G.R. No.

L-60502 July 16, 1991

PEDRO LOPEZ DEE, petitioner,
vs.
SECURITIES AND EXCHANGE
COMMISSION, HEARING OFFICER
EMMANUEL SISON, NAGA
TELEPHONE CO., INC.,
COMMUNICATION SERVICES, INC.,
LUCIANO MAGGAY, AUGUSTO
FEDERIS, NILDA RAMOS, FELIPA
JAVALERA, DESIDERIO SAAVEDRA,
respondents.
G.R. No. L-63922 July 16, 1991
JUSTINO DE JESUS, SR., PEDRO
LOPEZ DEE, JULIO LOPEZ DEE, and
VICENTE TORDILLA, JR., petitioners,
vs.
INTERMEDIATE APPELLATE
COURT, LUCIANO MAGGAY, NILDA
I. RAMOS, DESIDERIO SAAVEDRA,
AUGUSTO FEDERIS, ERNESTO
MIGUEL, COMMUNICATION
SERVICES, INC., and NAGA
TELEPHONE COMPANY, INC.,
respondents.

PARAS, J.:p
These are petitions for certiorari with
preliminary injunction and/or restraining
order which seek to annul and set aside in:
(1) G.R. No. 60502, the order * of the
hearing officer dated May 4, 1982, setting
the date for the election of the directors to be
held by the stockholders on May 22, 1982,
in SEC Case No. 1748 entitled "Pedro
Lopez Dee v. Naga Telephone Co., Inc. et
al."; and (2) G.R. No. 63922, the decision **
of the Intermediate Appellate Court dated
April 14, 1983 which annulled the judgment
of the trial court on the contempt charge

against the private respondents in G.R. No.

SP-14846-R, entitled "Luciano Maggay, et
al. v. Hon. Delfin Vir Sunga, et al."
As gathered from the records, the facts of
these cases are as follows:
Naga Telephone Company, Inc. was
organized in 1954, the authorized capital
was P100,000.00. In 1974 Naga Telephone
Co., Inc. (Natelco for short) decided to
increase its authorized capital to
P3,000,000.00. As required by the Public
Service Act, Natelco filed an application for
the approval of the increased authorized
capital with the then Board of
Communications under BOC Case No. 7484. On January 8, 1975, a decision was
rendered in said case, approving the said
application subject to certain conditions,
among which was:
3. That the issuance of the
shares of stocks will be for a
period of one year from the
date hereof, "after which no
further issues will be made
without previous authority
from this Board."
Pursuant to the approval given by the then
Board of Communications, Natelco filed its
Amended Articles of Incorporation with the
Securities and Exchange Commission (SEC
for short). When the amended articles were
filed with the SEC, the original authorized
capital of P100,000.00 was already paid. Of
the increased capital of P2,900,000.00 the
subscribers subscribed to P580,000.00 of
which P145,000 was fully paid.
The capital stock of Natelco was divided
into 213,000 common shares and 87,000
preferred shares, both at a par value of
P10.00 per shares.

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On April 12, 1977, Natelco entered into a

contract with Communication Services, Inc.
(CSI for short) for the "manufacture, supply,
delivery and installation" of telephone
equipment. In accordance with this contract,
Natelco issued 24,000 shares of common
stocks to CSI on the same date as part of the
downpayment. On May 5, 1979, another
12,000 shares of common stocks were
issued to CSI. In both instances, no prior
authorization from the Board of
Communications, now the National
Telecommunications Commission, was
secured pursuant to the conditions imposed
by the decision in BOC Case NO. 74-84
aforecited (Rollo, Vol. III, Memorandum for
private respondent Natelco, pp. 814-816).
On May 19, 1979, the stockholders of the
Natelco held their annual stockholders'
meeting to elect their seven directors to their
Board of Directors, for the year 1979-1980.
In this election Pedro Lopez Dee (Dee for
short) was unseated as Chairman of the
Board and President of the Corporation, but
was elected as one of the directors, together
with his wife, Amelia Lopez Dee (Rollo,
Vol. III, Memorandum for private
respondents, p. 985; p. 2).
In the election CSI was able to gain control
of Natelco when the latter's legal counsel,
Atty. Luciano Maggay (Maggay for short)
won a seat in the Board with the help of
CSI. In the reorganization Atty. Maggay
became president (Ibid., Memorandum for
Private Respondent Natelco, p. 811).
The following were elected in the May 19,
1979 election: Atty. Luciano Maggay, Mr.
Augusto Federis, Mrs. Nilda Ramos, Ms.
Felipa Javalera, Mr. Justino de Jesus, Sr.,
Mr. Pedro Lopez Dee and Mrs Amelia C.
Lopez Dee. The last three named directors
never attended the meetings of the Maggay
Board. The members of the Maggay Board

who attended its meetings were Maggay.

Federis, Ramos and Javalera. The last two
were and are CSI representatives (Ibid., p.
812).
Petitioner Dee having been unseated in the
election, filed a petition in the SEC docketed
as SEC Case No. 1748, questioning the
validity of the elections of May 19, 1979
upon the main ground that there was no
valid list of stockholders through which the
right to vote could be determined (Rollo,
Vol. I, pp. 254-262-A). As prayed for in the
petition (Ibid., p. 262), a restraining order
was issued by the SEC placing petitioner
and the other officers of the 1978-1979
Natelco Board in hold-over capacity (Rollo,
Vol. II, Reply, p. 667).
The SEC restraining order was elevated to
the Supreme Court in G.R. No. 50885 where
the enforcement of the SEC restraining order
was restrained. Private respondents
therefore, replaced the hold-over officers
(Rollo, Vol. 11, p. 897).
During the tenure of the Maggay Board,
from June 22, 1979 to March 10, 1980, it did
not reform the contract of April 12, 1977,
and entered into another contract with CSI
for the supply and installation of additional
equipment but also issued to CSI 113,800
shares of common stock (Ibid., p. 812).
The shares of common stock issued to CSI
are as follows:
NO. OF SHARES DATE
ISSUED
24,000 shares April 12, 1977
12,000 shares May 5, 1979
28,000 shares October 2,
1979
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28,500 shares November 5,

1979
20,000 shares November 14,
1979
20,000 shares January 7,
1980
16,500 shares January 26,
1980
149,000 shares (Ibid., pp.
816-817).
Subsequently, the Supreme Court dismissed
the petition in G.R. No. 50885 upon the
ground that the same was premature and the
Commission should be allowed to conduct
its hearing on the controversy. The dismissal
of the petition resulted in the unseating of
the Maggay group from the board of
directors of Natelco in a "hold-over"
capacity (Rollo, Vol. II, p. 533).
In the course of the proceedings in SEC
Case No. 1748, respondent hearing officer
issued an order on June 23, 1981, declaring:
(1) that CSI is a stockholder of Natelco and,
therefore, entitled to vote; (2) that
unexplained 16,858 shares of Natelco appear
to have been issued in excess to CSI which
should not be allowed to vote; (3) that 82
shareholders with their corresponding
number of shares shall be allowed to vote;
and (4) consequently, ordering the holding
of special stockholder' meeting to elect the
new members of the Board of Directors for
Natelco based on the findings made in the
order as to who are entitled to vote (Rollo,
Vol. 1, pp. 288-299).
From the foregoing order dated June 23,
1981, petitioner Dee filed a petition for
certiorari/appeal with the SEC en banc. The
petition/appeal was docketed as SEC-AC

NO. 036. Thereafter, the Commission en

banc rendered a decision on April 5, 1982,
the dispositive part of which leads:
Now therefore, the
Commission en banc resolves
to sustain the order of the
Hearing Officer; to dismiss
the petition/appeal for lack of
merit; and order new
elections as the Hearing
Officer shall set after
consultations with Natelco
officers. For the protection of
minority stockholders and in
the interest of fair play and
justice, the Hearing Officer
shall order the formation of a
special committee of three,
one from the respondents
(other than Natelco), one
from petitioner, and the
Hearing Officer as Chairman
to supervise the election.
It remains to state that the
Commission en banc cannot
pass upon motions belatedly
filed by petitioner and
respondent Natelco to
introduce newly discovered
evidence any such
evidence may be introduced
at hearings on the merits of
SEC Case No. 1748.
SO ORDERED. (Rollo, Vol.
I, p. 24).
On April 21, 1982, petitioner filed a motion
for reconsideration (Rollo, Vol. I, pp. 2530). Likewise, private respondent Natelco
filed its motion for reconsideration dated
April 21, 1982 (Ibid., pp. 32-51).

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3

Pending resolution of the motions for

reconsideration, on May 4, 1982, respondent
healing officer without waiting for the
decision of the commission en banc to
become final and executory rendered an
order stating that the election for directors
would be held on May 22, 1982 (Ibid., pp.
300-301).
On May 20, 1982, the SEC en banc denied
the motions for reconsideration (Rollo, Vol.
II, pp. 763-765).

stockholders of the Natelco defied the

restraining order, and proceeded with the
elections, under the supervision of the SEC
representatives (Rollo, Vol. III, p. 985); p.
10; G.R. No. 60502).
On May 25, 1982, the SEC recognized the
fact that elections were duly held, and
proclaimed that the following are the "duly
elected directors" of the Natelco for the term
1982-1983:
1. Felipa T. Javalera

Meanwhile on May 20, 1982 (G.R. No.

63922), petitioner Antonio Villasenor (as
plaintiff) filed Civil Case No. 1507 with the
Court of First Instance of Camarines Sur,
Naga City, against private respondents and
co-petitioners, de Jesus, Tordilla and the
Dee's all defendants therein, which was
raffled to Branch I, presided over by Judge
Delfin Vir Sunga (Rollo, G.R. No. 63922;
pp. 25-30). Villasenor claimed that he was
an assignee of an option to repurchase
36,000 shares of common stocks of Natelco
under a Deed of Assignment executed in his
favor (Rollo, p. 31). The defendants therein
(now private respondents), principally the
Maggay group, allegedly refused to allow
the repurchase of said stocks when petitioner
Villasenor offered to defendant CSI the
repurchase of said stocks by tendering
payment of its price (Rollo, p. 26 and p. 78).
The complaint therefore, prayed for the
allowance to repurchase the aforesaid stocks
and that the holding of the May 22, 1982
election of directors and officers of Natelco
be enjoined (Rollo, pp. 28-29).
A restraining order dated May 21, 1982 was
issued by the lower court commanding
desistance from the scheduled election until
further orders (Rollo, p. 32).
Nevertheless, on May 22, 1982, as
scheduled, the controlling majority of the

2. Nilda I. Ramos
3. Luciano Maggay
4. Augusto Federis
5. Daniel J. Ilano
6. Nelin J. Ilano Sr.
7. Ernesto A. Miguel
And, the following are the recognized
officers to wit:
1. President Luciano Maggay
2. Vice-President Nilda I.
Ramos
3. Secretary Desiderio
Saavedra
4. Treasurer Felipa Javalera
5. Auditor Daniel Ilano
(Rollo, Vol. 1, pp. 302-303)
Despite service of the order of May 25,
1982, the Lopez Dee group headed by
Messrs. Justino De Jesus and Julio Lopez
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Dee kept insisting no elections were held

and refused to vacate their positions (Rollo,
Vol. III, p. 985; p. 11).
On May 28, 1982, the SEC issued another
order directing the hold-over directors and
officers to turn over their respective posts to
the newly elected directors and officers and
directing the Sheriff of Naga City, with the
assistance of PC and INP of Naga City, and
other law enforcement agencies of the City
or of the Province of Camarines Sur, to
enforce the aforesaid order (Rollo, Vol. 11,
pp. 577-578).
On May 29, 1982, the Sheriff of Naga City,
assisted by law enforcement agencies,
installed the newly elected directors and
officers of the Natelco, and the hold-over
officers peacefully vacated their respective
offices and turned-over their functions to the
new officers (Rollo, Vol. III, p. 985; pp. 1213).
On June 2, 1982, a charge for contempt was
filed by petitioner Villasenor alleging that
private respondents have been claiming in
press conferences and over the radio airlanes
that they actually held and conducted
elections on May 22, 1982 in the City of
Naga and that they have a new set of
officers, and that such acts of herein private
respondents constitute contempt of court
(G.R. 63922; Rollo, pp. 35-37).
On September 7, 1982, the lower court
rendered judgment on the contempt charge,
the dispositive portion of which reads:
WHEREFORE, judgment is
hereby rendered:
1. Declaring respondents,
CSI Nilda Ramos, Luciano
Maggay, Desiderio Saavedra,
Augusto Federis and Ernesto

Miguel, guilty of contempt of

court, and accordingly
punished with imprisonment
of six (6) months and to pay
fine of P1,000.00 each; and
2. Ordering respondents, CSI
Nilda Ramos, Luciano
Maggay, Desiderio Saavedra,
Augusto Federis and Ernesto
Miguel, and those now
occupying the positions of
directors and officers of
NATELCO to vacate their
respective positions therein,
and ordering them to reinstate
the hold-over directors and
officers of NATELCO, such
as Pedro Lopez Dee as
President, Justino de Jesus,
Sr., as Vice President, Julio
Lopez Dee as Treasurer and
Vicente Tordilla, Jr. as
Secretary, and others referred
to as hold-over directors and
officers of NATELCO in the
order dated May 28, 1982 of
SEC Hearing Officer
Emmanuel Sison, in SEC
Case No. 1748 (Exh. 6), by
way of RESTITUTION, and
consequently, ordering said
respondents to turn over all
records, property and assets
of NATELCO to said holdover directors and officers.
(Ibid., Rollo, p. 49).
The trial judge issued an order dated
September 10, 1982 directing the
respondents in the contempt charge to
"comply strictly, under pain of being
subjected to imprisonment until they do so"
(Ibid., p. 50). The order also commanded the
Deputy Provincial Sheriff, with the aid of
the PC Provincial Commander of Camarines
DELOS REYES | CORPO
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Sur and the INP Station Commander of

Naga City to "physically remove or oust
from the offices or positions of directors and
officers of NATELCO, the aforesaid
respondents (herein private respondents) . . .
and to reinstate and maintain, the hold-over
directors and officers of NATELCO referred
to in the order dated May 28, 1982 of SEC
Hearing Officer Emmanuel Sison." (Ibid.).
Private respondents filed on September 17,
1982, a petition for certiorari and
prohibition with preliminary injunction or
restraining order against the CFI Judge of
Camarines Sur, Naga City and herein
petitioners, with the then Intermediate
Appellate Court which issued a resolution
ordering herein petitioners to comment on
the petition, which was complied with, and
at the same time temporarily refrained from
implementing and/or enforcing the
questioned judgment and order of the lower
court (Rollo, p. 77), Decision of CA, p. 2).
On April 14, 1983, the then Intermediate
Appellate Court, rendered a decision, the
dispositive portion of which reads:
WHEREFORE, judgment is
hereby rendered as follows:
1. Annuling the judgment
dated September 7, 1982
rendered by respondent judge
on the contempt charge, and
his order dated September 10,
1982, implementing said
judgment;

petitioners (private
respondents in this case) who
were ejected on May 22,
1982 to their respective
offices in the NATELCO, . .
.;
4. Prohibiting whoever may
be the successor of
respondent Judge from
interfering with the
proceedings of the Securities
and Exchange Commission in
SE-CAC No. 036;
xxx xxx xxx
(Rollo, p. 88).
The order of re-implementation was issued,
and, finally, the Maggay group has been
restored as the officers of the Natelco (Rollo,
G.R. No. 60502, p. 985; p. 37).
Hence, these petitions involve the same
parties and practically the same issues.
Consequently, in the resolution of the Court
En Banc dated August 23, 1983, G.R. No.
63922 was consolidated with G.R. No.
60502.
In G.R. No. 60502 In a resolution issued
by the Court En Banc dated March 22, 1983,
the Court gave due course to the petition and
required the parties to submit their
respective memoranda (Rollo, Resolution, p.
638-A; Vol. II).
In G.R. No. 60502

2. Ordering the "hold-over"

directors and officers of
NATELCO to vacate their
respective offices;
3. Directing respondents to
restore or re-establish

The main issues in this case are:

(1) Whether or not the Securities and
Exchange Commission has the power and
jurisdiction to declare null and void shares
of stock issued by NATELCO to CSI for
DELOS REYES | CORPO
6

violation of Sec. 20 (h) of the Public Service

Act;
(2) Whether or not the issuance of 113,800
shares of Natelco to CSI made during the
pendency of SEC Case No. 1748 in the
Securities and Exchange Commission was
valid;
(3) Whether or not Natelco stockholders
have a right of preemption to the 113,800
shares in question; and
(4) Whether or not the private respondents
were duly elected to the Board of Directors
of Natelco at an election held on May 22,
1982.
In G.R. No. 63922
The crucial issue to be resolved is whether
or not the trial judge has jurisdiction to
restrain the holding of an election of officers
and directors of a corporation. The petitions
are devoid of merit.
In G.R. No. 60502
I
It is the contention of petitioner that the
Securities and Exchange Commission En
Banc committed grave abuse of discretion
when, in its decision dated April 5, 1982, in
SEC-AC No. 036, it refused to declare void
the shares of stock issued by Natelco to CSI
allegedly in violation of Sec. 20 (h) of the
Public Service Act. This section requires
prior administrative approval of any transfer
or sale of shares of stock of any public
service which vest in the transferee more
than forty percentum of the subscribed
capital of the said public service.

Section 5 of P.D. No. 902-A, as amended,

enumerates the jurisdiction of the Securities
and Exchange Commission:
Sec. 5. In addition to the
regulatory and adjudicative
functions of the Securities
and Exchange Commission
over Corporations,
partnerships and other forms
of associations, registered
with it as expressly granted
under the existing laws and
decrees, it shall have original
and exclusive jurisdiction to
hear and decide cases
involving:
a) Devices or schemes
employed by or any acts, of
the board of directors,
business associates, its
officers or partners,
amounting to fraud and
misrepresentation which may
be detrimental to the interest
of the public and/or of the
stockholders, partners,
members of associations or
organizations registered with
the Commission.
(b) Controversies arising out
of intra-corporate or
partnership relations,
between and among
stockholders, members, or
associates; between any or all
of them and the corporation,
partnership or association of
which they are stockholders,
members or associates,
respectively; and between
such corporation, partnership
or association and the state
insofar as it concerns their
DELOS REYES | CORPO
7

individual franchise or right

to exist as such entity;

Container Corp. vs. SEC, 126 SCRA 31

[1983]).

c) Controversies in the
election or appointments of
directors, trustees, officers or
managers of such
corporations, partnerships or
associations.

The jurisdiction of the SEC is limited to

matters intrinsically connected with the
regulation of corporations, partnerships and
associations and those dealing with internal
affairs of such entities; P.D. 902-A does not
confer jurisdiction to SEC over all matters
affecting corporations (Pereyra vs. IAC, 181
SCRA 244 [1990]; Sales vs. SEC, 169
SCRA 121 [1989]).

d) Petitions of corporations,
partnerships or associations
to be declared in the state of
suspension of payments in
cases where the corporation,
partnership or association
possesses sufficient property
to cover all its debts but
foresees the impossibility of
meeting them when they
respectively fall due or in
cases where the corporation,
partnership or association has
no sufficient assets to cover
its liabilities, but is under the
management of a
Rehabilitation Receiver or
Management Committee
created pursuant to this
Decree, (As added by PD
1758)
In other words, in order that the SEC can
take cognizance of a case, the controversy
must pertain to any of the following
relationships: (a) between corporation,
partnership or association and the public; (b)
between the corporation, partnership, or
association and its stockholders, partners,
members or officers; (c) between the
corporation, partnership or association and
the state insofar as its franchise, permit or
license to operate is concerned; and (d)
among the stockholders, partners, or
associates themselves (Union Glass &

The jurisdiction of the SEC in SEC Case

No. 1748 is limited to deciding the
controversy in the election of the directors
and officers of Natelco. Thus, the SEC was
correct when it refused to rule on whether
the issuance of the shares of Natelco stocks
to CSI violated Sec. 20 (h) of the Public
Service Act.
The SEC ruling as to the issue involving the
Public Service Act, Section 20 (h), asserts
that the Commission En Banc is not
empowered to grant much less cancel
franchise for telephone and
communications, and therefore has no
authority to rule that the issuance and sale of
shares would in effect constitute a violation
of Natelco's secondary franchise. It would
be in excess of jurisdiction on our part to
decide that a violation of our public service
laws has been committed. The matter is
better brought to the attention of the
appropriate body for determination. Neither
can the SEC provisionally decide the issue
because it is only vested with the power to
grant or revoke the primary corporate
franchise. The SEC is empowered by P.D.
902-A to decide intra-corporate
controversies and that is precisely the only
issue in this case.
II

DELOS REYES | CORPO

8

The issuance of 113,800 shares of Natelco

stock to CSI made during the pendency of
SEC Case No. 1748 in the Securities and
Exchange Commission was valid. The
findings of the SEC En Banc as to the
issuance of the 113,800 shares of stock was
stated as follows:
But the issuance of 113,800
shares were (sic) pursuant to
a Board Resolution and
stockholders' approval prior
to May 19, 1979 when CSI
was not yet in control of the
Board or of the voting shares.
There is distinction between
an order to issue shares on or
before May 19, 1979 and
actual issuance of the shares
after May 19, 1979. The
actual issuance, it is true,
came during the period when
CSI was in control of voting
shares and the Board (if they
were in fact in control but
only pursuant to the original
Board and stockholders'
orders, not on the initiative to
the new Board, elected May
19, 1979, which petitioners
are questioning. The
Commission en banc finds it
difficult to see how the one
who gave the orders can turn
around and impugn the
implementation of the orders
lie had previously given. The
reformation of the contract is
understandable for Natelco
lacked the corporate funds to
purchase the CSI equipment.
xxx xxx xxx
Appellant had raise the issue
whether the issuance of

113,800 shares of stock

during the incumbency of the
Maggay Board which was
allegedly CSI controlled, and
while the case was sub
judice, amounted to unfair
and undue advantage. This
does not merit consideration
in the absence of additional
evidence to support the
proposition.
In effect, therefore, the stockholders of
Natelco approved the issuance of stock to
CSI
III
While the group of Luciano Maggay was in
control of Natelco by virtue of the
restraining order issued in G.R. No. 50885,
the Maggay Board issued 113,800 shares of
stock to CSI Petitioner said that the Maggay
Board, in issuing said shares without
notifying Natelco stockholders, violated
their right of pre-emption to the unissued
shares.
This Court in Benito vs. SEC, et al., has
ruled that:
Petitioner bewails the fact
that in view of the lack of
notice to him of such
subsequent issuance, he was
not able to exercise his right
of pre-emption over the
unissued shares. However,
the general rule is that preemptive right is recognized
only with respect to new
issues of shares, and not with
respect to additional issues of
originally authorized shares.
This is on the theory that
when a corporation at its
DELOS REYES | CORPO
9

inception offers its first

shares, it is presumed to have
offered all of those which it is
authorized to issue. An
original subscriber is deemed
to have taken his shares
knowing that they form a
definite proportionate part of
the whole number of
authorized shares. When the
shares left unsubscribed are
later re-offered, he cannot
therefore (sic) claim a
dilution of interest (Benito
vs. SEC, et al., 123 SCRA
722).
The questioned issuance of the 113,800
stocks is not invalid even assuming that it
was made without notice to the stockholders
as claimed by the petitioner. The power to
issue shares of stocks in a corporation is
lodged in the board of directors and no
stockholders meeting is required to consider
it because additional issuance of shares of
stocks does not need approval of the
stockholders. Consequently, no pre-emptive
right of Natelco stockholders was violated
by the issuance of the 113,800 shares to CSI.
IV
Petitioner insists that no meeting and
election were held in Naga City on May 22,
1982 as directed by respondent Hearing
Officer. This fact is shown by the Sheriffs
return of a restraining order issued by the
Court of First Instance of Camarines Sur in
Case No. 1505 entitled "Antonio Villasenor
v. Communications Service Inc, et al."
(Rollo, Vol. 1, p. 309).
There is evidence of the fact that the Natelco
special stockholders' meeting and election of
members of the Board of Directors of the
corporation were held at its office in Naga

City on May 22, 1982 as shown when the

Hearing Officer issued an order on May 25,
1982, declaring the stockholders named
therein as corporate officers duly elected for
the term 1982-1983.
More than that, private respondents were in
fact charged with contempt of court and
found guilty for holding the election on May
22, 1982, in defiance of the restraining order
issued by Judge Sunga (Rollo, Vol. II, p.
750).
It is, therefore, very clear from the records
that an election was held on May 22, 1982 at
the Natelco Offices in Naga City and its
officers were duly elected, thereby rendering
the issue of election moot and academic, not
to mention the fact that the election of the
Board of Directors/Officers has been held
annually, while this case was dragging for
almost a decade.
The contempt charge against herein private
respondents was predicated on their failure
to comply with the restraining order issued
by the lower court on May 21, 1982,
enjoining them from holding the election of
officers and directors of Natelco scheduled
on May 22, 1982. The SEC en banc, in its
decision of April 5, 1982, directed the
holding of a new election which, through a
conference attended by the hold-over
directors of Natelco accompanied by their
lawyers and presided by a SEC hearing
officer, was scheduled on May 22, 1982
(Rollo, p. 59). Contrary to the claim of
petitioners that the case is within the
jurisdiction of the lower court as it does not
involve an intra-corporate matter but merely
a claim of a private party of the right to
repurchase common shares of stock of
Natelco and that the restraining order was
not meant to stop the election duly called for
by the SEC, it is undisputed that the main
objective of the lower court's order of May
DELOS REYES | CORPO
10

21, 1982 was precisely to restrain or stop the

holding of said election of officers and
directors of Natelco, a matter purely within
the exclusive jurisdiction of the SEC (P.D.
No. 902-A, Section 5). The said restraining
order reads in part:
. . . A temporary restraining
order is hereby issued,
directing defendants (herein
respondents), their agents,
attorneys as well as any and
all persons, whether public
officers or private individuals
to desist from conducting and
holding, in any manner
whatsoever, an election of the
directors and officers of the
Naga Telephone Co.
(Natelco). . . . (Rollo, P. 32).
Indubitably, the aforesaid restraining order,
aimed not only to prevent the stockholders
of Natelco from conducting the election of
its directors and officers, but it also
amounted to an injunctive relief against the
SEC, since it is clear that even "public
officers" (such as the Hearing Officer of the
SEC) are commanded to desist from
conducting or holding the election "under
pain of punishment of contempt of court"
(Ibid.) The fact that the SEC or any of its
officers has not been cited for contempt,
along with the stockholders of Natelco, who
chose to heed the lawful order of the SEC to
go on with the election as scheduled by the
latter, is of no moment, since it was
precisely the acts of herein private
respondents done pursuant to an order
lawfully issued by an administrative body
that have been considered as contemptuous
by the lower court prompting the latter to
cite and punish them for contempt (Rollo, p.
48).

Noteworthy is the pertinent portion of the

judgment of the lower court which states:
Certainly, this Court will not
tolerate, or much less
countenance, a mere Hearing
Officer of the Securities and
Exchange Commission, to
render a restraining order
issued by it (said Court)
within its jurisdiction,
nugatory and ineffectual and
abet disobedience and even
defiance by individuals and
entities of the same. . . .
(Rollo, p. 48).
Finally, in the case of Philippine Pacific
Fishing Co., Inc. vs. Luna, 12 SCRA 604,
613 [1983], this Tribunal stated clearly the
following rule:
Nowhere does the law (P.D.
No. 902-A) empower any
Court of First Instance to
interfere with the orders of
the Commission (SEC). Not
even on grounds of due
process or jurisdiction. The
Commission is, conceding
arguendo a possible claim of
respondents, at the very least,
a co-equal body with the
Courts of First Instance. Even
as such co-equal, one would
have no power to control the
other. But the truth of the
matter is that only the
Supreme Court can enjoin
and correct any actuation of
the Commission.
Accordingly, it is clear that since the trial
judge in the lower court (CFI of Camarines
Sur) did not have jurisdiction in issuing the
questioned restraining order, disobedience
DELOS REYES | CORPO
11

thereto did not constitute contempt, as it is

necessary that the order be a valid and legal
one. It is an established rule that the court
has no authority to punish for disobedience
of an order issued without authority (Chanco
v. Madrilejos, 9 Phil. 356; Angel Jose Realty
Corp. v. Galao, et al., 76 Phil. 201).
Finally, it is well-settled that the power to
punish for contempt of court should be
exercised on the preservative and not on the
vindictive principle. Only occasionally
should the court invoke its inherent power in
order to retain that respect without which the
administration of justice must falter or fail
(Rivera v. Florendo, 144 SCRA 643, 662663 [1986]; Lipata v. Tutaan, 124 SCRA
880 [1983]).
PREMISES CONSIDERED, both
petitioners are hereby DISMISSED for lack
of merit.
SO ORDERED.
Fernan, C.J., Narvasa, Melencio-Herrera,
Gutierrez, Jr., Cruz, Feliciano, Gancayco,
Padilla, Bidin, Sarmiento, Grio-Aquino,
Medialdea, Regalado and Davide, Jr., JJ.,
concur.

