 

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In cases of constructive dismissal, the burden of proof is on the

employer to show that the employee was dismissed for a valid and a

just cause.[13] In the instant case, respondent failed to discharge this

burden. As aptly observed by the NLRC: In essence, respondents would have it that

they have not dismissed complainant, rather it was he who did not return to his job after 13 January 2003.

 To begin with, the issues raised undoubtedly

was factual, the determination of which lies within the competence of the Labor Arbiters jurisdiction, over which this Commission will interfere only when grave abuse or serious errors were committed by him in the interpretation of the evidence on records.

 In this case however, respondents failed to

show by substantial proof the veracity of their assertion. For one, while claiming that complainant was placed on a six (6) days suspension for an alleged infraction, they failed nonetheless to adduce evidence showing that indeed complainant committed the offense and was placed as such as disciplinary measure.

 Relevant on this score is the observation and

findings of the Labor Arbiter, to wit: 

Respondents averment that complainant was arrogant, and did not want to be transferred to another position or department is belied by complainants letter dated November 28, 2002.

 

Excerpts from complainants letter reads:

 Na tinatanggap ko na utos ng

kumpanyang ito na umako ng ibang gawain para sa kabutihan ng lahat. Na ang pagtanggap ko ng ibang trabaho ay pansamantala lang habang walang gawain sa dati ko puwesto or gawain trabaho sa kompanya.

 Nang ang sulat salaysay kong

ito ay aking isinagawa bilang pagtalima sa kautusan ng atin kumpanya.

 x x x x Complainants claim that he

was required to go on a leave of absence due to a dearth of work is consistent with respondents claim that there was scarcity of work because of the economic crisis.

 By all appearances,

complainant does not have a high educational attainment and his skill is limited to being a machinist. As such, all he can do is to obey the biddings of his superior. So when required to go on leave, he meekly obeys.

 Even his claim that he failed

to report for work due to indisposition is supported by a medical certificate. As between the conflicting claims of the parties, this

48

Arbitration Branch has to accord more weight to complainants claim that he was no longer allowed to work because he was barred by the security guard of the company to enter the premises for reasons only known to respondents.

 Had there been truth to

respondents claim that complainant abandoned his work because he did not want the job in the fabrication department, complainant would not have made a letter of conformity to do the bidding of the company. Moreover, complainant would not have taken steps to protect his rights like the institution of the present labor suit if he had abandoned his work because rather than spend time, effort and a little money in attending to the hearings of this case, he would have concentrated in his new job or in finding one in order to feed his family.[14]

 

While the decision to transfer employees to other areas of its

operations forms part of the well recognized prerogatives of

management, it must be stressed, however, that the managerial

prerogative to transfer personnel must not be exercised with grave

abuse of discretion, bearing in mind the basic elements of justice and

fair play. Having the right should not be confused with the manner in

which that right is exercised. Thus it cannot be used as a subterfuge by

the employer to rid himself of an undesirable worker.[15]

 

In the instant case, while petitioners transfer was valid, the

manner by which respondent unjustifiably prevented him from

returning to work on several occasions runs counter to the claim of

good faith on the part of respondent corporation. By reporting for

work, petitioner manifested his willingness to comply with the

regulations of the corporation and his desire to continue working for

the latter. However, he was barred from entering the premises without

any explanation. This is a clear manifestation of disdain and

insensibility on the part of an employer towards a particular employee

and a veritable hallmark of constructive dismissal.

 

We cannot sustain the theory of respondent that since petitioner was

allowed to join its 2002 Christmas Party, there can be no constructive

dismissal. Petitioners joining the Christmas party does not negate his

illegal dismissal. Neither does it detract us from the fact that petitioner

was prevented from entering the premises of the respondent

corporation on previous occasions.

49

While the liability of the respondent corporation for the

constructive dismissal of the petitioner has been clearly established,

the same does not hold true with the other respondent, Engr. Rodolfo S.

Labucay, President and General Manager of the respondent

corporation.[16] In finding Labucay also liable, the Labor Arbiter

declared that:

 The foregoing circumstances support the view

that complainant was constructively dismissed in an illegal manner. Consequently, respondents, in solidum, are ordered to reinstate the complainant to his former position and pay complainant his backwages x x x.

A corporation is invested by law with a personality separate

from that of its stockholders or members. It has a personality separate

and distinct from those of the persons composing it as well as from that

of any other entity to which it may be related. Mere ownership by a

single stockholder or by another corporation of all or nearly all of the

capital stock of a corporation is not in itself sufficient ground for

disregarding the separate corporate personality. A corporations

authority to act and its liability for its actions are separate and apart

from the individuals who own it.

 

The veil of corporate fiction treats as separate and distinct the

affairs of a corporation and its officers and stockholders. As a general

rule, a corporation will be looked upon as a legal entity, unless and until

sufficient reason to the contrary appears. When the notion of legal

entity is used to defeat public convenience, justify wrong, protect fraud,

or defend crime, the law will regard the corporation as an association

of persons. Also, the corporate entity may be disregarded in the interest

of justice in such cases as fraud that may work inequities among

members of the corporation internally, involving no rights of the public

or third persons. In both instances, there must have been fraud and

proof of it. For the separate juridical personality of a corporation to be

disregarded, the wrongdoing must be clearly and convincingly

established. It cannot be presumed.[17]

 

In the instant case, no reason exists that will justify the

piercing of the veil of corporate fiction such as to hold Labucay, as the

president and general manager of the respondent corporation,

solidarily liable with it. Thus, the liability for the constructive dismissal

of the petitioner solely devolves upon the respondent

corporation. Consequently, the decision of the Labor Arbiter and of the

NLRC should be modified in that only the respondent corporation

should be held liable.

 

WHEREFORE, the petition is GRANTED. The June 23, 2005 

Decision of the Court of Appeals in CA-G.R. SP No. 83963 and its January

10, 2006 Resolution are REVERSED and SET ASIDE. The February 27,

2004 Resolution of the National Labor Relations Commission in NLRC

50

CA No. 036963-03 affirming the decision of the Labor Arbiter finding

that petitioner was constructively dismissed,

is REINSTATED with MODIFICATION that only the respondent

corporation, Cimech System Construction, Inc. is held liable.

 

No pronouncement as to costs.

 

SO ORDERED.

  

Republic of the PhilippinesSUPREME COURTManila

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

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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

52

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

53

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

54

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

55

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.

56

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,

57

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

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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

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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

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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

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exemplary damages in the sum of P10,000.00. The circumstances of the case also warrant the award of P3,000.00 as attorney's fees for herein appellant.

WHEREFORE AND CONSIDERING ALL THE FOREGOING, the decision appealed from should be, as hereby, it is set aside. The Philippine National Bank and the Deputy Sheriff of the province of Camarines Norte are ordered to pay, jointly and severally, to Mambulao Lumber Company the total amount of P56,000.73, broken as follows: P150.73 overpaid by the latter to the PNB, P42,850.00 the value of the chattels at the time of the sale with interest at the rate of 6% per annum from December 21, 1961, until fully paid, P10,000.00 in exemplary damages, and P3,000.00 as attorney's fees. Costs against both appellees.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro and Fernando, JJ., concur.Bengzon, J.P. J., took no part.

Republic of the PhilippinesSUPREME COURTManila

FIRST DIVISION

 

G.R. No. 128690 January 21, 1999

ABS-CBN BROADCASTING CORPORATION, petitioner, vs.HONORABLE COURT OF APPEALS, REPUBLIC BROADCASTING CORP, VIVA PRODUCTION, INC., and VICENTE DEL ROSARIO, respondents.

 

DAVIDE, JR., CJ.:

In this petition for review on certiorari, petitioner ABS-CBN Broadcasting Corp. (hereafter ABS-CBN) seeks to reverse and set aside the decision 1 of 31 October 1996 and the resolution 2 of 10 March 1997 of the Court of Appeals in CA-G.R. CV No. 44125. The former affirmed with modification the decision 3 of 28 April 1993 of the Regional Trial Court (RTC) of Quezon City, Branch 80, in Civil Case No. Q-92-12309. The latter denied the motion to reconsider the decision of 31 October 1996.

The antecedents, as found by the RTC and adopted by the Court of Appeals, are as follows:

In 1990, ABS-CBN and Viva executed a Film Exhibition Agreement (Exh. "A") whereby Viva gave ABS-CBN an exclusive right to exhibit some Viva films.Sometime in December 1991, in accordance with paragraph 2.4 [sic] of said agreement stating that —.

1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) Viva films for TV telecast under such terms as may be agreed upon by the parties hereto, provided, however, that such right shall be exercised by ABS-CBN from the actual offer in writing.

Viva, through defendant Del Rosario, offered ABS-CBN, through its vice-president Charo Santos-Concio, a list of three(3) film packages (36 title) from which ABS-CBN may exercise its right of first refusal under the afore-said agreement (Exhs. "1" par, 2, "2," "2-A'' and "2-B"-Viva). ABS-CBN, however through Mrs. Concio, "can tick off only ten (10) titles" (from the list) "we can purchase" (Exh. "3" - Viva) and therefore did not accept said list (TSN, June 8, 1992, pp. 9-10). The titles ticked off by Mrs. Concio are not the subject of the case at bar except the film ''Maging Sino Ka Man."

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For further enlightenment, this rejection letter dated January 06, 1992 (Exh "3" - Viva) is hereby quoted:

6 January 1992

Dear Vic,

This is not a very formal business letter I am writing to you as I would like to express my difficulty in recommending the purchase of the three film packages you are offering ABS-CBN.

From among the three packages I can only tick off 10 titles we can purchase. Please see attached. I hope you will understand my position. Most of the action pictures in the list do not have big action stars in the cast. They are not for primetime. In line with this I wish to mention that I have not scheduled for telecast several action pictures in out very first contract because of the cheap production value of these movies as well as the lack of big action stars. As a film producer, I am sure you understand what I am trying to say as Viva produces only big action pictures.

