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Jurisprudential standards for equal protection challenges indubitably show that the

classification created by the questioned proviso, on its face and in its operation, bears no
constitutional infirmities.
It is settled in constitutional law that the "equal protection" clause does not prevent the
Legislature from establishing classes of individuals or objects upon which different rules shall
operate - so long as the classification is not unreasonable. As held in Victoriano v. Elizalde
Rope Workers Union,[13] and reiterated in a long line of cases:[14]
The guaranty of equal protection of the laws is not a guaranty of equality in the application of
the laws upon all citizens of the state. It is not, therefore, a requirement, in order to avoid the
constitutional prohibition against inequality, that every man, woman and child should be
affected alike by a statute. Equality of operation of statutes does not mean indiscriminate
operation on persons merely as such, but on persons according to the circumstances
surrounding them. It guarantees equality, not identity of rights. The Constitution does not
require that things which are different in fact be treated in law as though they were the same.
The equal protection clause does not forbid discrimination as to things that are different. It
does not prohibit legislation which is limited either in the object to which it is directed or by
the territory within which it is to operate.
The equal protection of the laws clause of the Constitution allows classification. Classification
in law, as in the other departments of knowledge or practice, is the grouping of things in
speculation or practice because they agree with one another in certain particulars. A law is not
invalid because of simple inequality. The very idea of classification is that of inequality, so
that it goes without saying that the mere fact of inequality in no manner determines the matter
of constitutionality. All that is required of a valid classification is that it be reasonable, which
means that the classification should be based on substantial distinctions which make for real
differences, that it must be germane to the purpose of the law; that it must not be limited to
existing conditions only; and that it must apply equally to each member of the class. This
Court has held that the standard is satisfied if the classification or distinction is based on a
reasonable foundation or rational basis and is not palpably arbitrary.
In the exercise of its power to make classifications for the purpose of enacting laws over
matters within its jurisdiction, the state is recognized as enjoying a wide range of discretion. It
is not necessary that the classification be based on scientific or marked differences of things or
in their relation. Neither is it necessary that the classification be made with mathematical
nicety. Hence, legislative classification may in many cases properly rest on narrow
distinctions, for the equal protection guaranty does not preclude the legislature from
recognizing degrees of evil or harm, and legislation is addressed to evils as they may appear.
(citations omitted)
Congress is allowed a wide leeway in providing for a valid classification. [15] The equal
protection clause is not infringed by legislation which applies only to those persons falling
within a specified class.[16] If the groupings are characterized by substantial distinctions that
make real differences, one class may be treated and regulated differently from another. [17] The
classification must also be germane to the purpose of the law and must apply to all those
belonging to the same class.[18]
In the case at bar, it is clear in the legislative deliberations that the exemption of officers (SG
20 and above) from the SSL was intended to address the BSPs lack of competitiveness in
terms of attracting competent officers and executives. It was not intended to discriminate
against the rank-and-file. If the end-result did in fact lead to a disparity of treatment between
the officers and the rank-and-file in terms of salaries and benefits, the discrimination or
distinction has a rational basis and is not palpably, purely, and entirely arbitrary in the
legislative sense. [19]

That the provision was a product of amendments introduced during the deliberation of the
Senate Bill does not detract from its validity. As early as 1947 and reiterated in subsequent
cases,[20] this Court has subscribed to the conclusiveness of an enrolled bill to refuse
invalidating a provision of law, on the ground that the bill from which it originated contained
no such provision and was merely inserted by the bicameral conference committee of both
Houses.
Moreover, it is a fundamental and familiar teaching that all reasonable doubts should be
resolved in favor of the constitutionality of a statute. [21] An act of the legislature, approved by
the executive, is presumed to be within constitutional limitations. [22] To justify the nullification
of a law, there must be a clear and unequivocal breach of the Constitution, not a doubtful and
equivocal breach.[23]
B. THE ENACTMENT, HOWEVER, OF SUBSEQUENT LAWS EXEMPTING ALL OTHER RANK-AND-FILE EMPLOYEES
OF GFIs FROM THE SSL - RENDERS THE CONTINUED
APPLICATION OF THE CHALLENGED PROVISION
A VIOLATION OF THE EQUAL PROTECTION CLAUSE.
While R.A. No. 7653 started as a valid measure well within the legislatures power, we hold
that the enactment of subsequent laws exempting all rank-and-file employees of other GFIs
leeched all validity out of the challenged proviso.
1. The concept of relative constitutionality.
The constitutionality of a statute cannot, in every instance, be determined by a mere
comparison of its provisions with applicable provisions of the Constitution, since the statute
may be constitutionally valid as applied to one set of facts and invalid in its application to
another.[24]
A statute valid at one time may become void at another time because of altered circumstances.
[25]
Thus, if a statute in its practical operation becomes arbitrary or confiscatory, its validity,
even though affirmed by a former adjudication, is open to inquiry and investigation in the light
of changed conditions.[26]
Demonstrative of this doctrine is Vernon Park Realty v. City of Mount Vernon,[27] where the
Court of Appeals of New York declared as unreasonable and arbitrary a zoning ordinance
which placed the plaintiff's property in a residential district, although it was located in the
center of a business area. Later amendments to the ordinance then prohibited the use of the
property except for parking and storage of automobiles, and service station within a parking
area. The Court found the ordinance to constitute an invasion of property rights which was
contrary to constitutional due process. It ruled:
While the common council has the unquestioned right to enact zoning laws respecting the use
of property in accordance with a well-considered and comprehensive plan designed to promote
public health, safety and general welfare, such power is subject to the constitutional limitation
that it may not be exerted arbitrarily or unreasonably and this is so whenever the zoning
ordinance precludes the use of the property for any purpose for which it is reasonably
adapted. By the same token, an ordinance valid when adopted will nevertheless be stricken
down as invalid when, at a later time, its operation under changed conditions proves
confiscatory such, for instance, as when the greater part of its value is destroyed, for which the
courts will afford relief in an appropriate case. [28] (citations omitted, emphasis supplied)
In the Philippine setting, this Court declared the continued enforcement of a valid law as
unconstitutional as a consequence of significant changes in circumstances. Rutter v.
Esteban[29] upheld the constitutionality of the moratorium law - its enactment and operation
being a valid exercise by the State of its police power [30] - but also ruled that the continued
enforcement of the otherwise valid law would be unreasonable and oppressive. It noted