DELOS REYES | CORPO

12

G.R. No. L-21601

December 28, 1968

NIELSON & COMPANY, INC., plaintiffappellant,

vs.
LEPANTO CONSOLIDATED MINING
COMPANY, defendant-appellee.
RESOLUTION
ZALDIVAR, J.:
Lepanto seeks the reconsideration of the
decision rendered on December 17, 1966.
The motion for reconsideration is based on
two sets of grounds the first set
consisting of four principal grounds, and the
second set consisting of five alternative
grounds, as follows:
Principal Grounds:
1. The court erred in overlooking and
failing to apply the proper law
applicable to the agency or
management contract in question,
namely, Article 1733 of the Old
Civil Code (Article 1920 of the
new), by virtue of which said agency
was effectively revoked and
terminated in 1945 when, as stated in
paragraph 20 of the complaint,
"defendant voluntarily ... prevented
plaintiff from resuming management
and operation of said mining
properties."
2. The court erred in holding that
paragraph II of the management
contract (Exhibit C) suspended the
period of said contract.
3. The court erred in reversing the
ruling of the trial judge, based on
well-settled jurisprudence of this
Supreme Court, that the management

agreement was only suspended but

not extended on account of the war.
4. The court erred in reversing the
finding of the trial judge that
Nielson's action had prescribed, but
considering only the first claim and
ignoring the prescriptibility of the
other claims.
Alternative Grounds:
5. The court erred in holding that the
period of suspension of the contract
on account of the war lasted from
February 1942 to June 26, 1948.
6. Assuming arguendo that Nielson
is entitled to any relief, the court
erred in awarding as damages (a)
10% of the cash dividends declared
and paid in December, 1941; (b) the
management fee of P2,500.00 for the
month of January, 1942; and (c) the
full contract price for the extended
period of sixty months, since these
damages were neither demanded nor
proved and, in any case, not
allowable under the general law of
damages.
7. Assuming arguendo that appellant
is entitled to any relief, the court
erred in ordering appellee to issue
and deliver to appellant shares of
stock together with fruits thereof.
8. The court erred in awarding to
appellant an undetermined amount of
shares of stock and/or cash, which
award cannot be ascertained and
executed without further litigation.
9. The court erred in rendering
judgment for attorney's fees.

DELOS REYES | CORPO

13

We are going to dwell on these grounds in

the order they are presented.
1. In its first principal ground Lepanto
claims that its own counsel and this Court
had overlooked the real nature of the
management contract entered into by and
between Lepanto and Nielson, and the law
that is applicable on said contract. Lepanto
now asserts for the first time and this is done
in a motion for reconsideration - that the
management contract in question is a
contract of agency such that it has the right
to revoke and terminate the said contract, as
it did terminate the same, under the law of
agency, and particularly pursuant to Article
1733 of the Old Civil Code (Article 1920 of
the New Civil Code).
We have taken note that Lepanto is
advancing a new theory. We have carefully
examined the pleadings filed by Lepanto in
the lower court, its memorandum and its
brief on appeal, and never did it assert the
theory that it has the right to terminate the
management contract because that contract
is one of agency which it could terminate at
will. While it is true that in its ninth and
tenth special affirmative defenses, in its
answer in the court below, Lepanto pleaded
that it had the right to terminate the
management contract in question, that plea
of its right to terminate was not based upon
the ground that the relation between Lepanto
and Nielson was that of principal and agent
but upon the ground that Nielson had
allegedly not complied with certain terms of
the management contract. If Lepanto had
thought of considering the management
contract as one of agency it could have
amended its answer by stating exactly its
position. It could have asserted its theory of
agency in its memorandum for the lower
court and in its brief on appeal. This,
Lepanto did not do. It is the rule, and the
settled doctrine of this Court, that a party

cannot change his theory on appeal that

is, that a party cannot raise in the appellate
court any question of law or of fact that was
not raised in the court below or which was
not within the issue made by the parties in
their pleadings (Section 19, Rule 49 of the
old Rules of Court, and also Section 18 of
the new Rules of Court; Hautea vs.
Magallon, L-20345, November 28, 1964;
Northern Motors, Inc. vs. Prince Line, L13884, February 29, 1960; American
Express Co. vs. Natividad, 46 Phil. 207;
Agoncillo vs. Javier, 38 Phil. 424 and
Molina vs. Somes, 24 Phil 49).
At any rate, even if we allow Lepanto to
assert its new theory at this very late stage of
the proceedings, this Court cannot sustain
the same.
Lepanto contends that the management
contract in question (Exhibit C) is one of
agency because: (1) Nielson was to manage
and operate the mining properties and mill
on behalf, and for the account, of Lepanto;
and (2) Nielson was authorized to represent
Lepanto in entering, on Lepanto's behalf,
into contracts for the hiring of laborers,
purchase of supplies, and the sale and
marketing of the ores mined. All these,
Lepanto claims, show that Nielson was, by
the terms of the contract, destined to execute
juridical acts not on its own behalf but on
behalf of Lepanto under the control of the
Board of Directors of Lepanto "at all times".
Hence Lepanto claims that the contract is
one of agency. Lepanto then maintains that
an agency is revocable at the will of the
principal (Article 1733 of the Old Civil
Code), regardless of any term or period
stipulated in the contract, and it was in
pursuance of that right that Lepanto
terminated the contract in 1945 when it took
over and assumed exclusive management of
the work previously entrusted to Nielson
under the contract. Lepanto finally maintains
DELOS REYES | CORPO
14

that Nielson as an agent is not entitled to

damages since the law gives to the principal
the right to terminate the agency at will.
Because of Lepanto's new theory We
consider it necessary to determine the nature
of the management contract whether it is
a contract of agency or a contract of lease of
services. Incidentally, we have noted that the
lower court, in the decision appealed from,
considered the management contract as a
contract of lease of services.
Article 1709 of the Old Civil Code, defining
contract of agency, provides:
By the contract of agency, one
person binds himself to render some
service or do something for the
account or at the request of another.
Article 1544, defining contract of lease of
service, provides:
In a lease of work or services, one of
the parties binds himself to make or
construct something or to render a
service to the other for a price
certain.
In both agency and lease of services one of
the parties binds himself to render some
service to the other party. Agency, however,
is distinguished from lease of work or
services in that the basis of agency is
representation, while in the lease of work or
services the basis is employment. The lessor
of services does not represent his employer,
while the agent represents his principal.
Manresa, in his "Commentarios al Codigo
Civil Espaol" (1931, Tomo IX, pp. 372373), points out that the element of
representation distinguishes agency from
lease of services, as follows:

Nuestro art. 1.709 como el art. 1.984

del Codigo de Napoleon y cuantos
textos legales citamos en las
concordancias, expresan claramente
esta idea de la representacion, "hacer
alguna cosa por cuenta o encargo de
otra" dice nuestro Codigo; "poder de
hacer alguna cosa para el mandante o
en su nombre" dice el Codigo de
Napoleon, y en tales palabras
aparece vivo y luminoso el concepto
y la teoria de la representacion, tan
fecunda en ensenanzas, que a su sola
luz es como se explican las
diferencias que separan el mandato
del arrendamiento de servicios, de
los contratos inominados, del
consejo y de la gestion de negocios.
En efecto, en el arrendamiento de
servicios al obligarse para su
ejecucion, se trabaja, en verdad, para
el dueno que remunera la labor, pero
ni se le representa ni se obra en su
nombre....
On the basis of the interpretation of Article
1709 of the old Civil Code, Article 1868 of
the new Civil Code has defined the contract
of agency in more explicit terms, as follows:
By the contract of agency a person
binds himself to render some service
or to do something in representation
or on behalf of another, with the
consent or authority of the latter.
There is another obvious distinction between
agency and lease of services. Agency is a
preparatory contract, as agency "does not
stop with the agency because the purpose is
to enter into other contracts." The most
characteristic feature of an agency
relationship is the agent's power to bring
about business relations between his
principal and third persons. "The agent is
DELOS REYES | CORPO
15

destined to execute juridical acts (creation,

modification or extinction of relations with
third parties). Lease of services contemplate
only material (non-juridical) acts." (Reyes
and Puno, "An Outline of Philippine Civil
Law," Vol. V, p. 277).
In the light of the interpretations we have
mentioned in the foregoing paragraphs let us
now determine the nature of the
management contract in question. Under the
contract, Nielson had agreed, for a period of
five years, with the right to renew for a like
period, to explore, develop and operate the
mining claims of Lepanto, and to mine, or
mine and mill, such pay ore as may be found
therein and to market the metallic products
recovered therefrom which may prove to be
marketable, as well as to render for Lepanto
other services specified in the contract. We
gather from the contract that the work
undertaken by Nielson was to take complete
charge subject at all times to the general
control of the Board of Directors of Lepanto,
of the exploration and development of the
mining claims, of the hiring of a sufficient
and competent staff and of sufficient and
capable laborers, of the prospecting and
development of the mine, of the erection and
operation of the mill, and of the benefication
and marketing of the minerals found on the
mining properties; and in carrying out said
obligation Nielson should proceed diligently
and in accordance with the best mining
practice. In connection with its work
Nielson was to submit reports, maps, plans
and recommendations with respect to the
operation and development of the mining
properties, make recommendations and
plans on the erection or enlargement of any
existing mill, dispatch mining engineers and
technicians to the mining properties as from
time to time may reasonably be required to
investigate and make recommendations
without cost or expense to Lepanto. Nielson
was also to "act as purchasing agent of

supplies, equipment and other necessary

purchases by Lepanto, provided, however,
that no purchase shall be made without the
prior approval of Lepanto; and provided
further, that no commission shall be claimed
or retained by Nielson on such purchase";
and "to submit all requisition for supplies,
all constricts and arrangement with
engineers, and staff and all matters requiring
the expenditures of money, present or future,
for prior approval by Lepanto; and also to
make contracts subject to the prior approve
of Lepanto for the sale and marketing of the
minerals mined from said properties, when
said products are in a suitable condition for
marketing."1
It thus appears that the principal and
paramount undertaking of Nielson under the
management contract was the operation and
development of the mine and the operation
of the mill. All the other undertakings
mentioned in the contract are necessary or
incidental to the principal undertaking
these other undertakings being dependent
upon the work on the development of the
mine and the operation of the mill. In the
performance of this principal undertaking
Nielson was not in any way executing
juridical acts for Lepanto, destined to create,
modify or extinguish business relations
between Lepanto and third persons. In other
words, in performing its principal
undertaking Nielson was not acting as an
agent of Lepanto, in the sense that the term
agent is interpreted under the law of agency,
but as one who was performing material acts
for an employer, for a compensation.
It is true that the management contract
provides that Nielson would also act as
purchasing agent of supplies and enter into
contracts regarding the sale of mineral, but
the contract also provides that Nielson could
not make any purchase, or sell the minerals,
without the prior approval of Lepanto. It is
DELOS REYES | CORPO
16

clear, therefore, that even in these cases

Nielson could not execute juridical acts
which would bind Lepanto without first
securing the approval of Lepanto. Nielson,
then, was to act only as an intermediary, not
as an agent.
Lepanto contends that the management
contract in question being one of agency it
had the right to terminate the contract at will
pursuant to the provision of Article 1733 of
the old Civil Code. We find, however, a
proviso in the management contract which
militates against this stand of Lepanto.
Paragraph XI of the contract provides:
Both parties to this agreement fully
recognize that the terms of this
Agreement are made possible only
because of the faith or confidence
that the Officials of each company
have in the other; therefore, in order
to assure that such confidence and
faith shall abide and continue,
NIELSON agrees that LEPANTO
may cancel this Agreement at any
time upon ninety (90) days written
notice, in the event that NIELSON
for any reason whatsoever, except
acts of God, strike and other causes
beyond its control, shall cease to
prosecute the operation and
development of the properties herein
described, in good faith and in
accordance with approved mining
practice.
It is thus seen, from the above-quoted
provision of paragraph XI of the
management contract, that Lepanto could
not terminate the agreement at will. Lepanto
could terminate or cancel the agreement by
giving notice of termination ninety days in
advance only in the event that Nielson
should prosecute in bad faith and not in
accordance with approved mining practice

the operation and development of the mining

properties of Lepanto. Lepanto could not
terminate the agreement if Nielson should
cease to prosecute the operation and
development of the mining properties by
reason of acts of God, strike and other
causes beyond the control of Nielson.
The phrase "Both parties to this agreement
fully recognize that the terms of this
agreement are made possible only because
of the faith and confidence of the officials of
each company have in the other" in
paragraph XI of the management contract
does not qualify the relation between
Lepanto and Nielson as that of principal and
agent based on trust and confidence, such
that the contractual relation may be
terminated by the principal at any time that
the principal loses trust and confidence in
the agent. Rather, that phrase simply implies
the circumstance that brought about the
execution of the management contract.
Thus, in the annual report for 19362,
submitted by Mr. C. A. Dewit, President of
Lepanto, to its stockholders, under date of
March 15, 1937, we read the following:
To the stockholders
xxx

xxx

xxx

The incorporation of our Company

was effected as a result of
negotiations with Messrs. Nielson &
Co., Inc., and an offer by these
gentlemen to Messrs. C. I. Cookes
and V. L. Lednicky, dated August
11, 1936, reading as follows:
Messrs. Cookes and Lednicky,
Present
Re: Mankayan Copper Mines
GENTLEMEN:
DELOS REYES | CORPO
17

After an examination of your

property by our engineers, we
have decided to offer as we
hereby offer to underwrite the
entire issue of stock of a
corporation to be formed for
the purpose of taking over
said properties, said
corporation to have an
authorized capital of
P1,750,000.00, of which
P700,000.00 will be issued in
escrow to the claim-owners
in exchange for their claims,
and the balance of
P1,050,000.00 we will sell to
the public at par or take
ourselves.
The arrangement will be
under the following
conditions:
1. The subscriptions for cash
shall be payable 50% at time
of subscription and the
balance subject to the call of
the Board of Directors of the
proposed corporation.
2. We shall have an
underwriting and brokerage
commission of 10% of the
P1,050,000.00 to be sold for
cash to the public, said
commission to be payable
from the first payment of
50% on each subscription.
3. We will bear the cost of
preparing and mailing any
prospectus that may be
required, but no such
prospectus will be sent out
until the text thereof has been
first approved by the Board

of Directors of the proposed

corporation.
4. That after the organization
of the corporation, all
operating contract be entered
into between ourselves and
said corporation, under the
terms which the property will
be developed and mined and
a mill erected, under our
supervision, our
compensation to be
P2,000.00 per month until the
property is put on a profitable
basis and P2,500.00 per
month plus 10% of the net
profits for a period of five
years thereafter.
5. That we shall have the
option to renew said
operating contract for an
additional period of five
years, on the same basis as
the original contract, upon
the expiration thereof.
It is understood that the
development and mining
operations on said property,
and the erection of the mill
thereon, and the expenditures
therefor shall be subject to
the general control of the
Board of Directors of the
proposed corporation, and, in
case you accept this
proposition, that a detailed
operating contract will be
entered into, covering the
relationships between the
parties.
Y
o
DELOS REYES | CORPO
18

u
r
s
v
e
r
y
t
r
u
l
y
,
(
S
g
d
.
)

the Company in cash. The claim

owners have transferred their claims
to the Corporation, but the
P700,000.00 in stock which they are
to receive therefor, is as yet held in
escrow.
Immediately upon the formation of
the Corporation Messrs. Nielson &
Co., assumed the Management of the
property under the control of the
Board of Directors. A modification
in the Management Contract was
made with the consent of all the then
stockholders, in virtue of which the
compensation of Messrs. Nielson &
Co., was increased to P2,500.00 per
month when mill construction began.
The formal Management Contract
was not entered into until January
30, 1937.
xxx

L
.

xxx

xxx

Manila, March 15, 1937

R
.

(
S
g
d
.
)

N
i
e
l
s
o
n

C
.
A
.

Pursuant to the provisions of

paragraph 2 of this offer, Messrs.
Nielson & Co., took subscriptions
for One Million Fifty Thousand
Pesos (P1,050,000.00) in shares of
our Company and their underwriting
and brokerage commission has been
paid. More than fifty per cent of
these subscriptions have been paid to

D
e
W
i
t
t

DELOS REYES | CORPO

19

We can gather from the foregoing

statements in the annual report for 1936, and
from the provision of paragraph XI of the
Management contract, that the employment
by Lepanto of Nielson to operate and
manage its mines was principally in
consideration of the know-how and
technical services that Nielson offered
Lepanto. The contract thus entered into
pursuant to the offer made by Nielson and
accepted by Lepanto was a "detailed
operating contract". It was not a contract of
agency. Nowhere in the record is it shown
that Lepanto considered Nielson as its agent
and that Lepanto terminated the
management contract because it had lost its
trust and confidence in Nielson.
The contention of Lepanto that it had
terminated the management contract in
1945, following the liberation of the mines
from Japanese control, because the relation
between it and Nielson was one of agency
and as such it could terminate the agency at
will, is, therefore, untenable. On the other
hand, it can be said that, in asserting that it
had terminated or cancelled the management
contract in 1945, Lepanto had thereby
violated the express terms of the
management contract. The management
contract was renewed to last until January
31, 1947, so that the contract had yet almost
two years to go upon the liberation of the
mines in 1945. There is no showing that
Nielson had ceased to prosecute the
operation and development of the mines in

good faith and in accordance with approved

P
r
mining
practice which would warrant the
e
termination
of the contract upon ninety days
s
written
notice. In fact there was no such
i
written
notice of termination. It is an
d
admitted
fact that Nielson ceased to operate
e develop the mines because of the war
and
an cause beyond the control of Nielson.
t
Indeed,
if the management contract in
question was intended to create a
relationship of principal and agent between
Lepanto and Nielson, paragraph XI of the
contract should not have been inserted
because, as provided in Article 1733 of the
old Civil Code, agency is essentially
revocable at the will of the principal that
means, with or without cause. But precisely
said paragraph XI was inserted in the
management contract to provide for the
cause for its revocation. The provision of
paragraph XI must be given effect.
In the construction of an instrument where
there are several provisions or particulars,
such a construction is, if possible, to be
adopted as will give effect to all,3 and if
some stipulation of any contract should
admit of several meanings, it shall be
understood as bearing that import which is
most adequate to render it effectual.4
It is Our considered view that by express
stipulation of the parties, the management
contract in question is not revocable at the
will of Lepanto. We rule that this
management contract is not a contract of
agency as defined in Article 1709 of the old
Civil Code, but a contract of lease of
services as defined in Article 1544 of the
same Code. This contract can not be
unilaterally revoked by Lepanto.
The first ground of the motion for
reconsideration should, therefore, be
brushed aside.

DELOS REYES | CORPO

20

2. In the second, third and fifth grounds of

its motion for reconsideration, Lepanto
maintains that this Court erred, in holding
that paragraph 11 of the management
contract suspended the period of said
contract, in holding that the agreement was
not only suspended but was extended on
account of the war, and in holding that the
period of suspension on account of the war
lasted from February, 1942 to June 26, 1948.
We are going to discuss these three grounds
together because they are interrelated.
In our decision we have dwelt lengthily on
the points that the management contract was
suspended because of the war, and that the
period of the contract was extended for a
period equivalent to the time when Nielson
was unable to perform the work of mining
and milling because of the adverse effects of
the war on the work of mining and milling.
It is the contention of Lepanto that the
happening of those events, and the effects of
those events, simply suspended the
performance of the obligations by either
party in the contract, but did not suspend the
period of the contract, much less extended
the period of the contract.
We have conscientiously considered the
arguments of Lepanto in support of these
three grounds, but We are not persuaded to
reconsider the rulings that We made in Our
decision.
We want to say a little more on these points,
however. Paragraph II of the management
contract provides as follows:
In the event of inundation, flooding
of the mine, typhoon, earthquake or
any other force majeure, war,
insurrection, civil commotion,
organized strike, riot, fire, injury to
the machinery or other event or

cause reasonably beyond the control

of NIELSON and which adversely
affects the work of mining and
milling; NIELSON shall report such
fact to LEPANTO and without
liability or breach of the terms of this
Agreement, the same shall remain in
suspense, wholly or partially during
the terms of such inability.
(Emphasis supplied)
A reading of the above-quoted paragraph II
cannot but convey the idea that upon the
happening of any of the events enumerated
therein, which adversely affects the work of
mining and milling, the agreement is
deemed suspended for as long as Nielson is
unable to perform its work of mining and
milling because of the adverse effects of the
happening of the event on the work of
mining and milling. During the period when
the adverse effects on the work of mining
and milling exist, neither party in the
contract would be held liable for noncompliance of its obligation under the
contract. In other words, the operation of the
contract is suspended for as long as the
adverse effects of the happening of any of
those events had impeded or obstructed the
work of mining and milling. An analysis of
the phraseology of the above-quoted
paragraph II of the management contract
readily supports the conclusion that it is the
agreement, or the contract, that is
suspended. The phrase "the same" can refer
to no other than the term "Agreement"
which immediately precedes it. The
"Agreement" may be wholly or partially
suspended, and this situation will depend on
whether the event wholly or partially
affected adversely the work of mining and
milling. In the instant case, the war had
adversely affected and wholly at that
the work of mining and milling. We have
clearly stated in Our decision the
circumstances brought about by the war
DELOS REYES | CORPO
21

which caused the whole or total suspension

of the agreement or of the management
contract.
LEPANTO itself admits that the
management contract was suspended. We
quote from the brief of LEPANTO:
Probably, what Nielson meant was, it
was prevented by Lepanto to assume
again the management of the mine in
1945, at the precise time when
defendant was at the feverish phase
of rehabilitation and although the
contract had already been suspended.
(Lepanto's Brief, p. 9).
... it was impossible, as a result of the
destruction of the mine, for the
plaintiff to manage and operate the
same and because, as provided in the
agreement, the contract was
suspended by reason of the war
(Lepanto's Brief, pp. 9-10).
Clause II, by its terms, is clear that
the contract is suspended in case
fortuitous event or force majeure,
such as war, adversely affects the
work of mining and milling.
(Lepanto's Brief, p. 49).
Lepanto is correct when it said that the
obligations under the contract were
suspended upon the happening of any of the
events enumerated in paragraph II of the
management contract. Indeed, those
obligations were suspended because the
contract itself was suspended. When we talk
of a contract that has been suspended we
certainly mean that the contract temporarily
ceased to be operative, and the contract
becomes operative again upon the
happening of a condition or when a
situation obtains which warrants the

termination of the suspension of the

contract.
In Our decision We pointed out that the
agreement in the management contract
would be suspended when two conditions
concur, namely: (1) the happening of the
event constituting a force majeure that was
reasonably beyond the control of Nielson,
and (2) that the event constituting the force
majeure adversely affected the work of
mining and milling. The suspension,
therefore, would last not only while the
event constituting the force majeure
continued to occur but also for as long as the
adverse effects of the force majeure on the
work of mining and milling had not been
eliminated. Under the management contract
the happening alone of the event constituting
the force majeure which did not affect
adversely the work of mining and milling
would not suspend the period of the
contract. It is only when the two conditions
concur that the period of the agreement is
suspended.
It is not denied that because of the war, in
February 1942, the mine, the original mill,
the original power plant, the supplies and
equipment, and all installations at the
Mankayan mines of Lepanto, were
destroyed upon order of the United States
Army, to prevent their utilization by the
enemy. It is not denied that for the duration
of the war Nielson could not undertake the
work of mining and milling. When the
mines were liberated from the enemy in
August, 1945, the condition of the mines,
the mill, the power plant and other
installations, was not the same as in
February 1942 when they were ordered
destroyed by the US army. Certainly, upon
the liberation of the mines from the enemy,
the work of mining and milling could not be
undertaken by Nielson under the same
favorable circumstances that obtained before
DELOS REYES | CORPO
22

February 1942. The work of mining and

milling, as undertaken by Nielson in
January, 1942, could not be resumed by
Nielson soon after liberation because of the
adverse effects of the war, and this situation
continued until June of 1948. Hence, the
suspension of the management contract did
not end upon the liberation of the mines in
August, 1945. The mines and the mill and
the installations, laid waste by the ravages of
war, had to be reconstructed and
rehabilitated, and it can be said that it was
only on June 26, 1948 that the adverse
effects of the war on the work of mining and
milling had ended, because it was on that
date that the operation of the mines and the
mill was resumed. The period of suspension
should, therefore, be reckoned from
February 1942 until June 26, 1948, because
it was during this period that the war and the
adverse effects of the war on the work of
mining and milling had lasted. The mines
and the installations had to be rehabilitated
because of the adverse effects of the war.
The work of rehabilitation started soon after
the liberation of the mines in August, 1945
and lasted until June 26, 1948 when, as
stated in Lepanto's annual report to its
stockholders for the year 1948, "June 28,
1948 marked the official return to operation
of this company at its properties at
Mankayan, Mountain Province, Philippines"
(Exh. F-1).
Lepanto would argue that if the management
contract was suspended at all the suspension
should cease in August of 1945, contending
that the effects of the war should cease upon
the liberation of the mines from the enemy.
This contention cannot be sustained, because
the period of rehabilitation was still a period
when the physical effects of the war the
destruction of the mines and of all the
mining installations adversely affected,
and made impossible, the work of mining
and milling. Hence, the period of the

reconstruction and rehabilitation of the

mines and the installations must be counted
as part of the period of suspension of the
contract.
Lepanto claims that it would not be unfair to
end the period of suspension upon the
liberation of the mines because soon after
the liberation of the mines Nielson insisted
to resume the management work, and that
Nielson was under obligation to reconstruct
the mill in the same way that it was under
obligation to construct the mill in 1937. This
contention is untenable. It is true that
Nielson insisted to resume its management
work after liberation, but this was only for
the purpose of restoring the mines, the mill,
and other installations to their operating and
producing condition as of February 1942
when they were ordered destroyed. It is not
shown by any evidence in the record, that
Nielson had agreed, or would have agreed,
that the period of suspension of the contract
would end upon the liberation of the mines.
This is so because, as found by this Court,
the intention of the parties in the
management contract, and as understood by
them, the management contract was
suspended for as long as the adverse effects
of the force majeure on the work of mining
and milling had not been removed, and the
contract would be extended for as long as it
was suspended. Under the management
contract Nielson had the obligation to erect
and operate the mill, but not to erect or
reconstruct the mill in case of its destruction
by force majeure.
It is the considered view of this court that it
would not be fair to Nielson to consider the
suspension of the contract as terminated
upon the liberation of the mines because
then Nielson would be placed in a situation
whereby it would have to suffer the adverse
effects of the war on the work of mining and
milling. The evidence shows that as of
DELOS REYES | CORPO
23

January 1942 the operation of the mines

under the management of Nielson was
already under beneficial conditions, so much
so that dividends were already declared by
Lepanto for the years 1939, 1940 and 1941.
To make the management contract
immediately operative after the liberation of
the mines from the Japanese, at the time
when the mines and all its installations were
laid waste as a result of the war, would be to
place Nielson in a situation whereby it
would lose all the benefits of what it had
accomplished in placing the Lepanto mines
in profitable operation before the outbreak
of the war in December, 1941. The record
shows that Nielson started its management
operation way back in 1936, even before the
management contract was entered into. As
early as August 1936 Nielson negotiated
with Messrs. C. I. Cookes and V. L.
Lednicky for the operation of the Mankayan
mines and it was the result of those
negotiations that Lepanto was incorporated;
that it was Nielson that helped to capitalize
Lepanto, and that after the formation of the
corporation (Lepanto) Nielson immediately
assumed the management of the mining
properties of Lepanto. It was not until
January 30, 1937 when the management
contract in question was entered into
between Lepanto and Nielson (Exhibit A).
A contract for the management and
operation of mines calls for a speculative
and risky venture on the part of the
manager-operator. The manager-operator
invests its technical know-how, undertakes
back-breaking efforts and tremendous
spade-work, so to say, in the first years of its
management and operation of the mines, in
the expectation that the investment and the
efforts employed might be rewarded later
with success. This expected success may
never come. This had happened in the very
case of the Mankayan mines where, as
recounted by Mr. Lednicky of Lepanto,

various persons and entities of different

nationalities, including Lednicky himself,
invested all their money and failed. The
manager-operator may not strike sufficient
ore in the first, second, third, or fourth year
of the management contract, or he may not
strike ore even until the end of the fifth year.
Unless the manager-operator strikes
sufficient quantity of ore he cannot expect
profits or reward for his investment and
efforts. In the case of Nielson, its corps of
competent engineers, geologists, and
technicians begun working on the Mankayan
mines of Lepanto since the latter part of
1936, and continued their work without
success and profit through 1937, 1938, and
the earlier part of 1939. It was only in
December of 1939 when the efforts of
Nielson started to be rewarded when
Lepanto realized profits and the first
dividends were declared. From that time on
Nielson could expect profit to come to it
as in fact Lepanto declared dividends for
1940 and 1941 if the development and
operation of the mines and the mill would
continue unhampered. The operation, and
the expected profits, however, would still be
subject to hazards due to the occurrence of
fortuitous events, fires, earthquakes, strikes,
war, etc., constituting force majeure, which
would result in the destruction of the mines
and the mill. One of these diverse causes, or
one after the other, may consume the whole
period of the contract, and if it should
happen that way the manager-operator
would reap no profit to compensate for the
first years of spade-work and investment of
efforts and know-how. Hence, in fairness to
the manager-operator, so that he may not be
deprived of the benefits of the work he had
accomplished, the force majeure clause is
incorporated as a standard clause in
contracts for the management and operation
of mines.

DELOS REYES | CORPO

24

The nature of the contract for the

management and operation of mines justifies
the interpretation of the force majeure
clause, that a period equal to the period of
suspension due to force majeure should be
added to the original term of the contract by
way of an extension. We, therefore, reiterate
the ruling in Our decision that the
management contract in the instant case was
suspended from February, 1942 to June 26,
1948, and that from the latter date the
contract had yet five years to go.

of 16 years, 1 month and 5 days because

of the operation of the moratorium law.

3. In the fourth ground of its motion for

reconsideration, Lepanto maintains that this
Court erred in reversing the finding of the
trial court that Nielson's action has
prescribed, by considering only the first
claim and ignoring the prescriptibility of the
other claims.