In fact, I would like to request two (2) additional runs for these movies as I can only schedule them in our non-primetime slots. We have to cover the amount that was paid for these movies because as you very well know that non-primetime advertising rates are very low. These are the unaired titles in the first contract.

1. Kontra Persa [sic].

2. Raider Platoon.

3. Underground guerillas

4. Tiger Command

5. Boy de Sabog

6. Lady Commando

7. Batang Matadero

8. Rebelyon

I hope you will consider this request of mine.

The other dramatic films have been offered to us before and have been rejected because of the ruling of MTRCB to have them aired at 9:00 p.m. due to their very adult themes.

As for the 10 titles I have choosen [sic] from the 3 packages please consider including all the other Viva movies produced last year. I have quite an attractive offer to make.

Thanking you and with my warmest regards.

(Signed)

Charo Santos-Concio

On February 27, 1992, defendant Del Rosario approached ABS-CBN's Ms. Concio, with a list consisting of 52 original movie titles (i.e. not yet aired on television) including the 14 titles subject of the present case, as well as 104 re-runs (previously aired on television) from which ABS-CBN may choose another 52 titles, as a total of 156 titles, proposing to sell to ABS-CBN airing rights over this package of 52 originals and 52

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re-runs for P60,000,000.00 of which P30,000,000.00 will be in cash and P30,000,000.00 worth of television spots (Exh. "4" to "4-C" Viva; "9" -Viva).

On April 2, 1992, defendant Del Rosario and ABS-CBN general manager, Eugenio Lopez III, met at the Tamarind Grill Restaurant in Quezon City to discuss the package proposal of Viva. What transpired in that lunch meeting is the subject of conflicting versions. Mr. Lopez testified that he and Mr. Del Rosario allegedly agreed that ABS-CRN was granted exclusive film rights to fourteen (14) films for a total consideration of P36 million; that he allegedly put this agreement as to the price and number of films in a "napkin'' and signed it and gave it to Mr. Del Rosario (Exh. D; TSN, pp. 24-26, 77-78, June 8, 1992). On the other hand, Del Rosario denied having made any agreement with Lopez regarding the 14 Viva films; denied the existence of a napkin in which Lopez wrote something; and insisted that what he and Lopez discussed at the lunch meeting was Viva's film package offer of 104 films (52 originals and 52 re-runs) for a total price of P60 million. Mr. Lopez promising [sic]to make a counter proposal which came in the form of a proposal contract Annex "C" of the complaint (Exh. "1"·- Viva; Exh. "C" - ABS-CBN).

On April 06, 1992, Del Rosario and Mr. Graciano Gozon of RBS Senior vice-president for Finance discussed the terms and conditions of Viva's offer to sell the 104 films, after the rejection of the same package by ABS-CBN.

On April 07, 1992, defendant Del Rosario received through his secretary, a handwritten note from Ms. Concio, (Exh. "5" - Viva), which reads: "Here's the draft of the contract. I hope you find everything in order," to

which was attached a draft exhibition agreement (Exh. "C''- ABS-CBN; Exh. "9" - Viva, p. 3) a counter-proposal covering 53 films, 52 of which came from the list sent by defendant Del Rosario and one film was added by Ms. Concio, for a consideration of P35 million. Exhibit "C" provides that ABS-CBN is granted films right to 53 films and contains a right of first refusal to "1992 Viva Films." The said counter proposal was however rejected by Viva's Board of Directors [in the] evening of the same day, April 7, 1992, as Viva would not sell anything less than the package of 104 films for P60 million pesos (Exh. "9" - Viva), and such rejection was relayed to Ms. Concio.

On April 29, 1992, after the rejection of ABS-CBN and following several negotiations and meetings defendant Del Rosario and Viva's President Teresita Cruz, in consideration of P60 million, signed a letter of agreement dated April 24, 1992. granting RBS the exclusive right to air 104 Viva-produced and/or acquired films (Exh. "7-A" - RBS; Exh. "4" - RBS) including the fourteen (14) films subject of the present case. 4

On 27 May 1992, ABS-CBN filed before the RTC a complaint for specific performance with a prayer for a writ of preliminary injunction and/or temporary restraining order against private respondents Republic Broadcasting Corporation 5 (hereafter RBS ), Viva Production (hereafter VIVA), and Vicente Del Rosario. The complaint was docketed as Civil Case No. Q-92-12309.

On 27 May 1992, RTC issued a temporary restraining order 6 enjoining private respondents from proceeding with the airing, broadcasting, and televising of the fourteen VIVA films subject of the controversy, starting with the film Maging Sino Ka Man, which was scheduled to be shown on private respondents RBS' channel 7 at seven o'clock in the evening of said date.

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On 17 June 1992, after appropriate proceedings, the RTC issued an order 7 directing the issuance of a writ of preliminary injunction upon ABS-CBN's posting of P35 million bond. ABS-CBN moved for the reduction of the bond, 8 while private respondents moved for reconsideration of the order and offered to put up a counterbound. 9

In the meantime, private respondents filed separate answers with counterclaim. 10 RBS also set up a cross-claim against VIVA..

On 3 August 1992, the RTC issued an order 11 dissolving the writ of preliminary injunction upon the posting by RBS of a P30 million counterbond to answer for whatever damages ABS-CBN might suffer by virtue of such dissolution. However, it reduced petitioner's injunction bond to P15 million as a condition precedent for the reinstatement of the writ of preliminary injunction should private respondents be unable to post a counterbond.

At the pre-trial 12 on 6 August 1992, the parties, upon suggestion of the court, agreed to explore the possibility of an amicable settlement. In the meantime, RBS prayed for and was granted reasonable time within which to put up a P30 million counterbond in the event that no settlement would be reached.

As the parties failed to enter into an amicable settlement RBS posted on 1 October 1992 a counterbond, which the RTC approved in its Order of 15 October 1992. 13

On 19 October 1992, ABS-CBN filed a motion for reconsideration 14 of the 3 August and 15 October 1992 Orders, which RBS opposed. 15

On 29 October 1992, the RTC conducted a pre-trial. 16

Pending resolution of its motion for reconsideration, ABS-CBN filed with the Court of Appeals a petition  17challenging the RTC's Orders of 3 August and 15 October 1992 and praying for the issuance of a writ of preliminary injunction to enjoin the RTC from enforcing said orders. The case was docketed as CA-G.R. SP No. 29300.

On 3 November 1992, the Court of Appeals issued a temporary restraining order 18 to enjoin the airing, broadcasting, and televising of any or all of the films involved in the controversy.

On 18 December 1992, the Court of Appeals promulgated a decision 19 dismissing the petition in CA -G.R. No. 29300 for being premature. ABS-CBN challenged the dismissal in a petition for review filed with this Court on 19 January 1993, which was docketed as G.R. No. 108363.

In the meantime the RTC received the evidence for the parties in Civil Case No. Q-192-1209. Thereafter, on 28 April 1993, it rendered a decision 20 in favor of RBS and VIVA and against ABS-CBN disposing as follows:

WHEREFORE, under cool reflection and prescinding from the foregoing, judgments is rendered in favor of defendants and against the plaintiff.

(1) The complaint is hereby dismissed;

(2) Plaintiff ABS-CBN is ordered to pay defendant RBS the following:

a) P107,727.00, the amount of premium paid by RBS to the surety which issued defendant RBS's bond to lift the injunction;

b) P191,843.00 for the amount of print advertisement for "Maging Sino Ka

65

Man" in various newspapers;

c) Attorney's fees in the amount of P1 million;

d) P5 million as and by way of moral damages;

e) P5 million as and by way of exemplary damages;

(3) For defendant VIVA, plaintiff ABS-CBN is ordered to pay P212,000.00 by way of reasonable attorney's fees.

(4) The cross-claim of defendant RBS against defendant VIVA is dismissed.

(5) Plaintiff to pay the costs.

According to the RTC, there was no meeting of minds on the price and terms of the offer. The alleged agreement between Lopez III and Del Rosario was subject to the approval of the VIVA Board of Directors, and said agreement was disapproved during the meeting of the Board on 7 April 1992. Hence, there was no basis for ABS-CBN's demand that VIVA signed the 1992 Film Exhibition Agreement. Furthermore, the right of first refusal under the 1990 Film Exhibition Agreement had previously been exercised per Ms. Concio's letter to Del Rosario ticking off ten titles acceptable to them, which would have made the 1992 agreement an entirely new contract.

On 21 June 1993, this Court denied 21 ABS-CBN's petition for review in G.R. No. 108363, as no reversible error was committed by the Court of Appeals in its challenged decision and the case had "become moot and academic in view of the dismissal of the main action by the court a quo in its decision" of 28 April 1993.

Aggrieved by the RTC's decision, ABS-CBN appealed to the Court of Appeals claiming that there was a perfected contract between ABS-CBN and VIVA granting ABS-CBN the exclusive right to exhibit the subject films. Private respondents VIVA and Del Rosario also appealed seeking moral and exemplary damages and additional attorney's fees.

In its decision of 31 October 1996, the Court of Appeals agreed with the RTC that the contract between ABS-CBN and VIVA had not been perfected, absent the approval by the VIVA Board of Directors of whatever Del Rosario, it's agent, might have agreed with Lopez III. The appellate court did not even believe ABS-CBN's evidence that Lopez III actually wrote down such an agreement on a "napkin," as the same was never produced in court. It likewise rejected ABS-CBN's insistence on its right of first refusal and ratiocinated as follows:

As regards the matter of right of first refusal, it may be true that a Film Exhibition Agreement was entered into between Appellant ABS-CBN and appellant VIVA under Exhibit "A" in 1990, and that parag. 1.4 thereof provides:

1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) VIVA films for TV telecast under such terms as may be agreed upon by the parties hereto, provided, however, that such right shall be exercised by ABS-CBN within a period of fifteen (15) days from the actual offer in writing (Records, p. 14).