the subsequent changes in the countrys business, industry and agriculture. Thus, the law was
set aside because its continued operation would be grossly discriminatory and lead to the
oppression of the creditors. The landmark ruling states:[31]
The question now to be determined is, is the period of eight (8) years which Republic Act No.
342 grants to debtors of a monetary obligation contracted before the last global war and who is
a war sufferer with a claim duly approved by the Philippine War Damage Commission
reasonable under the present circumstances?
It should be noted that Republic Act No. 342 only extends relief to debtors of prewar
obligations who suffered from the ravages of the last war and who filed a claim for their losses
with the Philippine War Damage Commission. It is therein provided that said obligation shall
not be due and demandable for a period of eight (8) years from and after settlement of the
claim filed by the debtor with said Commission. The purpose of the law is to afford to prewar
debtors an opportunity to rehabilitate themselves by giving them a reasonable time within
which to pay their prewar debts so as to prevent them from being victimized by their creditors.
While it is admitted in said law that since liberation conditions have gradually returned to
normal, this is not so with regard to those who have suffered the ravages of war and so it was
therein declared as a policy that as to them the debt moratorium should be continued in force
(Section 1).
But we should not lose sight of the fact that these obligations had been pending since 1945 as
a result of the issuance of Executive Orders Nos. 25 and 32 and at present their enforcement is
still inhibited because of the enactment of Republic Act No. 342 and would continue to be
unenforceable during the eight-year period granted to prewar debtors to afford them an
opportunity to rehabilitate themselves, which in plain language means that the creditors would
have to observe a vigil of at least twelve (12) years before they could effect a liquidation of
their investment dating as far back as 1941. his period seems to us unreasonable, if not
oppressive. While the purpose of Congress is plausible, and should be commended, the relief
accorded works injustice to creditors who are practically left at the mercy of the debtors. Their
hope to effect collection becomes extremely remote, more so if the credits are unsecured. And
the injustice is more patent when, under the law, the debtor is not even required to pay interest
during the operation of the relief, unlike similar statutes in the United States.
xxx xxx xxx
In the face of the foregoing observations, and consistent with what we believe to be as the only
course dictated by justice, fairness and righteousness, we feel that the only way open to us
under the present circumstances is to declare that the continued operation and enforcement of
Republic Act No. 342 at the present time is unreasonable and oppressive, and should not be
prolonged a minute longer, and, therefore, the same should be declared null and void and
without effect. (emphasis supplied, citations omitted)
2. Applicability of the equal protection clause.
In the realm of equal protection, the U.S. case of Atlantic Coast Line R. Co. v. Ivey[32] is
illuminating. The Supreme Court of Florida ruled against the continued application of statutes
authorizing the recovery of double damages plus attorney's fees against railroad companies,
for animals killed on unfenced railroad right of way without proof of negligence. Competitive
motor carriers, though creating greater hazards, were not subjected to similar liability because
they were not yet in existence when the statutes were enacted. The Court ruled that the statutes
became invalid as denying equal protection of the law, in view of changed conditions since
their enactment.
In another U.S. case, Louisville & N.R. Co. v. Faulkner,[33] the Court of Appeals of Kentucky
declared unconstitutional a provision of a statute which imposed a duty upon a railroad
company of proving that it was free from negligence in the killing or injury of cattle by its

engine or cars. This, notwithstanding that the constitutionality of the statute, enacted in 1893,
had been previously sustained. Ruled the Court:
The constitutionality of such legislation was sustained because it applied to all similar
corporations and had for its object the safety of persons on a train and the protection of
property. Of course, there were no automobiles in those days. The subsequent inauguration
and development of transportation by motor vehicles on the public highways by common
carriers of freight and passengers created even greater risks to the safety of occupants of the
vehicles and of danger of injury and death of domestic animals. Yet, under the law the
operators of that mode of competitive transportation are not subject to the same extraordinary
legal responsibility for killing such animals on the public roads as are railroad companies for
killing them on their private rights of way.
The Supreme Court, speaking through Justice Brandeis in Nashville, C. & St. L. Ry. Co. v.
Walters, 294 U.S. 405, 55 S.Ct. 486, 488, 79 L.Ed. 949, stated, A statute valid when enacted
may become invalid by change in the conditions to which it is applied. The police power is
subject to the constitutional limitation that it may not be exerted arbitrarily or unreasonably. A
number of prior opinions of that court are cited in support of the statement. The State of
Florida for many years had a statute, F.S.A. 356.01 et seq. imposing extraordinary and special
duties upon railroad companies, among which was that a railroad company was liable for
double damages and an attorney's fee for killing livestock by a train without the owner having
to prove any act of negligence on the part of the carrier in the operation of its train. In Atlantic
Coast Line Railroad Co. v. Ivey, it was held that the changed conditions brought about by
motor vehicle transportation rendered the statute unconstitutional since if a common carrier by
motor vehicle had killed the same animal, the owner would have been required to prove
negligence in the operation of its equipment. Said the court, This certainly is not equal
protection of the law.[34] (emphasis supplied)
Echoes of these rulings resonate in our case law, viz:
[C]ourts are not confined to the language of the statute under challenge in determining
whether that statute has any discriminatory effect. A statute nondiscriminatory on its face may
be grossly discriminatory in its operation. Though the law itself be fair on its face and
impartial in appearance, yet, if it is applied and administered by public authority with an evil
eye and unequal hand, so as practically to make unjust and illegal discriminations between
persons in similar circumstances, material to their rights, the denial of equal justice is still
within the prohibition of the Constitution.[35] (emphasis supplied, citations omitted)
[W]e see no difference between a law which denies equal protection and a law which permits
of such denial. A law may appear to be fair on its face and impartial in appearance, yet, if it
permits of unjust and illegal discrimination, it is within the constitutional prohibition.. In other
words, statutes may be adjudged unconstitutional because of their effect in operation. If a law
has the effect of denying the equal protection of the law it is unconstitutional. . [36] (emphasis
supplied, citations omitted
3. Enactment of R.A. Nos. 7907 + 8282 + 8289 + 8291 + 8523 + 8763
+ 9302 = consequential unconstitutionality of challenged proviso.
According to petitioner, the last proviso of Section 15(c), Article II of R.A. No. 7653 is also
violative of the equal protection clause because after it was enacted, the charters of the GSIS,
LBP, DBP and SSS were also amended, but the personnel of the latter GFIs were all exempted
from the coverage of the SSL.[37] Thus, within the class of rank-and-file personnel of GFIs, the
BSP rank-and-file are also discriminated upon.
Indeed, we take judicial notice that after the new BSP charter was enacted in 1993, Congress
also undertook the amendment of the charters of the GSIS, LBP, DBP and SSS, and three other
GFIs, from 1995 to 2004, viz:

1. R.A. No. 7907 (1995) for Land Bank of the Philippines (LBP);
2. R.A. No. 8282 (1997) for Social Security System (SSS);
3. R.A. No. 8289 (1997) for Small Business Guarantee and Finance Corporation, (SBGFC);
4. R.A. No. 8291 (1997) for Government Service Insurance System (GSIS);
5. R.A. No. 8523 (1998) for Development Bank of the Philippines (DBP);
6. R.A. No. 8763 (2000) for Home Guaranty Corporation (HGC);[38] and
7. R.A. No. 9302 (2004) for Philippine Deposit Insurance Corporation (PDIC).
It is noteworthy, as petitioner points out, that the subsequent charters of the seven other GFIs
share this common proviso: a blanket exemption of all their employees from the coverage of
the SSL, expressly or impliedly, as illustrated below:
1. LBP (R.A. No. 7907)
Section 10. Section 90 of [R.A. No. 3844] is hereby amended to read as follows:
Section 90. Personnel. xxx xxx xxx
All positions in the Bank shall be governed by a compensation, position classification system
and qualification standards approved by the Banks Board of Directors based on a
comprehensive job analysis and audit of actual duties and responsibilities. The compensation
plan shall be comparable with the prevailing compensation plans in the private sector and shall
be subject to periodic review by the Board no more than once every two (2) years without
prejudice to yearly merit reviews or increases based on productivity and profitability. The
Bank shall therefore be exempt from existing laws, rules and regulations on compensation,
position classification and qualification standards. It shall however endeavor to make its
system conform as closely as possible with the principles under Republic Act No. 6758.
(emphasis supplied)
xxx xxx xxx
2. SSS (R.A. No. 8282)
Section 1. [Amending R.A. No. 1161, Section 3(c)]:
xxx xxx xxx
(c)The Commission, upon the recommendation of the SSS President, shall appoint an actuary
and such other personnel as may [be] deemed necessary; fix their reasonable compensation,
allowances and other benefits; prescribe their duties and establish such methods and
procedures as may be necessary to insure the efficient, honest and economical administration
of the provisions and purposes of this Act: Provided, however, That the personnel of the SSS
below the rank of Vice President shall be appointed by the SSS President: Provided, further,
That the personnel appointed by the SSS President, except those below the rank of assistant
manager, shall be subject to the confirmation by the Commission; Provided further, That the
personnel of the SSS shall be selected only from civil service eligibles and be subject to civil
service rules and regulations: Provided, finally, That the SSS shall be exempt from the
provisions of Republic Act No. 6758 and Republic Act No. 7430. (emphasis supplied)
3. SBGFC (R.A. No. 8289)
Section 8. [Amending R.A. No. 6977, Section 11]:
xxx xxx xxx
The Small Business Guarantee and Finance Corporation shall:
xxx xxx xxx
(e) notwithstanding the provisions of Republic Act No. 6758, and Compensation Circular No.
10, series of 1989 issued by the Department of Budget and Management, the Board of
Directors of SBGFC shall have the authority to extend to the employees and personnel thereof
the allowance and fringe benefits similar to those extended to and currently enjoyed by the
employees and personnel of other government financial institutions. (emphases supplied)

4. GSIS (R.A. No. 8291)


Section 1. [Amending Section 43(d)].
xxx xxx xxx
Sec. 43. Powers and Functions of the Board of Trustees. - The Board of Trustees shall have
the following powers and functions:
xxx xxx xxx
(d) upon the recommendation of the President and General Manager, to approve the GSIS
organizational and administrative structures and staffing pattern, and to establish, fix, review,
revise and adjust the appropriate compensation package for the officers and employees of the
GSIS with reasonable allowances, incentives, bonuses, privileges and other benefits as may be
necessary or proper for the effective management, operation and administration of the GSIS,
which shall be exempt from Republic Act No. 6758, otherwise known as the Salary
Standardization Law and Republic Act No. 7430, otherwise known as the Attrition
Law. (emphasis supplied)
xxx xxx xxx
5. DBP (R.A. No. 8523)
Section 6. [Amending E.O. No. 81, Section 13]:
Section 13. Other Officers and Employees. - The Board of Directors shall provide for an
organization and staff of officers and employees of the Bank and upon recommendation of the
President of the Bank, fix their remunerations and other emoluments. All positions in the Bank
shall be governed by the compensation, position classification system and qualification
standards approved by the Board of Directors based on a comprehensive job analysis of actual
duties and responsibilities. The compensation plan shall be comparable with the prevailing
compensation plans in the private sector and shall be subject to periodic review by the Board
of Directors once every two (2) years, without prejudice to yearly merit or increases based on
the Banks productivity and profitability. The Bank shall, therefore, be exempt from existing
laws, rules, and regulations on compensation, position classification and qualification
standards. The Bank shall however, endeavor to make its system conform as closely as
possible with the principles under Compensation and Position Classification Act of 1989
(Republic Act No. 6758, as amended). (emphasis supplied)
6. HGC (R.A. No. 8763)
Section 9. Powers, Functions and Duties of the Board of Directors. - The Board shall have the
following powers, functions and duties:
xxx xxx xxx
(e) To create offices or positions necessary for the efficient management, operation and
administration of the Corporation: Provided, That all positions in the Home Guaranty
Corporation (HGC) shall be governed by a compensation and position classification system
and qualifications standards approved by the Corporations Board of Directors based on a
comprehensive job analysis and audit of actual duties and responsibilities: Provided,
further, That the compensation plan shall be comparable with the prevailing compensation
plans in the private sector and which shall be exempt from Republic Act No. 6758, otherwise
known as the Salary Standardization Law, and from other laws, rules and regulations on
salaries and compensations; and to establish a Provident Fund and determine the Corporations
and the employees contributions to the Fund; (emphasis supplied)
xxx xxx xxx
7. PDIC (R.A. No. 9302)
Section 2. Section 2 of [Republic Act No. 3591, as amended] is hereby further amended to
read:
xxx xxx xxx

3.
xxx xxx xxx
A compensation structure, based on job evaluation studies and wage surveys and subject to the
Boards approval, shall be instituted as an integral component of the Corporations human
resource development program: Provided, That all positions in the Corporation shall be
governed by a compensation, position classification system and qualification standards
approved by the Board based on a comprehensive job analysis and audit of actual duties and
responsibilities. The compensation plan shall be comparable with the prevailing compensation
plans of other government financial institutions and shall be subject to review by the Board no
more than once every two (2) years without prejudice to yearly merit reviews or increases
based on productivity and profitability. The Corporation shall therefore be exempt from
existing laws, rules and regulations on compensation, position classification and qualification
standards. It shall however endeavor to make its system conform as closely as possible with
the principles under Republic Act No. 6758, as amended. (emphases supplied)
Thus, eleven years after the amendment of the BSP charter, the rank-and-file of seven other
GFIs were granted the exemption that was specifically denied to the rank-and-file of the
BSP. And as if to add insult to petitioners injury, even the Securities and Exchange
Commission (SEC) was granted the same blanket exemption from the SSL in 2000! [39]
The prior view on the constitutionality of R.A. No. 7653 was confined to an evaluation of its
classification between the rank-and-file and the officers of the BSP, found reasonable because
there were substantial distinctions that made real differences between the two classes.
The above-mentioned subsequent enactments, however, constitute significant changes in
circumstance that considerably alter the reasonability of the continued operation of the
last proviso of Section 15(c), Article II of Republic Act No. 7653, thereby exposing
the proviso to more serious scrutiny. This time, the scrutiny relates to the constitutionality of
the classification - albeit made indirectly as a consequence of the passage of eight other laws
- between the rank-and-file of the BSP and the seven other GFIs. The classification must not
only be reasonable, but must also apply equally to all members of the class. The proviso may
be fair on its face and impartial in appearance but it cannot be grossly discriminatory in its
operation, so as practically to make unjust distinctions between persons who are without
differences.[40]
Stated differently, the second level of inquiry deals with the following questions: Given that
Congress chose to exempt other GFIs (aside the BSP) from the coverage of the SSL, can the
exclusion of the rank-and-file employees of the BSP stand constitutional scrutiny in the light
of the fact that Congress did not exclude the rank-and-file employees of the other GFIs? Is
Congress power to classify so unbridled as to sanction unequal and discriminatory treatment,
simply because the inequity manifested itself, not instantly through a single overt act, but
gradually and progressively, through seven separate acts of Congress? Is the right to equal
protection of the law bounded in time and space that: (a) the right can only be invoked against
a classification made directly and deliberately, as opposed to a discrimination that arises
indirectly, or as a consequence of several other acts; and (b) is the legal analysis confined to
determining the validity within the parameters of the statute or ordinance (where the inclusion
or exclusion is articulated), thereby proscribing any evaluation vis--vis the grouping, or the
lack thereof, among several similar enactments made over a period of time?
In this second level of scrutiny, the inequality of treatment cannot be justified on the mere
assertion that each exemption (granted to the seven other GFIs) rests on a policy determination
by the legislature. All legislative enactments necessarily rest on a policy determination - even
those that have been declared to contravene the Constitution. Verily, if this could serve as a
magic wand to sustain the validity of a statute, then no due process and equal protection