This claim of Nielson is covered by

Executive Order No. 32, issued on March
10, 1945, which provides as follows:

This ground of the motion for

reconsideration has no merit.
In Our decision We stated that the claims of
Nielson are based on a written document,
and, as such, the cause of action prescribes
in ten years.5 Inasmuch as there are different
claims which accrued on different dates the
prescriptive periods for all the claims are not
the same. The claims of Nielson that have
been awarded by this Court are itemized in
the dispositive part of the decision.
The first item of the awards in Our decision
refers to Nielson's compensation in the sum
of P17,500.00, which is equivalent to 10%
of the cash dividends declared by Lepanto in
December, 1941. As we have stated in Our
decision, this claim accrued on December
31, 1941, and the right to commence an
action thereon started on January 1, 1942.
We declared that the action on this claim did
not prescribe although the complaint was
filed on February 6, 1958 or after a lapse

We declared that under the applicable

decisions of this Court 6 the moratorium
period of 8 years, 2 months and 8 days
should be deducted from the period that had
elapsed since the accrual of the cause of
action to the date of the filing of the
complaint, so that there is a period of less
than 8 years to be reckoned for the purpose
of prescription.

Enforcement of payments of all

debts and other monetary obligations
payable in the Philippines, except
debts and other monetary obligations
entered into in any area after
declaration by Presidential
Proclamation that such area has been
freed from enemy occupation and
control, is temporarily suspended
pending action by the
Commonwealth Government. (41
O.G. 56-57; Emphasis supplied)
Executive Order No. 32 covered all debts
and monetary obligation contracted before
the war (or before December 8, 1941) and
those contracted subsequent to December 8,
1941 and during the Japanese occupation.
Republic Act No. 342, approved on July 26,
1948, lifted the moratorium provided for in
Executive Order No. 32 on pre-war (or preDecember 8, 1941) debts of debtors who had
not filed war damage claims with the United
States War Damage Commission. In other
words, after the effectivity of Republic Act
No. 342, the debt moratorium was limited:
(1) to debts and other monetary obligations
which were contracted after December 8,
1941 and during the Japanese occupation,
DELOS REYES | CORPO
25

and (2) to those pre-war (or pre-December 8,

1941) debts and other monetary obligations
where the debtors filed war damage claims.
That was the situation up to May 18, 1953
when this Court declared Republic Act No.
342 unconstitutional.7 It has been held by
this Court, however, that from March 10,
1945 when Executive Order No. 32 was
issued, to May 18, 1953 when Republic Act
No. 342 was declared unconstitutional or
a period of 8 years, 2 months and 8 days
the debt moratorium was in force, and had
the effect of suspending the period of
prescription.8
Lepanto is wrong when in its motion for
reconsideration it claims that the
moratorium provided for in Executive Order
No. 32 was continued by Republic Act No.
342 "only with respect to debtors of pre-war
obligations or those incurred prior to
December 8, 1941," and that "the
moratorium was lifted and terminated with
respect to obligations incurred after
December 8, 1941."9
This Court has held that Republic Act No.
342 does not apply to debts contracted
during the war and did not lift the
moratorium in relations thereto. 10 In the case
of Abraham, et al. vs. Intestate Estate of
Juan C. Ysmael, et al., L-16741, Jan. 31,
1962, this Court said:
Respondents, however, contend that
Republic Act No. 342, which took
effect on July 26, 1948, lifted the
moratorium on debts contracted
during the Japanese occupation. The
court has already held that Republic
Act No. 342 did not lift the
moratorium on debts contracted
during the war (Uy vs. Kalaw
Katigbak, G.R. No. L-1830, Dec. 31,
1949) but modified Executive Order
No. 32 as to pre-war debts, making

the protection available only to

debtors who had war damage claims
(Sison v. Mirasol, G.R. No. L-4711,
Oct. 3, 1952).
We therefore reiterate the ruling in Our
decision that the claim involved in the first
item awarded to Nielson had not prescribed.
What we have stated herein regarding the
non-prescription of the cause of action of the
claim involved in the first item in the award
also holds true with respect to the second
item in the award, which refers to Nielson's
claim for management fee of P2,500.00 for
January, 1942. Lepanto admits that this
second item, like the first, is a monetary
obligation. The right of action of Nielson
regarding this claim accrued on January 31,
1942.
As regards items 3, 4, 5, 6 and 7 in the
awards in the decision, the moratorium law
is not applicable. That is the reason why in
Our decision We did not discuss the
question of prescription regarding these
items. The claims of Nielson involved in
these items are based on the management
contract, and Nielson's cause of action
regarding these claims prescribes in ten
years. Corollary to Our ruling that the
management contract was suspended from
February, 1942 until June 26, 1948, and that
the contract was extended for five years
from June 26, 1948, the right of action of
Nielson to claim for what is due to it during
that period of extension accrued during the
period from June 26, 1948 till the end of the
five-year extension period or until June 26,
1953. And so, even if We reckon June 26,
1948 as the starting date of the ten-year
period in connection with the prescriptibility
of the claims involved in items 3, 4, 5, 6 and
7 of the awards in the decision, it is obvious
that when the complaint was filed on

DELOS REYES | CORPO

26

February 6, 1958 the ten-year prescriptive

period had not yet lapsed.
In Our decision We have also ruled that the
right of action of Nielson against Lepanto
had not prescribed because of the arbitration
clause in the Management contract. We are
satisfied that there is evidence that Nielson
had asked for arbitration, and an arbitration
committee had been constituted. The
arbitration committee, however, failed to
bring about any settlement of the differences
between Nielson and Lepanto. On June 25,
1957 counsel for Lepanto definitely advised
Nielson that they were not entertaining any
claim of Nielson. The complaint in this case
was filed on February 6, 1958.
4. In the sixth ground of its motion for
reconsideration, Lepanto maintains that this
Court "erred in awarding as damages (a)
10% of the cash dividends declared and paid
in December, 1941; (b) the management fee
of P2,500.00 for the month of January 1942;
and (c) the full contract price for the
extended period of 60 months, since the
damages were never demanded nor proved
and, in any case, not allowable under the
general law on damages."
We have stated in Our decision that the
original agreement in the management
contract regarding the compensation of
Nielson was modified, such that instead of
receiving a monthly compensation of
P2,500.00 plus 10% of the net profits from
the operation of the properties for the
preceding month,11 Nielson would receive a
compensation of P2,500.00 a month, plus
(1) 10% of the dividends declared and paid,
when and as paid, during the period of the
contract, and at the end of each year, (2)
10% of any depletion reserve that may be set
up, and (3) 10% of any amount expended
during the year out of surplus earnings for
capital account.

It is shown that in December, 1941, cash

dividends amounting to P175,000.00 was
declared by Lepanto.12 Nielson, therefore,
should receive the equivalent of 10% of this
amount, or the sum of P17,500.00. We have
found that this amount was not paid to
Nielson.
In its motion for reconsideration, Lepanto
inserted a photographic copy of page 127 of
its cash disbursement book, allegedly for
1941, in an effort to show that this amount
of P17,500.00 had been paid to Nielson. It
appears, however, in this photographic copy
of page 127 of the cash disbursement book
that the sum of P17,500.00 was entered on
October 29 as "surplus a/c Nielson & Co.
Inc." The entry does not make any reference
to dividends or participation of Nielson in
the profits. On the other hand, in the
photographic copy of page 89 of the 1941
cash disbursement book, also attached to the
motion for reconsideration, there is an entry
for P17,500.00 on April 23, 1941 which
states "Accts. Pay. Particip. Nielson & Co.
Inc." This entry for April 23, 1941 may
really be the participation of Nielson in the
profits based on dividends declared in April
1941 as shown in Exhibit L. But in the same
Exhibit L it is not stated that any dividend
was declared in October 1941. On the
contrary it is stated in Exhibit L that
dividends were declared in December 1941.
We cannot entertain this piece of evidence
for several reasons: (1) because this
evidence was not presented during the trial
in the court below; (2) there is no showing
that this piece of evidence is newly
discovered and that Lepanto was not in
possession of said evidence when this case
was being tried in the court below; and (3)
according to Exhibit L cash dividends of
P175,000.00 were declared in December,
1941, and so the sum of P17,500.00 which
appears to have been paid to Nielson in
October 1941 could not be payment of the
DELOS REYES | CORPO
27

equivalent of 10% of the cash dividends that

were later declared in December, 1941.

Lepanto during the period of extension of

the contract.

As regards the management fee of Nielson

corresponding to January, 1942, in the sum
of P2,500.00, We have also found that
Nielson is entitled to be paid this amount,
and that this amount was not paid by
Lepanto to Nielson. Whereas, Lepanto was
able to prove that it had paid the
management fees of Nielson for November
and December, 1941,13 it was not able to
present any evidence to show that the
management fee of P2,500.00 for January,
1942 had been paid.

It is not denied that on November 28, 1949,

Lepanto declared stock dividends worth
P1,000,000.00; and on August 22, 1950, it
declared stock dividends worth
P2,000,000.00). In other words, during the
period of extension Lepanto had declared
stock dividends worth P3,000,000.00. We
held in Our decision that Nielson is entitled
to receive l0% of the stock dividends
declared, or shares of stock worth
P300,000.00 at the par value of P0.10 per
share. We ordered Lepanto to issue and
deliver to Nielson those shares of stocks as
well as all the fruits or dividends that
accrued to said shares.

It having been declared in Our decision, as

well as in this resolution, that the
management contract had been extended for
5 years, or sixty months, from June 27, 1948
to June 26, 1953, and that the cause of
action of Nielson to claim for its
compensation during that period of
extension had not prescribed, it follows that
Nielson should be awarded the management
fees during the whole period of extension,
plus the 10% of the value of the dividends
declared during the said period of extension,
the 10% of the depletion reserve that was set
up, and the 10% of any amount expended
out of surplus earnings for capital account.
5. In the seventh ground of its motion for
reconsideration, Lepanto maintains that this
Court erred in ordering Lepanto to issue and
deliver to Nielson shares of stock together
with fruits thereof.
In Our decision, We declared that pursuant
to the modified agreement regarding the
compensation of Nielson which provides,
among others, that Nielson would receive
10% of any dividends declared and paid,
when and as paid, Nielson should be paid
10% of the stock dividends declared by

In its motion for reconsideration, Lepanto

contends that the payment to Nielson of
stock dividends as compensation for its
services under the management contract is a
violation of the Corporation Law, and that it
was not, and it could not be, the intention of
Lepanto and Nielson as contracting
parties that the services of Nielson should
be paid in shares of stock taken out of stock
dividends declared by Lepanto. We have
assiduously considered the arguments
adduced by Lepanto in support of its
contention, as well as the answer of Nielson
in this connection, and We have arrived at
the conclusion that there is merit in the
contention of Lepanto.
Section 16 of the Corporation Law, in part,
provides as follows:
No corporation organized under this
Act shall create or issue bills, notes
or other evidence of debt, for
circulation as money, and no
corporation shall issue stock or
bonds except in exchange for actual
cash paid to the corporation or for:
DELOS REYES | CORPO
28

(1) property actually received by it at

a fair valuation equal to the par or
issued value of the stock or bonds so
issued; and in case of disagreement
as to their value, the same shall be
presumed to be the assessed value or
the value appearing in invoices or
other commercial documents, as the
case may be; and the burden or proof
that the real present value of the
property is greater than the assessed
value or value appearing in invoices
or other commercial documents, as
the case may be, shall be upon the
corporation, or for (2) profits earned
by it but not distributed among its
stockholders or members; Provided,
however, That no stock or bond
dividend shall be issued without the
approval of stockholders
representing not less than two-thirds
of all stock then outstanding and
entitled to vote at a general meeting
of the corporation or at a special
meeting duly called for the purpose.
xxx

xxx

xxx

No corporation shall make or

declare any dividend except from the
surplus profits arising from its
business, or divide or distribute its
capital stock or property other than
actual profits among its members or
stockholders until after the payment
of its debts and the termination of its
existence by limitation or lawful
dissolution: Provided, That banking,
savings and loan, and trust
corporations may receive deposits
and issue certificates of deposit,
checks, drafts, and bills of exchange,
and the like in the transaction of the
ordinary business of banking,
savings and loan, and trust
corporations. (As amended by Act

No. 2792, and Act No. 3518;

Emphasis supplied.)
From the above-quoted provision of Section
16 of the Corporation Law, the
consideration for which shares of stock may
be issued are: (1) cash; (2) property; and (3)
undistributed profits. Shares of stock are
given the special name "stock dividends"
only if they are issued in lieu of
undistributed profits. If shares of stocks are
issued in exchange of cash or property then
those shares do not fall under the category of
"stock dividends". A corporation may
legally issue shares of stock in consideration
of services rendered to it by a person not a
stockholder, or in payment of its
indebtedness. A share of stock issued to pay
for services rendered is equivalent to a stock
issued in exchange of property, because
services is equivalent to property.14
Likewise a share of stock issued in payment
of indebtedness is equivalent to issuing a
stock in exchange for cash. But a share of
stock thus issued should be part of the
original capital stock of the corporation
upon its organization, or part of the stocks
issued when the increase of the
capitalization of a corporation is properly
authorized. In other words, it is the shares of
stock that are originally issued by the
corporation and forming part of the capital
that can be exchanged for cash or services
rendered, or property; that is, if the
corporation has original shares of stock
unsold or unsubscribed, either coming from
the original capitalization or from the
increased capitalization. Those shares of
stock may be issued to a person who is not a
stockholder, or to a person already a
stockholder in exchange for services
rendered or for cash or property. But a share
of stock coming from stock dividends
declared cannot be issued to one who is not
a stockholder of a corporation.

DELOS REYES | CORPO

29

A "stock dividend" is any dividend payable

in shares of stock of the corporation
declaring or authorizing such dividend. It is,
what the term itself implies, a distribution of
the shares of stock of the corporation among
the stockholders as dividends. A stock
dividend of a corporation is a dividend paid
in shares of stock instead of cash, and is
properly payable only out of surplus
profits.15 So, a stock dividend is actually two
things: (1) a dividend, and (2) the enforced
use of the dividend money to purchase
additional shares of stock at par. 16 When a
corporation issues stock dividends, it shows
that the corporation's accumulated profits
have been capitalized instead of distributed
to the stockholders or retained as surplus
available for distribution, in money or kind,
should opportunity offer. Far from being a
realization of profits for the stockholder, it
tends rather to postpone said realization, in
that the fund represented by the new stock
has been transferred from surplus to assets
and no longer available for actual
distribution.17 Thus, it is apparent that stock
dividends are issued only to stockholders.
This is so because only stockholders are
entitled to dividends. They are the only ones
who have a right to a proportional share in
that part of the surplus which is declared as
dividends. A stock dividend really adds
nothing to the interest of the stockholder; the
proportional interest of each stockholder
remains the same.18If a stockholder is
deprived of his stock dividends - and this
happens if the shares of stock forming part
of the stock dividends are issued to a nonstockholder then the proportion of the
stockholder's interest changes radically.
Stock dividends are civil fruits of the
original investment, and to the owners of the
shares belong the civil fruits.19
The term "dividend" both in the technical
sense and its ordinary acceptation, is that
part or portion of the profits of the enterprise

which the corporation, by its governing

agents, sets apart for ratable division among
the holders of the capital stock. It means the
fund actually set aside, and declared by the
directors of the corporation as dividends and
duly ordered by the director, or by the
stockholders at a corporate meeting, to be
divided or distributed among the
stockholders according to their respective
interests.20
It is Our considered view, therefore, that
under Section 16 of the Corporation Law
stock dividends can not be issued to a person
who is not a stockholder in payment of
services rendered. And so, in the case at bar
Nielson can not be paid in shares of stock
which form part of the stock dividends of
Lepanto for services it rendered under the
management contract. We sustain the
contention of Lepanto that the understanding
between Lepanto and Nielson was simply to
make the cash value of the stock dividends
declared as the basis for determining the
amount of compensation that should be paid
to Nielson, in the proportion of 10% of the
cash value of the stock dividends declared.
And this conclusion of Ours finds support in
the record.
We had adverted to in Our decision that in
1940 there was some dispute between
Lepanto and Nielson regarding the
application and interpretation of certain
provisions of the original contract
particularly with regard to the 10%
participation of Nielson in the net profits, so
that some adjustments had to be made. In
the minutes of the meeting of the Board of
Directors of Lepanto on August 21, 1940,
We read the following:
The Chairman stated that he believed
that it would be better to tie the
computation of the 10%
participation of Nielson & Company,
DELOS REYES | CORPO
30

Inc. to the dividend, because Nielson

will then be able to definitely
compute its net participation by the
amount of the dividends declared. In
addition to the dividend, we have
been setting up a depletion reserve
and it does not seem fair to burden
the 10% participation of Nielson
with the depletion reserve, as the
depletion reserve should not be
considered as an operating expense.
After a prolonged discussion, upon
motion duly made and seconded, it
was
RESOLVED, That the President, be,
and he hereby is, authorized to enter
into an agreement with Nielson &
Company, Inc., modifying Paragraph
V of management contract of
January 30, 1937, effective January
1, 1940, in such a way that Nielson
& Company, Inc. shall receive 10%
of any dividends declared and paid,
when and as paid during the period
of the contract and at the end of each
year, 10% of any depletion reserve
that may be set up and 10% of any
amount expended during the year out
of surplus earnings for capital
account. (Emphasis supplied.)
From the sentence, "The Chairman stated
that he believed that it would be better to tie
the computation of the 10% participation of
Nielson & Company, Inc., to the dividend,
because Nielson will then be able to
definitely compute its net participation by
the amount of the dividends declared" the
idea is conveyed that the intention of
Lepanto, as expressed by its Chairman C. A.
DeWitt, was to make the value of the
dividends declared whether the dividends
were in cash or in stock as the basis for
determining the amount of compensation
that should be paid to Nielson, in the

proportion of 10% of the cash value of the

dividends so declared. It does not mean,
however, that the compensation of Nielson
would be taken from the amount actually
declared as cash dividend to be distributed
to the stockholder, nor from the shares of
stocks to be issued to the stockholders as
stock dividends, but from the other assets or
funds of the corporation which are not
burdened by the dividends thus declared. In
other words, if, for example, cash dividends
of P300,000.00 are declared, Nielson would
be entitled to a compensation of P30,000.00,
but this P30,000.00 should not be taken
from the P300,000.00 to be distributed as
cash dividends to the stockholders but from
some other funds or assets of the corporation
which are not included in the amount to
answer for the cash dividends thus declared.
This is so because if the P30,000.00 would
be taken out from the P300,000.00 declared
as cash dividends, then the stockholders
would not be getting P300,000.00 as
dividends but only P270,000.00. There
would be a dilution of the dividend that
corresponds to each share of stock held by
the stockholders. Similarly, if there were
stock dividends worth one million pesos that
were declared, which means an issuance of
ten million shares at the par value of ten
centavos per share, it does not mean that
Nielson would be given 100,000 shares. It
only means that Nielson should be given the
equivalent of 10% of the aggregate cash
value of those shares issued as stock
dividends. That this was the understanding
of Nielson itself is borne out by the fact that
in its appeal brief Nielson urged that it
should be paid "P300,000.00 being 10% of
the P3,000,000.00 stock dividends declared
on November 28, 1949 and August 20,
1950...."21
We, therefore, reconsider that part of Our
decision which declares that Nielson is
entitled to shares of stock worth
DELOS REYES | CORPO
31

P300,000.00 based on the stock dividends

declared on November 28, 1949 and on
August 20, 1950, together with all the fruits
accruing thereto. Instead, We declare that
Nielson is entitled to payment by Lepanto of
P300,000.00 in cash, which is equivalent to
10% of the money value of the stock
dividends worth P3,000,000.00 which were
declared on November 28, 1949 and on
August 20, 1950, with interest thereon at the
rate of 6% from February 6, 1958.

share based on the stock dividends declared

by Lepanto on November 28, 1949 and
August 20, 1950, together with their fruits,
Nielson should be awarded the sum of
P300,000.00 which is an amount equivalent
to 10% of the cash value of the stock
dividends thus declared, as part of the
compensation due Nielson under the
management contract. The dispositive
portion of the decision should, therefore, be
amended, to read as follows:

6. In the eighth ground of its motion for

reconsideration Lepanto maintains that this
Court erred in awarding to Nielson an
undetermined amount of shares of stock
and/or cash, which award can not be
ascertained and executed without further
litigation.

IN VIEW OF THE FOREGOING

CONSIDERATIONS, We hereby reverse
the decision of the court a quo and enter in
lieu thereof another, ordering the appellee
Lepanto to pay the appellant Nielson the
different amounts as specified hereinbelow:

In view of Our ruling in this resolution that

Nielson is not entitled to receive shares of
stock as stock dividends in payment of its
compensation under the management
contract, We do not consider it necessary to
discuss this ground of the motion for
reconsideration. The awards in the present
case are all reduced to specific sums of
money.
7. In the ninth ground of its motion for
reconsideration Lepanto maintains that this
Court erred in rendering judgment or
attorney's fees.
The matter of the award of attorney's fees is
within the sound discretion of this Court. In
Our decision We have stated the reason why
the award of P50,000.00 for attorney's fees
is considered by this Court as reasonable.
Accordingly, We resolve to modify the
decision that We rendered on December 17,
1966, in the sense that instead of awarding
Nielson shares of stock worth P300,000.00
at the par value of ten centavos (P0.10) per

(1) Seventeen thousand five hundred pesos

(P17,500.00), equivalent to 10% of the cash
dividends of December, 1941, with legal
interest thereon from the date of the filing of
the complaint;
(2) Two thousand five hundred pesos
(P2,500.00) as management fee for January
1942, with legal interest thereon from the
date of the filing of the complaint;
(3) One hundred fifty thousand pesos
(P150,000.00), representing management
fees for the sixty-month period of extension
of the management contract, with legal
interest thereon from the date of the filing of
the complaint;
(4) One million four hundred thousand pesos
(P1,400,000.00), equivalent to 10% of the
cash dividends declared during the period of
extension of the management contract, with
legal interest thereon from the date of the
filing of the complaint;
(5) Three hundred thousand pesos
(P300,000.00), equivalent to 10% of the
DELOS REYES | CORPO
32

cash value of the stock dividends declared

on November 28, 1949 and August 20,
1950, with legal interest thereon from the
date of the filing of the complaint;

(6) Fifty three thousand nine hundred twenty

eight pesos and eighty eight centavos
(P53,928.88), equivalent to 10% of the
depletion reserve set up during the period of
extension, with legal interest thereon from
the date of the filing of the complaint;

Article 1373 of the (new) Civil

Code.
5

Section 43, par. 1, Act 190.

Tiosejo vs. Day, et al., L-9944,

April 30, 1937; Levi Hermanos, Inc.
vs. Perez, L-14487, April 29, 1960.
7

Rutter vs. Esteban, 93 Phil. 68.

(7) Six hundred ninety four thousand three

hundred sixty four pesos and seventy six
centavos (P694,364.76), equivalent to 10%
of the expenses for capital account during
the period of extension, with legal interest
thereon from the date of the filing of the
complaint;
(8) Fifty thousand pesos (P50,000.00) as
attorney's fees; and

Tiosejo vs. Day, supra; Levi

Hermanos, Inc. vs. Perez, supra.
9

Motion for reconsideration, p. 60.

10

Uy v. Kalaw Katigbak, G.R. No.

L-1830, Dec. 31, 1949; Sison v.
Mirasol, L-4711, Oct. 31, 1962;
Compania Maritima v. Court of
Appeals, L-14949, May 30, 1960.
11

(9) The costs.

It is so ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon,
Makalintal, Sanchez and Castro, JJ., concur.
Fernando, Capistrano, Teehankee and
Barredo, JJ., took no part.

Par. V of Management Contract,

Exhibit C.
12

Page 3, Exhibit L, Report for

1954.
13

Exhibit 1.

14

Sec. 5187, 11 Fletcher, Cyclopedia

of the Law on Private Corporations,
p. 422.
15

Sec. 16, Corporation Law .

16

Words and Phrases, p. 270.

Annex A to complaint, pp. 43-46,

R.A.; Also Exhibit C.

17

Fisher vs. Trinidad, 43 Phil. 973..

18

Towns vs. Eisner, 62 L. Ed. 372.

Footnotes
1

Exhibit A.

Sec. 9, Rule 130 of the Rules of

Court.

19

Art. 441, Civil Code of the

Philippines.

DELOS REYES | CORPO

33

20

7 Thompson on Corporations 134135.

21

. 115, Nielson's Appeal Brief.

DELOS REYES | CORPO

34

G.R. No. 142936

April 17, 2002

PHILIPPINE NATIONAL BANK &

NATIONAL SUGAR DEVELOPMENT
CORPORATION, petitioners,
vs.
ANDRADA ELECTRIC &
ENGINEERING COMPANY, respondent.
PANGANIBAN, J.:
Basic is the rule that a corporation has a
legal personality distinct and separate from
the persons and entities owning it. The
corporate veil may be lifted only if it has
been used to shield fraud, defend crime,
justify a wrong, defeat public convenience,
insulate bad faith or perpetuate injustice.
Thus, the mere fact that the Philippine
National Bank (PNB) acquired ownership or
management of some assets of the
Pampanga Sugar Mill (PASUMIL), which
had earlier been foreclosed and purchased at
the resulting public auction by the
Development Bank of the Philippines
(DBP), will not make PNB liable for the
PASUMILs contractual debts to
respondent.
Statement of the Case
Before us is a Petition for Review assailing
the April 17, 2000 Decision1 of the Court of
Appeals (CA) in CA-GR CV No. 57610.
The decretal portion of the challenged
Decision reads as follows:
"WHEREFORE, the judgment
appealed from is hereby
AFFIRMED."2
The Facts
The factual antecedents of the case are
summarized by the Court of Appeals as
follows:

"In its complaint, the plaintiff [herein

respondent] alleged that it is a
partnership duly organized, existing,
and operating under the laws of the
Philippines, with office and principal
place of business at Nos. 794-812
Del Monte [A]venue, Quezon City,
while the defendant [herein
petitioner] Philippine National Bank
(herein referred to as PNB), is a
semi-government corporation duly
organized, existing and operating
under the laws of the Philippines,
with office and principal place of
business at Escolta Street, Sta. Cruz,
Manila; whereas, the other
defendant, the National Sugar
Development Corporation
(NASUDECO in brief), is also a
semi-government corporation and
the sugar arm of the PNB, with
office and principal place of business
at the 2nd Floor, Sampaguita
Building, Cubao, Quezon City; and
the defendant Pampanga Sugar Mills
(PASUMIL in short), is a
corporation organized, existing and
operating under the 1975 laws of the
Philippines, and had its business
office before 1975 at Del Carmen,
Floridablanca, Pampanga; that the
plaintiff is engaged in the business of
general construction for the repairs
and/or construction of different kinds
of machineries and buildings; that on
August 26, 1975, the defendant PNB
acquired the assets of the defendant
PASUMIL that were earlier
foreclosed by the Development Bank
of the Philippines (DBP) under LOI
No. 311; that the defendant PNB
organized the defendant
NASUDECO in September, 1975, to
take ownership and possession of the
assets and ultimately to nationalize
and consolidate its interest in other
DELOS REYES | CORPO
35

PNB controlled sugar mills; that

prior to October 29, 1971, the
defendant PASUMIL engaged the
services of plaintiff for electrical
rewinding and repair, most of which
were partially paid by the defendant
PASUMIL, leaving several unpaid
accounts with the plaintiff; that
finally, on October 29, 1971, the
plaintiff and the defendant
PASUMIL entered into a contract for
the plaintiff to perform the
following, to wit
(a) Construction of one (1)
power house building;
(b) Construction of three (3)
reinforced concrete
foundation for three (3) units
350 KW diesel engine
generating set[s];

foundation and drainage

canals, excavation, and earth
fillings all for the total
amount of P543,500.00 as
evidenced by a contract, [a]
xerox copy of which is hereto
attached as Annex A and
made an integral part of this
complaint;
that aside from the work contract
mentioned-above, the defendant
PASUMIL required the plaintiff to
perform extra work, and provide
electrical equipment and spare parts,
such as:
(a) Supply of electrical
devices;
(b) Extra mechanical works;
(c) Extra fabrication works;

(c) Construction of three (3)

reinforced concrete
foundation for the 5,000 KW
and 1,250 KW turbo
generator sets;
(d) Complete overhauling
and reconditioning tests sum
for three (3) 350 KW diesel
engine generating set[s];
(e) Installation of turbine
and diesel generating sets
including transformer,
switchboard, electrical
wirings and pipe provided
those stated units are
completely supplied with
their accessories;
(f) Relocating of 2,400 V
transmission line, demolition
of all existing concrete

(d) Supply of materials and

consumable items;
(e) Electrical shop repair;
(f) Supply of parts and
related works for turbine
generator;
(g) Supply of electrical
equipment for machinery;
(h) Supply of diesel engine
parts and other related works
including fabrication of
parts.
that out of the total obligation of
P777,263.80, the defendant
PASUMIL had paid only
P250,000.00, leaving an unpaid
balance, as of June 27, 1973,
DELOS REYES | CORPO
36

amounting to P527,263.80, as shown

in the Certification of the chief
accountant of the PNB, a machine
copy of which is appended as Annex
C of the complaint; that out of said
unpaid balance of P527,263.80, the
defendant PASUMIL made a partial
payment to the plaintiff of
P14,000.00, in broken amounts,
covering the period from January 5,
1974 up to May 23, 1974, leaving an
unpaid balance of P513,263.80; that
the defendant PASUMIL and the
defendant PNB, and now the
defendant NASUDECO, failed and
refused to pay the plaintiff their just,
valid and demandable obligation;
that the President of the
NASUDECO is also the VicePresident of the PNB, and this
official holds office at the 10th Floor
of the PNB, Escolta, Manila, and
plaintiff besought this official to pay
the outstanding obligation of the
defendant PASUMIL, inasmuch as
the defendant PNB and NASUDECO
now owned and possessed the assets
of the defendant PASUMIL, and
these defendants all benefited from
the works, and the electrical, as well
as the engineering and repairs,
performed by the plaintiff; that
because of the failure and refusal of
the defendants to pay their just,
valid, and demandable obligations,
plaintiff suffered actual damages in
the total amount of P513,263.80; and
that in order to recover these sums,
the plaintiff was compelled to
engage the professional services of
counsel, to whom the plaintiff agreed
to pay a sum equivalent to 25% of
the amount of the obligation due by
way of attorneys fees. Accordingly,
the plaintiff prayed that judgment be
rendered against the defendants

PNB, NASUDECO, and PASUMIL,

jointly and severally to wit:
(1) Sentencing the
defendants to pay the
plaintiffs the sum of
P513,263.80, with annual
interest of 14% from the time
the obligation falls due and
demandable;
(2) Condemning the
defendants to pay attorneys
fees amounting to 25% of the
amount claim;
(3) Ordering the defendants
to pay the costs of the suit.
"The defendants PNB and
NASUDECO filed a joint motion to
dismiss the complaint chiefly on the
ground that the complaint failed to
state sufficient allegations to
establish a cause of action against
both defendants, inasmuch as there is
lack or want of privity of contract
between the plaintiff and the two
defendants, the PNB and
NASUDECO, said defendants citing
Article 1311 of the New Civil Code,
and the case law ruling in Salonga v.
Warner Barnes & Co., 88 Phil. 125;
and Manila Port Service, et al. v.
Court of Appeals, et al., 20 SCRA
1214.
"The motion to dismiss was by the
court a quo denied in its Order of
November 27, 1980; in the same
order, that court directed the
defendants to file their answer to the
complaint within 15 days.