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[H]owever, it is very clear that said right of first refusal in favor of ABS-CBN shall still be subject to such terms as may be agreed upon by the parties thereto, and that the said right shall be exercised by ABS-CBN within fifteen (15) days from the actual offer in writing.

Said parag. 1.4 of the agreement Exhibit "A" on the right of first refusal did not fix the price of the film right to the twenty-four (24) films, nor did it specify the terms thereof. The same are still left to be agreed upon by the parties.

In the instant case, ABS-CBN's letter of rejection Exhibit 3 (Records, p. 89) stated that it can only tick off ten (10) films, and the draft contract Exhibit "C" accepted only fourteen (14) films, while parag. 1.4 of Exhibit "A'' speaks of the next twenty-four (24) films.

The offer of V1VA was sometime in December 1991 (Exhibits 2, 2-A. 2-B; Records, pp. 86-88; Decision, p. 11, Records, p. 1150), when the first list of VIVA films was sent by Mr. Del Rosario to ABS-CBN. The Vice President of ABS-CBN, Ms. Charo Santos-Concio, sent a letter dated January 6, 1992 (Exhibit 3, Records, p. 89) where ABS-CBN exercised its right of refusal by rejecting the offer of VIVA.. As aptly observed by the trial court, with the said letter of Mrs. Concio of January 6, 1992, ABS-CBN had lost its right of first refusal. And even if We reckon the fifteen (15) day period from February 27, 1992 (Exhibit 4 to 4-C) when another list was sent to ABS-CBN after the letter of Mrs. Concio, still the fifteen (15) day period within which ABS-CBN shall exercise its right of first refusal has already expired. 22

Accordingly, respondent court sustained the award of actual damages consisting in the cost of print advertisements and the premium payments for the counterbond, there being adequate proof of the pecuniary loss which RBS had suffered as a result of the filing of the complaint by ABS-CBN. As to the award of moral damages, the Court of Appeals found reasonable basis therefor, holding that RBS's reputation was debased by the filing of the complaint in Civil Case No. Q-92-12309 and by the non-showing of the film "Maging Sino Ka Man." Respondent court also held that exemplary damages were correctly imposed by way of example or correction for the public good in view of the filing of the complaint despite petitioner's knowledge that the contract with VIVA had not been perfected, It also upheld the award of attorney's fees, reasoning that with ABS-CBN's act of instituting Civil Case No, Q-92-1209, RBS was "unnecessarily forced to litigate." The appellate court, however, reduced the awards of moral damages to P2 million, exemplary damages to P2 million, and attorney's fees to P500, 000.00.

On the other hand, respondent Court of Appeals denied VIVA and Del Rosario's appeal because it was "RBS and not VIVA which was actually prejudiced when the complaint was filed by ABS-CBN."

Its motion for reconsideration having been denied, ABS-CBN filed the petition in this case, contending that the Court of Appeals gravely erred in

I

. . . RULING THAT THERE WAS NO PERFECTED CONTRACT BETWEEN PETITIONER AND PRIVATE RESPONDENT VIVA NOTWITHSTANDING PREPONDERANCE OF EVIDENCE ADDUCED BY PETITIONER TO THE CONTRARY.

II

. . . IN AWARDING ACTUAL AND COMPENSATORY DAMAGES IN FAVOR OF PRIVATE RESPONDENT RBS.

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III

. . . IN AWARDING MORAL AND EXEMPLARY DAMAGES IN FAVOR OF PRIVATE RESPONDENT RBS.

IV

. . . IN AWARDING ATTORNEY'S FEES IN FAVOR OF RBS.

ABS-CBN claims that it had yet to fully exercise its right of first refusal over twenty-four titles under the 1990 Film Exhibition Agreement, as it had chosen only ten titles from the first list. It insists that we give credence to Lopez's testimony that he and Del Rosario met at the Tamarind Grill Restaurant, discussed the terms and conditions of the second list (the 1992 Film Exhibition Agreement) and upon agreement thereon, wrote the same on a paper napkin. It also asserts that the contract has already been effective, as the elements thereof, namely, consent, object, and consideration were established. It then concludes that the Court of Appeals' pronouncements were not supported by law and jurisprudence, as per our decision of 1 December 1995 in Limketkai Sons Milling, Inc. v. Court of Appeals, 23 which cited Toyota Shaw, Inc. v. Court of Appeals, 24 Ang Yu Asuncion v. Court of Appeals, 25 andVillonco Realty Company v. Bormaheco. Inc. 26

Anent the actual damages awarded to RBS, ABS-CBN disavows liability therefor. RBS spent for the premium on the counterbond of its own volition in order to negate the injunction issued by the trial court after the parties had ventilated their respective positions during the hearings for the purpose. The filing of the counterbond was an option available to RBS, but it can hardly be argued that ABS-CBN compelled RBS to incur such expense. Besides, RBS had another available option, i.e., move for the dissolution or the injunction; or if it was determined to put up a counterbond, it could have presented a cash bond. Furthermore under Article 2203 of the Civil Code, the party suffering loss or injury is also required to exercise the diligence of a good father of a family to minimize the damages resulting from the act

or omission. As regards the cost of print advertisements, RBS had not convincingly established that this was a loss attributable to the non showing "Maging Sino Ka Man"; on the contrary, it was brought out during trial that with or without the case or the injunction, RBS would have spent such an amount to generate interest in the film.

ABS-CBN further contends that there was no clear basis for the awards of moral and exemplary damages. The controversy involving ABS-CBN and RBS did not in any way originate from business transaction between them. The claims for such damages did not arise from any contractual dealings or from specific acts committed by ABS-CBN against RBS that may be characterized as wanton, fraudulent, or reckless; they arose by virtue only of the filing of the complaint, An award of moral and exemplary damages is not warranted where the record is bereft of any proof that a party acted maliciously or in bad faith in filing an action. 27 In any case, free resort to courts for redress of wrongs is a matter of public policy. The law recognizes the right of every one to sue for that which he honestly believes to be his right without fear of standing trial for damages where by lack of sufficient evidence, legal technicalities, or a different interpretation of the laws on the matter, the case would lose ground. 28 One who makes use of his own legal right does no injury. 29 If damage results front the filing of the complaint, it is damnum absque injuria. 30 Besides, moral damages are generally not awarded in favor of a juridical person, unless it enjoys a good reputation that was debased by the offending party resulting in social humiliation. 31

As regards the award of attorney's fees, ABS-CBN maintains that the same had no factual, legal, or equitable justification. In sustaining the trial court's award, the Court of Appeals acted in clear disregard of the doctrines laid down in Buan v. Camaganacan 32 that the text of the decision should state the reason why attorney's fees are being awarded; otherwise, the award should be disallowed. Besides, no bad faith has been imputed on, much less proved as having been committed by, ABS-CBN. It has been held that "where no sufficient showing of bad faith would be reflected in a party' s persistence in a case other than an erroneous conviction of the righteousness of his cause, attorney's fees shall not be recovered as cost." 33

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On the other hand, RBS asserts that there was no perfected contract between ABS-CBN and VIVA absent any meeting of minds between them regarding the object and consideration of the alleged contract. It affirms that the ABS-CBN's claim of a right of first refusal was correctly rejected by the trial court. RBS insist the premium it had paid for the counterbond constituted a pecuniary loss upon which it may recover. It was obliged to put up the counterbound due to the injunction procured by ABS-CBN. Since the trial court found that ABS-CBN had no cause of action or valid claim against RBS and, therefore not entitled to the writ of injunction, RBS could recover from ABS-CBN the premium paid on the counterbond. Contrary to the claim of ABS-CBN, the cash bond would prove to be more expensive, as the loss would be equivalent to the cost of money RBS would forego in case the P30 million came from its funds or was borrowed from banks.

RBS likewise asserts that it was entitled to the cost of advertisements for the cancelled showing of the film "Maging Sino Ka Man" because the print advertisements were put out to announce the showing on a particular day and hour on Channel 7, i.e., in its entirety at one time, not a series to be shown on a periodic basis. Hence, the print advertisement were good and relevant for the particular date showing, and since the film could not be shown on that particular date and hour because of the injunction, the expenses for the advertisements had gone to waste.

As regards moral and exemplary damages, RBS asserts that ABS-CBN filed the case and secured injunctions purely for the purpose of harassing and prejudicing RBS. Pursuant then to Article 19 and 21 of the Civil Code, ABS-CBN must be held liable for such damages. Citing Tolentino, 34 damages may be awarded in cases of abuse of rights even if the act done is not illicit and there is abuse of rights were plaintiff institutes and action purely for the purpose of harassing or prejudicing the defendant.

In support of its stand that a juridical entity can recover moral and exemplary damages, private respondents RBScited People v. Manero, 35 where it was stated that such entity may recover moral

and exemplary damages if it has a good reputation that is debased resulting in social humiliation. it then ratiocinates; thus:

There can be no doubt that RBS' reputation has been debased by ABS-CBN's acts in this case. When RBS was not able to fulfill its commitment to the viewing public to show the film "Maging Sino Ka Man" on the scheduled dates and times (and on two occasions that RBS advertised), it suffered serious embarrassment and social humiliation. When the showing was canceled, late viewers called up RBS' offices and subjected RBS to verbal abuse ("Announce kayo nang announce, hindi ninyo naman ilalabas," "nanloloko yata kayo") (Exh. 3-RBS, par. 3). This alone was not something RBS brought upon itself. it was exactly what ABS-CBN had planned to happen.

The amount of moral and exemplary damages cannot be said to be excessive. Two reasons justify the amount of the award.

The first is that the humiliation suffered by RBS is national extent. RBS operations as a broadcasting company is [sic] nationwide. Its clientele, like that of ABS-CBN, consists of those who own and watch television. It is not an exaggeration to state, and it is a matter of judicial notice that almost every other person in the country watches television. The humiliation suffered by RBS is multiplied by the number of televiewers who had anticipated the showing of the film "Maging Sino Ka Man" on May 28 and November 3, 1992 but did not see it owing to the cancellation. Added to this are the advertisers who had placed commercial spots for the telecast and to whom RBS had a commitment in consideration of the placement to show the film in the dates and times specified.