challenges would ever prosper. There is nothing inherently sacrosanct in a policy


determination made by Congress or by the Executive; it cannot run riot and overrun the
ramparts of protection of the Constitution.
In fine, the policy determination argument may support the inequality of treatment between the
rank-and-file and the officers of the BSP, but it cannot justify the inequality of treatment
between BSP rank-and-file and other GFIs who are similarly situated. It fails to appreciate that
what is at issue in the second level of scrutiny is not the declared policy of each law per se,
but the oppressive results of Congress inconsistent and unequal policytowards the BSP rankand-file and those of the seven other GFIs. At bottom, the second challenge to the
constitutionality of Section 15(c), Article II of Republic Act No. 7653 is premised precisely on
the irrational discriminatory policy adopted by Congress in its treatment of persons similarly
situated. In the field of equal protection, the guarantee that "no person shall be denied the
equal protection of the laws includes the prohibition against enacting laws that allow invidious
discrimination, directly or indirectly. If a law has the effect of denying the equal protection of
the law, or permits such denial, it is unconstitutional. [41]
It is against this standard that the disparate treatment of the BSP rank-and-file from the other
GFIs cannot stand judicial scrutiny. For as regards the exemption from the coverage of the
SSL, there exist no substantial distinctions so as to differentiate, the BSP rank-and-file from
the other rank-and-file of the seven GFIs. On the contrary, our legal history shows that GFIs
have long been recognized as comprising one distinct class, separate from other governmental
entities.
Before the SSL, Presidential Decree (P.D.) No. 985 (1976) declared it as a State policy (1) to
provide equal pay for substantially equal work, and (2) to base differences in pay upon
substantive differences in duties and responsibilities, and qualification requirements of the
positions. P.D. No. 985 was passed to address disparities in pay among similar or comparable
positions which had given rise to dissension among government employees.But even then,
GFIs and government-owned and/or controlled corporations (GOCCs) were already identified
as a distinct class among government employees. Thus, Section 2 also provided, [t]hat
notwithstanding a standardized salary system established for all employees, additional
financial incentives may be established by government corporation and financial institutions
for their employees to be supported fully from their corporate funds and for such technical
positions as may be approved by the President in critical government agencies. [42]
The same favored treatment is made for the GFIs and the GOCCs under the SSL. Section 3(b)
provides that one of the principles governing the Compensation and Position Classification
System of the Government is that: [b]asic compensation for all personnel in the government
and government-owned or controlled corporations and financial institutions shall generally be
comparable with those in the private sector doing comparable work, and must be in
accordance with prevailing laws on minimum wages.
Thus, the BSP and all other GFIs and GOCCs were under the unified Compensation and
Position Classification System of the SSL, [43] but rates of pay under the SSL were determined
on the basis of, among others, prevailing rates in the private sector for comparable work.
Notably, the Compensation and Position Classification System was to be governed by the
following principles: (a) just and equitable wages, with the ratio of compensation between pay
distinctions maintained at equitable levels; [44] and (b) basic compensation generally
comparable with the private sector, in accordance with prevailing laws on minimum wages.
[45]
Also, the Department of Budget and Management was directed to use, as guide for
preparing the Index of Occupational Services, the Benchmark Position Schedule, and the
following factors:[46]

(1) the education and experience required to perform the duties and responsibilities of the
positions;
(2) the nature and complexity of the work to be performed;
(3) the kind of supervision received;
(4) mental and/or physical strain required in the completion of the work;
(5) nature and extent of internal and external relationships;
(6) kind of supervision exercised;
(7) decision-making responsibility;
(8) responsibility for accuracy of records and reports;
(9) accountability for funds, properties and equipment; and
(10) hardship, hazard and personal risk involved in the job.
The Benchmark Position Schedule enumerates the position titles that fall within Salary Grades
1 to 20.
Clearly, under R.A. No. 6758, the rank-and-file of all GFIs were similarly situated in all
aspects pertaining to compensation and position classification, in consonance with Section 5,
Article IX-B of the 1997 Constitution.[47]
Then came the enactment of the amended charter of the BSP, implicitly exempting the
Monetary Board from the SSL by giving it express authority to determine and institute its own
compensation and wage structure. However, employees whose positions fall under SG 19 and
below were specifically limited to the rates prescribed under the SSL.
Subsequent amendments to the charters of other GFIs followed. Significantly, each
government financial institution (GFI) was not only expressly authorized to determine and
institute its own compensation and wage structure, but also explicitly exempted - without
distinction as to salary grade or position - all employees of the GFI from the SSL.
It has been proffered that legislative deliberations justify the grant or withdrawal of exemption
from the SSL, based on the perceived need to fulfill the mandate of the institution concerned
considering, among others, that: (1) the GOCC or GFI is essentially proprietary in character;
(2) the GOCC or GFI is in direct competition with their [sic] counterparts in the private
sector, not only in terms of the provisions of goods or services, but also in terms of hiring and
retaining competent personnel; and (3) the GOCC or GFI are or were [sic] experiencing
difficulties filling up plantilla positions with competent personnel and/or retaining these
personnel. The need for the scope of exemption necessarily varies with the particular
circumstances of each institution, and the corresponding variance in the benefits received by
the employees is merely incidental.
The fragility of this argument is manifest. First, the BSP is the central monetary authority,
[48]
and the banker of the government and all its political subdivisions. [49] It has the sole power
and authority to issue currency;[50] provide policy directions in the areas of money, banking,
and credit; and supervise banks and regulate finance companies and non-bank financial
institutions performing quasi-banking functions, including the exempted GFIs.[51] Hence, the
argument that the rank-and-file employees of the seven GFIs were exempted because of the
importance of their institutions mandate cannot stand any more than an empty sack can stand.
Second, it is certainly misleading to say that the need for the scope of exemption necessarily
varies with the particular circumstances of each institution. Nowhere in the deliberations is
there a cogent basis for the exclusion of the BSP rank-and-file from the exemption which was
granted to the rank-and-file of the other GFIs and the SEC. As point in fact, the BSP and the
seven GFIs are similarly situated in so far as Congress deemed it necessary for these
institutions to be exempted from the SSL. True, the SSL-exemption of the BSP and the seven
GFIs was granted in the amended charters of each GFI, enacted separately and over a period
of time. But it bears emphasis that, while each GFI has a mandate different and distinct from