DELOS REYES | CORPO

37

"In their answer, the defendant

NASUDECO reiterated the grounds
of its motion to dismiss, to wit:
That the complaint does not
state a sufficient cause of
action against the defendant
NASUDECO because: (a)
NASUDECO is not x x x
privy to the various electrical
construction jobs being sued
upon by the plaintiff under
the present complaint; (b) the
taking over by NASUDECO
of the assets of defendant
PASUMIL was solely for the
purpose of reconditioning the
sugar central of defendant
PASUMIL pursuant to
martial law powers of the
President under the
Constitution; (c) nothing in
the LOI No. 189-A (as well
as in LOI No. 311)
authorized or commanded the
PNB or its subsidiary
corporation, the
NASUDECO, to assume the
corporate obligations of
PASUMIL as that being
involved in the present case;
and, (d) all that was
mentioned by the said letter
of instruction insofar as the
PASUMIL liabilities [were]
concerned [was] for the PNB,
or its subsidiary corporation
the NASUDECO, to make a
study of, and submit [a]
recommendation on the
problems concerning the
same.
"By way of counterclaim, the
NASUDECO averred that by reason
of the filing by the plaintiff of the

present suit, which it [labeled] as

unfounded or baseless, the defendant
NASUDECO was constrained to
litigate and incur litigation expenses
in the amount of P50,000.00, which
plaintiff should be sentenced to pay.
Accordingly, NASUDECO prayed
that the complaint be dismissed and
on its counterclaim, that the plaintiff
be condemned to pay P50,000.00 in
concept of attorneys fees as well as
exemplary damages.
"In its answer, the defendant PNB
likewise reiterated the grounds of its
motion to dismiss, namely: (1) the
complaint states no cause of action
against the defendant PNB; (2) that
PNB is not a party to the contract
alleged in par. 6 of the complaint and
that the alleged services rendered by
the plaintiff to the defendant
PASUMIL upon which plaintiffs
suit is erected, was rendered long
before PNB took possession of the
assets of the defendant PASUMIL
under LOI No. 189-A; (3) that the
PNB take-over of the assets of the
defendant PASUMIL under LOI
189-A was solely for the purpose of
reconditioning the sugar central so
that PASUMIL may resume its
operations in time for the 1974-75
milling season, and that nothing in
the said LOI No. 189-A, as well as in
LOI No. 311, authorized or directed
PNB to assume the corporate
obligation/s of PASUMIL, let alone
that for which the present action is
brought; (4) that PNBs management
and operation under LOI No. 311 did
not refer to any asset of PASUMIL
which the PNB had to acquire and
thereafter [manage], but only to
those which were foreclosed by the
DBP and were in turn redeemed by
DELOS REYES | CORPO
38

the PNB from the DBP; (5) that

conformably to LOI No. 311, on
August 15, 1975, the PNB and the
Development Bank of the
Philippines (DBP) entered into a
Redemption Agreement whereby
DBP sold, transferred and conveyed
in favor of the PNB, by way of
redemption, all its (DBP) rights and
interest in and over the foreclosed
real and/or personal properties of
PASUMIL, as shown in Annex C
which is made an integral part of the
answer; (6) that again, conformably
with LOI No. 311, PNB pursuant to
a Deed of Assignment dated October
21, 1975, conveyed, transferred, and
assigned for valuable consideration,
in favor of NASUDECO, a distinct
and independent corporation, all its
(PNB) rights and interest in and
under the above Redemption
Agreement. This is shown in Annex
D which is also made an integral
part of the answer; [7] that as a
consequence of the said Deed of
Assignment, PNB on October 21,
1975 ceased to managed and operate
the above-mentioned assets of
PASUMIL, which function was now
actually transferred to NASUDECO.
In other words, so asserted PNB, the
complaint as to PNB, had become
moot and academic because of the
execution of the said Deed of
Assignment; [8] that moreover, LOI
No. 311 did not authorize or direct
PNB to assume the corporate
obligations of PASUMIL, including
the alleged obligation upon which
this present suit was brought; and [9]
that, at most, what was granted to
PNB in this respect was the authority
to make a study of and submit
recommendation on the problems
concerning the claims of PASUMIL

creditors, under sub-par. 5 LOI No.

311.
"In its counterclaim, the PNB
averred that it was unnecessarily
constrained to litigate and to incur
expenses in this case, hence it is
entitled to claim attorneys fees in
the amount of at least P50,000.00.
Accordingly, PNB prayed that the
complaint be dismissed; and that on
its counterclaim, that the plaintiff be
sentenced to pay defendant PNB the
sum of P50,000.00 as attorneys fees,
aside from exemplary damages in
such amount that the court may seem
just and equitable in the premises.
"Summons by publication was made
via the Philippines Daily Express, a
newspaper with editorial office at
371 Bonifacio Drive, Port Area,
Manila, against the defendant
PASUMIL, which was thereafter
declared in default as shown in the
August 7, 1981 Order issued by the
Trial Court.
"After due proceedings, the Trial
Court rendered judgment, the
decretal portion of which reads:
WHEREFORE, judgment is
hereby rendered in favor of
plaintiff and against the
defendant Corporation,
Philippine National Bank
(PNB) NATIONAL SUGAR
DEVELOPMENT
CORPORATION
(NASUDECO) and
PAMPANGA SUGAR
MILLS (PASUMIL),
ordering the latter to pay
jointly and severally the
former the following:
DELOS REYES | CORPO
39

1. The sum of
P513,623.80 plus
interest thereon at the
rate of 14% per
annum as claimed
from September 25,
1980 until fully paid;
2. The sum of
P102,724.76 as
attorneys fees; and,
3. Costs.
SO ORDERED.
Manila, Philippines,
September 4, 1986.
'(SGD) ERNESTO S. TENGCO
Judge"3

corporation whose corporate

existence has not been legally
extinguished or terminated, simply
because of petitioners[] take-over of
the management and operation of
PASUMIL pursuant to the mandates
of LOI No. 189-A, as amended by
LOI No. 311.
"II
The Court of Appeals gravely erred
in law in not applying [to] the case at
bench the ruling enunciated in
Edward J. Nell Co. v. Pacific Farms,
15 SCRA 415."6
Succinctly put, the aforesaid errors boil
down to the principal issue of whether PNB
is liable for the unpaid debts of PASUMIL
to respondent.
This Courts Ruling

Ruling of the Court of Appeals

The Petition is meritorious.
Affirming the trial court, the CA held that it
was offensive to the basic tenets of justice
and equity for a corporation to take over and
operate the business of another corporation,
while disavowing or repudiating any
responsibility, obligation or liability arising
therefrom.4
Hence, this Petition.5
Issues
In their Memorandum, petitioners raise the
following errors for the Courts
consideration:
"I
The Court of Appeals gravely erred
in law in holding the herein
petitioners liable for the unpaid
corporate debts of PASUMIL, a

Main Issue:
Liability for Corporate Debts
As a general rule, questions of fact may not
be raised in a petition for review under Rule
45 of the Rules of Court.7 To this rule,
however, there are some exceptions
enumerated in Fuentes v. Court of Appeals.8
After a careful scrutiny of the records and
the pleadings submitted by the parties, we
find that the lower courts misappreciated the
evidence presented.9 Overlooked by the CA
were certain relevant facts that would justify
a conclusion different from that reached in
the assailed Decision.10
Petitioners posit that they should not be held
liable for the corporate debts of PASUMIL,
because their takeover of the latters
DELOS REYES | CORPO
40

foreclosed assets did not make them

assignees. On the other hand, respondent
asserts that petitioners and PASUMIL
should be treated as one entity and, as such,
jointly and severally held liable for
PASUMILs unpaid obligation.1wphi1.nt
As a rule, a corporation that purchases the
assets of another will not be liable for the
debts of the selling corporation, provided the
former acted in good faith and paid adequate
consideration for such assets, except when
any of the following circumstances is
present: (1) where the purchaser expressly or
impliedly agrees to assume the debts, (2)
where the transaction amounts to a
consolidation or merger of the corporations,
(3) where the purchasing corporation is
merely a continuation of the selling
corporation, and (4) where the transaction is
fraudulently entered into in order to escape
liability for those debts.11
Piercing the Corporate

Hence, any application of the doctrine of

piercing the corporate veil should be done
with caution.17 A court should be mindful of
the milieu where it is to be applied.18 It must
be certain that the corporate fiction was
misused to such an extent that injustice,
fraud, or crime was committed against
another, in disregard of its rights. 19 The
wrongdoing must be clearly and
convincingly established; it cannot be
presumed.20 Otherwise, an injustice that was
never unintended may result from an
erroneous application.21
This Court has pierced the corporate veil to
ward off a judgment credit,22 to avoid
inclusion of corporate assets as part of the
estate of the decedent,23 to escape liability
arising from a debt,24 or to perpetuate fraud
and/or confuse legitimate issues25 either to
promote or to shield unfair objectives26 or to
cover up an otherwise blatant violation of
the prohibition against forum-shopping.27
Only in these and similar instances may the
veil be pierced and disregarded.28

Veil Not Warranted

A corporation is an artificial being created
by operation of law. It possesses the right of
succession and such powers, attributes, and
properties expressly authorized by law or
incident to its existence.12 It has a
personality separate and distinct from the
persons composing it, as well as from any
other legal entity to which it may be
related.13 This is basic.
Equally well-settled is the principle that the
corporate mask may be removed or the
corporate veil pierced when the corporation
is just an alter ego of a person or of another
corporation.14 For reasons of public policy
and in the interest of justice, the corporate
veil will justifiably be impaled15 only when
it becomes a shield for fraud, illegality or
inequity committed against third persons. 16

The question of whether a corporation is a

mere alter ego is one of fact.29 Piercing the
veil of corporate fiction may be allowed
only if the following elements concur: (1)
control -- not mere stock control, but
complete domination -- not only of finances,
but of policy and business practice in respect
to the transaction attacked, must have been
such that the corporate entity as to this
transaction had at the time no separate mind,
will or existence of its own; (2) such control
must have been used by the defendant to
commit a fraud or a wrong to perpetuate the
violation of a statutory or other positive
legal duty, or a dishonest and an unjust act
in contravention of plaintiffs legal right;
and (3) the said control and breach of duty
must have proximately caused the injury or
unjust loss complained of.30

DELOS REYES | CORPO

41

We believe that the absence of the foregoing

elements in the present case precludes the
piercing of the corporate veil. First, other
than the fact that petitioners acquired the
assets of PASUMIL, there is no showing
that their control over it warrants the
disregard of corporate personalities. 31
Second, there is no evidence that their
juridical personality was used to commit a
fraud or to do a wrong; or that the separate
corporate entity was farcically used as a
mere alter ego, business conduit or
instrumentality of another entity or person. 32
Third, respondent was not defrauded or
injured when petitioners acquired the assets
of PASUMIL.33
Being the party that asked for the piercing of
the corporate veil, respondent had the
burden of presenting clear and convincing
evidence to justify the setting aside of the
separate corporate personality rule. 34
However, it utterly failed to discharge this
burden;35 it failed to establish by competent
evidence that petitioners separate corporate
veil had been used to conceal fraud,
illegality or inequity.36

only a right, but also a duty under the law to

foreclose the subject properties.41
Pursuant to LOI No. 189-A42 as amended by
LOI No. 311,43 PNB acquired PASUMILs
assets that DBP had foreclosed and
purchased in the normal course. Petitioner
bank was likewise tasked to manage
temporarily the operation of such assets
either by itself or through a subsidiary
corporation.44
PNB, as the second mortgagee, redeemed
from DBP the foreclosed PASUMIL assets
pursuant to Section 6 of Act No. 3135.45
These assets were later conveyed to PNB for
a consideration, the terms of which were
embodied in the Redemption Agreement. 46
PNB, as successor-in-interest, stepped into
the shoes of DBP as PASUMILs creditor. 47
By way of a Deed of Assignment, 48 PNB
then transferred to NASUDECO all its rights
under the Redemption Agreement.

While we agree with respondents claim that

the assets of the National Sugar
Development Corporation (NASUDECO)
can be easily traced to PASUMIL,37 we are
not convinced that the transfer of the latters
assets to petitioners was fraudulently entered
into in order to escape liability for its debt to
respondent.38

In Development Bank of the Philippines v.

Court of Appeals,49 we had the occasion to
resolve a similar issue. We ruled that PNB,
DBP and their transferees were not liable for
Marinduque Minings unpaid obligations to
Remington Industrial Sales Corporation
(Remington) after the two banks had
foreclosed the assets of Marinduque Mining.
We likewise held that Remington failed to
discharge its burden of proving bad faith on
the part of Marinduque Mining to justify the
piercing of the corporate veil.

A careful review of the records reveals that

DBP foreclosed the mortgage executed by
PASUMIL and acquired the assets as the
highest bidder at the public auction
conducted.39 The bank was justified in
foreclosing the mortgage, because the
PASUMIL account had incurred arrearages
of more than 20 percent of the total
outstanding obligation.40 Thus, DBP had not

In the instant case, the CA erred in affirming

the trial courts lifting of the corporate
mask.50 The CA did not point to any fact
evidencing bad faith on the part of PNB and
its transferee.51 The corporate fiction was
not used to defeat public convenience,
justify a wrong, protect fraud or defend
crime.52 None of the foregoing exceptions
was shown to exist in the present case. 53 On
DELOS REYES | CORPO
42

the contrary, the lifting of the corporate veil

would result in manifest injustice. This we
cannot allow.
No Merger or Consolidation
Respondent further claims that petitioners
should be held liable for the unpaid
obligations of PASUMIL by virtue of LOI
Nos. 189-A and 311, which expressly
authorized PASUMIL and PNB to merge or
consolidate. On the other hand, petitioners
contend that their takeover of the operations
of PASUMIL did not involve any corporate
merger or consolidation, because the latter
had never lost its separate identity as a
corporation.
A consolidation is the union of two or more
existing entities to form a new entity called
the consolidated corporation. A merger, on
the other hand, is a union whereby one or
more existing corporations are absorbed by
another corporation that survives and
continues the combined business.54
The merger, however, does not become
effective upon the mere agreement of the
constituent corporations.55 Since a merger or
consolidation involves fundamental changes
in the corporation, as well as in the rights of
stockholders and creditors, there must be an
express provision of law authorizing them. 56
For a valid merger or consolidation, the
approval by the Securities and Exchange
Commission (SEC) of the articles of merger
or consolidation is required.57 These articles
must likewise be duly approved by a
majority of the respective stockholders of
the constituent corporations.58
In the case at bar, we hold that there is no
merger or consolidation with respect to
PASUMIL and PNB. The procedure
prescribed under Title IX of the Corporation
Code59 was not followed.

In fact, PASUMILs corporate existence, as

correctly found by the CA, had not been
legally extinguished or terminated.60
Further, prior to PNBs acquisition of the
foreclosed assets, PASUMIL had previously
made partial payments to respondent for the
formers obligation in the amount of
P777,263.80. As of June 27, 1973,
PASUMIL had paid P250,000 to respondent
and, from January 5, 1974 to May 23, 1974,
another P14,000.
Neither did petitioner expressly or impliedly
agree to assume the debt of PASUMIL to
respondent.61 LOI No. 11 explicitly provides
that PNB shall study and submit
recommendations on the claims of
PASUMILs creditors.62 Clearly, the
corporate separateness between PASUMIL
and PNB remains, despite respondents
insistence to the contrary.63
WHEREFORE, the Petition is hereby
GRANTED and the assailed Decision SET
ASIDE. No pronouncement as to costs.
SO ORDERED.
Vitug, Sandoval-Gutierrez, and Carpio, JJ.,
concur.
Melo, J., Abroad, on official leave.

Footnotes
1

Rollo, pp. 30-39. Penned by Justice

Renato C. Dacudao, with the
concurrence of Justices Quirino D.
Abad Santos Jr. (Division chairman)
and B. A. Adefuin de la Cruz
(member).
2

Assailed Decision, p. 11; rollo, p.

39.

DELOS REYES | CORPO

43

Ibid., pp. 1-7; ibid., pp. 30-35.

Id., p. 9; id., p. 37.

The case was deemed submitted for

decision on February 12, 2001, upon
this Courts receipt of petitioners
Memorandum, signed by Atty.
Salvador A. Luy. Respondents
Memorandum, which was filed on
February 9, 2001, was signed by
Atty. Renecio R. Espiritu.

15

Francisco Motors Corporation v.

Court of Appeals, 309 SCRA 72,
June 25, 1999.
16

San Juan Structural and Steel

Fabricators, Inc. v. Court of
Appeals, 296 SCRA 631, September
29, 1998.
17

Reynoso IV v. Court of Appeals,

345 SCRA 335, November 22, 2000.
18

Petitioners Memorandum, pp. 7-8;

rollo, pp. 73-74. Original in upper
case and italicized.
7

Cordial v. Miranda, 348 SCRA

158, December 14, 2000.

Francisco Motors Corporation v.

Court of Appeals, supra.
19

Traders Royal Bank v. Court of

Appeals, 269 SCRA 15, March 3,
1997.
20

268 SCRA 703, February 26, 1997.

Matuguina Integrated Wood

Products, Inc. v. Court of Appeals,
263 SCRA 491, October 24, 1996.

Baricuatro Jr. v. Court of Appeals,

325 SCRA 137, February 9, 2000.
10

21

Francisco Motors Corporation v.

Court of Appeals, supra.

Ibid.
22

11

Jose C. Campos Jr. and Maria

Clara Lopez-Campos, The
Corporation Code: Comments, Notes
and Selected Cases, Vol. 2, 1990 ed.,
p. 465, citing Edward J. Nell
Company v. Pacific Farms, Inc., 15
SCRA 415, November 29, 1965;
West Texas Refining & Dev. Co. v.
Comm. of Int. Rev., 68 F. 2d 77.
12

Sibagat Timber Corp. v. Garcia,

216 SCRA 470, December 11, 1992.
23

Cease v. Court of Appeals, 93

SCRA 483, October 18, 1979.
24

Arcilla v. Court of Appeals, 215

SCRA 120, October 23, 1992.
25

Jacinto v. Court of Appeals, 198

SCRA 211, June 6, 1991.

2, Corporation Code.
26

13

Yu v. National Labor Relations

Commission, 245 SCRA 134, June
16, 1995.
14

Lim v. Court of Appeals, 323

SCRA 102, January 24, 2000.

Villanueva v. Adre, 172 SCRA

876, April 27, 1989
27

First Philippine International

Bank v. Court of Appeals, 252 SCRA
259, January 24, 1996.

DELOS REYES | CORPO

44

28

ARB Construction Co., Inc. v.

Court of Appeals, 332 SCRA 427,
May 31, 2000.
29

Heirs of Ramon Durano Sr. v. Uy,

344 SCRA 238, October 24, 2000.
30

Lim v. Court of Appeals, supra.

31

Traders Royal Bank, v. Court of

Appeals, supra.
32

Umali v. Court of Appeals, 189

SCRA 529, September 13, 1990.
33

Traders Royal Bank, v. Court of

Appeals, supra.
34

Republic v. Sandiganbayan, 346

SCRA 760, December 4, 2000.
35

Lim v. Court of Appeals, supra.

securities for any loan, credit,

accommodation, and/or guarantees
granted by them whenever the
arrearages on such account,
including accrued interest and other
charges, amount to at least twenty
percent (20%) of the total
outstanding obligations, including
interest and other charges, as
appearing in the books of account
and/or related records of the
financial institution concerned. This
shall be without prejudice to the
exercise by the government financial
institutions of such rights and/or
remedies available to them under
their respective contracts with their
debtors, including the right to
foreclosure on loans, credits,
accommodations and/or guarantees
on which the arrearages are less than
twenty percent (20%)."

36

41

37

42

Annex "A"; records, p. 50.

43

Annex "B"; ibid., p. 52.

44

Ibid.; id., p. 53.

45

This article provides:

San Juan Structural and Steel

Fabricators, Inc. v. Court of
Appeals, supra.
Respondents Memorandum, p. 6;
rollo, p. 60.

Development Bank of the

Philippines v. Court of Appeals,
supra.

38

Edward J. Nell Company v.

Pacific Farms Inc., supra, p. 417, per
Concepcion, J.
39

See Redemption Agreement,

Annex "C"; records, p. 56.
40

Presidential Decree No. 385 (The

Law on Mandatory Foreclosure)
provides:
"Section 1. It shall be mandatory for
government financial institutions,
after the lapse of sixty (60) days
from the issuance of this Decree, to
foreclose the collaterals and/or

"Sec. 6. In all cases in which an

extrajudicial sale is made under the
special power hereinbefore referred
to, the debtor, his successor in
interest or any judicial creditor or
judgment creditor of said debtor, or
any person having a lien on the
property subsequent to the mortgage
or deed of trust under which the
property is sold, may redeem the
same at any time within the term of
DELOS REYES | CORPO
45

one year from and after the date of

the sale; and such redemption shall
be governed by the provisions of
sections four hundred and sixty-four
to four hundred and sixty six,
inclusive, of the Code of Civil
Procedure (now Rule 39, Section 28
of the 1997 Revised Rules of Civil
Procedure), in so far as these are not
inconsistent with the provisions of
this Act."

56

46

"SEC. 76. Plan of merger or

consolidation. Two or more
corporations may merge into a single
corporation which shall be one of the
constituent corporations or may
consolidate into a new single
corporation which shall be the
consolidated corporation.

See Redemption Agreement

Annex "C"; records, p. 56.
47

Litonjua v. L &R Corporation, 320

SCRA 405, December 9, 1999.
48

Annex PNB-2; records, p. 61.

49

GR No. 126200, August 16, 2001.

50

Francisco Motors Corporation v.

Court of Appeals, supra.
51

Development Bank of the

Philippines v. Court of Appeals,
supra.
52

Union Bank of the Philippines v.

Court of Appeals, 290 SCRA 198,
May 19, 1998.
53

Vlason Enterprises Corporation v.

Court of Appeals, 310 SCRA 26,
July 6, 1999.
54

Campos Jr. and Lopez-Campos,

The Corporation Code: Comments,
Notes and Selected Cases, supra, pp.
440-441.
55

Associated Bank v. Court of

Appeals, 291 SCRA 511, June 29,
1998.

Campos Jr. and Lopez-Campos,

The Corporation Code: Comments,
Notes and Selected Cases, supra, p.
441.
57

79 Corporation Code.

58

77 Corporation Code.

59

"Title IX MERGER AND

CONSOLIDATION

"The board of directors or trustees of

each corporation, party to the merger
or consolidation, shall approve a plan
of merger or consolidation setting
forth the following:
1. The names of the
corporations
proposing to merge or
consolidate,
hereinafter referred to
as the constituent
corporations;
2. The terms of the
merger or
consolidation and the
mode of carrying the
same into effect;
3. A statement of the
changes, if any, in the
articles of
incorporation of the
surviving corporation
DELOS REYES | CORPO
46

in case of merger;
and, with respect to
the consolidated
corporation in case of
consolidation, all the
statements required to
be set forth in the
articles of
incorporation for
corporations
organized under this
Code; and
4. Such other
provisions with
respect to the
proposed merger or
consolidation as are
deemed necessary or
desirable.
"SEC. 77. Stockholders or
members approval. Upon approval
by majority vote of each of the board
of directors or trustees of the
constituent corporations of the plan
of merger or consolidation, the same
shall be submitted for approval by
the stockholders or members of each
of such corporations at separate
corporate meetings duly called for
the purpose. Notice of such meetings
shall be given to all stockholders or
members of the respective
corporations, at least two (2) weeks
prior to the date of the meeting,
either personally or by registered
mail. Said notice shall state the
purpose of the meeting and shall
include a copy or a summary of the
plan of merger or consolidation. The
affirmative vote of stockholders
representing at least two-thirds (2/3)
of the outstanding capital stock of
each corporation in the case of stock
corporations or at least two-thirds

(2/3) of the members in the case of

non-stock corporations shall be
necessary for the approval of such
plan. Any dissenting stockholder in
stock corporations may exercise his
appraisal right in accordance with
the Code: Provided, That if after the
approval by the stockholders of such
plan, the board of directors decides
to abandon the plan, the appraisal
right shall be extinguished.
"Any amendment to the plan of
merger or consolidation may be
made, provided such amendment is
approved by majority vote of the
respective boards of directors or
trustees of all the constituent
corporations and ratified by the
affirmative vote of stockholders
representing at least two-thirds (2/3)
of the outstanding capital stock or of
two thirds (2/3) of the members of
each of the constituent corporations.
Such plan, together with any
amendment, shall be considered as
the agreement of merger or
consolidation.1wphi1.nt
"SEC. 78. Articles of merger or
consolidation. - After the approval
by the stockholders or members as
required by the preceding section,
articles of merger or articles of
consolidation shall be executed by
each of the constituent corporations,
to be signed by the president or vicepresident and certified by the
secretary or assistant secretary of
each corporation setting forth:
1. The plan of the
merger or the plan of
consolidation;

DELOS REYES | CORPO

47

2. As to stock
corporations, the
number of shares
outstanding, or in the
case of non-stock
corporations, the
number of members,
and
3. As to each
corporation, the
number of shares or
members voting for
and against such plan,
respectively.
"SEC. 79. Effectivity of merger or
consolidation. - The articles of
merger or of consolidation, signed
and certified as herein above
required, shall be submitted to the
Securities and Exchange
Commission in quadruplicate for its
approval: Provided, That in the case
of merger or consolidation of banks
or banking institutions, building and
loan associations, trust companies,
insurance companies, public utilities,
educational institutions and other
special corporations governed by
special laws, the favorable
recommendation of the appropriate
government agency shall first be
obtained. If the Commission is
satisfied that the merger or
consolidation of the corporations
concerned is not inconsistent with
the provisions of this Code and
existing laws, it shall issue a
certificate of merger or of
consolidation, at which time the
merger or consolidation shall be
effective.
"If, upon investigation, the Securities
and Exchange Commission has

reason to believe that the proposed

merger or consolidation is contrary
to or inconsistent with the provisions
of this Code or existing laws, it shall
set a hearing to give the corporations
concerned the opportunity to be
heard. Written notice of the date,
time and place of hearing shall be
given to each constituent corporation
at least two (2) weeks before said
hearing. The Commission shall
thereafter proceed as provided in this
Code.
"SEC. 80. Effects of merger or
consolidation. - The merger or
consolidation shall have the
following effects:
1. The constituent
corporations shall become a
single corporation which, in
case of merger, shall be the
surviving corporation
designated in the plan of
merger; and, in case of
consolidation, shall be the
consolidated corporation
designated in the plan of
consolidation;
2. The separate existence of
the constituent corporations
shall cease, except that of the
surviving or the consolidated
corporation;
3. The surviving or the
consolidated corporation
shall possess all the rights,
privileges, immunities and
powers and shall be subject
to all the duties and liabilities
of a corporation organized
under this Code;

DELOS REYES | CORPO

48

4. The surviving or the

consolidated corporation
shall thereupon and thereafter
possess all the rights,
privileges, immunities and
franchises of each of the
constituent corporations; and
all property, real or personal,
and all receivables due on
whatever account, including
subscriptions to shares and
other choses in action, and all
and every other interest of, or
belonging to, or due to each
constituent corporation, shall
be deemed transferred to and
vested in such surviving or
consolidated corporation
without further act or deed;
and

61

Edward J. Nell Company v.

Pacific Farms, Inc., supra.
62

Annex "B"; records, p. 53.

63

Traders Royal Bank, v. Court of

Appeals, supra.

5. The surviving or
consolidated corporation
shall be responsible and
liable for all the liabilities
and obligations of each of the
constituent corporations in
the same manner as if such
surviving or consolidated
corporation had itself
incurred such liabilities or
obligations; and any pending
claim, action or proceeding
brought by or against any of
such constituent corporations
may be prosecuted by or
against the surviving or
consolidated corporation. The
right of creditors or liens
upon the property of any of
such constituent corporations
shall not be impaired by such
merger or consolidation."
60

Associated Bank v. Court of

Appeals, supra.
DELOS REYES | CORPO
49

FIRST DIVISION
[G.R. No. 117897. May 14, 1997]
ISLAMIC DIRECTORATE OF THE
PHILIPPINES, MANUEL F. PEREA and
SECURITIES & EXCHANGE
COMMISSION, petitioners, vs. COURT OF
APPEALS and IGLESIA NI CRISTO,
respondents.
DECISION
HERMOSISIMA, JR., J.:
The subject of this petition for review is the
Decision of the public respondent Court of
Appeals,i[1] dated October 28, 1994, setting
aside the portion of the Decision of the
Securities and Exchange Commission (SEC,
for short) in SEC Case No. 4012 which
declared null and void the sale of two (2)
parcels of land in Quezon City covered by
the Deed of Absolute Sale entered into by
and between private respondent Iglesia Ni
Cristo (INC, for short) and the Islamic
Directorate of the Philippines, Inc., Carpizo
Group, (IDP, for short).