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The second is that it is a competitor that caused RBS to suffer the humiliation. The humiliation and injury are far greater in degree when caused by an entity whose ultimate business objective is to lure customers (viewers in this case) away from the competition. 36

For their part, VIVA and Vicente del Rosario contend that the findings of fact of the trial court and the Court of Appeals do not support ABS-CBN's claim that there was a perfected contract. Such factual findings can no longer be disturbed in this petition for review under Rule 45, as only questions of law can be raised, not questions of fact. On the issue of damages and attorneys fees, they adopted the arguments of RBS.

The key issues for our consideration are (1) whether there was a perfected contract between VIVA and ABS-CBN, and (2) whether RBS is entitled to damages and attorney's fees. It may be noted that the award of attorney's fees of P212,000 in favor of VIVA is not assigned as another error.

I.

The first issue should be resolved against ABS-CBN. A contract is a meeting of minds between two persons whereby one binds himself to give something or to render some service to another 37 for a consideration. there is no contract unless the following requisites concur: (1) consent of the contracting parties; (2) object certain which is the subject of the contract; and (3) cause of the obligation, which is established. 38 A contract undergoes three stages:

(a) preparation, conception, or generation, which is the period of negotiation and bargaining, ending at the moment of agreement of the parties;

(b) perfection or birth of the contract, which is the moment when the parties come to agree on the terms of the contract; and

(c) consummation or death, which is the fulfillment or performance of the terms agreed upon in the contract. 39

Contracts that are consensual in nature are perfected upon mere meeting of the minds, Once there is concurrence between the offer and the acceptance upon the subject matter, consideration, and terms of payment a contract is produced. The offer must be certain. To convert the offer into a contract, the acceptance must be absolute and must not qualify the terms of the offer; it must be plain, unequivocal, unconditional, and without variance of any sort from the proposal. A qualified acceptance, or one that involves a new proposal, constitutes a counter-offer and is a rejection of the original offer. Consequently, when something is desired which is not exactly what is proposed in the offer, such acceptance is not sufficient to generate consent because any modification or variation from the terms of the offer annuls the offer. 40

When Mr. Del Rosario of VIVA met with Mr. Lopez of ABS-CBN at the Tamarind Grill on 2 April 1992 to discuss the package of films, said package of 104 VIVA films was VIVA's offer to ABS-CBN to enter into a new Film Exhibition Agreement. But ABS-CBN, sent, through Ms. Concio, a counter-proposal in the form of a draft contract proposing exhibition of 53 films for a consideration of P35 million. This counter-proposal could be nothing less than the counter-offer of Mr. Lopez during his conference with Del Rosario at Tamarind Grill Restaurant. Clearly, there was no acceptance of VIVA's offer, for it was met by a counter-offer which substantially varied the terms of the offer.

ABS-CBN's reliance in Limketkai Sons Milling, Inc. v. Court ofAppeals 41 and Villonco Realty Company v. Bormaheco, Inc., 42 is misplaced. In these cases, it was held that an acceptance may contain a request for certain changes in the terms of the offer and yet be a binding acceptance as long as "it is clear that the meaning of the acceptance is positively and unequivocally to accept the offer, whether such request is granted or not." This ruling was, however, reversed in the resolution of 29 March 1996, 43 which ruled that the acceptance of all offer must be unqualified and absolute, i.e., it "must be identical in all

70

respects with that of the offer so as to produce consent or meeting of the minds."

On the other hand, in Villonco, cited in Limketkai, the alleged changes in the revised counter-offer were not material but merely clarificatory of what had previously been agreed upon. It cited the statement in Stuart v.Franklin Life Insurance Co. 44 that "a vendor's change in a phrase of the offer to purchase, which change does not essentially change the terms of the offer, does not amount to a rejection of the offer and the tender of a counter-offer." 45However, when any of the elements of the contract is modified upon acceptance, such alteration amounts to a counter-offer.

In the case at bar, ABS-CBN made no unqualified acceptance of VIVA's offer. Hence, they underwent a period of bargaining. ABS-CBN then formalized its counter-proposals or counter-offer in a draft contract, VIVA through its Board of Directors, rejected such counter-offer, Even if it be conceded arguendo that Del Rosario had accepted the counter-offer, the acceptance did not bind VIVA, as there was no proof whatsoever that Del Rosario had the specific authority to do so.

Under Corporation Code, 46 unless otherwise provided by said Code, corporate powers, such as the power; to enter into contracts; are exercised by the Board of Directors. However, the Board may delegate such powers to either an executive committee or officials or contracted managers. The delegation, except for the executive committee, must be for specific purposes, 47 Delegation to officers makes the latter agents of the corporation; accordingly, the general rules of agency as to the bindings effects of their acts would apply. 48 For such officers to be deemed fully clothed by the corporation to exercise a power of the Board, the latter must specially authorize them to do so. That Del Rosario did not have the authority to accept ABS-CBN's counter-offer was best evidenced by his submission of the draft contract to VIVA's Board of Directors for the latter's approval. In any event, there was between Del Rosario and Lopez III no meeting of minds. The following findings of the trial court are instructive:

A number of considerations militate against ABS-CBN's claim that a contract was perfected at that lunch meeting on April 02, 1992 at the Tamarind Grill.

FIRST, Mr. Lopez claimed that what was agreed upon at the Tamarind Grill referred to the price and the number of films, which he wrote on a napkin. However, Exhibit "C" contains numerous provisions which, were not discussed at the Tamarind Grill, if Lopez testimony was to be believed nor could they have been physically written on a napkin. There was even doubt as to whether it was a paper napkin or a cloth napkin. In short what were written in Exhibit "C'' were not discussed, and therefore could not have been agreed upon, by the parties. How then could this court compel the parties to sign Exhibit "C" when the provisions thereof were not previously agreed upon?

SECOND, Mr. Lopez claimed that what was agreed upon as the subject matter of the contract was 14 films. The complaint in fact prays for delivery of 14 films. But Exhibit "C" mentions 53 films as its subject matter. Which is which If Exhibits "C" reflected the true intent of the parties, then ABS-CBN's claim for 14 films in its complaint is false or if what it alleged in the complaint is true, then Exhibit "C" did not reflect what was agreed upon by the parties. This underscores the fact that there was no meeting of the minds as to the subject matter of the contracts, so as to preclude perfection thereof. For settled is the rule that there can be no contract where there is no object which is its subject matter (Art. 1318, NCC).

THIRD, Mr. Lopez [sic] answer to question 29 of his affidavit testimony (Exh. "D") states:

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We were able to reach an agreement. VIVA gave us the exclusive license to show these fourteen (14) films, and we agreed to pay Viva the amount of P16,050,000.00 as well as grant Viva commercial slots worth P19,950,000.00. We had already earmarked this P16, 050,000.00.

which gives a total consideration of P36 million (P19,950,000.00 plus P16,050,000.00. equals P36,000,000.00).

On cross-examination Mr. Lopez testified:

Q. What was written in this napkin?

A. The total price, the breakdown the known Viva movies, the 7 blockbuster movies and the other 7 Viva movies because the price was broken down accordingly. The none[sic] Viva and the seven other Viva movies and the sharing between the cash portion and the concerned spot portion in the total amount of P35 million pesos.

Now, which is which? P36 million or P35 million? This weakens ABS-CBN's claim.

FOURTH. Mrs. Concio, testifying for ABS-CBN stated that she transmitted Exhibit "C" to Mr. Del Rosario with a handwritten note, describing said Exhibit "C" as a "draft." (Exh."5" - Viva; tsn pp. 23-24 June 08, 1992). The said draft has a well defined meaning.

Since Exhibit "C" is only a draft, or a tentative, provisional or preparatory writing prepared for discussion, the terms and conditions thereof could not have been previously agreed upon by ABS-CBN and Viva Exhibit "C'' could not therefore legally bind Viva, not having agreed thereto. In fact, Ms. Concio admitted that the terms and conditions embodied in Exhibit "C" were prepared by ABS-CBN's lawyers and there was no discussion on said terms and conditions. . . .

As the parties had not yet discussed the proposed terms and conditions in Exhibit "C," and there was no evidence whatsoever that Viva agreed to the terms and conditions thereof, said document cannot be a binding contract. The fact that Viva refused to sign Exhibit "C" reveals only two [sic] well that it did not agree on its terms and conditions, and this court has no authority to compel Viva to agree thereto.

FIFTH. Mr. Lopez understand [sic] that what he and Mr. Del Rosario agreed upon at the Tamarind Grill was only provisional, in the sense that it was subject to approval by the Board of Directors of Viva. He testified:

Q. Now, Mr. Witness, and after that Tamarind meeting ... the second meeting wherein you claimed that you have the meeting of the minds between you and Mr. Vic del Rosario, what happened?

A. Vic Del Rosario was supposed to call us up and tell us specifically the result of the discussion with the Board of Directors.

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Q. And you are referring to the so-called agreement which you wrote in [sic] a piece of paper?

A. Yes, sir.

Q. So, he was going to forward that to the board of Directors for approval?

A. Yes, sir. (Tsn, pp. 42-43, June 8, 1992)

Q. Did Mr. Del Rosario tell you that he will submit it to his Board for approval?

A. Yes, sir. (Tsn, p. 69, June 8, 1992).

The above testimony of Mr. Lopez shows beyond doubt that he knew Mr. Del Rosario had no authority to bind Viva to a contract with ABS-CBN until and unless its Board of Directors approved it. The complaint, in fact, alleges that Mr. Del Rosario "is the Executive Producer of defendant Viva" which "is a corporation." (par. 2, complaint). As a mere agent of Viva, Del Rosario could not bind Viva unless what he did is ratified by its Board of Directors. (Vicente vs. Geraldez, 52 SCRA 210; Arnold vs. Willets and Paterson, 44 Phil. 634). As a mere agent, recognized as such by plaintiff, Del Rosario could not be held liable jointly and severally with Viva and his inclusion as party defendant has no legal basis. (Salonga vs. Warner Barner [sic] , COLTA , 88 Phil. 125; Salmon vs. Tan, 36 Phil. 556).