that of another, the deliberations show that the raison dtre of the SSL-exemption
was inextricably linked to and for the most part based on factors common to the eight
GFIs, i.e., (1) the pivotal role they play in the economy; (2) the necessity of hiring and
retaining qualified and effective personnel to carry out the GFIs mandate; and (3) the
recognition that the compensation package of these GFIs is not competitive, and fall
substantially below industry standards. Considering further that (a) the BSP was the first GFI
granted SSL exemption; and (b) the subsequent exemptions of other GFIs did not distinguish
between the officers and the rank-and-file; it is patent that the classification made between the
BSP rank-and-file and those of the other seven GFIs was inadvertent, and NOT intended, i.e.,
it was not based on any substantial distinction vis--vis the particular circumstances of each
GFI. Moreover, the exemption granted to two GFIs makes express reference to allowance and
fringe benefits similar to those extended to and currently enjoyed by the employees and
personnel of other GFIs,[52] underscoring that GFIs are a particular class within the realm of
government entities.
It is precisely this unpremeditated discrepancy in treatment of the rank-and-file of the BSP made manifest and glaring with each and every consequential grant of blanket exemption from
the SSL to the other GFIs - that cannot be rationalized or justified. Even more so, when the
SEC - which is not a GFI - was given leave to have a compensation plan that shall be
comparable with the prevailing compensation plan in the [BSP] and other [GFIs], [53] then
granted a blanket exemption from the SSL, and its rank-and-file endowed a more preferred
treatment than the rank-and-file of the BSP.
The violation to the equal protection clause becomes even more pronounced when we are
faced with this undeniable truth: that if Congress had enacted a law for the sole purpose of
exempting the eight GFIs from the coverage of the SSL, the exclusion of the BSP rank-andfile employees would have been devoid of any substantial or material basis. It bears no
moment, therefore, that the unlawful discrimination was not a direct result arising from one
law. Nemo potest facere per alium quod non potest facere per directum. No one is allowed to
do indirectly what he is prohibited to do directly.
It has also been proffered that similarities alone are not sufficient to support the conclusion
that rank-and-file employees of the BSP may be lumped together with similar employees of
the other GOCCs for purposes of compensation, position classification and qualification
standards. The fact that certain persons have some attributes in common does not
automatically make them members of the same class with respect to a legislative
classification. Cited is the ruling in Johnson v. Robinson:[54] this finding of similarity ignores
that a common characteristic shared by beneficiaries and nonbeneficiaries alike, is not
sufficient to invalidate a statute when other characteristics peculiar to only one group
rationally explain the statutes different treatment of the two groups.
The reference to Johnson is inapropos. In Johnson, the US Court sustained the validity of the
classification as there were quantitative and qualitative distinctions, expressly recognized by
Congress, which formed a rational basis for the classification limiting educational benefits to
military service veterans as a means of helping them readjust to civilian life. The Court listed
the peculiar characteristics as follows:
First, the disruption caused by military service is quantitatively greater than that caused by
alternative civilian service. A conscientious objector performing alternative service is
obligated to work for two years. Service in the Armed Forces, on the other hand, involves a
six-year commitment
xxx xxx xxx
Second, the disruptions suffered by military veterans and alternative service performers are
qualitatively different. Military veterans suffer a far greater loss of personal freedom during

their service careers. Uprooted from civilian life, the military veteran becomes part of the
military establishment, subject to its discipline and potentially hazardous duty. Congress was
acutely aware of the peculiar disabilities caused by military service, in consequence of which
military servicemen have a special need for readjustment benefits [55] (citations omitted)
In the case at bar, it is precisely the fact that as regards the exemption from the SSL, there are
no characteristics peculiar only to the seven GFIs or their rank-and-file so as to justify the
exemption which BSP rank-and-file employees were denied (not to mention the anomaly of
the SEC getting one). The distinction made by the law is not only superficial, [56] but also
arbitrary. It is not based on substantial distinctions that make real differences between the BSP
rank-and-file and the seven other GFIs.
Moreover, the issue in this case is not - as the dissenting opinion of Mme. Justice CarpioMorales would put it - whether being an employee of a GOCC or GFI is reasonable and
sufficient basis for exemption from R.A. No. 6758. It is Congress itself that distinguished the
GFIs from other government agencies, not once but eight times, through the enactment of R.A.
Nos. 7653, 7907, 8282, 8289, 8291, 8523, 8763, and 9302. These laws may have created a
preferred sub-class within government employees, but the present challenge is not directed at
the wisdom of these laws. Rather, it is a legal conundrum involving the exercise of legislative
power, the validity of which must be measured not only by looking at the specific exercise in
and by itself (R.A. No. 7653), but also as to the legal effects brought about by seven separate
exercises - albeit indirectly and without intent.
Thus, even if petitioner had not alleged a comparable change in the factual milieu as regards
the compensation, position classification and qualification standards of the employees of the
BSP (whether of the executive level or of the rank-and-file) since the enactment of the new
Central Bank Act is of no moment. In GSIS v. Montesclaros,[57] this Court resolved the issue of
constitutionality notwithstanding that claimant had manifested that she was no longer
interested in pursuing the case, and even when the constitutionality of the said provision was
not squarely raised as an issue, because the issue involved not only the claimant but also
others similarly situated and whose claims GSIS would also deny based on the
challenged proviso. The Court held that social justice and public interest demanded the
resolution of the constitutionality of the proviso. And so it is with the challenged proviso in the
case at bar.
It bears stressing that the exemption from the SSL is a privilege fully within the legislative
prerogative to give or deny. However, its subsequent grant to the rank-and-file of the seven
other GFIs and continued denial to the BSP rank-and-file employees breached the latters right
to equal protection. In other words, while the granting of a privilege per se is a matter of
policy exclusively within the domain and prerogative of Congress, the validity or legality of
the exercise of this prerogative is subject to judicial review.[58] So when the distinction made is
superficial, and not based on substantial distinctions that make real differences between those
included and excluded, it becomes a matter of arbitrariness that this Court has the duty and the
power to correct.[59] As held in the United Kingdom case of Hooper v. Secretary of State for
Work and Pensions,[60] once the State has chosen to confer benefits, discrimination contrary to
law may occur where favorable treatment already afforded to one group is refused to another,
even though the State is under no obligation to provide that favorable treatment. [61]
The disparity of treatment between BSP rank-and-file and the rank-and-file of the other seven
GFIs definitely bears the unmistakable badge of invidious discrimination - no one can, with
candor and fairness, deny the discriminatory character of the subsequent blanket and total
exemption of the seven other GFIs from the SSL when such was withheld from the
BSP. Alikes are being treated as unalikes without any rational basis.