Towards this end, that is, in the same year,

the Libyan government donated money to
the IDP to purchase land at Culiat, Tandang
Sora, Quezon City, to be used as a Center
for the Islamic populace. The land, with an
area of 49,652 square meters, was covered
by two titles: Transfer Certificate of Title
Nos. RT-26520 (176616)iii[3] and RT26521 (170567),iv[4] both registered in the
name of IDP.
It appears that in 1971, the Board of
Trustees of the IDP was composed of the
following per Article 6 of its Articles of
Incorporation:
Senator Mamintal Tamanov[5]
Congressman Ali Dimaporo
Congressman Salipada Pendatun
Dean Cesar Adib Majul
Sultan Harun Al-Rashid Lucman
Delegate Ahmad Alonto
Commissioner Datu Mama Sinsuat

The following facts appear of record.

Mayor Aminkadra Abubakarvi[6]
Petitioner IDP-Tamano Group alleges that
sometime in 1971, Islamic leaders of all
Muslim major tribal groups in the
Philippines headed by Dean Cesar Adib
Majul organized and incorporated the
ISLAMIC DIRECTORATE OF THE
PHILIPPINES (IDP), the primary purpose
of which is to establish an Islamic Center in
Quezon City for the construction of a
Mosque (prayer place), Madrasah (Arabic
School), and other religious infrastructures
so as to facilitate the effective practice of
Islamic faith in the area.ii[2]

According to the petitioner, in 1972, after

the purchase of the land by the Libyan
government in the name of IDP, Martial
Law was declared by the late President
Ferdinand Marcos. Most of the members of
the 1971 Board of Trustees like Senators
Mamintal Tamano, Salipada Pendatun,
Ahmad Alonto, and Congressman Al-Rashid
Lucman flew to the Middle East to escape
political persecution.
Thereafter, two Muslim groups sprung, the
Carpizo Group, headed by Engineer Farouk
Carpizo, and the Abbas Group, led by Mrs.
DELOS REYES | CORPO
50

Zorayda Tamano and Atty. Firdaussi Abbas.

Both groups claimed to be the legitimate
IDP. Significantly, on October 3, 1986, the
SEC, in a suit between these two contending
groups, came out with a Decision in SEC
Case No. 2687 declaring the election of both
the Carpizo Group and the Abbas Group as
IDP board members to be null and void.
The dispositive portion of the SEC Decision
reads:
WHEREFORE, judgment is hereby
rendered declaring the elections of both the
petitionersvii[7] and respondentsviii[8] as
null and void for being violative of the
Articles of Incorporation of petitioner
corporation. With the nullification of the
election of the respondents, the approved
by-laws which they certified to this
Commission as members of the Board of
Trustees must necessarily be likewise
declared null and void. However, before
any election of the members of the Board of
Trustees could be conducted, there must be
an approved by-laws to govern the internal
government of the association including the
conduct of election. And since the election
of both petitioners and respondents have
been declared null and void, a vacuum is
created as to who should adopt the by-laws
and certify its adoption. To remedy this
unfortunate situation that the association has
found itself in, the members of the
petitioning corporation are hereby
authorized to prepare and adopt their bylaws for submission to the Commission.
Once approved, an election of the members
of the Board of Trustees shall immediately
be called pursuant to the approved by-laws.
SO ORDERED.ix[9]
Neither group, however, took the necessary
steps prescribed by the SEC in its October 3,
1986 Decision, and, thus, no valid election
of the members of the Board of Trustees of

IDP was ever called. Although the Carpizo

Groupx[10] attempted to submit a set of bylaws, the SEC found that, aside from
Engineer Farouk Carpizo and Atty. Musib
Buat, those who prepared and adopted the
by-laws were not bona fide members of the
IDP, thus rendering the adoption of the bylaws likewise null and void.
On April 20, 1989, without having been
properly elected as new members of the
Board of Trustees of IDP, the Carpizo
Group caused to be signed an alleged Board
Resolutionxi[11] of the IDP, authorizing the
sale of the subject two parcels of land to the
private respondent INC for a consideration
of P22,343,400.00, which sale was
evidenced by a Deed of Absolute Salexii[12]
dated April 20, 1989.
On May 30, 1991, the petitioner 1971 IDP
Board of Trustees headed by former Senator
Mamintal Tamano, or the Tamano Group,
filed a petition before the SEC, docketed as
SEC Case No. 4012, seeking to declare null
and void the Deed of Absolute Sale signed
by the Carpizo Group and the INC since the
group of Engineer Carpizo was not the
legitimate Board of Trustees of the IDP.
Meanwhile, private respondent INC,
pursuant to the Deed of Absolute Sale
executed in its favor, filed an action for
Specific Performance with Damages against
the vendor, Carpizo Group, before Branch
81 of the Regional Trial Court of Quezon
City, docketed as Civil Case No. Q-90-6937,
to compel said group to clear the property of
squatters and deliver complete and full
physical possession thereof to INC.
Likewise, INC filed a motion in the same
case to compel one Mrs. Leticia P. Ligon to
produce and surrender to the Register of
Deeds of Quezon City the owners duplicate
copy of TCT Nos. RT-26521 and RT-26520
covering the aforementioned two parcels of
DELOS REYES | CORPO
51

land, so that the sale in INCs favor may be

registered and new titles issued in the name
of INC. Mrs. Ligon was alleged to be the
mortgagee of the two parcels of land
executed in her favor by certain
Abdulrahman R.T. Linzag and Rowaida
Busran-Sampaco claimed to be in behalf of
the Carpizo Group.

Judge Celia Lipana-Reyes of Branch 81,

Regional Trial Court of Quezon City, denied
petitioners motion to intervene on the
ground of lack of juridical personality of the
IDP-Tamano Group and that the issues
being raised by way of intervention are
intra-corporate in nature, jurisdiction thereto
properly pertaining to the SEC.xv[15]

The IDP-Tamano Group, on June 11, 1991,

sought to intervene in Civil Case No. Q-906937 averring, inter alia:

Apprised of the pendency of SEC Case No.

4012 involving the controverted status of the
IDP-Carpizo Group but without waiting for
the outcome of said case, Judge Reyes, on
September 12, 1991, rendered Partial
Judgment in Civil Case No. Q-90-6937
ordering the IDP-Carpizo Group to comply
with its obligation under the Deed of Sale of
clearing the subject lots of squatters and of
delivering the actual possession thereof to
INC.xvi[16]

xxx

xxx

xxx

2. That the Intervenor has filed a case before

the Securities and Exchange Commission
(SEC) against Mr. Farouk Carpizo, et, al.,
who, through false schemes and
machinations, succeeded in executing the
Deed of Sale between the IDP and the
Iglesia Ni Kristo (plaintiff in the instant
case) and which Deed of Sale is the subject
of the case at bar;
3. That the said case before the SEC is
docketed as Case No. 04012, the main issue
of which is whether or not the aforesaid
Deed of Sale between IDP and the Iglesia ni
Kristo is null and void, hence, Intervenors
legal interest in the instant case. A copy of
the said case is hereto attached as Annex
A;
4. That, furthermore, Intervenor herein is the
duly constituted body which can lawfully
and legally represent the Islamic Directorate
of the Philippines;
xxx

xxx

xxx.xiii[13]

Private respondent INC opposed the motion

arguing, inter alia, that the issue sought to
be litigated by way of intervention is an
intra-corporate dispute which falls under the
jurisdiction of the SEC.xiv[14]

Thereupon, Judge Reyes in another Order,

dated March 2, 1992, pertaining also to Civil
Case No. Q-90-6937, treated INC as the
rightful owner of the real properties and
disposed as follows:
WHEREFORE, Leticia P. Ligon is hereby
ordered to produce and/or surrender to
plaintiffxvii[17] the owners copy of RT26521 (170567) and RT-26520 (176616) in
open court for the registration of the Deed of
Absolute Sale in the latters name and the
annotation of the mortgage executed in her
favor by herein defendant Islamic
Directorate of the Philippines on the new
transfer certificate of title to be issued to
plaintiff.
SO ORDERED.xviii[18]
On April 6, 1992, the above Order was
amended by Judge Reyes directing Ligon
to deliver the owners duplicate copies of
TCT Nos. RT-26521 (170567) and RT26520 (176616) to the Register of Deeds of
DELOS REYES | CORPO
52

Quezon City for the purposes stated in the

Order of March 2, 1992.xix[19]

executory, no appeal having been taken

therefrom.xxv[25]

Mortgagee Ligon went to the Court of

Appeals, thru a petition for certiorari,
docketed as CA-G.R. No. SP-27973,
assailing the foregoing Orders of Judge
Reyes. The appellate court dismissed her
petition on October 28, 1992.xx[20]

INC elevated SEC Case No. 4012 to the

public respondent Court of Appeals by way
of a special civil action for certiorari,
docketed as CA-G.R. SP No. 33295. On
October 28, 1994, the court a quo
promulgated a Decision in CA-G.R. SP No.
33295 granting INCs petition. The portion
of the SEC Decision in SEC Case No. 4012
which declared the sale of the two (2) lots in
question to INC as void was ordered set
aside by the Court of Appeals.

Undaunted, Ligon filed a petition for review

before the Supreme Court which was
docketed as G.R. No. 107751.
In the meantime, the SEC, on July 5, 1993,
finally came out with a Decision in SEC
Case No. 4012 in this wise:
1. Declaring the by-laws submitted by the
respondentsxxi[21] as unauthorized, and
hence, null and void.
2. Declaring the sale of the two (2) parcels
of land in Quezon City covered by the Deed
of Absolute Sale entered into by Iglesia ni
Kristo and the Islamic Directorate of the
Philippines, Inc.xxii[22] null and void.
3. Declaring the election of the Board of
Directorsxxiii[23] of the corporation from
1986 to 1991 as null and void;
4. Declaring the acceptance of the
respondents, except Farouk Carpizo and
Musnib Buat, as members of the IDP null
and void.
No pronouncement as to cost.
SO ORDERED.xxiv[24]
Private respondent INC filed a Motion for
Intervention, dated September 7, 1993, in
SEC Case No. 4012, but the same was
denied on account of the fact that the
decision of the case had become final and

Thus, the IDP-Tamano Group brought the

instant petition for review, dated December
21, 1994, submitting that the Court of
Appeals gravely erred in:
1) Not upholding the jurisdiction of the SEC
to declare the nullity of the sale;
2) Encouraging multiplicity of suits; and
3) Not applying the principles of estoppel
and laches.xxvi[26]
While the above petition was pending,
however, the Supreme Court rendered
judgment in G.R. No. 107751 on the petition
filed by Mrs. Leticia P. Ligon. The
Decision, dated June 1, 1995, denied the
Ligon petition and affirmed the October 28,
1992 Decision of the Court of Appeals in
CA-G.R. No. SP-27973 which sustained the
Order of Judge Reyes compelling mortgagee
Ligon to surrender the owners duplicate
copies of TCT Nos. RT-26521 (170567) and
RT-26520 (176616) to the Register of Deeds
of Quezon City so that the Deed of Absolute
Sale in INCs favor may be properly
registered.
Before we rule upon the main issue posited
in this petition, we would like to point out
DELOS REYES | CORPO
53

that our disposition in G.R. No. 107751

entitled, Ligon v. Court of Appeals,
promulgated on June 1, 1995, in no wise
constitutes res judicata such that the petition
under consideration would be barred if it
were the case. Quite the contrary, the
requisites of res judicata do not obtain in the
case at bench.
Section 49, Rule 39 of the Revised Rules of
Court lays down the dual aspects of res
judicata in actions in personam, to wit:
Effect of judgment. - The effect of a
judgment or final order rendered by a court
or judge of the Philippines, having
jurisdiction to pronounce the judgment or
order, may be as follows:
xxx

xxx

xxx

(b) In other cases the judgment or

order is, with respect to the matter
directly adjudged or as to any other
matter that could have been raised
in relation thereto, conclusive
between the parties and their
successors in interest by title
subsequent to the commencement
of the action or special proceeding,
litigating for the same thing and
under the same title and in the
same capacity;
(c) In any other litigation between
the same parties or their successors
in interest, that only is deemed to
have been adjudged in a former
judgment which appears upon its
face to have been so adjudged, or
which was actually and necessarily
included therein or necessary
thereto.
Section 49(b) enunciates the first concept of
res judicata known as bar by prior

judgment, whereas, Section 49(c) is

referred to as conclusiveness of judgment.
There is bar by former judgment when,
between the first case where the judgment
was rendered, and the second case where
such judgment is invoked, there is identity
of parties, subject matter and cause of
action. When the three identities are
present, the judgment on the merits rendered
in the first constitutes an absolute bar to the
subsequent action. But where between the
first case wherein judgment is rendered and
the second case wherein such judgment is
invoked, there is only identity of parties but
there is no identity of cause of action, the
judgment is conclusive in the second case,
only as to those matters actually and directly
controverted and determined, and not as to
matters merely involved therein. This is
what is termed conclusiveness of
judgment.xxvii[27]
Neither of these concepts of res judicata
find relevant application in the case at
bench. While there may be identity of
subject matter (IDP property) in both cases,
there is no identity of parties. The principal
parties in G.R. No. 107751 were mortgagee
Leticia P. Ligon, as petitioner, and the
Iglesia Ni Cristo, as private respondent. The
IDP, as represented by the 1971 Board of
Trustees or the Tamano Group, was only
made an ancillary party in G.R. No. 107751
as intervenor.xxviii[28] It was never
originally a principal party thereto. It must
be noted that intervention is not an
independent action, but is merely collateral,
accessory, or ancillary to the principal
action. It is just an interlocutory proceeding
dependent on or subsidiary to the case
between the original parties.xxix[29] Indeed,
the IDP-Tamano Group cannot be
considered a principal party in G.R. No.
107751 for purposes of applying the
principle of res judicata since the contrary
DELOS REYES | CORPO
54

goes against the true import of the action of

intervention as a mere subsidiary proceeding
without an independent life apart from the
principal action as well as the intrinsic
character of the intervenor as a mere
subordinate party in the main case whose
right may be said to be only in aid of the
right of the original party.xxx[30] It is only
in the present case, actually, where the IDPTamano Group became a principal party, as
petitioner, with the Iglesia Ni Cristo, as
private respondent. Clearly, there is no
identity of parties in both cases.
In this connection, although it is true that
Civil Case No. Q-90-6937, which gave rise
to G.R. No. 107751, was entitled, Iglesia
Ni Kristo, Plaintiff v. Islamic Directorate of
the Philippines, Defendant,xxxi[31] the
IDP can not be considered essentially a
formal party thereto for the simple reason
that it was not duly represented by a
legitimate Board of Trustees in that case.
As a necessary consequence, Civil Case No.
Q-90-6937, a case for Specific Performance
with Damages, a mere action in personam,
did not become final and executory insofar
as the true IDP is concerned since petitioner
corporation, for want of legitimate
representation, was effectively deprived of
its day in court in said case. Res inter alios
judicatae nullum aliis praejudicium faciunt.
Matters adjudged in a cause do not prejudice
those who were not parties to it.xxxii[32]
Elsewise put, no person (natural or juridical)
shall be affected by a proceeding to which
he is a stranger.xxxiii[33]
Granting arguendo, that IDP may be
considered a principal party in Ligon, res
judicata as a bar by former judgment will
still not set in on the ground that the cause of
action in the two cases are different. The
cause of action in G.R. No. 107751 is the
surrender of the owners duplicate copy of
the transfer certificates of title to the rightful

possessor thereof, whereas the cause of

action in the present case is the validity of
the Carpizo Group-INC Deed of Absolute
Sale.
Res Judicata in the form of conclusiveness
of judgment cannot likewise apply for the
reason that any mention at all in Ligon as to
the validity of the disputed Carpizo BoardINC sale may only be deemed incidental to
the resolution of the primary issue posed in
said case which is: Who between Ligon and
INC has the better right of possession over
the owners duplicate copy of the TCTs
covering the IDP property? G.R. No.
107751 cannot be considered determinative
and conclusive on the matter of the validity
of the sale for this particular issue was not
the principal thrust of Ligon. To rule
otherwise would be to cause grave and
irreparable injustice to IDP which never
gave its consent to the sale, thru a legitimate
Board of Trustees.
In any case, while it is true that the principle
of res judicata is a fundamental component
of our judicial system, it should be
disregarded if its rigid application would
involve the sacrifice of justice to
technicality.xxxiv[34]
The main question though in this petition is:
Did the Court of Appeals commit reversible
error in setting aside that portion of the
SECs Decision in SEC Case No. 4012
which declared the sale of two (2) parcels of
land in Quezon City between the IDPCarpizo Group and private respondent INC
null and void?
We rule in the affirmative.
There can be no question as to the authority
of the SEC to pass upon the issue as to who
among the different contending groups is the
legitimate Board of Trustees of the IDP
DELOS REYES | CORPO
55

since this is a matter properly falling within

the original and exclusive jurisdiction of the
SEC by virtue of Sections 3 and 5(c) of
Presidential Decree No. 902-A:
Section 3. The Commission shall have
absolute jurisdiction, supervision and
control over all corporations, partnerships
or associations, who are the grantees of
primary franchises and/or a license or permit
issued by the government to operate in the
Philippines xxx xxx.
xxx

xxx

xxx

It must be noted that SEC Case No. 4012 is

not the first case wherein the SEC had the
opportunity to pass upon the status of the
Carpizo Group. As far back as October 3,
1986, the SEC, in Case No. 2687,xxxvi[36]
in a suit between the Carpizo Group and the
Abbas Group, already declared the election
of the Carpizo Group (as well as the Abbas
Group) to the IDP Board as null and void for
being violative of the Articles of
Incorporation.xxxvii[37] Nothing thus
becomes more settled than that the IDPCarpizo Group with whom private
respondent INC contracted is a fake Board.

Section 5. In addition to the regulatory and

adjudicative functions of the Securities and
Exchange Commission over corporations,
partnerships and other forms of associations
registered with it as expressly granted under
existing laws and decrees, it shall have
original and exclusive jurisdiction to hear
and decide cases involving:

Premises considered, all acts carried out by

the Carpizo Board, particularly the sale of
the Tandang Sora property, allegedly in the
name of the IDP, have to be struck down for
having been done without the consent of the
IDP thru a legitimate Board of Trustees.
Article 1318 of the New Civil Code lays
down the essential requisites of contracts:

xxx

There is no contract unless the following

requisites concur:

xxx

xxx

c) Controversies in the selection or

appointment of directors, trustees, officers,
or managers of such corporations,
partnerships or associations. x x x.
If the SEC can declare who is the legitimate
IDP Board, then by parity of reasoning, it
can also declare who is not the legitimate
IDP Board. This is precisely what the SEC
did in SEC Case No. 4012 when it adjudged
the election of the Carpizo Group to the IDP
Board of Trustees to be null and
void.xxxv[35] By this ruling, the SEC in
effect made the unequivocal finding that the
IDP-Carpizo Group is a bogus Board of
Trustees. Consequently, the Carpizo Group
is bereft of any authority whatsoever to bind
IDP in any kind of transaction including the
sale or disposition of IDP property.

(1) Consent of the contracting parties;

(2) Object certain which is the subject
matter of the contract;
(3) Cause of the obligation which is
established.
All these elements must be present to
constitute a valid contract. For, where even
one is absent, the contract is void. As
succinctly put by Tolentino, consent is
essential for the existence of a contract, and
where it is wanting, the contract is nonexistent.xxxviii[38] In this case, the IDP,
owner of the subject parcels of land, never
gave its consent, thru a legitimate Board of
Trustees, to the disputed Deed of Absolute
Sale executed in favor of INC. This is,
DELOS REYES | CORPO
56

therefore, a case not only of vitiated consent,

but one where consent on the part of one of
the supposed contracting parties is totally
wanting. Ineluctably, the subject sale is
void and produces no effect whatsoever.

property and assets if thereby the

corporation would be rendered incapable of
continuing the business or accomplishing
the purpose for which it was incorporated.
xxx

The Carpizo Group-INC sale is further

deemed null and void ab initio because of
the Carpizo Groups failure to comply with
Section 40 of the Corporation Code
pertaining to the disposition of all or
substantially all assets of the corporation:
Sec. 40. Sale or other disposition of assets.
- Subject to the provisions of existing laws
on illegal combinations and monopolies, a
corporation may, by a majority vote of its
board of directors or trustees, sell, lease,
exchange, mortgage, pledge or otherwise
dispose of all or substantially all of its
property and assets, including its goodwill,
upon terms and conditions and for such
consideration, which may be money, stocks,
bonds or other instruments for the payment
of money or other property or consideration,
as its board of directors or trustees may
deem expedient, when authorized by the
vote of the stockholders representing at least
two-thirds (2/3) of the outstanding capital
stock; or in case of non-stock corporation,
by the vote of at least two-thirds (2/3) of the
members, in a stockholders or members
meeting duly called for the purpose. Written
notice of the proposed action and of the time
and place of the meeting shall be addressed
to each stockholder or member at his place
of residence as shown on the books of the
corporation and deposited to the addressee
in the post office with postage prepaid, or
served personally: Provided, That any
dissenting stockholder may exercise his
appraisal right under the conditions provided
in this Code.
A sale or other disposition shall be deemed
to cover substantially all the corporate

xxx

x x x.

The Tandang Sora property, it appears from

the records, constitutes the only property of
the IDP. Hence, its sale to a third-party is a
sale or disposition of all the corporate
property and assets of IDP falling squarely
within the contemplation of the foregoing
section. For the sale to be valid, the
majority vote of the legitimate Board of
Trustees, concurred in by the vote of at least
2/3 of the bona fide members of the
corporation should have been obtained.
These twin requirements were not met as the
Carpizo Group which voted to sell the
Tandang Sora property was a fake Board of
Trustees, and those whose names and
signatures were affixed by the Carpizo
Group together with the sham Board
Resolution authorizing the negotiation for
the sale were, from all indications, not bona
fide members of the IDP as they were made
to appear to be. Apparently, there are only
fifteen (15) official members of the
petitioner corporation including the eight (8)
members of the Board of Trustees.xxxix[39]
All told, the disputed Deed of Absolute Sale
executed by the fake Carpizo Board and
private respondent INC was intrinsically
void ab initio.
Private respondent INC nevertheless
questions the authority of the SEC to nullify
the sale for being made outside of its
jurisdiction, the same not being an intracorporate dispute.
The resolution of the question as to whether
or not the SEC had jurisdiction to declare
the subject sale null and void is rendered
DELOS REYES | CORPO
57

moot and academic by the inherent nullity of

the highly dubious sale due to lack of
consent of the IDP, owner of the subject
property. No end of substantial justice will
be served if we reverse the SECs
conclusion on the matter, and remand the
case to the regular courts for further
litigation over an issue which is already
determinable based on what we have in the
records.
It is unfortunate that private respondent INC
opposed the motion for intervention filed by
the 1971 Board of Trustees in Civil Case
No. Q-90-6937, a case for Specific
Performance with Damages between INC
and the Carpizo Group on the subject Deed
of Absolute Sale. The legitimate IDP Board
could have been granted ample opportunity
before the regional trial court to shed light
on the true status of the Carpizo Board and
settled the matter as to the validity of the
sale then and there. But INC, wanting to
acquire the property at all costs and
threatened by the participation of the
legitimate IDP Board in the civil suit, argued
for the denial of the motion averring, inter
alia, that the issue sought to be litigated by
the movant is intra-corporate in nature and
outside the jurisdiction of the regional trial
court.xl[40] As a result, the motion for
intervention was denied. When the Decision
in SEC Case No. 4012, came out nullifying
the sale, INC came forward, this time,
quibbling over the issue that it is the
regional trial court, and not the SEC, which
has jurisdiction to rule on the validity of the
sale. INC is here trifling with the courts.
We cannot put a premium on this clever
legal maneuverings of private respondent
which, if countenanced, would result in a
failure of justice.
Furthermore, the Court observed that the
INC bought the questioned property from
the Carpizo Group without even seeing the

owners duplicate copy of the titles covering

the property. This is very strange
considering that the subject lot is a large
piece of real property in Quezon City worth
millions, and that under the Torrens System
of Registration, the minimum requirement
for one to be a good faith buyer for value is
that the vendee at least sees the owners
duplicate copy of the title and relies upon
the same.xli[41] The private respondent
presumably knowledgeable on the aforesaid
working of the Torrens System, did not take
heed of this and nevertheless went through
with the sale with undue haste. The
unexplained eagerness of INC to buy this
valuable piece of land in Quezon City
without even being presented with the
owners copy of the titles casts very serious
doubt on the rightfulness of its position as
vendee in the transaction.
WHEREFORE, the petition is GRANTED.
The Decision of the public respondent Court
of Appeals dated October 28, 1994 in CAG.R. SP No. 33295 is SET ASIDE. The
Decision of the Securities and Exchange
Commission dated July 5, 1993 in SEC Case
No. 4012 is REINSTATED. The Register
of Deeds of Quezon City is hereby ordered
to cancel the registration of the Deed of
Absolute Sale in the name of respondent
Iglesia Ni Cristo, if one has already been
made. If new titles have been issued in the
name of Iglesia Ni Cristo, the register of
Deeds is hereby ordered to cancel the same,
and issue new ones in the name of petitioner
Islamic Directorate of the Philippines.
Petitioner corporation is ordered to return to
private respondent whatever amount has
been initially paid by INC as consideration
for the property with legal interest, if the
same was actually received by IDP.
Otherwise, INC may run after Engineer
Farouk Carpizo and his group for the
amount of money paid.

DELOS REYES | CORPO

58

SO ORDERED.
xv[15] Order, pp. 1-2; Rollo, pp. 75-76.
Kapunan, JJ., concur.
xvi[16] Rollo, p. 79.
Padilla, (Chairman), J., on leave.
xvii[17] Iglesia Ni Cristo.
Bellosillo, J., no part, he dispels doubt on his
judicial objectivity.

xviii[18] Rollo, p. 82.

Vitug, J., in the result.

xix[19] Rollo, p.158.

xx[20] Rollo, p. 164.
xxi[21] Engr. Farouk Carpizo, et. al.

i[1] Docketed as CA G.R. SP No. 33295.

xxii[22] Carpizo Group.

ii[2] Rollo, p. 197.

xxiii[23] Ibid.

iii[3] Annex C; Rollo, p. 40.

xxiv[24] Decision, p. 19; Rollo, p. 104.

iv[4] Annex B; Rollo, p. 39.

xxv[25] Annex P; Rollo, p. 109.

v[5] Now deceased.

xxvi[26] Petition, p. 14; Rollo, p. 22.

vi[6] Rollo, p. 99.

xxvii[27] Nabus v. Court of Appeals, 193

SCRA 732, 739-740 [ 1991].

vii[7] IDP-Carpizo Group.

xxviii[28] Rollo of G.R. No. 107751, p. 561.
viii[8] Hadja Potri Zorayda Tamano, et. al.
ix[9] Rollo, p. 45.
x[10] Composed of Farouk Carpizo, Musib
M. Buat, Abdulla U. Camlian, Suleiman
Clem Antonio, Al-Haj, Ustadz Iljas Ismael,
Abdurafih Sayedy, and Abdurahman Linzag
.

xxix[29] Big Country Ranch Corp. v. Court

of Appeals, 227 SCRA 161, 167 [1993];
Carino v. Ofilada, 217 SCRA 206, 215
[1993]; Ordonez v. Gustilo, 192 SCRA 469
[1990]; Chavez v. Ongpin, 186 SCRA 331,
338 [1990]; Republic v. Sandiganbayan, 182
SCRA 911, 918 [1990].

xi[11] Rollo, pp. 135-145.

xxx[30] Carino, supra., citing Clareza v.

Rosales, 2 SCRA 455, 457 [1961].

xii[12] Annex E; Rollo, pp. 46-48.

xxxi[31] Rollo, p. 80.

xiii[13] Rollo, pp. 51-52.

xxxii[32] Tan v. Barrios, 190 SCRA 686,

698 [1990], citing 54 C.J. 719.

xiv[14] Rollo, pp. 67-72.

DELOS REYES | CORPO
59

xxxiii[33] Filamer Christian Institute v.

Court of Appeals, 190 SCRA 485, 492
[1990], citing Church Assistance Program v.
Sibulo, G.R. No. 76552, March 21, 1989.
xxxiv[34] Zaldarriaga v. Court of Appeals,
255 SCRA 254, 268 [1996], citing
Ronquillo v. Marasigan, L-11621, May 31,
1962, 5 SCRA 304, 312, cited in Republic v.
De los Santos, L-30240, March 25, 1988,
159 SCRA 264, 285 and in the concurring
opinion of Justice Florenz D. Regalado in
Sumaoang v. Judge, RTC, Br. XXXI,
Guimba, Nueva Ecija, G.R. No. 78173,
October 26, 1992, 215 SCRA 136, 150-151;
Suarez v. Court of Appeals, 193 SCRA 183,
189 [1991].
xxxv[35] Supra., note 24.
xxxvi[36] Annex D; Rollo, p. 41.
xxxvii[37] Id., p. 45.
xxxviii[38] Tolentino, Arturo M.,
Commentaries and Jurisprudence on the
Civil Code of the Philippines, Vol. IV, 1991
ed., p. 445.
xxxix[39] Rollo, p. 200.
xl[40] Supra., note 14.
xli[41] See Realty Sales Enterprise, Inc. v.
IAC, 154 SCRA 328 [1987].

DELOS REYES | CORPO

60

CORPORATION (FILSYN),
SECOND DIVISION

FAR EASTERN
INC.,
STA.
ROSA
Promulgated:

TEXTILE

MILLS,

TEXTILES,

INC.,

(PEGGY MILLS, INC.),

JOHN F. MCLEOD,
G.R. No. 146667

PATRICIO L. LIM, and ERIC HU,

Petitioner,
Respondents.
January 23, 2007
Present:

x-------------------------------------------------x
QUISUMBING, J.,

Chairperson,
DECISION
CARPIO,
versus
CARPIO MORALES,

CARPIO, J.:

TINGA, and

VELASCO, JR., JJ.