The testimony of Mr. Lopez and the allegations in the complaint are clear admissions that what was

supposed to have been agreed upon at the Tamarind Grill between Mr. Lopez and Del Rosario was not a binding agreement. It is as it should be because corporate power to enter into a contract is lodged in the Board of Directors. (Sec. 23, Corporation Code). Without such board approval by the Viva board, whatever agreement Lopez and Del Rosario arrived at could not ripen into a valid contract binding upon Viva (Yao Ka Sin Trading vs. Court of Appeals, 209 SCRA 763). The evidence adduced shows that the Board of Directors of Viva rejected Exhibit "C" and insisted that the film package for 140 films be maintained (Exh. "7-1" - Viva ). 49

The contention that ABS-CBN had yet to fully exercise its right of first refusal over twenty-four films under the 1990 Film Exhibition Agreement and that the meeting between Lopez and Del Rosario was a continuation of said previous contract is untenable. As observed by the trial court, ABS-CBN right of first refusal had already been exercised when Ms. Concio wrote to VIVA ticking off ten films, Thus:

[T]he subsequent negotiation with ABS-CBN two (2) months after this letter was sent, was for an entirely different package. Ms. Concio herself admitted on cross-examination to having used or exercised the right of first refusal. She stated that the list was not acceptable and was indeed not accepted by ABS-CBN, (TSN, June 8, 1992, pp. 8-10). Even Mr. Lopez himself admitted that the right of the first refusal may have been already exercised by Ms. Concio (as she had). (TSN, June 8, 1992, pp. 71-75). Del Rosario himself knew and understand [sic] that ABS-CBN has lost its rights of the first refusal when his list of 36 titles were rejected (Tsn, June 9, 1992, pp. 10-11) 50

II

73

However, we find for ABS-CBN on the issue of damages. We shall first take up actual damages. Chapter 2, Title XVIII, Book IV of the Civil Code is the specific law on actual or compensatory damages. Except as provided by law or by stipulation, one is entitled to compensation for actual damages only for such pecuniary loss suffered by him as he has duly proved. 51 The indemnification shall comprehend not only the value of the loss suffered, but also that of the profits that the obligee failed to obtain. 52 In contracts and quasi-contracts the damages which may be awarded are dependent on whether the obligor acted with good faith or otherwise, It case of good faith, the damages recoverable are those which are the natural and probable consequences of the breach of the obligation and which the parties have foreseen or could have reasonably foreseen at the time of the constitution of the obligation. If the obligor acted with fraud, bad faith, malice, or wanton attitude, he shall be responsible for all damages which may be reasonably attributed to the non-performance of the obligation. 53 In crimes and quasi-delicts, the defendant shall be liable for all damages which are the natural and probable consequences of the act or omission complained of, whether or not such damages has been foreseen or could have reasonably been foreseen by the defendant. 54

Actual damages may likewise be recovered for loss or impairment of earning capacity in cases of temporary or permanent personal injury, or for injury to the plaintiff's business standing or commercial credit. 55

The claim of RBS for actual damages did not arise from contract, quasi-contract, delict, or quasi-delict. It arose from the fact of filing of the complaint despite ABS-CBN's alleged knowledge of lack of cause of action. Thus paragraph 12 of RBS's Answer with Counterclaim and Cross-claim under the heading COUNTERCLAIM specifically alleges:

12. ABS-CBN filed the complaint knowing fully well that it has no cause of action RBS. As a result thereof, RBS suffered actual damages in the amount of P6,621,195.32. 56

Needless to state the award of actual damages cannot be comprehended under the above law on actual damages. RBS could only probably take refuge under Articles 19, 20, and 21 of the Civil Code, which read as follows:

Art. 19. Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith.

Art. 20. Every person who, contrary to law, wilfully or negligently causes damage to another, shall indemnify the latter for tile same.

Art. 21. Any person who wilfully causes loss or injury to another in a manner that is contrary to morals, good customs or public policy shall compensate the latter for the damage.

It may further be observed that in cases where a writ of preliminary injunction is issued, the damages which the defendant may suffer by reason of the writ are recoverable from the injunctive bond. 57 In this case, ABS-CBN had not yet filed the required bond; as a matter of fact, it asked for reduction of the bond and even went to the Court of Appeals to challenge the order on the matter, Clearly then, it was not necessary for RBS to file a counterbond. Hence, ABS-CBN cannot be held responsible for the premium RBS paid for the counterbond.

Neither could ABS-CBN be liable for the print advertisements for "Maging Sino Ka Man" for lack of sufficient legal basis. The RTC issued a temporary restraining order and later, a writ of preliminary injunction on the basis of its determination that there existed sufficient ground for the issuance thereof. Notably, the RTC did not dissolve the injunction on the ground of lack of legal and factual basis, but because of the plea of RBS that it be allowed to put up a counterbond.

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As regards attorney's fees, the law is clear that in the absence of stipulation, attorney's fees may be recovered as actual or compensatory damages under any of the circumstances provided for in Article 2208 of the Civil Code. 58

The general rule is that attorney's fees cannot be recovered as part of damages because of the policy that no premium should be placed on the right to litigate. 59 They are not to be awarded every time a party wins a suit. The power of the court to award attorney's fees under Article 2208 demands factual, legal, and equitable justification. 60 Even when claimant is compelled to litigate with third persons or to incur expenses to protect his rights, still attorney's fees may not be awarded where no sufficient showing of bad faith could be reflected in a party's persistence in a case other than erroneous conviction of the righteousness of his cause. 61

As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book IV of the Civil Code. Article 2217 thereof defines what are included in moral damages, while Article 2219 enumerates the cases where they may be recovered, Article 2220 provides that moral damages may be recovered in breaches of contract where the defendant acted fraudulently or in bad faith. RBS's claim for moral damages could possibly fall only under item (10) of Article 2219, thereof which reads:

(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.

Moral damages are in the category of an award designed to compensate the claimant for actual injury suffered. and not to impose a penalty on the wrongdoer. 62 The award is not meant to enrich the complainant at the expense of the defendant, but to enable the injured party to obtain means, diversion, or amusements that will serve to obviate then moral suffering he has undergone. It is aimed at the restoration, within the limits of the possible, of the spiritual status quo ante, and should be proportionate to the suffering inflicted. 63 Trial courts must then guard against the award of exorbitant damages; they should exercise balanced restrained and measured objectivity to avoid suspicion that it

was due to passion, prejudice, or corruption on the part of the trial court. 64

The award of moral damages cannot be granted in favor of a corporation because, being an artificial person and having existence only in legal contemplation, it has no feelings, no emotions, no senses, It cannot, therefore, experience physical suffering and mental anguish, which call be experienced only by one having a nervous system. 65 The statement in People v. Manero 66 and Mambulao Lumber Co. v. PNB 67 that a corporation may recover moral damages if it "has a good reputation that is debased, resulting in social humiliation" is an obiter dictum. On this score alone the award for damages must be set aside, since RBS is a corporation.

The basic law on exemplary damages is Section 5, Chapter 3, Title XVIII, Book IV of the Civil Code. These are imposed by way of example or correction for the public good, in addition to moral, temperate, liquidated or compensatory damages. 68 They are recoverable in criminal cases as part of the civil liability when the crime was committed with one or more aggravating circumstances; 69 in quasi-contracts, if the defendant acted with gross negligence;70 and in contracts and quasi-contracts, if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. 71

It may be reiterated that the claim of RBS against ABS-CBN is not based on contract, quasi-contract, delict, or quasi-delict, Hence, the claims for moral and exemplary damages can only be based on Articles 19, 20, and 21 of the Civil Code.

The elements of abuse of right under Article 19 are the following: (1) the existence of a legal right or duty, (2) which is exercised in bad faith, and (3) for the sole intent of prejudicing or injuring another. Article 20 speaks of the general sanction for all other provisions of law which do not especially provide for their own sanction; while Article 21 deals with acts contra bonus mores, and has the following elements; (1) there is an act which is legal, (2) but which is contrary to morals, good

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custom, public order, or public policy, and (3) and it is done with intent to injure. 72

Verily then, malice or bad faith is at the core of Articles 19, 20, and 21. Malice or bad faith implies a conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity. 73 Such must be substantiated by evidence. 74

There is no adequate proof that ABS-CBN was inspired by malice or bad faith. It was honestly convinced of the merits of its cause after it had undergone serious negotiations culminating in its formal submission of a draft contract. Settled is the rule that the adverse result of an action does not per se make the action wrongful and subject the actor to damages, for the law could not have meant to impose a penalty on the right to litigate. If damages result from a person's exercise of a right, it is damnum absque injuria. 75

WHEREFORE, the instant petition is GRANTED. The challenged decision of the Court of Appeals in CA-G.R. CV No, 44125 is hereby REVERSED except as to unappealed award of attorney's fees in favor of VIVA Productions, Inc.1âwphi1.nêt

No pronouncement as to costs.

SO ORDERED.

Republic of the PhilippinesSUPREME COURTManila

THIRD DIVISION

G.R. No. 126204            November 20, 2001

NATIONAL POWER CORPORATION, petitioner, vs.PHILIPP BROTHERS OCEANIC, INC., respondent.

SANDOVAL-GUTIERREZ, J.:

Where a person merely uses a right pertaining to him, without bad faith or intent to injure, the fact that damages are thereby suffered by another will not make him liable.1

This principle finds useful application to the present case.

Before us is a petition for review of the Decision2 dated August 27, 1996 of the Court of Appeals affirming in toto the Decision3 dated January 16, 1992 of the Regional Trial Court, Branch 57, Makati City.