Again, it must be emphasized that the equal protection clause does not demand absolute
equality but it requires that all persons shall be treated alike, under like circumstances and
conditions both as to privileges conferred and liabilities enforced. Favoritism and undue
preference cannot be allowed. For the principle is that equal protection and security shall be
given to every person under circumstances which, if not identical, are analogous. If law be
looked upon in terms of burden or charges, those that fall within a class should be treated in
the same fashion; whatever restrictions cast on some in the group is equally binding on the
rest.[62]
In light of the lack of real and substantial distinctions that would justify the unequal treatment
between the rank-and-file of BSP from the seven other GFIs, it is clear that the enactment of
the seven subsequent charters has rendered the continued application of the
challenged proviso anathema to the equal protection of the law, and the same should be
declared as an outlaw.
IV.
Equal Protection Under
International Lens
In our jurisdiction, the standard and analysis of equal protection challenges in the main have
followed the rational basis test, coupled with a deferential attitude to legislative
classifications[63] and a reluctance to invalidate a law unless there is a showing of a clear and
unequivocal breach of the Constitution. [64]
A. Equal Protection
in the United States
In contrast, jurisprudence in the U.S. has gone beyond the static rational basis test. Professor
Gunther highlights the development in equal protection jurisprudential analysis, to wit: [65]
Traditionally, equal protection supported only minimal judicial intervention in most contexts.
Ordinarily, the command of equal protection was only that government must not impose
differences in treatment except upon some reasonable differentiation fairly related to the
object of regulation. The old variety of equal protection scrutiny focused solely on
the means used by the legislature: it insisted merely that the classification in the
statutereasonably relates to the legislative purpose. Unlike substantive due process, equal
protection scrutiny was not typically concerned with identifying fundamental values and
restraining legislative ends. And usually the rational classification requirement was readily
satisfied: the courts did not demand a tight fit between classification and purpose; perfect
congruence between means and ends was not required.
xxx xxx xxx
[From marginal intervention to major cutting edge: The Warren Courts new equal protection
and the two-tier approach.]
From its traditional modest role, equal protection burgeoned into a major intervention tool
during the Warren era, especially in the 1960s. The Warren Court did not abandon the
deferential ingredients of the old equal protection: in most areas of economic and social
legislation, the demands imposed by equal protection remained as minimal as everBut the
Court launched an equal protection revolution by finding large new areas for strict rather than
deferential scrutiny. A sharply differentiated two-tier approach evolved by the late 1960s: in
addition to the deferential old equal protection, a new equal protection, connoting strict
scrutiny, arose. The intensive review associated with the new equal protection imposed two
demands - a demand not only as to means but also one as to ends. Legislation qualifying for
strict scrutiny required a far closer fit between classification and statutory purpose than the
rough and ready flexibility traditionally tolerated by the old equal protection: means had to be
shown necessary to achieve statutory ends, not merely reasonably related ones. Moreover,

equal protection became a source of ends scrutiny as well: legislation in the areas of the new
equal protection had to be justified by compelling state interests, not merely the wide spectrum
of legitimate state ends.
The Warren Court identified the areas appropriate for strict scrutiny by searching for two
characteristics: the presence of a suspect classification; or an impact on fundamental rights or
interests. In the category of suspect classifications, the Warren Courts major contribution was
to intensify the strict scrutiny in the traditionally interventionist area of racial classifications.
But other cases also suggested that there might be more other suspect categories as well:
illegitimacy and wealth for example. But it was the fundamental interests ingredient of the
new equal protection that proved particularly dynamic, open-ended, and amorphous.. [Other
fundamental interests included voting, criminal appeals, and the right of interstate travel .]
xxx xxx xxx
The Burger Court and Equal Protection.
The Burger Court was reluctant to expand the scope of the new equal protection, although its
best established ingredient retains vitality. There was also mounting discontent with the rigid
two-tier formulations of the Warren Courts equal protection doctrine. It was prepared to use
the clause as an interventionist tool without resorting to the strict language of the new equal
protection. [Among the fundamental interests identified during this time were voting and
access to the ballot, while suspect classifications included sex, alienage and illegitimacy.]
xxx xxx xxx
Even while the two-tier scheme has often been adhered to in form, there has also been an
increasingly noticeable resistance to the sharp difference between deferential old and
interventionist new equal protection. A number of justices sought formulations that would blur
the sharp distinctions of the two-tiered approach or that would narrow the gap between strict
scrutiny and deferential review. The most elaborate attack came from Justice Marshall, whose
frequently stated position was developed most elaborately in his dissent in
the Rodriguez case: [66]
The Court apparently seeks to establish [that] equal protection cases fall into one of two neat
categories which dictate the appropriate standard of review - strict scrutiny or mere
rationality. But this (sic) Courts [decisions] defy such easy categorization. A principled reading
of what this Court has done reveals that it has applied a spectrum of standards in reviewing
discrimination allegedly violative of the equal protection clause. This spectrum clearly
comprehends variations in the degree of care with which Court will scrutinize particular
classification, depending, I believe, on the constitutional and societal importance of the
interests adversely affected and the recognized invidiousness of the basis upon which the
particular classification is drawn.
Justice Marshalls sliding scale approach describes many of the modern decisions, although it
is a formulation that the majority refused to embrace. But the Burger Courts results indicate at
least two significant changes in equal protection law: First, invocation of the old equal
protection formula no longer signals, as it did with the Warren Court, an extreme deference to
legislative classifications and a virtually automatic validation of challenged statutes. Instead,
several cases, even while voicing the minimal rationality hands-off standards of the old equal
protection, proceed to find the statute unconstitutional. Second, in some areas the modern
Court has put forth standards for equal protection review that, while clearly more intensive
than the deference of the old equal protection, are less demanding than the strictness of the
new equal protection. Sex discrimination is the best established example of an intermediate
level of review. Thus, in one case, the Court said that classifications by gender must
serve important governmental objectives and must be substantially related to achievement of
those objectives. That standard is intermediate with respect to both ends and means: where

ends must be compelling to survive strict scrutiny and merely legitimate under the old mode,
important objectives are required here; and where means must be necessary under the new
equal protection, and merely rationally related under the old equal protection, they must be
substantially related to survive the intermediate level of review. (emphasis supplied, citations
omitted)
B. Equal Protection
in Europe
The United Kingdom and other members of the European Community have also gone forward
in discriminatory legislation and jurisprudence. Within the United Kingdom domestic law, the
most extensive list of protected grounds can be found in Article 14 of the European
Convention on Human Rights (ECHR). It prohibits discrimination on grounds such as sex,
race, colour, language, religion, political or other opinion, national or social origin, association
with a national minority, property, birth or other status. This list is illustrative and not
exhaustive. Discrimination on the basis of race, sex and religion is regarded as grounds that
require strict scrutiny. A further indication that certain forms of discrimination are regarded
as particularly suspect under the Covenant can be gleaned from Article 4, which, while
allowing states to derogate from certain Covenant articles in times of national emergency,
prohibits derogation by measures that discriminate solely on the grounds of race, colour,
language, religion or social origin.[67]
Moreover, the European Court of Human Rights has developed a test of justification which
varies with the ground of discrimination. In the Belgian Linguistics case[68] the European Court
set the standard of justification at a low level: discrimination would contravene the
Convention only if it had no legitimate aim, or there was no reasonable relationship of
proportionality between the means employed and the aim sought to be realised. [69] But over the
years, the European Court has developed a hierarchy of grounds covered by Article 14 of the
ECHR, a much higher level of justification being required in respect of those regarded as
suspect (sex, race, nationality, illegitimacy, or sexual orientation) than of others. Thus,
in Abdulaziz, [70] the European Court declared that:
. . . [t]he advancement of the equality of the sexes is today a major goal in the member States
of the Council of Europe. This means that very weighty reasons would have to be advanced
before a difference of treatment on the ground of sex could be regarded as compatible with the
Convention.
And in Gaygusuz v. Austria,[71] the European Court held that very weighty reasons would have
to be put forward before the Court could regard a difference of treatment based exclusively on
the ground of nationality as compatible with the Convention. [72] The European Court will then
permit States a very much narrower margin of appreciation in relation to discrimination on
grounds of sex, race, etc., in the application of the Convention rights than it will in relation to
distinctions drawn by states between, for example, large and small land-owners. [73]
C. Equality under
International Law
The principle of equality has long been recognized under international law. Article 1 of the
Universal Declaration of Human Rights proclaims that all human beings are born free and
equal in dignity and rights. Non-discrimination, together with equality before the law and
equal protection of the law without any discrimination, constitutes basic principles in the
protection of human rights. [74]
Most, if not all, international human rights instruments include some prohibition on
discrimination and/or provisions about equality.[75] The general international provisions
pertinent to discrimination and/or equality are the International Covenant on Civil and
Political Rights (ICCPR);[76] the International Covenant on Economic, Social and Cultural