The Case

This is a petition for reviewxli[1] to

NATIONAL LABOR RELATIONS
COMMISSION (First Division),
FILIPINAS SYNTHETIC FIBER

set aside the Decisionxli[2] dated 15 June

2000 and the Resolutionxli[3] dated 27
December 2000 of the Court of Appeals in
DELOS REYES | CORPO
61

CA-G.R. SP No. 55130.

The Court of

Appeals affirmed with modification the 29

December
National

1998
Labor

Decisionxli[4]
Relations

of

the

Commission

(NLRC) in NLRC NCR 02-00949-95.

The Facts

The facts, as summarized by the

Labor Arbiter and adopted by the NLRC
and the Court of Appeals, are as follows:

On February 2, 1995,
John F. McLeod filed a
complaint for retirement
benefits, vacation and sick
leave benefits, non-payment
of unused airline tickets,
holiday pay, underpayment
of salary and 13th month pay,
moral
and
exemplary
damages, attorneys fees plus
interest against Filipinas
Synthetic
Corporation
(Filsyn), Far Eastern Textile
Mills, Inc., Sta. Rosa
Textiles, Inc., Patricio Lim
and Eric Hu.
In his Position Paper,
complainant alleged that he is
an
expert
in
textile

manufacturing process; that

as early as 1956 he was hired
as the Assistant Spinning
Manager
of
Universal
Textiles, Inc. (UTEX); that
he was promoted to Senior
Manager and worked for
UTEX till 1980 under its
President, respondent Patricio
Lim; that in 1978 Patricio
Lim formed Peggy Mills, Inc.
with
respondent
Filsyn
having controlling interest;
that
complainant
was
absorbed by Peggy Mills as
its Vice President and Plant
Manager of the plant at Sta.
Rosa, Laguna; that at the time
of
his
retirement
complainant was receiving
P60,000.00 monthly with
vacation and sick leave
benefits; 13th month pay,
holiday pay and two round
trip business class tickets on
a
Manila-London-Manila
itinerary every three years
which is convertible to cas[h]
if unused; that in January
1986, respondents failed to
pay vacation and leave
credits
and
requested
complainant to wait as it was
short of funds but the same
remain unpaid at present; that
complainant is entitled to
such benefit as per CBA
provision (Annex A); that
respondents likewise failed to
pay complainants holiday
pay up to the present; that
complainant is entitled to
such benefits as per CBA
provision (Annex B); that
in 1989 the plant union
DELOS REYES | CORPO
62

staged a strike and in 1993

was found guilty of staging
an illegal strike; that from
1989 to 1992 complainant
was entitled to 4 round trip
business class plane tickets
on a Manila-London-Manila
itinerary but this benefit not
(sic) its monetary equivalent
was not given; that on August
1990 the
respondents
reduced
complainants
monthly salary of P60,000.00
by P9,900.00 till November
1993 or a period of 39
months; that in 1991 Filsyn
sold Peggy Mills, Inc. to Far
Eastern Textile Mills, Inc. as
per agreement (Annex D)
and this was renamed as Sta.
Rosa Textile with Patricio
Lim as Chairman and
President; that complainant
worked for Sta. Rosa until
November 30 that from time
to time the owners of Far
Eastern
consulted
with
complainant on technical
aspects of reoperation of the
plant as per correspondence
(Annexes D-1 and D-2);
that
when complainant
reached
and
applied
retirement age at the end of
1993, he was only given a
reduced 13th month pay of
P44,183.63, leaving a balance
of P15,816.87; that thereafter
the owners of Far Eastern
Textiles decided for cessation
of operations of Sta. Rosa
Textiles; that
on two
occasions, complainant wrote
letters (Annexes E-1 to E2) to Patricio Lim requesting

for his retirement and other

benefits; that in the last
quarter of 1994 respondents
offered
complainant
compromise settlement of
only P300,000.00 which
complainant rejected; that
again complainant wrote a
letter (Annex F) reiterating
his demand for full payment
of all benefits and to no
avail, hence this complaint;
and that he is entitled to all
his money claims pursuant to
law.
On the other hand,
respondents in their Position
Paper
alleged
that
complainant was the former
Vice-President and Plant
Manager of Peggy Mills,
Inc.; that he was hired in June
1980 and Peggy Mills closed
operations due to irreversible
losses at the end of July 1992
but the corporation still exists
at present; that its assets were
acquired by Sta. Rosa Textile
Corporation
which
was
established in April 1992 but
still remains non-operational
at present; that complainant
was hired as consultant by
Sta.
Rosa
Textile
in
November 1992 but he
resigned on November 30,
1993; that Filsyn and Far
Eastern Textiles are separate
legal entities and have no
employer relationship with
complainant; that respondent
Patricio Lim is the President
and Board Chairman of Sta.
Rosa Textile
Corporation;
DELOS REYES | CORPO
63

that respondent Eric Hu is a

Taiwanese and is Director of
Sta. Rosa Textiles, Inc.; that
complainant has no cause of
action against Filsyn, Far
Eastern Textile Ltd., Sta.
Rosa Textile Corporation and
Eric Hu; that Sta. Rosa only
acquired the assets and not
the liabilities of Peggy Mills,
Inc.; that Patricio Lim was
only impleaded as Board
Chairman of Sta. Rosa
Textile and not as private
individual;
that
while
complainant
was
Vice
President and Plant Manager
of Peggy Mills, the union
staged a strike up to July
1992 resulting in closure of
operations due to irreversible
losses as per Notice (Annex
1); that complainant was
relied upon to settle the labor
problem but due to his lack of
attention and absence the
strike continued resulting in
closure of the company; and
losses to Sta. Rosa which
acquired its assets as per their
financial
statements
(Annexes 2 and 3); that
the attendance records of
complainant from April 1992
to November 1993 (Annexes
4 and 5) show that he
was either absent or worked
at most two hours a day; that
Sta. Rosa and Peggy Mills
are
interposing
counterclaims for damages in
the
total
amount
of
P36,757.00
against
complainant;
that
complainants monthly salary

at
Peggy
Mills
was
P50,495.00
and
not
P60,000.00; that Peggy Mills,
does not have a retirement
program;
that
whatever
amount
complainant
is
entitled should be offset with
the
counterclaims;
that
complainant worked only for
12 years from 1980 to 1992;
that complainant was only
hired as a consultant and not
an employee by Sta. Rosa
Textile; that complainants
attendance record of absence
and two hours daily work
during the period of the
strike
wipes out any
vacation/sick leave he may
have accumulated; that there
is no basis for complainants
claim of two (2) business
class airline tickets; that
complainants pay already
included the holiday pay; that
he is entitled to holiday pay
as consultant by Sta. Rosa;
that he has waived this
benefit in his 12 years of
work with Peggy Mills; that
he is not entitled to 13th
month pay as consultant; and
that he is not entitled to
moral
and
exemplary
damages and attorneys fees.
In
his
Reply,
complainant alleged that all
respondents being one and
the
same
entities
are
solidarily liable for all
salaries and benefits and
complainant is entitled to;
that all respondents have the
same address at 12/F B.A.
DELOS REYES | CORPO
64

Lepanto Building, Makati

City; that their counsel holds
office in the same address;
that all respondents have the
same offices and key
personnel such as Patricio
Lim and Eric Hu; that
respondents Position Paper
is verified by Marialen C.
Corpuz who knows all the
corporate officers of all
respondents; that the veil of
corporate fiction may be
pierced if it is used as a
shield to perpetuate fraud and
confuse legitimate issues;
that
complainant
never
accepted the change in his
position from Vice-President
and
Plant
Manger
to
consultant
and it is
incumbent upon respondents
to prove that he was only a
consultant; that the Deed of
Dation in Payment
with
Lease (Annex C) proves
that Sta. Rosa took over the
assets of Peggy Mills as early
as June 15, 1992 and not
1995
as
alleged
by
respondents; that complainant
never resigned from his job
but applied for retirement as
per letters (Annexes E-1,
E-2 and F);
that
documents G, H and I
show that Eric Hu is a top
official of Peggy Mills that
the closure of Peggy Mills
cannot be the fault of
complainant; that the strike
was staged on the issue of
CBA negotiations which is
not part of the usual duties
and responsibilities as Plant

Manager; that complainant is

a British national and is
prohibited by law in engaging
in union activities; that as per
Resolution (Annex 3) of
the NLRC in the proper case,
complainant testified in favor
of management; that the
alleged attendance record of
complainant was lifted from
the logbook of a security
agency and is hearsay
evidence; that in the other
attendance record it shows
that
complainant
was
reporting daily and even on
Saturdays; that his limited
hours was due to the strike
and cessation of operations;
that as plant manager
complainant was on call 24
hours a day; that respondents
must pay complainant the
unpaid portion of his salaries
and his retirement benefits
that cash voucher No. 17015
(Annex K) shows that
complainant
drew the
monthly salary of P60,000.00
which was reduced to
P50,495.00 in August 1990
and therefore without the
consent of complainant; that
complainant was assured that
he will be paid the deduction
as soon as the company
improved
its
financial
standing but this assurance
was never fulfilled; that
Patricio
Lim
promised
complainant his retirement
pay as per the latters letters
(Annexes E-1, E-2 and
F);
that the law itself
provides
for
retirement
DELOS REYES | CORPO
65

benefits; that Patricio Lim by

way of Memorandum (Annex
M) approved vacation and
sick leave benefits of 22
days per year effective 1986;
that Peggy Mills required
monthly paid employees to
sign an acknowledgement
that
their
monthly
compensation
includes
holiday pay; that complainant
was not made to sign this
undertaking
precisely
because he is entitled to
holiday pay over and above
his monthly pay; that the
company
paid
for
complainants two (2) round
trip tickets to London in 1983
and 1986 as reflected in the
complainants
passport
(Annex
N);
that
respondents
claim that
complainant is not entitled to
13th month pay but paid in
1993 and all the past 13
years; that complainant is
entitled to moral and
exemplary damages and
attorneys fees; that all
doubts must be resolved in
favor of complainant; and
that complainant reserved the
right to file perjury cases
against those concerned.
In
their
Reply,
respondents alleged that
except for Peggy Mills, the
other respondents are not
proper persons in interest due
to the lack of employeremployee
relationship
between
them
and
complainant;
that

undersigned counsel does not

represent Peggy Mills, Inc.
In a separate Position
Paper,
respondent Peggy
Mills
alleged
that
complainant was hired on
February 10, 1991 as per
Board Minutes (Annex A);
that on August 19, 1987, the
workers staged an illegal
strike causing cessation of
operations on July 21, 1992;
that respondent filed a Notice
of Closure with the DOLE
(Annex B); that all
employees
were
given
separation pay except for
complainant whose task was
extended to December 31,
1992 to wind up the affairs of
the company as per vouchers
(Annexes C and C-1);
that
respondent
offered
complainant his retirement
benefits under RA 7641 but
complainant refused; that the
regular
salaries
of
complainant from closure up
to December 31, 1992 have
offset whatever vacation and
sick leaves he accumulated;
that his claim for unused
plane tickets from 1989 to
1992 has no policy basis, the
companys
formula
of
employees monthly rate x
314 days over 12 months
already included holiday pay;
that complainants unpaid
portion of the 13 th month pay
in 1993 has no basis because
he was only an employee up
to December 31, 1992; that
the 13th month pay was based
DELOS REYES | CORPO
66

on his last salary; and that

complainant is not entitled to
damages.xli[5]

P
9,505 x
36.0 mos. ...
342,180.00

On 3 April 1998, the Labor Arbiter

Holiday Pay (3 yrs.)

P2,000 x 30
days .
60,000.00

rendered his decision with the following

dispositive portion:

WHEREFORE,
premises considered, We
hold all respondents as jointly
and solidarily liable for
complainants money claims
as adjudicated above and
computed below as follows:
Retirement Benefits
(one month salary
for every year
of service)
6/80
11/30/93 = 14 years
P60,000
x
14.0
mos.

P840,000.00
Vacation and Sick
Leave (3 yrs.)
P2,000.00 x
22 days x 3 yrs.
132,000.00
Underpayment
Salaries (3 yrs.)
P60,000
P50,495 = P9,505

Underpayment of 13th
month pay (1993) ...
15,816.87
Moral
Damages

..
3,000,000.00
Exemplary Damages
..
1,000,000.00
10% Attorneys Fees
.
138,999.68

TOTAL
P5,528,996.55
Unused
Airline
Tickets (3 yrs.)
(To be converted in
Peso upon payment)
$2,450.00 x
3.0
[yrs.]..
$7,350.00
SO ORDERED.xli[6]

of
Filipinas Synthetic Fiber Corporation
-

(Filsyn), Far Eastern Textile Mills, Inc.

(FETMI), Sta. Rosa Textiles, Inc. (SRTI),
DELOS REYES | CORPO
67

Patricio L. Lim (Patricio), and Eric Hu

The Ruling of the Court of Appeals

appealed to the NLRC. The NLRC rendered

its decision on 29 December 1998, thus:
On 15 June 2000, the Court of
Appeals rendered judgment as follows:
WHEREFORE, the
Decision dated 3 April 1998
is hereby REVERSED and
SET ASIDE and a new one is
entered
ORDERING
respondent Peggy Mills, Inc.
to pay complainant his
retirement pay equivalent to
22.5 days for every year of
service for his twelve (12)
years of service from 1980 to
1992 based on a salary rate of
P50,495.00 a month.
All other claims are
DISMISSED for lack of
merit.

WHEREFORE, the
decision dated December 29,
1998 of the NLRC is hereby
AFFIRMED
with
the
MODIFICATION
that
respondent Patricio Lim is
jointly and solidarily liable
with Peggy Mills, Inc., to pay
the following amounts to
petitioner John F. McLeod:
1.

retirement pay
equivalent to 22.5
days for every
year of service for
his twelve (12)
years of service
from 1980 to 1992
based on a salary
rate of P50,495, a
month;

2.

moral damages
in the amount of
one
hundred
thousand
(P100,000.00)
Pesos;

SO ORDERED.xli[7]

John F. McLeod (McLeod) filed a

motion for reconsideration which the NLRC
denied in its Resolution of 30 June
1999.xli[8] McLeod thus filed a petition for
certiorari before the Court of Appeals
assailing the decision and resolution of the
NLRC.xli[9]

DELOS REYES | CORPO

68

3.

exemplary
damages in the
amount of fifty
thousand
(P50,000.00)
Pesos; and

of the doctrine of piercing the veil of

corporate fiction.

The Court of Appeals held that there

should be clear and convincing evidence that
4.

attorneys fees
equivalent to 10%
of the total award.

SRTI, FETMI, and Filsyn were being used

as alter ego, adjunct or business conduit for
the sole benefit of Peggy Mills, Inc. (PMI),
otherwise, said corporations should be

No costs is awarded.
SO
ORDERED.xli[10]

treated as distinct and separate from each

other.

The Court of Appeals pointed out

The Court of Appeals rejected
McLeods

theory

that

all

respondent

corporations are the same corporate entity

which should be held solidarily liable for the
payment of his monetary claims.

that the Articles of Incorporation of PMI

show that it has six incorporators, namely,
Patricio, Jose Yulo, Jr., Carlos Palanca, Jr.,
Cesar R. Concio, Jr., E. A. Picasso, and
Walter Euyang.

On the other hand, the

Articles of Incorporation of Filsyn show that

it has 10 incorporators, namely, Jesus Y.
The Court of Appeals ruled that the

Yujuico, Carlos Palanca, Jr., Patricio, Ang

fact that (1) all respondent corporations have

Beng Uh,

Ramon A.

Yulo,

Honorio

the same address; (2) all were represented

Poblador, Jr., Cipriano Azada, Manuel

by the same counsel, Atty. Isidro S. Escano;

Tomacruz, Ismael Maningas, and Benigno

(3) Atty. Escano holds office at respondent

Zialcita, Jr.

corporations address; and (4) all respondent

corporations have common officers and key
personnel, would not justify the application
DELOS REYES | CORPO
69

The Court of Appeals pointed out

employee

relationship

existed

between

that PMI and Filsyn have only two

McLeod and respondent corporations except

interlocking incorporators and directors,

PMI.

namely, Patricio and Carlos Palanca, Jr.

The Court of Appeals ruled that Eric

Reiterating the ruling of this Court in

Hu, as an officer of PMI, should be

Laguio v. NLRC,xli[11] the Court of

exonerated from any liability, there being no

Appeals held that mere substantial identity

proof of malice or bad faith on his part. The

of the incorporators of two corporations

Court of Appeals, however, ruled that

does not necessarily imply fraud, nor

McLeod was entitled to recover from PMI

warrant the piercing of the veil of corporate

and Patricio, the companys Chairman and

fiction.

President.

The Court of Appeals also pointed

The Court of Appeals pointed out

out that when SRTI and PMI executed the

that Patricio deliberately and maliciously

Dation in Payment with Lease, it was clear

evaded

that SRTI did not assume the liabilities PMI

McLeod. The Court of Appeals stated that,

incurred before the execution of the

on several occasions, despite his approval,

contract.

Patricio

PMIs

refused

financial

and

obligation

ignored

to

to

pay

McLeods retirement benefits. The Court of

Appeals stated that the delay lasted for one
The Court of Appeals held that
McLeod failed to substantiate his claim that
all respondent

corporations

should

be

treated as one corporate

entity. The Court of Appeals thus upheld

year prompting McLeod to initiate legal

action.

The Court of Appeals stated that

although PMI offered to pay McLeod his

retirement benefits, this offer for P300,000
was still below the floor limits provided
by law. The Court of Appeals held that an

the NLRCs finding that no employerDELOS REYES | CORPO

70

employee

could

demand

payment

of

retirement benefits as a matter of right.

The Court of Appeals stated that for
McLeod to be entitled to payment of service
incentive leave and holidays, there must be
The Court of Appeals stated that
considering that PMI was no longer in

an agreement to that effect between him and

his employer.

operation, its officer should be held liable

for acting on behalf of the corporation.
Moreover, the Court of Appeals
rejected McLeods argument that since PMI
The Court of Appeals also ruled that
since PMI did not have a retirement program
providing for retirement benefits of its
employees, Article 287 of the Labor Code
must be followed. The Court of Appeals
thus upheld the NLRCs finding that
McLeod was entitled to retirement pay
equivalent to 22.5 days for every year of
service from 1980 to 1992 based on a salary

paid for his two round-trip tickets ManilaLondon in 1983 and 1986, he was also
entitled to unused airline tickets.

The

Court of Appeals stated that the fact that

PMI granted McLeod free transport to and
from Manila and London for the year 1983
and 1986 does not ipso facto characterize it
as regular that would establish a prevailing
company policy.

rate of P50,495 a month.

The Court of Appeals also denied

The Court of Appeals held that

McLeods claims for underpayment of

McLeod was not entitled to payment of

salaries and his 13th month pay for the year

vacation, sick leave and holiday pay because

1994.

The Court of Appeals upheld the

as Vice President and Plant Manager,

NLRCs ruling that it could be deduced

McLeod is a managerial employee who,

from McLeods own narration of facts that

under Article 82 of the Labor Code, is not

he

agreed

to

the

reduction

of

his

entitled to these benefits.

DELOS REYES | CORPO
71

compensation from P60,000 to P50,495 in

August 1990 to November 1993.
1.

Whether the challenged

Decision and Resolution
of the 14th Division of the
Court
of
Appeals
promulgated on 15 June
2000 and 27 December
2000, respectively, in
CA-G.R. SP No. 55130
are in accord with law
and jurisprudence;

2.

Whether an employeremployee
relationship
exists between the private
respondents and the
petitioner for purposes of
determining
employer
liability to the petitioner;

3.

Whether the private

respondents may avoid
their financial obligations
to the petitioner by
invoking the veil of
corporate fiction;

4.

Whether petitioner is
entitled to the relief he
seeks against the private
respondents;

5.

Whether the ruling of

[this] Court in Special
Police and Watchman
Association
(PLUM)

The Court of Appeals found the

award of moral damages for P50,000 in
order because of the stubborn refusal of
PMI and Patricio to respect McLeods valid
claims.

The Court of Appeals also ruled that

attorneys fees equivalent to 10% of the total
award should be given to McLeod under
Article 2208, paragraph 2 of the Civil
Code.xli[12]

Hence, this petition.

The Issues

McLeod submits the following issues

for our consideration:

DELOS REYES | CORPO

72

Federation v. National
Labor
Relations
Commission cited by the
Office of the Solicitor
General is applicable to
the case of petitioner;
and

6.

Whether the appeal

taken by the private
respondents from the
Decision of the labor
arbiter
meets
the
mandatory requirements
recited in the Labor Code
of the Philippines, as
amended.xli[13]

only for this brazen assumption, the Court

of Appeals should not have sustained the
NLRCs ruling that his cause of action was
only against PMI.

These assertions do not deserve

serious consideration.

Records disclose that McLeod was

an employee only of PMI.xli[14] PMI hired
McLeod as its acting Vice President and
General Manager on 20 June 1980.xli[15]
PMI confirmed McLeods appointment as
Vice President/Plant Manager in the Special
Meeting of its Board of Directors on 10

The Courts Ruling

February 1981.xli[16]

McLeod himself

testified during the hearing before the Labor

Arbiter that his regular employment was
with PMI.xli[17]
The petition must fail.

When
McLeod asserts that the Court of
Appeals should not have upheld the NLRCs
findings that he was a managerial employee
of PMI from 20 June 1980 to 31 December
1992, and then a consultant of SRTI up to 30
November 1993.

PMIs

rank-and-file

employees staged a strike on 19 August

1989 to July 1992, PMI incurred serious
business losses.xli[18] This prompted PMI
to stop permanently plant operations and to
send a notice of closure to the Department of

McLeod asserts that if

DELOS REYES | CORPO
73

Labor

and

Employment

on

21

July

1992.xli[19]

However, McLeod claims that after

FETMI purchased PMI in January 1993, he
continued to work at the same plant with
the

PMI

informed

its

employees,

including McLeod, of the closure.xli[20]

PMI

paid

its

employees,

including

managerial employees, except McLeod,

their unpaid wages, sick leave, vacation
leave,

prorated

separation pay.

13th

month pay,

and

same

responsibilities

November 1993.

until

30

McLeod claims that

FETMI merely renamed PMI as SRTI.

McLeod asserts that it was for this reason
that when he reached the retirement age in
1993, he asked all the respondents for the
payment of his benefits.xli[24]

Under the compromise

agreement between PMI and its employees,

the

employer-employee

relationship

These

between them ended on 25 November

consideration.

assertions

deserve

scant

1992.xli[21]

What took place between PMI and

Records also disclose that PMI

SRTI was dation in payment with lease.

extended McLeods service up to 31

Pertinent portions of the contract that PMI

December 1992 to wind up some affairs

and SRTI executed on 15 June 1992 read:

of the company.xli[22] McLeod testified on

cross-examination that he received his last
salary from PMI in December 1992.xli[23]

It is thus clear that McLeod was a

managerial employee of PMI from 20 June
1980 to 31 December 1992.

WHEREAS, PMI is
indebted to the Development
Bank of the Philippines
(DBP) and as security for
such
debts
(the
Obligations) has mortgaged
its real properties covered by
TCT Nos. T-38647, T-37136,
and T-37135, together with
all
machineries
and
improvements found thereat,
DELOS REYES | CORPO
74

a complete listing of which is

hereto attached as Annex A
(the Assets);

under terms and conditions

stated hereunder;
xxxx

WHEREAS, by virtue
of an inter-governmental
agency arrangement, DBP
transferred the Obligations,
including the Assets, to the
Asset Privatization Trust
(APT) and the latter has
received payment for the
Obligations from PMI, under
APTs Direct Debt Buy-Out
(DDBO) program thereby
causing APT to completely
discharge and cancel the
mortgage in the Assets and to
release the titles of the Assets
back to PMI;
WHEREAS,
PMI
obtained cash advances from
SRTC in the total amount of
TWO HUNDRED TEN
MILLION
PESOS
(P210,000,000.00)
(the
Advances) to enable PMI
to consummate the DDBO
with APT, with SRTC
subrogating APT as PMIs
creditor thereby;
WHEREAS,
in
payment to SRTC for
PMIs liability, PMI has
agreed to transfer all its
rights, title and interests in
the Assets by way of a
dation in payment to
SRTC,
provided
that
simultaneous
with
the
dation in payment, SRTC
shall grant unto PMI the
right to lease the Assets

NOW THEREFORE,
for and in consideration of
the foregoing premises, and
of the terms and conditions
hereinafter set forth, the
parties hereby agree as
follows:
1. CESSION.
In
consideration of the amount
of TWO HUNDRED TEN
MILLION
PESOS
(P210,000,000.00),
PMI
hereby cedes, conveys and
transfers to SRTC all of its
rights, title and interest in and
to the Assets by way of a
dation in payment.xli[25]
(Emphasis supplied)

As

rule,

corporation that

purchases the assets of another will not be

liable

for

the

debts

of

the

selling

corporation, provided the former acted in

good faith and paid adequate consideration
for such assets, except when any of the
following circumstances is present: (1)
where the purchaser expressly or impliedly
agrees to assume the debts, (2) where the
transaction amounts to a consolidation or
merger of the corporations, (3) where the
purchasing

corporation

is

merely

DELOS REYES | CORPO

75

continuation of the selling corporation, and

corporations

(4)

corporation

franchises, and property are united and

fraudulently enters into the transaction to

become those of a single, new corporation,

escape liability for those debts.xli[26]

composed

where

the

selling

by

which

generally,

their

rights,

although

not

necessarily, of the stockholders of the

original corporations.
None of the foregoing exceptions is
present in this case.
Merger, on the other hand, is a union
whereby one corporation absorbs one or
Here, PMI transferred its assets to
SRTI to settle its obligation to SRTI in the
sum of P210,000,000.

We are not

more

existing

absorbing

corporations,

corporation

and

the

survives

and

continues the combined business.

convinced that PMI fraudulently transferred

these assets to escape its liability for any of
its debts.

PMI had already paid its

The

parties

to

called

merger

or

employees, except McLeod, their money

consolidation

are

constituent

claims.

corporations.

In consolidation, all the

constituents are dissolved and absorbed by

the new consolidated enterprise. In merger,
There was also no

merger or

all

constituents,

except

the

surviving

corporation, are dissolved. In both cases,

consolidation of PMI and SRTI.

however, there is no liquidation of the assets

of the dissolved corporations, and the
surviving
Consolidation is the union of two or
more existing corporations to form a new
corporation
corporation.
agreement

called

the

consolidated

or

consolidated

corporation

acquires all their properties, rights and

franchises and their stockholders usually
become its stockholders.

It is a combination by
between

two

or

more
DELOS REYES | CORPO
76

The
corporation

surviving
assumes

or

consolidated

automatically

xxxx

the

liabilities of the dissolved corporations,

regardless of whether the creditors have
consented or not to such merger or
consolidation.xli[27]

(e) PMI shall

warrant that it will hold SRTC or its
assigns,
free
and
harmless from any liability for
claims of PMIs
creditors, laborers, and
workers and for physical injury or
injury
to property arising
from PMIs custody, possession,
care, repairs,
maintenance,
use or operation of the Assets except
ordinary wear
and
tear;xli[28] (Emphasis supplied)

In the present case, there is no

showing that the subject dation in payment
involved

any

corporate

merger

or

consolidation. Neither is there any showing

of those indicative factors that SRTI is a
mere instrumentality of PMI.

Also, McLeod did not present any

evidence to show the alleged renaming of
Peggy Mills, Inc. to Sta. Rosa Textiles,
Inc.

Moreover, SRTI did not expressly or

impliedly agree to assume any of PMIs
debts. Pertinent portions of the subject Deed
of Dation in Payment with Lease provide,

Hence, it is not correct for McLeod

to treat PMI and SRTI as the same entity.

thus:

Respondent corporations assert that

2.
WARRANTIES
AND REPRESENTATIONS.
PMI hereby warrants and
represents the following:

SRTI hired McLeod as consultant after PMI

stopped operations.xli[29]
hand,

McLeod

asserts

On the other
that

he

was

DELOS REYES | CORPO

77

respondent corporations employee from

1980

to

30

November

1993.xli[30]

However, McLeod failed to present any

proof of employer-employee relationship
between him and Filsyn, SRTI, or FETMI.
McLeod testified, thus:

ATTY. ESCANO:
Do you have any
employment contract with
Far Eastern Textile?
WITNESS:
It is my belief up the
present time.
ATTY. AVECILLA:
May I request that the
witness be allowed to go
through his Annexes, Your
Honor.
ATTY. ESCANO:
Yes, but I want a
precise answer to that
question.
If he has an
employment contract with
Far Eastern Textile?
WITNESS:
Can I answer it this
way, sir? There is not a valid
contract but I was under the
impression
taking
into
consideration
that
the
closeness that I had at Far
Eastern Textile is enough
during that period of time of
the development of Peggy
Mills to reorganize a staff. I

was
under
the
basic
impression that they might
still retain my status as Vice
President and Plant Manager
of the company.
ATTY. ESCANO:
But the answer is still,
there is no employment
contract in your possession
appointing you in any
capacity by Far Eastern?
WITNESS:
There was no written
contract, sir.
xxxx
ATTY. ESCANO:
So, there is proof that
you were in fact really
employed by Peggy Mills?
WITNESS:
Yes, sir.
ATTY. ESCANO:
Of course, my interest
now is to whether or not there
is a similar document to
present that you were
employed by the other
respondents
like
Filsyn
Corporation?
WITNESS:
I have no document,
sir.

ATTY. ESCANO:
What
about
Eastern Textile Mills?

Far

DELOS REYES | CORPO

78

words, was under the control

of Mr. Patricio Lim at that
period of time.