The facts are:

On May 14, 1987, the National Power Corporation (NAPOCOR) issued invitations to bid for the supply and delivery of 120,000 metric tons of imported coal for its Batangas Coal-Fired Thermal Power Plant in Calaca, Batangas. The Philipp Brothers Oceanic, Inc. (PHIBRO) prequalified and was allowed to participate as one of the bidders. After the public bidding was conducted, PHIBRO's bid was accepted. NAPOCOR's acceptance was conveyed in a letter dated July 8, 1987, which was received by PHIBRO on July 15, 1987.The "Bidding Terms and Specifications"4 provide for the manner of shipment of coals, thus:

"SECTION V

SHIPMENT

The winning TENDERER who then becomes the SELLER shall arrange and provide gearless bulk carrier for the shipment of coal to arrive at discharging port on or before thirty (30) calendar days after receipt of the Letter of Credit by the

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SELLER or its nominee as per Section XIV hereof to meet the vessel arrival schedules at Calaca, Batangas, Philippines as follows:

60,000 +/ - 10 % July 20, 1987

60,000 +/ - 10% September 4, 1987"5

On July 10, 1987, PHIBRO sent word to NAPOCOR that industrial disputes might soon plague Australia, the shipment's point of origin, which could seriously hamper PHIBRO's ability to supply the needed coal.6 From July 23 to July 31, 1987, PHIBRO again apprised NAPOCOR of the situation in Australia, particularly informing the latter that the ship owners therein are not willing to load cargo unless a "strike-free" clause is incorporated in the charter party or the contract of carriage.7 In order to hasten the transfer of coal, PHIBRO proposed to NAPOCOR that they equally share the burden of a "strike-free" clause. NAPOCOR refused.

On August 6, 1987, PHIBRO received from NAPOCOR a confirmed and workable letter of credit. Instead of delivering the coal on or before the thirtieth day after receipt of the Letter of Credit, as agreed upon by the parties in the July contract, PHIBRO effected its first shipment only on November 17, 1987.

Consequently, in October 1987, NAPOCOR once more advertised for the delivery of coal to its Calaca thermal plant. PHIBRO participated anew in this subsequent bidding. On November 24, 1987, NAPOCOR disapproved PHIBRO's application for pre-qualification to bid for not meeting the minimum requirements.8 Upon further inquiry, PHIBRO found that the real reason for the disapproval was its purported failure to satisfy NAPOCOR's demand for damages due to the delay in the delivery of the first coal shipment.

This prompted PHIBRO to file an action for damages with application for injunction against NAPOCOR with the Regional Trial Court, Branch 57, Makati City.9 In its complaint, PHIBRO alleged that NAPOCOR's act

of disqualifying it in the October 1987 bidding and in all subsequent biddings was tainted with malice and bad faith. PHIBRO prayed for actual, moral and exemplary damages and attorney's fees.

In its answer, NAPOCOR averred that the strikes in Australia could not be invoked as reason for the delay in the delivery of coal because PHIBRO itself admitted that as of July 28, 1987 those strikes had already ceased. And, even assuming that the strikes were still ongoing, PHIBRO should have shouldered the burden of a "strike-free" clause because their contract was "C and F Calaca, Batangas, Philippines," meaning, the cost and freight from the point of origin until the point of destination would be for the account of PHIBRO. Furthermore, NAPOCOR claimed that due to PHIBRO's failure to deliver the coal on time, it was compelled to purchase coal from ASEA at a higher price. NAPOCOR claimed for actual damages in the amount of P12,436,185.73, representing the increase in the price of coal, and a claim of P500,000.00 as litigation expenses.10

Thereafter, trial on the merits ensued.

On January 16, 1992, the trial court rendered a decision in favor of PHIBRO, the dispositive portion of which reads:

"WHEREFORE, judgment is hereby rendered in favor of plaintiff Philipp Brothers Oceanic Inc. (PHIBRO) and against the defendant National Power Corporation (NAPOCOR) ordering the said defendant NAPOCOR:

1. To reinstate Philipp Brothers Oceanic, Inc. (PHIBRO) in the defendant National Power Corporation's list of accredited bidders and allow PHIBRO to participate in any and all future tenders of National Power Corporation for the supply and delivery of imported steam coal;

2. To pay Philipp Brothers Oceanic, Inc. (PHIBRO);

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a. The peso equivalent at the time of payment of $864,000 as actual damages,

b. The peso equivalent at the time of payment of $100,000 as moral damages;

c. The peso equivalent at the time of payment of $50,000 as exemplary damages;

d. The peso equivalent at the time of payment of $73,231.91 as reimbursement for expenses, cost of litigation and attorney's fees;

3. To pay the costs of suit;

4. The counterclaims of defendant NAPOCOR are dismissed for lack of merit.

SO ORDERED."11

Unsatisfied, NAPOCOR, through the Solicitor General, elevated the case to the Court of Appeals. On August 27, 1996, the Court of Appeals rendered a Decision affirming in toto the Decision of the Regional Trial Court. It ratiocinated that:

"There is ample evidence to show that although PHIBRO's delivery of the shipment of coal was delayed, the delay was in fact caused by a) Napocor's own delay in opening a workable letter of credit; and b) the strikes which plaqued the Australian coal industry from the first week of July to the third week of September 1987. Strikes are included in the definition of force majeure in Section XVII of the Bidding Terms and Specifications, (supra), so Phibro is not liable for any delay caused thereby.

Phibro was informed of the acceptance of its bid on July 8, 1987. Delivery of coal was to be effected thirty (30) days from Napocor's opening of a confirmed and workable letter of credit. Napocor was only able to do so on August 6, 1987.

By that time, Australia's coal industry was in the middle of a seething controversy and unrest, occasioned by strikes, overtime bans, mine stoppages. The origin, the scope and the effects of this industrial unrest are lucidly described in the uncontroverted testimony of James Archibald, an employee of Phibro and member of the Export Committee of the Australian Coal Association during the time these events transpired.

xxx           xxx           xxx

The records also attest that Phibro periodically informed Napocor of these developments as early as July 1, 1987, even before the bid was approved. Yet, Napocor did not forthwith open the letter of credit in order to avoid delay which might be caused by the strikes and their after-effects.

"Strikes" are undoubtedly included in the force majeure clause of the Bidding Terms and Specifications (supra). The renowned civilist, Prof. Arturo Tolentino, defines force majeure as "an event which takes place by accident and could not have been foreseen." (Civil Code of the Philippines, Volume IV, Obligations and Contracts, 126, [1991]) He further states:

"Fortuitous events may be produced by two general causes: (1) by Nature, such as earthquakes, storms, floods, epidemics, fires, etc., and (2) by the act of man, such as an armed invasion, attack by bandits, governmental prohibitions, robbery, etc."

Tolentino adds that the term generally applies, broadly speaking, to natural accidents. In order that acts of man such as a strike, may constitute fortuitous event, it is necessary that

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they have the force of an imposition which the debtor could not have resisted. He cites a parallel example in the case of Philippine National Bank v. Court of Appeals, 94 SCRA 357 (1979), wherein the Supreme Court said that the outbreak of war which prevents performance exempts a party from liability.

Hence, by law and by stipulation of the parties, the strikes which took place in Australia from the first week of July to the third week of September, 1987, exempted Phibro from the effects of delay of the delivery of the shipment of coal."12

Twice thwarted, NAPOCOR comes to us via a petition for review ascribing to the Court of Appeals the following errors:

I

"Respondent Court of Appeals gravely and seriously erred in concluding and so holding that PHIBRO's delay in the delivery of imported coal was due to NAPOCOR's alleged delay in opening a letter of credit and to forcemajeure, and not to PHIBRO's own deliberate acts and faults."13

II

"Respondent Court of Appeals gravely and seriously erred in concluding and so holding that NAPOCOR acted maliciously and unjustifiably in disqualifying PHIBRO from participating in the December 8, 1987 and future biddings for the supply of imported coal despite the existence of valid grounds therefor such as serious impairment of its track record."14

III

"Respondent Court of Appeals gravely and seriously erred in concluding and so holding that PHIBRO was entitled to injunctive relief,

to actual or compensatory, moral and exemplary damages, attorney's fees and litigation expenses despite the clear absence of legal and factual bases for such award."15

IV

"Respondent Court of Appeals gravely and seriously erred in absolving PHIBRO from any liability for damages to NAPOCOR for its unjustified and deliberate refusal and/or failure to deliver the contracted imported coal within the stipulated period."16

V

"Respondent Court of Appeals gravely and seriously erred in dismissing NAPOCOR's counterclaims for damages and litigation expenses."17

It is axiomatic that only questions of law, not questions of fact, may be raised before this Court in a petition for review under Rule 45 of the Rules of Court.18 The findings of facts of the Court of Appeals are conclusive and binding on this Court19 and they carry even more weight when the said court affirms the factual findings of the trial court.20 Stated differently, the findings of the Court of .Appeals, by itself, which are supported by substantial evidence, are almost beyond the power of review by this Court.21

With the foregoing settled jurisprudence, we find it pointless to delve lengthily on the factual issues raised by petitioner. The existence of strikes in Australia having been duly established in the lower courts, we are left only with the burden of determining whether or not NAPOCOR acted wrongfully or with bad faith in disqualifying PHIBRO from participating in the subsequent public bidding.

Let us consider the case in its proper perspective.