Rights (ICESCR); the International Convention on the Elimination of all Forms of Racial
Discrimination (CERD);[77] the Convention on the Elimination of all Forms of Discrimination
against Women (CEDAW); and the Convention on the Rights of the Child (CRC).
In the broader international context, equality is also enshrined in regional instruments such as
the American Convention on Human Rights;[78] the African Charter on Human and People's
Rights;[79] the European Convention on Human Rights;[80] the European Social Charter of 1961
and revised Social Charter of 1996; and the European Union Charter of Rights (of particular
importance to European states). Even the Council of the League of Arab States has adopted the
Arab Charter on Human Rights in 1994, although it has yet to be ratified by the Member
States of the League.[81]
The equality provisions in these instruments do not merely function as traditional "first
generation" rights, commonly viewed as concerned only with constraining rather than
requiring State action. Article 26 of the ICCPR requires guarantee[s] of equal and effective
protection against discrimination while Articles 1 and 14 of the American and European
Conventions oblige States Parties to ensure ... the full and free exercise of [the rights
guaranteed] ... without any discrimination and to secure without discrimination the enjoyment
of the rights guaranteed.[82] These provisions impose a measure of positive obligation on States
Parties to take steps to eradicate discrimination.
In the employment field, basic detailed minimum standards ensuring equality and prevention
of discrimination, are laid down in the ICESCR[83] and in a very large number of Conventions
administered by the International Labour Organisation, a United Nations
body. [84] Additionally, many of the other international and regional human rights instruments
have specific provisions relating to employment.[85]
The United Nations Human Rights Committee has also gone beyond the earlier tendency to
view the prohibition against discrimination (Article 26) as confined to the ICCPR rights.
[86]
In Broeks[87] and Zwaan-de Vries,[88] the issue before the Committee was whether
discriminatory provisions in the Dutch Unemployment Benefits Act (WWV) fell within the
scope of Article 26. The Dutch government submitted that discrimination in social security
benefit provision was not within the scope of Article 26, as the right was contained in the
ICESCR and not the ICCPR. They accepted that Article 26 could go beyond the rights
contained in the Covenant to other civil and political rights, such as discrimination in the field
of taxation, but contended that Article 26 did not extend to the social, economic, and cultural
rights contained in ICESCR. The Committee rejected this argument. In its view, Article 26
applied to rights beyond the Covenant including the rights in other international treaties such
as the right to social security found in ICESCR:
Although Article 26 requires that legislation should prohibit discrimination, it does not of itself
contain any obligation with respect to the matters that may be provided for by legislation.
Thus it does not, for example, require any state to enact legislation to provide for social
security. However, when such legislation is adopted in the exercise of a State's sovereign
power, then such legislation must comply with Article 26 of the Covenant. [89]
Breaches of the right to equal protection occur directly or indirectly. A classification may be
struck down if it has the purpose or effect of violating the right to equal protection.
International law recognizes that discrimination may occur indirectly, as the Human Rights
Committee[90] took into account the definitions of discrimination adopted by CERD and
CEDAW in declaring that:
. . . discrimination as used in the [ICCPR] should be understood to imply any distinction,
exclusion, restriction or preference which is based on any ground such as race, colour, sex,
language, religion, political or other opinion, national or social origin, property, birth or other
status, and which has the purpose or effect of nullifying or impairing the recognition,

enjoyment or exercise by all persons, on an equal footing, of all rights and freedoms.
[91]
(emphasis supplied)
Thus, the two-tier analysis made in the case at bar of the challenged provision, and its
conclusion of unconstitutionality by subsequent operation, are in cadence and in consonance
with the progressive trend of other jurisdictions and in international law. There should be no
hesitation in using the equal protection clause as a major cutting edge to eliminate every
conceivable irrational discrimination in our society. Indeed, the social justice imperatives in
the Constitution, coupled with the special status and protection afforded to labor, compel this
approach.[92]
Apropos the special protection afforded to labor under our Constitution and international law,
we held in International School Alliance of Educators v. Quisumbing: [93]
That public policy abhors inequality and discrimination is beyond contention. Our
Constitution and laws reflect the policy against these evils. The Constitution in the Article on
Social Justice and Human Rights exhorts Congress to "give highest priority to the enactment
of measures that protect and enhance the right of all people to human dignity, reduce social,
economic, and political inequalities." The very broad Article 19 of the Civil Code requires
every person, "in the exercise of his rights and in the performance of his duties, [to] act with
justice, give everyone his due, and observe honesty and good faith."
International law, which springs from general principles of law, likewise proscribes
discrimination. General principles of law include principles of equity, i.e., the general
principles of fairness and justice, based on the test of what is reasonable. The Universal
Declaration of Human Rights, the International Covenant on Economic, Social, and Cultural
Rights, the International Convention on the Elimination of All Forms of Racial
Discrimination, the Convention against Discrimination in Education, the Convention (No. 111)
Concerning Discrimination in Respect of Employment and Occupation - all embody the
general principle against discrimination, the very antithesis of fairness and justice. The
Philippines, through its Constitution, has incorporated this principle as part of its national
laws.
In the workplace, where the relations between capital and labor are often skewed in favor of
capital, inequality and discrimination by the employer are all the more reprehensible.
The Constitution specifically provides that labor is entitled to "humane conditions of work."
These conditions are not restricted to the physical workplace - the factory, the office or the
field - but include as well the manner by which employers treat their employees.
The Constitution also directs the State to promote "equality of employment opportunities for
all." Similarly, the Labor Code provides that the State shall "ensure equal work opportunities
regardless of sex, race or creed." It would be an affront to both the spirit and letter of these
provisions if the State, in spite of its primordial obligation to promote and ensure equal
employment opportunities, closes its eyes to unequal and discriminatory terms and conditions
of employment.
xxx xxx xxx
Notably, the International Covenant on Economic, Social, and Cultural Rights, in Article 7
thereof, provides:
The States Parties to the present Covenant recognize the right of everyone to the enjoyment of
just and [favorable] conditions of work, which ensure, in particular:
a. Remuneration which provides all workers, as a minimum, with:
i. Fair wages and equal remuneration for work of equal value without distinction of any kind,
in particular women being guaranteed conditions of work not inferior to those enjoyed by
men, with equal pay for equal work;
xxx xxx xxx