WITNESS:
I have no document,
sir.

Q No documents to
show, Mr. McLeod?

ATTY. ESCANO:
And Sta. Rosa Textile
Mills?

A
No. No
documents, sir.xli[32]

WITNESS:
There is no document,
sir.xli[31]
xxxx
ATTY. ESCANO:
Q
Yes. Let me be
more specific, Mr. McLeod.
Do you have a contract of
employment
from
Far
Eastern Textiles, Inc.?
A

No, sir.

Q What about Sta.

Rosa Textile Mills, do you
have an employment contract
from this company?

McLeod

could

have

presented

evidence to support his allegation of

employer-employee relationship between
him and any of Filsyn, SRTI, and FETMI,
but he did not.
employment
organization

Appointment letters or
contracts,

charts,

payrolls,

SSS

registration,

personnel list, as well as testimony of coemployees, may serve as evidence of

employee status.xli[33]

No, sir.
It is a basic rule in evidence that

xxxx
parties
Q
And what about
respondent Eric Hu. Have
you had any contract of
employment from Mr. Eric
Hu?

must

prove

affirmative

allegations. While technical rules are not

strictly followed in the NLRC, this does not
mean that the rules on proving allegations
are entirely ignored.

A
Not a direct
contract but I was taken in
and I told to take over this
from
Mr.
Eric
Hu.
Automatically, it confirms
that Mr. Eric Hu, in other

their

not enough.

Bare allegations are

They must be supported by

substantial evidence at the very least.xli[34]

DELOS REYES | CORPO

79

crime,xli[37] or when it is made as a shield

However, McLeod claims that for
purposes of determining employer liability,
all private respondents are one and the same
employer because: (1) they have the same
address; (2) they are all engaged in the same
business; and (3) they have interlocking
directors and officers.xli[35]

to confuse the legitimate issues, or where a

corporation is the mere alter ego or business
conduit

of

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.xli[38]

This assertion is untenable.

To disregard the separate juridical

personality of a corporation, the wrongdoing
must

A corporation is an artificial being

be

established

clearly

and

convincingly. It cannot be presumed.xli[39]

invested by law with a personality separate

and distinct from that of its stockholders
and from that of other corporations to
which it may be connected.xli[36]

Here, we do not find any of the evils

sought to be prevented by the doctrine of
piercing the corporate veil.

While a corporation may exist for

any lawful purpose, the law will regard it as
an association of persons or, in case of two
corporations, merge them into one, when its
corporate legal entity is used as a cloak for

Respondent corporations may be

engaged in the same business as that of PMI,
but this fact alone is not enough reason to
pierce the veil of corporate fiction.xli[40]

fraud or illegality. This is the doctrine of

piercing the veil of corporate fiction. The
doctrine applies only when such corporate
fiction is used to defeat public convenience,
justify wrong, protect fraud, or defend
DELOS REYES | CORPO
80

In Indophil Textile Mill Workers

Union v. Calica,xli[41] the Court ruled,
thus:

Also, the fact that SRTI and PMI

shared the same address, i.e., 11/F BALepanto Bldg., Paseo de Roxas, Makati
City,xli[43] can be explained by the two

In the case at bar,

petitioner seeks to pierce the
veil of corporate entity of
Acrylic, alleging that the
creation of the corporation is
a devise to evade the
application of the CBA
between petitioner Union and
private respondent Company.
While we do not discount the
possibility of the similarities
of the businesses of private
respondent and Acrylic,
neither are we inclined to
apply the doctrine invoked by
petitioner in granting the
relief sought. The fact that
the businesses of private
respondent and Acrylic are
related, that some of the
employees of the private
respondent are the same
persons
manning
and
providing for auxiliary
services to the units of
Acrylic, and that the
physical plants, offices and
facilities are situated in the
same compound, it is our
considered opinion that
these facts are not sufficient
to justify the piercing of the
corporate
veil
of
Acrylic.xli[42]
(Emphasis
supplied)

companies stipulation in their Deed of

Dation

in

Payment

with

Lease

that

simultaneous with the dation in payment,

SRTC shall grant unto PMI the right to lease
the Assets under terms and conditions stated
hereunder.xli[44]

As for the addresses of Filsyn and

FETMI, Filsyn held office at 12th Floor, BALepanto Bldg., Paseo de Roxas, Makati
City,xli[45] while FETMI held office at 18F,
Tun Nan Commercial Building, 333 Tun
Hwa South Road, Sec. 2, Taipei, Taiwan,
R.O.C.xli[46] Hence, they did not have the
same address as that of PMI.

That respondent corporations have

interlocking incorporators, directors, and
officers is of no moment.

DELOS REYES | CORPO

81

The only interlocking incorporators

At

any rate, the existence of

of PMI and Filsyn were Patricio and Carlos

interlocking incorporators, directors, and

Palanca, Jr.xli[47]

While Patricio was

officers is not enough justification to pierce

Director and Board Chairman of Filsyn,

the veil of corporate fiction, in the absence

SRTI, and PMI,xli[48] he was never an

of

officer of FETMI.

considerations.xli[53]

fraud

or

other

public

policy

Eric Hu, on the other hand, was

In Del Rosario v. NLRC,xli[54] the

Director of Filsyn and SRTI.xli[49] He was

Court ruled that substantial identity of the

never an officer of PMI.

incorporators of corporations does not

necessarily imply fraud.

Marialen

C.

Corpuz,

Filsyns

Finance Officer,xli[50] testified on cross-

In light of the foregoing, and there

examination that (1) among all of Filsyns

being no proof of employer-employee

officers, only she was the one involved in

relationship

the management of PMI; (2) only she and

respondent

Patricio were the common officers between

McLeods cause of action is only against his

Filsyn and PMI; and (3) Filsyn and PMI are

former employer, PMI.

between

McLeod

corporations and

and

Eric Hu,

two separate companies.xli[51]

On Patricios personal liability, it is

Apolinario L. Posio, PMIs Chief

settled that in the absence of malice, bad

Accountant, testified that SRTI is a

faith, or specific provision of law, a

different corporation from PMI.xli[52]

stockholder or an officer of a corporation

cannot be made personally liable for
corporate liabilities.xli[55]

DELOS REYES | CORPO

82

To reiterate, a corporation is a
juridical

entity

with

personality

prove any of the foregoing exceptions in the

separate and distinct from those acting for

present case, McLeod cannot hold Patricio

and in its behalf and, in general, from the

solidarily liable with PMI.

people comprising it.

legal

Considering that McLeod failed to

The rule is that

obligations incurred by the corporation,

acting through its directors, officers, and
employees, are its sole liabilities.xli[56]

The records are bereft of any

evidence that Patricio acted with malice or
bad faith. Bad faith is a question of fact and
is evidentiary. Bad faith does not connote

Personal

liability

of

corporate

bad judgment or negligence. It imports a

directors, trustees or officers attaches only

dishonest purpose or some moral obliquity

when (1) they assent to a patently unlawful

and conscious wrongdoing. It means breach

act of the corporation, or when they are

of a known duty through some ill motive or

guilty of bad faith or gross negligence in

interest.

directing its affairs, or when there is a

fraud.xli[58]

It partakes of the nature of

conflict of interest resulting in damages to

the corporation, its stockholders or other
persons; (2) they consent to the issuance of
watered down stocks or when, having
knowledge

of such

issuance,

do

In the present case, there is nothing

substantial on record to show that Patricio

not

acted in bad faith in terminating McLeods

forthwith file with the corporate secretary

services to warrant Patricios personal

their written objection; (3) they agree to

hold themselves personally and solidarily
liable with the corporation; or
made

by

specific

(4) they are

provision

of

law

personally answerable for their corporate

action.xli[57]

liability. PMI had no other choice but to

stop plant operations. The work stoppage
therefore was by necessity. The company
could no longer continue with its plant
operations because of the serious business
losses that it had suffered. The mere fact
that Patricio was president and director of
PMI is not a ground to conclude that he
DELOS REYES | CORPO
83

should be held solidarily liable with PMI for

McLeods money claims.

The ruling in A.C. Ransom Labor

(b) How can the

foregoing provisions
be
implemented
when
the
employer is a corporation?
The answer is found in
Article 212 (c) of the Labor
Code which provides:

Union-CCLU v. NLRC,xli[59] which the

Court of Appeals cited, does not apply to
this case. We quote pertinent portions of the
ruling, thus:

(a) Article 265 of the

Labor
Code,
in
part,
expressly provides:

Any worker whose

employment
has
been
terminated as a consequence
of an unlawful lockout shall
be entitled to reinstatement
with full backwages.
Article 273 of the
Code provides that:
Any person violating
any of the provisions of
Article 265 of this Code shall
be punished by a fine of not
exceeding five hundred
pesos and/or imprisonment
for not less than one (1) day
nor more than six (6)
months.

(c)
Employer includes any
person acting in the
interest
of
an
employer,
directly
or
indirectly. The term
shall not include any
labor organization or any of
its
officers
or
agents except when acting as
employer.
.
The foregoing was
culled from Section 2 of RA
602, the Minimum Wage
Law. Since RANSOM 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 RANSOM. The
corporation, only in the
technical sense, is the
employer.
The
responsible
officer of an employer
corporation can be held
personally, not to say even
criminally, liable for nonpayment of back wages. That
is the policy of the law.

DELOS REYES | CORPO

84

xxxx
(c) If the policy of the
law were otherwise, the
corporation
employer can
have devious ways for
evading payment of back
wages. In the instant case, it
would
appear
that
RANSOM,
in
1969,
foreseeing the possibility or
probability of payment of
back wages to the 22
strikers,
organized
ROSARIO
to
replace
RANSOM, with the latter
to be eventually phased out
if the 22 strikers win their
case.
RANSOM actually
ceased operations on May 1,
1973, after the December 19,
1972 Decision of the Court of
Industrial Relations was
promulgated
against
RANSOM.xli[60] (Emphasis
supplied)

Clearly, in A.C. Ransom, RANSOM,

through its President, organized ROSARIO
to evade payment of backwages to the 22
strikers. This situation, or anything similar
showing malice or bad faith on the part of
Patricio, does not obtain in the present case.
In Santos v. NLRC,xli[61] the Court held,
thus:

It is true, there were various

cases when corporate officers
were themselves held by the
Court to be personally
accountable for the payment
of wages and money claims
to its employees. In A.C.
Ransom Labor Union-CCLU
vs. NLRC, for instance, the
Court ruled that under the
Minimum Wage Law, the
responsible officer of an
employer corporation could
be held personally liable for
nonpayment of backwages
for (i)f the policy of the law
were
otherwise,
the
corporation employer (would)
have devious ways for
evading
payment
of
backwages. In the absence
of a clear identification of the
officer directly responsible
for failure to pay the
backwages,
the
Court
considered the President of
the corporation as such
officer. The case was cited in
Chua vs. NLRC in holding
personally liable the vicepresident of the company,
being the highest and most
ranking official of the
corporation next to the
President who was dismissed
for the latters claim for
unpaid wages.
A review of the above
exceptional cases would
readily
disclose
the
attendance of facts and
circumstances that could
DELOS REYES | CORPO
85

rightly sanction personal

liability on the part of the
company officer. In A.C.
Ransom, the corporate entity
was a family corporation and
execution against it could
not be implemented because
of the disposition posthaste
of its leviable assets
evidently in order to evade
its just and due obligations.
The doctrine of piercing
the veil of corporate
fiction was thus clearly
appropriate. Chua likewise
involved another family
corporation, and this time the
conflict was between two
brothers
occupying
the
highest ranking positions in
the company. There were
incontrovertible facts which
pointed to extreme personal
animosity
that
resulted,
evidently in bad faith, in the
easing out from the company
of one of the brothers by the
other.
The basic rule is still that
which can be deduced from
the Courts pronouncement in
Sunio vs. National Labor
Relations Commission; thus:

company and
CIPI for the
payment of the
backwages of
private
respondents.
This
is
reversible
error.
The
Assistant
Regional
Directors
Decision
failed
to
disclose
the
reason why he
was
made
personally
liable.
Respondents,
however,
alleged
as
grounds
thereof,
his
being
the
owner of onehalf
()
interest of said
corporation,
and his alleged
arbitrary
dismissal of
private
respondents.

We come now
to the personal
liability
of
petitioner,
Sunio,
who
was
made
jointly
and
severally
responsible
with petitioner

Petitioner
Sunio
was
impleaded in
the Complaint
in his capacity
as
General
Manager
of
petitioner
corporation.
There appears
DELOS REYES | CORPO
86

to
be
no
evidence on
record that he
acted
maliciously or
in bad faith in
terminating
the services of
private
respondents.
His
act,
therefore, was
within
the
scope of his
authority and
was
a
corporate act.
It is basic that
a corporation
is invested by
law with a
personality
separate and
distinct from
those of the
persons
composing it
as well as
from that of
any other legal
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 of itself

sufficient
ground
for
disregarding
the separate
corporate
personality.
Petitioner
Sunio,
therefore,
should
not
have
been
made
personally
answerable for
the payment of
private
respondents
back
salaries.xli[62]
(Emphasis
supplied)

Thus, the rule is still that the doctrine

of piercing the corporate veil applies only
when the corporate fiction is used to defeat
public convenience, justify wrong, protect
fraud, or defend crime.

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.

Neither

Article 212(c) nor Article 273 (now 272) of

the Labor Code expressly makes any
corporate officer personally liable for the
debts of the corporation. As this Court ruled

DELOS REYES | CORPO

87

in H.L. Carlos Construction, Inc. v. Marina

Properties Corporation:xli[63]

We concur with the

CA
that
these
two
respondents are not liable.
Section 31 of the Corporation
Code (Batas Pambansa Blg.
68) provides:
Sectio
n 31. Liability
of
directors,
trustees
or
officers.
Directors
or
trustees who
willfully and
knowingly
vote for or
assent
to
patently
unlawful acts
of
the
corporation or
who are guilty
of
gross
negligence or
bad faith ...
shall be liable
jointly
and
severally for
all
damages
resulting
therefrom
suffered by the
corporation, its
stockholders
and
other
persons.

The personal liability

of corporate officers validly
attaches only when (a) they
assent to a patently unlawful
act of the corporation; or
(b) they are guilty of bad
faith or gross negligence in
directing its affairs; or (c)
they incur conflict of interest,
resulting in damages to the
corporation, its stockholders
or other persons.
The records are bereft
of any evidence that Typoco
acted in bad faith with gross
or inexcusable negligence, or
that he acted outside the
scope of his authority as
company president.
The
unilateral termination of the
Contract during the existence
of the TRO was indeed
contemptible for which
MPC should have merely
been cited for contempt of
court at the most and a
preliminary injunction would
have then stopped work by
the
second
contractor.
Besides, there is no showing
that the unilateral termination
of the Contract was null and
void.xli[64]

McLeod is not entitled to payment of

vacation leave and sick leave as well as to
holiday pay. Article 82, Title I, Book Three
of the Labor Code, on Working Conditions
and Rest Periods, provides:
DELOS REYES | CORPO
88

employee.xli[65] In the present case, there

is no showing that McLeod and PMI had an
Coverage. The
provisions of this title shall
apply to employees in all
establishments
and
undertakings whether for
profit or not, but not to
government
employees,
managerial employees, field
personnel, members of the
family of the employer who
are dependent on him for
support, domestic helpers,
persons in the personal
service of another, and
workers who are paid by
results as determined by the
Secretary of Labor in
appropriate regulations.
As
used
herein,
managerial employees refer
to those whose primary duty
consists of the management
of the establishment in which
they are employed or of a
department or subdivision
thereof, and to other officers
or members of the managerial
staff. (Emphasis supplied)
As Vice President/Plant Manager,

agreement concerning payment of these

benefits.

McLeods assertion of underpayment

of his 13th month pay in December 1993 is
unavailing.xli[66] As already stated, PMI
stopped plant operations in 1992. McLeod
himself testified that he received his last
salary from PMI in December 1992. After
the termination of the employer-employee
relationship between McLeod and PMI,
SRTI hired McLeod as consultant and not as
employee. Since McLeod was no longer an
employee, he was not entitled to the 13th
month pay.xli[67]

Besides, there is no

evidence on record that McLeod indeed

received his alleged reduced 13th month
pay

of

P44,183.63

in

December

1993.xli[68]

McLeod is a managerial employee who is

excluded from the coverage of Title I, Book
McLeod is

Also unavailing is McLeods claim

entitled to payment of vacation leave and

that he was entitled to the unpaid monetary

sick leave only if he and PMI had agreed on

equivalent of unused plane tickets for the

it. The payment of vacation leave and sick

period covering 1989 to 1992 in the amount

leave depends on the policy of the employer

of P279,300.00.xli[69]

or the agreement between the employer and

company policy granting its officers and

Three of the Labor Code.

PMI has no

DELOS REYES | CORPO

89

employees expenses for trips abroad.xli[70]

That at one time PMI reimbursed McLeod
McLeods

for his and his wifes plane tickets in a

vacation to Londonxli[71] could not be
deemed

as

an

established

practice

considering that it happened only once. To

be considered a regular practice, the
giving of the benefits should have been done
over a long period, and must be shown to
have been consistent and deliberate.xli[72]

reliance

on

Annex

Mxli[74] can hardly carry the day for him.

Annex M, which is McLeods letter
addressed

to

Philip

Lim,

VP

Administration, merely contains McLeods

proposals for the grant of some benefits to
supervisory and confidential employees.
Contrary to McLeods allegation, Patricio
did not sign the letter. Hence, the letter does
not

embody

any

agreement

between

McLeod and the management that would

In American Wire and Cable Daily

entitle McLeod to his money claims.

Rated Employees Union v. American Wire

and Cable Co., Inc.,xli[73] the Court held
that for a bonus to be enforceable, the
Neither can McLeods assertions

employer must have promised it, and the

parties must have expressly agreed upon it,
or it must have had a fixed amount and had
been a long and regular practice on the part

find support in Annex U.xli[75] Annex U is

the

Agreement

which

McLeod

and

Universal Textile Mills, Inc. executed in

1959. The Agreement merely contains the

of the employer.

renewal of the service agreement which the

parties signed in 1956.
In the present case, there is no
showing that PMI ever promised McLeod
that it would continue to grant him the
benefit in question.

Neither is there any

proof that PMI and McLeod had expressly

McLeod cannot successfully pretend

that his monthly salary of P60,000 was
reduced without his consent.

agreed upon the giving of that benefit.

DELOS REYES | CORPO

90

McLeod testified that in 1990, Philip

Lim explained to him why his salary would
have to be reduced. McLeod said that Philip
told him that they were short in finances;
that it would be repaid.xli[76]

Were

McLeod not amenable to that reduction in

Q
And as shown by their
annex L to their reply, that
this was reduced to roughly
P50,000.00 a month?
A

Yes, sir.

salary, he could have immediately resigned

from his work in PMI.

McLeod knew that PMI was then

suffering from serious business losses. In
fact, McLeod testified that PMI was not able
to operate from August 1989 to 1992
because of the strike. Even before 1989, as
Vice President of PMI, McLeod was aware
that the company had incurred huge loans
from DBP.xli[77] As it happened, McLeod
continued to work with PMI. We find it
pertinent

to

quote

some

portions

Apolinario Posios testimony, to wit:

Q
You also stated that
before the period of the strike
as shown by annex K of the
reply
filed
by
the
complainant which was I
think a voucher, the salary of
Mr. McLeod was roughly
P60,000.00 a month?
A

of

Q
You stated that this
was
indeed
upon the
instruction by the VicePresident of Peggy Mills at
that time and that was Mr.
Philip Lim, would you not?
A
Yes, sir.
Q
Of your own personal
knowledge, can you say if
this was, in fact, by
agreement
between Mr.
Philip Lim or any other
officers of Peggy Mills and
Mr. McLeod?
A
If I recall it correctly,
I assume it was an agreement,
verbal
agreement
with,
between Mr. Philip Lim and
Mr. McLeod, because the
voucher that we prepared was
actually acknowledged by
Mr. McLeod, the reduced
amount was acknowledged
by Mr. McLeod thru the
voucher that we prepared.
Q
In other words, Mr.
Witness, you mean to tell us
that
Mr.
McLeod
continuously received the
reduced
amount
of
P50,000.00 by signing the

Yes, sir.
DELOS REYES | CORPO
91

voucher and receiving the

amount in question?
A

Yes, sir.

Q
As far as you
remember, Mr. Posio, was
there any complaint by Mr.
McLeod because of this
reduced amount of his salary
at that time?
A
I dont have any
personal knowledge of any
complaint, sir.
Q
At least, that is in so
far as you were concerned, he
said nothing when he signed
the voucher in question?
A

Yes, sir.

Q
Now, you also stated
that the reason for what
appears to be an agreement
between Peggy Mills and Mr.
McLeod in so far as the
reduction of his salary from
P60,000.00 to P50,000.00 a
month was because he would
have a reduced number of
working days in view of the
strike at Peggy Mills, is that
right?
A

Yes, sir.

Q
And that this was so
because on account of the
strike, there was no work to
be done in the company?
A

xxxx

Q
Now, you also stated
if you remember during the
first time that you testified
that in the beginning, the
monthly salary of the
complainant was P60,000.00,
is that correct?
A

Yes, sir.

Q
And because of the
long period of the strike,
when there was no work to be
done, by agreement with the
complainant, his monthly
salary was adjusted to only
P50,495 because he would
not have to report for work
on Saturday.
Do you
remember having made that
explanation?
A

Yes, sir.

Q
You also stated that
the complainant continuously
received his monthly salary
in the adjusted amount of
P50,495.00 monthly signing
the necessary vouchers or pay
slips for that
without
complaining, is that not right,
Mr. Posio?
A

Yes, sir.xli[79]

Yes, sir.xli[78]

DELOS REYES | CORPO

92

Since the last salary that McLeod

received from PMI was P50,495, that
amount should be the basis in computing his
retirement benefits.

McLeod must be

credited only with his service to PMI as it

had a juridical personality separate and
distinct from that of the other respondent
corporations.

Since

PMI

has

no

5.2
Components of Onehalf (1/2) Month Salary.
For the purpose
of
determining the minimum
retirement pay due an
employee
under
this
Rule, the term one-half
month salary shall include
all
of the following:
(a)
(15) days salary
employee based on
latest salary rate. x

Fifteen
of the
his
x x

retirement

plan,xli[80] we apply Section 5, Rule II of

With McLeod having worked with

the Rules Implementing the New Retirement

PMI for 12 years, from 1980 to 1992, he is

Law which provides:

entitled to a retirement pay equivalent to

month salary for every year of service based
on his latest salary rate of P50,495 a month.

5.1

In the absence of
an
applicable
agreement
or
retirement plan, an
employee who retires
pursuant to the Act
shall be entitled to
retirement
pay
equivalent to at least
one-half (1/2) month
salary for every year
of service, a fraction
of at least six (6)
months
being
considered as one
whole year.

There is no basis for the award of

moral damages.

Moral damages are recoverable only

if the defendant has acted fraudulently or in
bad faith, or is guilty of gross negligence
amounting to bad faith, or in wanton
disregard of his contractual obligations. The
breach must be wanton, reckless, malicious,
or in bad faith, oppressive or abusive.xli[81]
DELOS REYES | CORPO
93

From the records of the case, the Court finds

no ultimate facts to support a conclusion of

WITNESS:
That is correct, sir.

bad faith on the part of PMI.

Records disclose that PMI had long

offered to pay McLeod his money claims.
In their Comment, respondents assert that
they offered to pay McLeod the sum of
P840,000, as separation benefits, and not
P300,000, if only to buy peace and to
forestall any complaint that McLeod may
initiate before the NLRC. McLeod admitted

ATTY. ESCANO:
The question I want to
ask is, are you aware that this
amount was offered to you
sometime last year through
your own lawyer, my good
friend, Atty. Avecilla, who is
right here with us?
WITNESS:
I was aware, sir.
ATTY. ESCANO:
So this was offered to
you, is that correct?

at the hearing before the Labor Arbiter that

PMI has made this offer

ATTY. ESCANO:
x x x According to
your own statement in your
Position Paper and I am
referring to page 8, your
unpaid retirement benefit for
fourteen (14) years of service
at P60,000.00 per year is
P840,000.00, is that correct?
WITNESS:
That is correct, sir.
ATTY. ESCANO:
And this amount is
correct
P840,000.00,
according to your Position
Paper?

WITNESS:
I was told that a fixed
sum of P840,000.00 was
offered.

ATTY. ESCANO:
And , of course, the
reason, if I may assume, that
you declined this offer was
that, according to you, there
are other claims which you
would like to raise against the
Respondents which, by your
impression, they were not
willing to pay in addition to
this particular amount?
WITNESS:
Yes, sir.

DELOS REYES | CORPO

94

ATTY. ESCANO:
The question now is,
if the same amount is offered
to you by way of retirement
which is exactly what you
stated in your own Position
Paper, would you accept it or
not?

The amount that I

mentioned was P840,000.00
corresponding to the . . . . . . .

WITNESS:
Not on the concept
without all the basic benefits
due me, I will refuse.xli[82]

ATTY. ROXAS:
Q
You
mentioned that you were
offered for the settlement of
your claims in 1994 for
P840,000.00, is that right,
Mr. Witness?

x x xx
ATTY. ROXAS:
Q
You
mentioned in the crossexamination of Atty. Escano
that you were offered the
separation pay in 1994, is that
correct, Mr. Witness?

WITNESS:
A
I was offered a
settlement of P300,000.00 for
complete settlement and that
was I think in January or
February 1994, sir.

WITNESS:
May I ask that the
question be clarified, your
Honor?

A
During
that
period in time, while the
petition in this case was
ongoing, we already filed a
case at that period of time,
sir. There was a discussion.
To the best of my knowledge,
they are willing to settle for
P840,000.00 and based on
what the Attorney told me, I
refused to accept because I
believe that my position was
not in anyway due to a
compromise situation to the
benefits I am entitled
to.xli[83]

ATTY. ESCANO:
No.
What
was
mentioned was the amount of
P840,000.00.
WITNESS:
What did you say,
Atty. Escano?

Hence, the awards for exemplary

damages and attorneys fees are not proper
in the present case.xli[84]

ATTY. ESCANO:
DELOS REYES | CORPO
95

That respondent corporations, in

their appeal to the NLRC, did not serve a

the appellant. These are not jurisdictional

requirements.xli[85]

copy of their memorandum of appeal upon

PMI is of no moment. Section 3(a), Rule VI
of the NLRC New Rules of Procedure
provides:

WHEREFORE, we DENY the

petition and AFFIRM the Decision of the
Court of Appeals in CA-G.R. SP No. 55130,
with the following MODIFICATIONS: (a)

Requisites
for
Perfection of Appeal. (a)
The appeal shall be filed
within the reglementary
period as provided in Section
1 of this Rule; shall be under
oath with proof of payment
of the required appeal fee and
the posting of a cash or surety
bond as provided in Section 5
of this Rule; shall be
accompanied
by
a
memorandum of appeal x x x
and proof of service on the
other party of such appeal.
(Emphasis supplied)

the retirement pay of John F. McLeod

should be computed at month salary for
every year of service for 12 years based on
his salary rate of P50,495 a month; (b)
Patricio L. Lim is absolved from personal
liability; and (c) the awards for moral and
exemplary damages and attorneys fees are
deleted. No pronouncement as to costs.

SO ORDERED.

The other party mentioned in the

Rule obviously refers to the adverse party, in
this case, McLeod. Besides, Section 3, Rule
VI of the Rules which requires, among

ANTONIO
T. CARPIO

others, proof of service of the memorandum

of appeal on the other party, is merely a

Associate

rundown of the contents of the required

memorandum of appeal to be submitted by

Justice

DELOS REYES | CORPO

96

WE CONCUR:

LEONARDO A. QUISUMBING

Associate Justice
LEONARDO A. QUISUMBING
Chairp
erson

Associate Justice
Chairperson

CERTIFICATION

CONCHITA CARPIO MORALES

DANTE O. TINGA
Associate Justice
Associate Justice

Pursuant to Section 13, Article VIII

of the Constitution, and the Division
Chairpersons Attestation, I certify that the
conclusions in the above Decision had been
reached in consultation before the case was
assigned to the writer of the opinion of the
Courts Division.

PRESBITERO J. VELASCO, JR.

Associate Justice
REYNATO S. PUNO

Chief Justice
ATTESTATION
I attest that the conclusions in the
above Decision had been reached in
consultation before the case was assigned to
the writer of the opinion of the Courts
Division.

DELOS REYES | CORPO

97

G.R. No. 160215

2004

November 10,

HYDRO RESOURCES
CONTRACTORS CORPORATION,
petitioner,
vs.
NATIONAL IRRIGATION
ADMINISTRATION, respondent.

DECISION

YNARES-SANTIAGO, J.:
Challenged in this petition for review on
certiorari under Rule 45 is the Decision of
the Court of Appeals1 dated October 29,
2002 and its Resolution dated September 24,
20032 in CA-G.R. SP No. 44527,3 reversing
the judgment of the Construction Industry
Arbitration Commission (CIAC) dated June
10, 19974 in CIAC Case No. 14-98 in favor
of petitioner Hydro Resources Contractors
Corporation.
The facts are undisputed and are matters of
record.
In a competitive bidding conducted by the
National Irrigation Administration (NIA)
sometime in August 1978, Hydro Resources
Contractors Corporation (Hydro) was
awarded Contract MPI-C-25 involving the
main civil work of the Magat River MultiPurpose Project. The contract price for the
work was pegged at P1,489,146,473.72 with
the peso component thereof amounting to
P1,041,884,766.99 and the US$ component
valued at $60,657,992.37 at the exchange
rate of P7.3735 to the dollar or
P447,361,706.73.