The Court of Appeals is justified in sustaining the Regional Trial Court's decision exonerating PHIBRO from any liability for damages to

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NAPOCOR as it was clearly established from the evidence, testimonial and documentary, that what prevented PHIBRO from complying with its obligation under the July 1987 contract was the industrial disputes which besieged Australia during that time. Extant in our Civil Code is the rule that no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable.22 This means that when an obligor is unable to fulfill his obligation because of a fortuitous event or force majeure, he cannot be held liable for damages for non-performance.23

In addition to the above legal precept, it is worthy to note that PHIBRO and NAPOCOR explicitly agreed in Section XVII of the "Bidding Terms and Specifications"24 that "neither seller (PHIBRO) nor buyer (NAPOCOR) shall be liable for any delay in or failure of the performance of its obligations, other than the payment of money due, if any such delay or failure is due to Force Majeure." Specifically, they defined force majeure as "any disabling cause beyond the control of and without fault or negligence of the party, which causes may include but are not restricted to Acts of God or of the public enemy; acts of the Government in either its sovereign or contractual capacity; governmental restrictions; strikes, fires, floods, wars, typhoons, storms, epidemics and quarantine restrictions."

The law is clear and so is the contract between NAPOCOR and PHIBRO. Therefore, we have no reason to rule otherwise.

However, proceeding from the premise that PHIBRO was prevented by force majeure from complying with its obligation, does it necessarily follow that NAPOCOR acted unjustly, capriciously, and unfairly in disapproving PHIBRO's application for pre-qualification to bid?

First, it must be stressed that NAPOCOR was not bound under any contract to approve PHIBRO's pre-qualification requirements. In fact, NAPOCOR had expressly reserved its right to reject bids. The Instruction to Bidders found in the "Post-Qualification Documents/Specifications for the Supply and Delivery of Coal for the

Batangas Coal-Fired Thermal Power Plant I at Calaca, Batangas Philippines,"25 is explicit, thus:

"IB-17 RESERVATION OF NAPOCOR TO REJECT BIDS

NAPOCOR reserves the right to reject any or all bids, to waive any minor informality in the bids received.The right is also reserved to reject the bids of any bidder who has previously failed to properly perform or complete on time any and all contracts for delivery of coal or any supply undertaken by a bidder."26(Emphasis supplied)

This Court has held that where the right to reject is so reserved, the lowest bid or any bid for that matter may be rejected on a mere technicality.27 And where the government as advertiser, availing itself of that right, makes its choice in rejecting any or all bids, the losing bidder has no cause to complain nor right to dispute that choice unless an unfairness or injustice is shown. Accordingly, a bidder has no ground of action to compel the Government to award the contract in his favor, nor to compel it to accept his bid. Even the lowest bid or any bid may be rejected.28 In Celeste v. Court of Appeals,29 we had the occasion to rule:

"Moreover, paragraph 15 of the Instructions to Bidders states that 'the Government hereby reserves the right to reject any or all bids submitted.' In the case of A.C. Esguerra and Sons v. Aytona, 4 SCRA 1245, 1249 (1962), we held:

'x x x [I]n the invitation to bid, there is a condition imposed upon the bidders to the effect that the bidders shall be subject to the right of the government to reject any and all bids subject to its discretion. Here the government has made its choice, and unless an unfairness or injustice is shown, the losing bidders have no cause to complain, nor right to dispute that choice.'

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Since there is no evidence to prove bad faith and arbitrariness on the part of the petitioners in evaluating the bids, we rule that the private respondents are not entitled to damages representing lost profits." (Emphasis supplied)

Verily, a reservation of the government of its right to reject any bid, generally vests in the authorities a wide discretion as to who is the best and most advantageous bidder. The exercise of such discretion involves inquiry, investigation, comparison, deliberation and decision, which are quasi-judicial functions, and when honestly exercised, may not be reviewed by the court.30 In Bureau Veritas v. Office of the President,31 we decreed:

"The discretion to accept or reject a bid and award contracts is vested in the Government agencies entrusted with that function. The discretion given to the authorities on this matter is of such wide latitude that the Courts will not interfere therewith, unless it is apparent that it is used as a shield to a fraudulent award. (Jalandoni v. NARRA, 108 Phil. 486 [1960]) x x x. The exercise of this discretion is a policy decision that necessitates prior inquiry, investigation, comparison, evaluation, and deliberation. This task can best be discharged by the Government agencies concerned, not by the Courts. The role of the Courts is to ascertain whether a branch or instrumentality of the Government has transgresses its constitutional boundaries. But the Courts will not interfere with executive or legislative discretion exercised within those boundaries. Otherwise, it strays into the realm of policy decision-making. x x x." (Emphasis supplied)

Owing to the discretionary character of the right involved in this case, the propriety of NAPOCOR's act should therefore be judged on the basis of the general principles regulating human relations, the forefront provision of which is Article 19 of the Civil Code which provides that "every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith."32Accordingly, a person will be protected only

when he acts in the legitimate exercise of his right, that is, when he acts with prudence and in good faith; but not when he acts with negligence or abuse.33

Did NAPOCOR abuse its right or act unjustly in disqualifying PHIBRO from the public bidding?

We rule in the negative.

In practice, courts, in the sound exercise of their discretion, will have to determine under all the facts and circumstances when the exercise of a right is unjust, or when there has been an abuse of right.34

We went over the record of the case with painstaking solicitude and we are convinced that NAPOCOR's act of disapproving PHIBRO's application for pre-qualification to bid was without any intent to injure or a purposive motive to perpetrate damage. Apparently, NAPOCOR acted on the strong conviction that PHIBRO had a "seriously-impaired" track record. NAPOCOR cannot be faulted from believing so. At this juncture, it is worth mentioning that at the time NAPOCOR issued its subsequent Invitation to Bid, i.e., October 1987, PHIBRO had not yet delivered the first shipment of coal under the July 1987 contract, which was due on or before September 5, 1987. Naturally, NAPOCOR is justified in entertaining doubts on PHIBRO's qualification or capability to assume an obligation under a new contract.

Moreover, PHIBRO's actuation in 1987 raised doubts as to the real situation of the coal industry in Australia. It appears from the records that when NAPOCOR was constrained to consider an offer from another coal supplier (ASEA) at a price of US$33.44 per metric ton, PHIBRO unexpectedly offered the immediate delivery of 60,000 metric tons of Ulan steam coal at US$31.00 per metric ton for arrival at Calaca, Batangas on September 20-21, 1987."35 Of course, NAPOCOR had reason to ponder — how come PHIBRO could assure the immediate delivery of 60,000 metric tons of coal from the same source to arrive at Calaca not later than September 20/21, 1987 but it could not deliver the coal it had undertaken under its contract?

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Significantly, one characteristic of a fortuitous event, in a legal sense, and consequently in relations to contracts, is that "the concurrence must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner."36 Faced with the above circumstance, NAPOCOR is justified in assuming that, may be, there was really no fortuitous event or force majeure which could render it impossible for PHIBRO to effect the delivery of coal. Correspondingly, it is also justified in treating PHIBRO's failure to deliver a serious impairment of its track record. That the trial court, thereafter, found PHIBRO's unexpected offer actually a result of its desire to minimize losses on the part of NAPOCOR is inconsequential. In determining the existence of good faith, the yardstick is the frame of mind of the actor at the time he committed the act, disregarding actualities or facts outside his knowledge. We cannot fault NAPOCOR if it mistook PHIBRO's unexpected offer a mere attempt on the latter's part to undercut ASEA or an indication of PHIBRO's inconsistency. The circumstances warrant such contemplation.

That NAPOCOR believed all along that PHIBRO's failure to deliver on time was unfounded is manifest from its letters37 reminding PHIBRO that it was bound to deliver the coal within 30 days from its (PHIBRO's) receipt of the Letter of Credit, otherwise it would be constrained to take legal action. The same honest belief can be deduced from NAPOCOR's Board Resolution, thus:

"On the legal aspect, Management stressed that failure of PBO to deliver under the contract makes them liable for damages, considering that the reasons invoked were not valid. The measure of the damages will be limited to actual and compensatory damages. However, it was reported that Philipp Brothers advised they would like to have continuous business relation with NPC so they are willing to sit down or even proposed that the case be submitted to the Department of Justice as to avoid a court action or arbitration.

xxx           xxx           xxx

On the technical-economic aspect, Management claims that if PBO delivers in November 1987 and January 1988, there are some advantages. If PBO reacts to any legal action and fails to deliver, the options are: one, to use 100% Semirara and second, to go into urgent coal order. The first option will result in a 75 MW derating and oil will be needed as supplement. We will stand to lose around P30 M. On the other hand, if NPC goes into an urgent coal order, there will be an additional expense of $786,000 or P16.11 M, considering the price of the latest purchase with ASEA. On both points, reliability is decreased."38

The very purpose of requiring a bidder to furnish the awarding authority its pre-qualification documents is to ensure that only those "responsible" and "qualified" bidders could bid and be awarded with government contracts. It bears stressing that the award of a contract is measured not solely by the smallest amount of bid for its performance, but also by the "responsibility" of the bidder. Consequently, the integrity, honesty, and trustworthiness of the bidder is to be considered. An awarding official is justified in considering a bidder not qualified or not responsible if he has previously defrauded the public in such contracts or if, on the evidence before him, the official bona fide believes the bidder has committed such fraud, despite the fact that there is yet no judicial determination to that effect.39 Otherwise stated, if the awarding body bona fide believes that a bidder has seriously impaired its track record because of a particular conduct, it is justified in disqualifying the bidder. This policy is necessary to protect the interest of the awarding body against irresponsible bidders.

Thus, one who acted pursuant to the sincere belief that another willfully committed an act prejudicial to the interest of the government cannot be considered to have acted in bad faith. Bad faith has always been a question of intention. It is that corrupt motive that operates in the mind. As understood in law, it contemplates a state of mind affirmatively operating with furtive design or with some motive of self-interest or ill-will or for ulterior purpose.40 While confined in the realm of thought, its presence may be ascertained through the party's actuation or through circumstantial evidence.41 The circumstances under which NAPOCOR disapproved PHIBRO's pre-qualification to bid

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do not show an intention to cause damage to the latter. The measure it adopted was one of self-protection. Consequently, we cannot penalize NAPOCOR for the course of action it took. NAPOCOR cannot be made liable for actual, moral and exemplary damages.