On November 6, 1978, the parties signed

Amendment No. 16 of the contract whereby
NIA agreed to increase the foreign currency
allocation for equipment financing from
US$28,000,000.00 for the first and second
years of the contract to US$38,000,000.00,
to be made available in full during the first
year of the contract to enable the contractor
to purchase the needed equipment and spare
parts, as approved by NIA, for the
construction of the project. On April 9,
1980, the parties entered into a
Memorandum of Agreement 7 (MOA)
whereby they agreed that Hydro may
directly avail of the foreign currency
component of the contract for the sole
purpose of purchasing necessary spare parts
and equipment for the project. This was
made in order for the contractor to avoid
further delays in the procurement of the said
spare parts and equipment.
A few months after the MOA was signed,
NIA and Hydro entered into a Supplemental
Memorandum of Agreement (Supplemental
MOA) to include among the items to be
financed out of the foreign currency portion
of the Contract "construction materials,
supplies and services as well as equipment
and materials for incorporation in the
permanent works of the Project."8
Work on the project progressed steadily
until Hydro substantially completed the
project in 1982 and the final acceptance was
made by NIA on February 14, 1984.9
During the period of the execution of the
contract, the foreign exchange value of the
peso against the US dollar declined and
steadily deteriorated. Whenever Hydro's
availment of the foreign currency
component exceeded the amount of the
foreign currency payable to Hydro for a
particular period, NIA charged interest in
DELOS REYES | CORPO
98

dollars based on the prevailing exchange

rate instead of the fixed exchange rate of
P7.3735 to the dollar. Yet when Hydro
received payments from NIA in Philippine
Pesos, NIA made deductions from Hydro's
foreign currency component at the fixed
exchange rate of P7.3735 to US$1.00
instead of the prevailing exchange rate.
Upon completion of the project, a final
reconciliation of the total entitlement of
Hydro to the foreign currency component of
the contract was made. The result of this
final reconciliation showed that the total
entitlement of Hydro to the foreign currency
component of the contract exceeded the
amount of US dollars required by Hydro to
repay the advances made by NIA for its
account in the importation of new
equipment, spare parts and tools. Hydro then
requested a full and final payment due to the
underpayment of the foreign exchange
portion caused by price escalations and extra
work orders. In 1983, NIA and Hydro
prepared a joint computation denominated
as the "MPI-C-2 Dollar Rate Differential on
Foreign Component of Escalation."10 Based
on said joint computation, Hydro was still
entitled to a foreign exchange differential of
US$1,353,771.79 equivalent to
P10,898,391.17.
Hydro then presented its claim for said
foreign exchange differential to NIA on
August 12, 198311 but the latter refused to
honor the same. Hydro made several12
demands to recover its claim until the same
was turned down with finality by then NIA
Administrator Federico N. Alday, Jr. on
January 6, 1987.13
On December 7, 1994, Hydro filed a request
for arbitration with the Construction
Industry Arbitration Commission (CIAC). 14
In the said request, Hydro nominated six (6)

arbitrators. The case was docketed as CIAC

Case No. 18-94.
NIA filed its Answer with Compulsory
Counterclaim15 raising laches, estoppel and
lack of jurisdiction by CIAC as its special
defenses. NIA also submitted its six (6)
nominees to the panel of arbitrators. After
appointment of the arbitrators, both parties
agreed on the Terms of Reference16 as well
as the issues submitted for arbitration.
On March 13, 1995, NIA filed a Motion to
Dismiss17 questioning CIAC's jurisdiction to
take cognizance of the case. The latter,
however, deferred resolution of the motion
and set the case for hearing for the reception
of evidence.18 NIA moved19 for
reconsideration but the same was denied by
CIAC in an Order dated April 25, 1995.20
Dissatisfied, NIA filed a petition for
certiorari and prohibition with the Court of
Appeals where the same was docketed as
CA-G.R. SP No. 37180,21 which dismissed
the petition in a Resolution dated June 28,
1996.22
NIA challenged the resolution of the Court
of Appeals before this Court in a special
civil action for certiorari, docketed as G.R.
No. 129169.23
Meanwhile, on June 10, 1997, the CIAC
promulgated a decision in favor of Hydro.24
NIA filed a Petition for Review on Appeal
before the Court of Appeals, which was
docketed as CA-G.R. SP No. 44527.25
During the pendency of CA-G.R. SP No.
44527 before the Court of Appeals, this
Court dismissed special civil action for
certiorari docketed as G.R. No. 129169 on
the ground that CIAC had jurisdiction over
the dispute and directed the Court of
DELOS REYES | CORPO
99

Appeals to proceed with reasonable dispatch

in the disposition of CA-G.R. SP No. 44527.
NIA did not move for reconsideration of the
said decision, hence, the same became final
and executory on December 15, 1999.26
Thereafter, the Court of Appeals rendered
the challenged decision in CA-G.R. SP No.
44527, reversing the judgment of the CIAC
on the grounds that: (1) Hydro's claim has
prescribed; (2) assuming that Hydro was
entitled to its claim, the rate of exchange
should be based on a fixed rate; (3) Hydro's
claim is contrary to R.A. No. 529;27 (4)
NIA's Certification of Non-Forum-Shopping
was proper even if the same was signed only
by counsel and not by NIA's authorized
representative; and (5) NIA did not engage
in forum-shopping.
Hydro's Motion for Reconsideration was
denied in Resolution of September 24, 2003.
Hence, this petition.
Addressing first the issue of prescription, the
Court of Appeals, in ruling that Hydro's
claim had prescribed, reasoned thus:
Nevertheless, We find good reason
to apply the principle of prescription
against HRCC. It is well to note that
Section 25 of the General Conditions
of the subject contract provides
(CIAC Decision, p. 15, Rollo, p. 57):
Any controversy or dispute arising
out of or relating to this Contract
which cannot be resolved by mutual
agreement shall be decided by the
Administrator within thirty (30)
calendar days from receipt of a
written notice from Contractor and
who shall furnish Contractor a
written copy of this decision. Such

decision shall be final and conclusive

unless within thirty (30) calendar
days from the date of receipt thereof,
Contractor shall deliver to NIA a
written notice addressed to the
Administrator that he desires that the
dispute be submitted to arbitration.
Pending decision from arbitration,
Contractor shall proceed diligently
with the performance of the Contract
and in accordance with the decision
of the Administrator. (Emphasis and
Underscoring Ours)
Both parties admit the existence of
this provision in the Contract
(Petition, p. 4; Comment, p. 16;
Rollo, pp. 12 and 131). Apropos, the
following matters are clear: (1) any
controversy or dispute between the
parties arising from the subject
contract shall be governed by the
provisions of the contract; (2) upon
the failure to arrive at a mutual
agreement, the contractor shall
submit the dispute to the
Administrator of NIA for
determination; and (3) the decision
of the Administrator shall become
final and conclusive, unless within
thirty (30) calendar days from the
date of receipt thereof, the
Contractor shall deliver to NIA a
written notice addressed to the
Administrator that he desires that the
dispute be submitted for arbitration.
Prescinding from the foregoing
matters, We find that the CIAC erred
in granting HRCC's claim
considering that the latter's right to
make such demand had clearly
prescribed. To begin with, on
January 7, 1986, Cesar L. Tech
(NIA's Administrator at the time)
DELOS REYES | CORPO
100

informed HRCC in writing that after

a review of the additional points
raised by the latter, NIA confirms its
original recommendation not to
allow the said claim (Annex "F";
Rollo, p. 81; CIAC Decision, p. 11;
Rollo, p. 53). This should have
propelled private respondent to
notify and signify to NIA of
intention to submit the dispute to
arbitration pursuant to the provision
of the contract. Yet, it did not.
Instead it persisted to send several
letters to NIA reiterating the reason
for its rejected claim (CIAC
Decision, p. 11; Rollo, p. 53).28

original recommendation which had

earlier been presented in our 4th
Indorsement dated February 5, 1985
to your office.
In view hereof, we regret to say with
finality that the claim cannot be
given favorable consideration.
(Emphasis and italics supplied)
Hydro received the above-mentioned letter
on January 27, 1987.30 Pursuant to Section
25 of the Contract's General Conditions
(GC-25), Hydro had thirty (30) days from
receipt of said denial, or until February 26,
1987, within which to notify NIA of its
desire to submit the dispute to arbitration.

We disagree for the following reasons:

First, the appellate court clearly overlooked
the fact that NIA, through then
Administrator Fedrico N. Alday, Jr., denied
"with finality" Hydro's claim only on
January 6, 1987 in a letter bearing the same
date29 which reads:
This refers to your letter dated
November 7, 1986 requesting
reconsideration on your claim for
payment of the Dollar Rate
Differential of Price Escalation in
Contract No. MPI-C-2.
We have reviewed the relevant facts
and issues as presented and the
additional points raised in the
abovementioned letter in the context
of the Contract Documents and we
find no strong and valid reason to
reverse the earlier decision of NIA's
previous management denying your
claim. Therefore, we regret that we
have to reiterate the earlier official
stand of NIA under its letter dated
January 7, 1986, that confirms the

On February 18, 1987, Hydro sent a letter31

to NIA, addressed to then NIA
Administrator Federico N. Alday, Jr.,
manifesting its desire to submit the dispute
to arbitration. The letter was received by
NIA on February 19, 1987, which was
within the thirty-day prescriptive period.
Moreover, a circumspect scrutiny of the
wording of GC-25 with regard to the thirtyday prescriptive period shows that said
proviso is intended to apply to disputes
which arose during the actual construction
of the project and not for controversies
which occured after the project is
completed. The rationale for such a
stipulation was aptly explained thus by the
CIAC in its Decision in CIAC Case No. 1894:
In construction contracts, there is
invariably a provision for interim
settlement of disputes. The right to
settle disputes is given to the owner
or his representative, either an
architect or engineer, designated as
"owner's representative," only for the
DELOS REYES | CORPO
101

purpose of avoiding delay in the

completion of the project. In this
particular contract, that right was
reserved to the NIA Administrator.
The types of disputes contemplated
were those which may have
otherwise affected the progress of
the work. It is very clear that this is
the purpose of the limiting periods in
this clause that the dispute shall be
resolved by the Administrator within
30 days from receipt of a written
notice from the Contractor and that
the Contractor may submit to
arbitration this dispute if it does not
agree with the decision of the
Administrator, and "Pending
decision from arbitration, Contractor
shall proceed diligently with the
performance of the Contract and in
accordance with the decision of the
Administrator."
In this case, the dispute had arisen
after completion of the Project. The
reason for the 30-day limitation no
longer applies, and we find no legal
basis for applying it. Moreover, in
Exhibit "B," NIA Administrator
Cesar L. Tech had, instead of
rendering an adverse decision, by
signing the document with HRCC's
Onofre B. Banson, implicitly
approved the payment of the foreign
exchange differential, but this
payment could not be made because
of the opinion of Auditor Saldua and
later of the Commission on Audit.32
Second, as early as April 1983, Hydro and
NIA, through its Administrator Cesar L.
Tech, prepared the Joint Computation which
shows that Hydro is entitled to the foreign
currency differential.33 As correctly found
by the CIAC, this computation constitutes a

written acknowledgment of the debt by the

debtor under Article 1155 of the Civil Code,
which states:
ART. 1155. The prescription of
actions is interrupted when they are
filed before the court, when there is a
written extrajudicial demand by the
creditors, and when there is any
written acknowledgment of the debt
by the debtor. (Emphasis and italics
supplied)
Instead of upholding the CIAC's findings on
this point, the Court of Appeals ruled that
Cesar L. Tech's act of signing the Joint
Computation was an ultra vires act. This
again is patent error. It must be noted that
the Administrator is the highest officer of
the NIA. Furthermore, Hydro has been
dealing with NIA through its Administrator
in all of its transactions with respect to the
contract and subsequently the foreign
currency differential claim. The NIA
Administrator is empowered by the Contract
to grant or deny foreign currency differential
claims. It would be preposterous for the NIA
Administrator to have the power of granting
claims without the authority to verify the
computation of such claims. Finally, the
records of the case will show that NIA itself
never disputed its Administrator's capacity
to sign the Joint Computation because it
knew that the Administrator, in fact, had
such capacity.
Even assuming for the sake of argument that
the Administrator had no authority to bind
NIA, the latter is already estopped after
repeatedly representing to Hydro that the
Administrator had such authority. A
corporation may be held in estoppel from
denying as against third persons the
authority of its officers or agents who have

DELOS REYES | CORPO

102

been clothed by it with ostensible or

apparent authority.34 Indeed
. . . The rule is of course settled that
"[a]lthough an officer or agent acts
without, or in excess of, his actual
authority if he acts within the scope
of an apparent authority with which
the corporation has clothed him by
holding him out or permitting him to
appear as having such authority, the
corporation is bound thereby in favor
of a person who deals with him in
good faith in reliance on such
apparent authority, as where an
officer is allowed to exercise a
particular authority with respect to
the business, or a particular branch
of it, continuously and publicly, for a
considerable time.". . .35
Third, NIA has clearly waived the
prescriptive period when it continued to
entertain Hydro's claim regarding new
matters raised by the latter in its letters to
NIA and then issuing rulings thereon. In this
regard, Article 1112 of the Civil Code
provides that:
ART. 1112. Persons with capacity to
alienate property may renounce
prescription already obtained, but not
the right to prescribe in the future.
Prescription is deemed to have been
tacitly renounced when the
renunciation results from acts which
imply the abandonment of the right
acquired. (Emphasis and italics
supplied)
Certainly, when a party has renounced a
right acquired by prescription through its
actions, it can no longer claim prescription
as a defense.36

Fourth, even assuming that NIA did not

waive the thirty-day prescriptive period, it
clearly waived the effects of such period
when it actively participated in arbitration
proceedings through the following acts:
a) On January 6, 1995, NIA
voluntarily filed its written
appearance, readily submitted its
Answer and asserted its own
Counterclaims;
b) In the Compliance which
accompanied the Answer, NIA also
submitted its six nominees to the
Arbitral Tribunal to be constituted,
among of which one was eventually
appointed to the tribunal;
c) NIA also actively participated in
the deliberations for and the
formulation of the Terms of
Reference during the preliminary
conference set by CIAC; and
d) For the purpose of obviating the
introduction of testimonial evidence
on the authenticity and due execution
of its documentary evidence, NIA
even had examined, upon prior
request to Hydro, all of the
documents which the latter intended
to present as evidentiary exhibits for
the said arbitration case.
We now come to the issue of whether or not
the provisions of R.A. No. 529, otherwise
known as an Act To Assure Uniform Value
to Philippine Coin And Currency, is
applicable to Hydro's claim.
The Contract between NIA and Hydro is an
internationally tendered contract considering
that it was funded by the International Bank
for Reconstruction and Development
DELOS REYES | CORPO
103

(IBRD). As a contract funded by an

international organization, particularly one
recognized by the Philippines,37 the contract
is exempt from the provisions of R.A. No.
529. R.A. No. 4100 amended the provisions
of R.A. 529 thus:
SECTION 1. Section one of
Republic Act Numbered Five
hundred and twenty-nine, entitled
"An Act to Assure Uniform Value of
Philippine Coin and Currency," is
hereby amended to read as follows:
Sec. 1. Every provision
contained in, or made with
respect to, any domestic
obligation to wit, any
obligation contracted in the
Philippines which provisions
purports to give the obligee
the right to require payment
in gold or in a particular kind
of coin or currency other than
Philippine currency or in an
amount of money of the
Philippines measured
thereby, be as it is hereby
declared against public
policy, and null, void, and of
no effect, and no such
provision shall be contained
in, or made with respect to,
any obligation hereafter
incurred. The above
prohibition shall not apply to
(a) transactions where the
funds involved are the
proceeds of loans or
investments made directly or
indirectly, through bona fide
intermediaries or agents, by
foreign governments, their
agencies and
instrumentalities, and

international financial and

banking institutions so long
as the funds are identifiable,
as having emanated from the
sources enumerated above;
(b) transactions affecting
high-priority economic
projects for agricultural,
industrial and power
development as may be
determined by the National
Economic Council which are
financed by or through
foreign funds; (c) forward
exchange transaction entered
into between banks or
between banks and
individuals or juridical
persons; (d) import-export
and other international
banking, financial investment
and industrial transactions.
With the exception of the
cases enumerated in items
(a), (b), (c) and (d) in the
foregoing provisions, in
which bases the terms of the
parties' agreement shall
apply, every other domestic
obligation heretofore or
hereafter incurred, whether or
not any such provision as to
payment is contained therein
or made with respect thereto,
shall be discharged upon
payment in any coin or
currency which at the time of
payment is legal tender for
public and private debts:
Provided, That if the
obligation was incurred prior
to the enactment of this Act
and required payment in a
particular kind of coin or
currency other than
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104

Philippine currency, it shall

be discharged in Philippine
currency measured at the
prevailing rates of exchange
at the time the obligation was
incurred, except in case of a
loan made in a foreign
currency stipulated to be
payable in the same currency
in which case the rate of
exchange prevailing at the
time of the stipulated date of
payment shall prevail. All
coin and currency, including
Central Bank notes,
heretofore and hereafter
issued and declared by the
Government of the
Philippines shall be legal
tender for all debts, public
and private.
SECTION 2. This Act shall take
effect upon its approval. (Emphasis
and italics supplied)
Even assuming ex gratia argumenti that R.A.
No. 529 is applicable, it is still erroneous for
the Court of Appeals to deny Hydro's claim
because Section 1 of R.A. No. 529 states
that only the stipulation requiring payment
in foreign currency is void, but not the
obligation to make payment. This can be
gleaned from the provision that "every other
domestic obligation heretofore or hereafter
incurred" shall be "discharged upon
payment in any coin and currency which at
the time is legal tender for public and private
debts." In Republic Resources and
Development Corporation v. Court of
Appeals,38 it was held:
. . . it is clear from Section 1 of R.A.
No. 529 that what is declared null
and void is the "provision contained

in, or made with respect to, any

domestic obligation to wit, any
obligation contracted in the
Philippines which provision purports
to give the obligee the right to
require payment in gold or in a
particular kind of coin or currency
other than Philippine currency or in
an amount of money of the
Philippines measured thereby" and
not the contract or agreement which
contains such proscribed provision.
(Emphasis supplied)
More succinctly, we held in San
Buenaventura v. Court of Appeals39 that
It is to be noted under the foregoing
provision that while an agreement to
pay an obligation in a currency other
than Philippine currency is null and
void as contrary to public policy,
what the law specifically prohibits is
payment in currency other than legal
tender but does not defeat a creditor's
claim for payment. A contrary rule
would allow a person to profit or
enrich himself inequitably at
another's expense. (Emphasis
supplied)
It is thus erroneous for the Court of Appeals
to disallow petitioner's claim for foreign
currency differential because NIA's
obligation should be converted to Philippine
Pesos which was legal tender at the time.40
The next issue to be resolved is whether or
not Hydro's claim should be computed at the
fixed rate of exchange.
When the MOA41 and the Supplemental
MOA42 were in effect, there were instances
when the foreign currency availed of by
Hydro exceeded the foreign currency
DELOS REYES | CORPO
105

payable to it for that particular Progress

Payment. In instances like these, NIA
actually charged Hydro interest in foreign
currency computed at the prevailing
exchange rate and not at the fixed rate. NIA
now insists that the exchange rate should be
computed according to the fixed rate and not
the escalating rate it actually charged Hydro.
Suffice it to state that this flip-flopping
stance of NIA of adopting and discarding
positions to suit its convenience cannot be
countenanced. A person who, by his deed or
conduct has induced another to act in a
particular manner, is barred from adopting
an inconsistent position, attitude or course of
conduct that thereby causes loss or injury to
another.43 Indeed, the application of the
principle of estoppel is proper and timely in
heading off NIA's efforts at renouncing its
previous acts to the prejudice of Hydro
which had dealt with it honestly and in good
faith.
. . . A principle of equity and natural
justice, this is expressly adopted
under Article 1431 of the Civil Code,
and pronounced as one of the
conclusive presumptions under Rule
131, Section 3(a) of the Rules of
Court, as follows:
Whenever a party has, by his own
declaration, act or omission,
intentionally and deliberately led
another to believe a particular thing
to be true, and to act upon such a
belief he cannot, in any litigation
arising out of such declaration, act or
omission, be permitted to falsify it.
Petitioner, having performed
affirmative acts upon which the
respondents based their subsequent
actions, cannot thereafter refute his

acts or renege on the effects of the

same, to the prejudice of the latter.
To allow him to do so would be
tantamount to conferring upon him
the liberty to limit his liability at his
whim and caprice, which is against
the very principles of equity and
natural justice44
NIA is, therefore, estopped from invoking
the contractual stipulation providing for the
fixed rate to justify a lower computation
than that claimed by Hydro. It cannot be
allowed to hide behind the very provision
which it itself continuously violated.45 An
admission or representation is rendered
conclusive upon the person making it and
cannot be denied or disproved as against the
person relying thereon.46 A party may not go
back on his own acts and representations to
the prejudice of the other party who relied
upon them.47
NIA was guilty of forum-shopping. Forumshopping refers to the act of availing oneself
of several judicial remedies in different
courts, either simultaneously or
successively, substantially founded on the
same transaction and identical material facts
and circumstances, raising basically the like
issues either pending in, or already resolved
by, some other court.48
It has been characterized as an act of
malpractice that is prohibited and
condemned as trifling with the courts and
abusing their processes. It constitutes
improper conduct which tends to degrade
the administration of justice. It has also been
described as deplorable because it adds to
the congestion of the heavily burdened
dockets of the courts.49 The test in
determining the presence of this pernicious
practice is whether in the two or more cases
pending, there is identity of: (a) parties; (b)
DELOS REYES | CORPO
106

rights or causes of action; and (c) reliefs

sought.50
Applying the foregoing yardstick to the
instant case, it is clear that NIA violated the
prohibition against forum-shopping. Besides
filing CA-G.R. SP No. 44527 wherein the
Court of Appeals' decision is the subject of
appeal in this proceeding, NIA previously
filed CA-G.R. SP No. 37180 and G.R. No.
129169 which is a special civil action for
certiorari. In all three cases, the parties are
invariably Hydro and NIA. In all three
petitions, NIA raised practically the same
issues51 and in all of them, NIA's prayer was
the same: to nullify the proceedings
commenced at the CIAC.
It must be pointed out in this regard that the
first two petitions namely, CA-G.R. SP No.
37180 and G.R. No. 129169 are both
original actions. Since NIA failed to file a
petition for review on certiorari under Rule
45 of the Rules of Court challenging the
decision of the appellate court in CA-G.R.
SP No. 37180 dismissing its petition, it
opted to file an original action for certiorari
under Rule 65 with this Court where the
same was docketed as G.R. No. 129169. For
its failure to appeal the judgments in CAG.R. SP No. 37180 and G.R. No. 129169,
NIA is necessarily bound by the effects of
those decisions. The filing of CA-G.R. SP
No. 44527, which raises the issues already
passed upon in both cases is a clear case of
forum-shopping which merits outright
dismissal.
The issue of whether or not the Certification
of Non-Forum Shopping is valid despite that
it was signed by NIA's counsel must be
answered in the negative. Applicable is the
ruling in Mariveles Shipyard Corp. v. Court
of Appeals, et al.:52

It is settled that the requirement in

the Rules that the certification of
non-forum shopping should be
executed and signed by the plaintiff
or the principal means that counsel
cannot sign said certification unless
clothed with special authority to do
so. The reason for this is that the
plaintiff or principal knows better
than anyone else whether a petition
has previously been filed involving
the same case or substantially the
same issues. Hence, a certification
signed by counsel alone is defective
and constitutes a valid cause for
dismissal of the petition. In the case
of natural persons, the Rule requires
the parties themselves to sign the
certificate of non-forum shopping.
However, in the case of the
corporations, the physical act of
signing may be performed, on behalf
of the corporate entity, only by
specifically authorized individuals
for the simple reason that
corporations, as artificial persons,
cannot personally do the task
themselves. . . It cannot be gainsaid
that obedience to the requirements of
procedural rule[s] is needed if we are
to expect fair results therefrom. Utter
disregard of the rules cannot justly
be rationalized by harking on the
policy of liberal construction.
(Emphasis and italics supplied)
In this connection, the lawyer must be
"specifically authorized" in order to validly
sign the certification.53
In closing, we restate the rule that the courts
will not interfere in matters which are
addressed to the sound discretion of
government agencies entrusted with the
regulation of activities coming under the
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107

special technical knowledge and training of

such agencies.54
An action by an administrative agency may
be set aside by the judicial department only
if there is an error of law, abuse of power,
lack of jurisdiction or grave abuse of
discretion clearly conflicting with the letter
and spirit of the law.55 In the case at bar,
there is no cogent reason to depart from the
general rule because the action of the CIAC
conforms rather than conflicts with the
governing statutes and controlling case law
on the matter.

Id., p. 232.

Id., p. 120.

Id., p. 124.

Id., p. 127.

Id., p. 278.

10

Id., p. 131.

11

Id., p. 180.

12

WHEREFORE, the petition is GRANTED.

The Decision of the Court of Appeals in
CA-G.R. SP No. 44527 dated October 29,
2002 and the Resolution dated September
24, 2003 are REVERSED and SET ASIDE.
The Decision of the Construction Industry
Arbitration Commission dated June 10, 1997
in CIAC Case No. 18-94 is REINSTATED.

Id., pp. 207-231, 245, 252, 257,

264.
13

Id., p. 269.

14

Id., p. 279.

15

Id., p. 282.

16

Id., p. 307.

17

Id., p. 316.

18

Id., p. 333.

19

Id., p. 338.

20

Id., p. 345.

SO ORDERED.
Davide, Jr., C.J., (Chairman), Quisumbing,
Carpio, and Azcuna, JJ., concur.

Footnotes
1

Rollo, pp. 71-90.

21

Id., p. 347.

Id., p. 92.

22

Id., p. 368.

Entitled National Irrigation

Administration v. Hydro Resources
Contractors Corporation and
Construction Industry Arbitration
Commission.

23

Id., p. 387.

24

Id., p. 422.

25

Id., p. 443.

26

Id., p. 564.

Rollo, pp. 423-442.

DELOS REYES | CORPO

108

27

Entitled An Act to Assure Uniform

Value to Philippine Coin and
Currency.

38

G.R. No. 33438, 28 October 1991,

203 SCRA 164, 168.
39

G.R. No. 43830, 22 January 1990,

181 SCRA 197, 201.

28

Rollo, pp. 80-82.

29

Id., p. 269.

30

Id.

31

Id., p. 230.

41

Rollo, p. 124.

32

Id., p. 438; CIAC Decision, p. 16.

42

Id., p. 127.

33

Id., p. 131.

43

34

Rural Bank of Milaor (Camarines

Sur) v. Ocfemia, G.R. No. 137686, 8
February 2000, 325 SCRA 99.
35

Yao Ka Sin Trading v. CA, G.R.

No. 53820, 15 June 1992, 209 SCRA
763, 783.
36

Sambrano v. CTA, 101 Phil. 1

[1957]; Republic v. Arcache, 119
Phil. 604 [1964]; DBP v. Adil, G.R.
No. L-48889, 11 May 1988, 161
SCRA 307.

40

Philippine Airlines v. Court of

Appeals, G.R. No. 70491, 11
December 1992.

Cruz v. Court of Appeals, G.R.

No. 126713, 27 July 1998, 293
SCRA 239, citing 31 C.J.S. 288.
44

Pureza v. Court of Appeals, G.R.

No. 122053, 15 May 1998, 290
SCRA 110, 115.
45

See Traders Royal Bank v. Court

of Appeals, G.R. Nos. 114299 and
118862, 24 September 1999, 315
SCRA 190.
46

Article 1431, Civil Code.

47
37

See Articles of Agreement of the

International Bank for
Reconstruction and Development
(Bretton Woods Agreement), 1 PTS
149. The Philippines was an original
signatory to this Agreement. The
membership of the Philippines to the
Bank was authorized by C.A. 699,
20 November 1945. The treaty
entered into force on 27 December
1945. It was proclaimed by the
President through Proc. No. 27, s.
1945.

Ayala Corporation v. Ray Burton

Development Corporation, G.R. No.
126699, 7 August 1998, 294 SCRA
48, citing Laureano Investment &
Development Corporation v. Court
of Appeals, G.R. No. 100468, 6 May
1997, 272 SCRA 253.
48

Landcar, Inc. v. Bachelor Express,

Inc., et al., G.R. No. 154377, 8
December 2003, 417 SCRA 307,
citing Gatmaytan v. Court of
Appeals, G.R. No. 123332, 3
February 1997, 267 SCRA 487;
Tolentino v. Natanauan, et al., G.R.
No. 135441, 20 November 2003, 416
DELOS REYES | CORPO
109

SCRA 273; People v.

Sandiganbayan, G.R. No. 149495, 21
August 2003, 409 SCRA 419.
49

Elcee Farms, Inc. v. Semillano,

G.R. No. 150286, 17 October 2003,
413 SCRA 669, citing Tantoy, Sr. v.
Court of Appeals, G.R. No. 141427,
20 April 2001, 357 SCRA 329,
citing Gatmaytan v. Court of
Appeals, supra.
50

MR Holdings, Ltd. v. Bajar, G.R.

No. 138104, 11 April 2002, 380
SCRA 617, citing Employees'
Compensation Commission v. Court
of Appeals, G.R. No. 115858, 28
June 1996, 257 SCRA 717.
51

Rollo, pp. 58-60.

52

G.R. No. 144134, 11 November

2003, 415 SCRA 573, 583-584.
53

BPI Leasing Corporation v. Court

of Appeals, G.R. No. 127624, 18
November 2003, 416 SCRA 4.
54

First Lepanto Ceramics, Inc. v.

Court of Appeals, G.R. No. 117680,
9 February 1996, 253 SCRA 552,
citing Ysmael, Jr. & Co., Inc. v.
Deputy Executive Secretary, G.R.
No. 79538, 18 October 1990, 190
SCRA 673.
55

Id., citing Sagun v. PHHC, G.R.

No. 44738, 22 June 1988, 162 SCRA
411.

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110