Corollarily, in awarding to PHIBRO actual damages in the amount of $864,000, the Regional Trial Court computed what could have been the profits of PHIBRO had NAPOCOR allowed it to participate in the subsequent public bidding. It ruled that "PHIBRO would have won the tenders for the supply of about 960,000 metric tons out of at least 1,200,000 metric tons" from the public bidding of December 1987 to 1990. We quote the trial court's ruling, thus:

". . . PHIBRO was unjustly excluded from participating in at least five (5) tenders beginning December 1987 to 1990, for the supply and delivery of imported coal with a total volume of about 1,200,000 metric tons valued at no less than US$32 Million. (Exhs."AA," "AA-1-1," to "AA-2"). The price of imported coal for delivery in 1988 was quoted in June 1988 by bidders at US$41.35 to US$43.95 per metric ton (Exh. "JJ"); in September 1988 at US$41.50 to US$49.50 per metric ton (Exh. "J-1"); in November 1988 at US$39.00 to US$48.50 per metric ton (Exh. "J-2") and for the 1989 deliveries, at US$44.35 to US$47.35 per metric ton (Exh."J-3") and US$38.00 to US$48.25 per metric ton in September 1990 (Exh."JJ-6" and "JJ-7"). PHIBRO would have won the tenders for the supply and delivery of about 960,000 metric tons of coal out of at least 1,200,000 metric tons awarded during said period based on its proven track record of 80%. The Court, therefore finds that as a result of its disqualification, PHIBRO suffered damages equivalent to its standard 3% margin in 960,000 metric tons of coal at the most conservative price of US$30,000 per metric ton, or the total of US$864,000 which PHIBRO would have earned had it been allowed to participate in biddings in which it was disqualified and in subsequent tenders for supply and delivery of imported coal."

We find this to be erroneous.

Basic is the rule that to recover actual damages, the amount of loss must not only be capable of proof but must actually be proven with reasonable degree of certainty, premised upon competent proof or best evidence obtainable of the actual amount thereof.42 A court cannot merely rely on speculations, conjectures, or guesswork as to the fact and amount of damages. Thus, while indemnification for damages shall comprehend not only the value of the loss suffered, but also that of the profits which the obligee failed to obtain,43 it is imperative that the basis of the alleged unearned profits is not too speculative and conjectural as to show the actual damages which may be suffered on a future period.

In Pantranco North Express, Inc. v. Court of Appeals,44 this Court denied the plaintiff's claim for actual damages which was premised on a contract he was about to negotiate on the ground that there was still the requisite public bidding to be complied with, thus:

"As to the alleged contract he was about to negotiate with Minister Hipolito, there is no showing that the same has been awarded to him. If Tandoc was about to negotiate a contract with Minister Hipolito, there was no assurance that the former would get it or that the latter would award the contract to him since there was the requisite public bidding. The claimed loss of profit arising out of that alleged contract which was still to be negotiated is a mere expectancy. Tandoc's claim that he could have earned P2 million in profits is highly speculative and no concrete evidence was presented to prove the same. The only unearned income to which Tandoc is entitled to from the evidence presented is that for the one-month period, during which his business was interrupted, which is P6,125.00, considering that his annual net income was P73,500.00."

In Lufthansa German Airlines v. Court of Appeals,45 this Court likewise disallowed the trial court's award of actual damages for unrealized profits in the amount of US$75,000.00 for being highly speculative. It

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was held that "the realization of profits by respondent . . . was not a certainty, but depended on a number of factors, foremost of which was his ability to invite investors and to win the bid." This Court went further saying that actual or compensatory damages cannot be presumed, but must be duly proved, and proved with reasonable degree of certainty.

And in National Power Corporation v. Court of Appeals,46 the Court, in denying the bidder's claim for unrealized commissions, ruled that even if NAPOCOR does not deny its (bidder's) claims for unrealized commissions, and that these claims have been transmuted into judicial admissions, these admissions cannot prevail over the rules and regulations governing the bidding for NAPOCOR contracts, which necessarily and inherently include the reservation by the NAPOCOR of its right to reject any or all bids.

The award of moral damages is likewise improper. To reiterate, NAPOCOR did not act in bad faith. Moreover, moral damages are not, as a general rule, granted to a corporation.47 While it is true that besmirched reputation is included in moral damages, it cannot cause mental anguish to a corporation, unlike in the case of a natural person, for a corporation has no reputation in the sense that an individual has, and besides, it is inherently impossible for a corporation to suffer mental anguish.48 In LBC Express, Inc. v. Court of Appeals,49 we ruled:

"Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no senses; therefore, it cannot experience physical suffering and mental anguish. Mental suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows, and griefs of life — all of which cannot be suffered by respondent bank as an artificial person."

Neither can we award exemplary damages under Article 2234 of the Civil Code. Before the court may consider the question of whether or not exemplary damages should be awarded, the plaintiff must show that he is entitled to moral, temperate, or compensatory damages.

NAPOCOR, in this petition, likewise contests the judgment of the lower courts awarding PHIBRO the amount of $73,231.91 as reimbursement for expenses, cost of litigation and attorney's fees.

We agree with NAPOCOR.

This Court has laid down the rule that in the absence of stipulation, a winning party may be awarded attorney's fees only in case plaintiff's action or defendant's stand is so untenable as to amount to gross and evident bad faith.50 This cannot be said of the case at bar. NAPOCOR is justified in resisting PHIBRO's claim for damages. As a matter of fact, we partially grant the prayer of NAPOCOR as we find that it did not act in bad faith in disapproving PHIBRO's pre-qualification to bid.

Trial courts must be reminded that attorney's fees may not be awarded to a party simply because the judgment is favorable to him, for it may amount to imposing a premium on the right to redress grievances in court. We adopt the same policy with respect to the expenses of litigation. A winning party may be entitled to expenses of litigation only where he, by reason of plaintiff's clearly unjustifiable claims or defendant's unreasonable refusal to his demands, was compelled to incur said expenditures. Evidently, the facts of this case do not warrant the granting of such litigation expenses to PHIBRO.

At this point, we believe that, in the interest of fairness, NAPOCOR should give PHIBRO another opportunity to participate in future public bidding. As earlier mentioned, the delay on its part was due to a fortuitous event.

But before we dispose of this case, we take this occasion to remind PHIBRO of the indispensability of coal to a coal-fired thermal plant. With households and businesses being entirely dependent on the

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electricity supplied by NAPOCOR, the delivery of coal cannot be venturesome. Indeed, public interest demands that one who offers to deliver coal at an appointed time must give a reasonable assurance that it can carry through. With the deleterious possible consequences that may result from failure to deliver the needed coal, we believe there is greater strain of commitment in this kind of obligation.

WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 126204 dated August 27, 1996 is hereby MODIFIED. The award, in favor of PHIBRO, of actual, moral and exemplary damages, reimbursement for expenses, cost of litigation and attorney's fees, and costs of suit, is DELETED.

SO ORDERED.

Vitug, Panganiban and Carpio, JJ., concur.

Republic of the PhilippinesSUPREME COURTManila

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.

D E C I S I O N

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 Resolution2 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,

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witnessed by Ultra's6 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 Reports7 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 ofP7,040,401.01.

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

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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 pfP500,000.00;

(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:

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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.

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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 Consumption28 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 Record31 (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

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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.41 P.D. 401 granted the electric companies the right to conduct inspections of electric meters and the criminal prosecution42 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

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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 andP280,813.72 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 ofP150,000.00, 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 ofP200,000.00 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 isREDUCED to P150,000.00; and (2) the award of P500,000.00 as moral damages is hereby DELETED.

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SO ORDERED.

Ynares-Santiago, Chairperson, Austria-Marinez, Chico-Nazario, Reyes, JJ., concur.

Republic of the PhilippinesSUPREME COURTManila

FIRST DIVISION

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.

D E C I S I O N

CALLEJO, SR., J.:

Before the Court is a petition for review on certiorari of the Decision1 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 Nos.

Date Granted

Maturity Date

Principal Description of Goods

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 [)]

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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 P6,940,280.66 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, 1988.9 The RTC, for its part, granted the Motion to Quash the Informations filed by petitioner on the ground that the material allegations therein did not amount to estafa.10

In the meantime, the Court rendered judgment in Allied Banking Corporation v. 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:

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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. 25015 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

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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

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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

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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

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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

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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 play37 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.

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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

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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.1âwphi1 If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense.

The crime defined in P.D. No. 115 is malum prohibitum but is classified as estafa under paragraph 1(b), Article 315 of the Revised Penal Code, or estafa with abuse of confidence. It may be committed by a corporation or other juridical entity or by natural persons. However, the penalty for the crime is imprisonment for the periods provided in said Article 315, which reads:

ARTICLE 315.Swindling (estafa). – Any person who shall defraud another by any of the means mentioned hereinbelow shall be punished by:

1st. The penalty of prision correccional in its maximum period to prision mayor in its minimum period, if the amount of the fraud is over 12,000 pesos but does not exceed 22,000 pesos; and if such amount exceeds the latter sum, the penalty provided in this paragraph shall be imposed in its maximum period, adding one year for each additional 10,000 pesos; but the total penalty which may be imposed shall not exceed twenty years. In such cases, and in connection with the accessory penalties which may be imposed and for the purpose of the other provisions of this Code, the penalty shall be termed prision mayor or reclusion temporal, as the case may be;

2nd. The penalty of prision correccional in its minimum and medium periods, if the amount of the fraud is over 6,000 pesos but does not exceed 12,000 pesos;

3rd. The penalty of arresto mayor in its maximum period to prision correccional in its minimum period, if such amount is over 200 pesos but does not exceed 6,000 pesos; and

4th. By arresto mayor in its medium and maximum periods, if such amount does not exceed 200 pesos, provided that in the four cases mentioned, the fraud be committed by any of the following means; xxx

Though the entrustee is a corporation, nevertheless, the law specifically makes the officers, employees or other officers or persons responsible

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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.