The foregoing provisions impregnably institutionalize in this jurisdiction the long honored
legal truism of "equal pay for equal work." Persons who work with substantially equal
qualifications, skill, effort and responsibility, under similar conditions, should be paid similar
salaries. (citations omitted)
Congress retains its wide discretion in providing for a valid classification, and its policies
should be accorded recognition and respect by the courts of justice except when they run afoul
of the Constitution.[94] The deference stops where the classification violates a fundamental
right, or prejudices persons accorded special protection by the Constitution. When these
violations arise, this Court must discharge its primary role as the vanguard of constitutional
guaranties, and require a stricter and more exacting adherence to constitutional
limitations. Rational basis should not suffice.
Admittedly, the view that prejudice to persons accorded special protection by the Constitution
requires a stricter judicial scrutiny finds no support in American or English jurisprudence.
Nevertheless, these foreign decisions and authorities are not per se controlling in this
jurisdiction. At best, they are persuasive and have been used to support many of our decisions.
[95]
We should not place undue and fawning reliance upon them and regard them as
indispensable mental crutches without which we cannot come to our own decisions through
the employment of our own endowments. We live in a different ambience and must decide our
own problems in the light of our own interests and needs, and of our qualities and even
idiosyncrasies as a people, and always with our own concept of law and justice. [96] Our laws
must be construed in accordance with the intention of our own lawmakers and such intent may
be deduced from the language of each law and the context of other local legislation related
thereto. More importantly, they must be construed to serve our own public interest which is
the be-all and the end-all of all our laws. And it need not be stressed that our public interest is
distinct and different from others.[97]
In the 2003 case of Francisco v. House of Representatives, this Court has stated that:
[A]merican jurisprudence and authorities, much less the American Constitution, are of dubious
application for these are no longer controlling within our jurisdiction and have only limited
persuasive merit insofar as Philippine constitutional law is concerned....[I]n resolving
constitutional disputes, [this Court] should not be beguiled by foreign jurisprudence some of
which are hardly applicable because they have been dictated by different constitutional
settings and needs.[98] Indeed, although the Philippine Constitution can trace its origins to that
of the United States, their paths of development have long since diverged. [99]
Further, the quest for a better and more equal world calls for the use of equal protection as a
tool of effective judicial intervention.
Equality is one ideal which cries out for bold attention and action in the Constitution. The
Preamble proclaims equality as an ideal precisely in protest against crushing inequities in
Philippine society. The command to promote social justice in Article II, Section 10, in all
phases of national development, further explicitated in Article XIII, are clear commands to the
State to take affirmative action in the direction of greater equality. [T]here is thus in the
Philippine Constitution no lack of doctrinal support for a more vigorous state effort towards
achieving a reasonable measure of equality.[100]
Our present Constitution has gone further in guaranteeing vital social and economic rights to
marginalized groups of society, including labor.[101] Under the policy of social justice, the law
bends over backward to accommodate the interests of the working class on the humane
justification that those with less privilege in life should have more in law.[102] And the
obligation to afford protection to labor is incumbent not only on the legislative and executive
branches but also on the judiciary to translate this pledge into a living reality.[103] Social justice
calls for the humanization of laws and the equalization of social and economic forces by the

State so that justice in its rational and objectively secular conception may at least be
approximated.[104]
V.
A Final Word
Finally, concerns have been raised as to the propriety of a ruling voiding the challenged
provision. It has been proffered that the remedy of petitioner is not with this Court, but with
Congress, which alone has the power to erase any inequity perpetrated by R.A. No. 7653.
Indeed, a bill proposing the exemption of the BSP rank-and-file from the SSL has supposedly
been filed.
Under most circumstances, the Court will exercise judicial restraint in deciding questions of
constitutionality, recognizing the broad discretion given to Congress in exercising its
legislative power. Judicial scrutiny would be based on the rational basis test, and the
legislative discretion would be given deferential treatment. [105]
But if the challenge to the statute is premised on the denial of a fundamental right, or the
perpetuation of prejudice against persons favored by the Constitution with special protection,
judicial scrutiny ought to be more strict. A weak and watered down view would call for the
abdication of this Courts solemn duty to strike down any law repugnant to the Constitution
and the rights it enshrines. This is true whether the actor committing the unconstitutional act is
a private person or the government itself or one of its instrumentalities. Oppressive acts will be
struck down regardless of the character or nature of the actor. [106]
Accordingly, when the grant of power is qualified, conditional or subject to limitations, the
issue on whether or not the prescribed qualifications or conditions have been met, or the
limitations respected, is justiciable or non-political, the crux of the problem being one of
legality or validity of the contested act, not its wisdom. Otherwise, said qualifications,
conditions or limitations - particularly those prescribed or imposed by the Constitution - would
be set at naught. What is more, the judicial inquiry into such issue and the settlement thereof
are the main functions of courts of justice under the Presidential form of government adopted
in our 1935 Constitution, and the system of checks and balances, one of its basic predicates.
As a consequence, We have neither the authority nor the discretion to decline passing upon
said issue, but are under the ineluctable obligation - made particularly more exacting and
peremptory by our oath, as members of the highest Court of the land, to support and defend
the Constitution - to settle it. This explains why, in Miller v. Johnson, it was held that courts
have a "duty, rather than a power", to determine whether another branch of the government has
"kept within constitutional limits." Not satisfied with this postulate, the court went farther and
stressed that, if the Constitution provides how it may be amended - as it is in our 1935
Constitution - "then, unless the manner is followed, the judiciary as the interpreter of that
constitution, will declare the amendment invalid." In fact, this very Court - speaking through
Justice Laurel, an outstanding authority on Philippine Constitutional Law, as well as one of the
highly respected and foremost leaders of the Convention that drafted the 1935 Constitution declared, as early as July 15, 1936, that "(i)n times of social disquietude or political
excitement, the great landmarks of the Constitution are apt to be forgotten or marred, if not
entirely obliterated. In cases of conflict, the judicial department is the only constitutional organ
which can be called upon to determine the proper allocation of powers between the several
departments" of the government.[107] (citations omitted; emphasis supplied)
In the case at bar, the challenged proviso operates on the basis of the salary grade or officeremployee status. It is akin to a distinction based on economic class and status, with the higher
grades as recipients of a benefit specifically withheld from the lower grades. Officers of the
BSP now receive higher compensation packages that are competitive with the industry, while
the poorer, low-salaried employees are limited to the rates prescribed by the SSL. The

implications are quite disturbing: BSP rank-and-file employees are paid the strictly regimented
rates of the SSL while employees higher in rank - possessing higher and better education and
opportunities for career advancement - are given higher compensation packages to entice them
to stay. Considering that majority, if not all, the rank-and-file employees consist of people
whose status and rank in life are less and limited, especially in terms of job marketability, it is
they - and not the officers - who have the real economic and financial need for the
adjustment This is in accord with the policy of the Constitution "to free the people from
poverty, provide adequate social services, extend to them a decent standard of living, and
improve the quality of life for all.[108] Any act of Congress that runs counter to this
constitutional desideratumdeserves strict scrutiny by this Court before it can pass muster.
To be sure, the BSP rank-and-file employees merit greater concern from this Court. They
represent the more impotent rank-and-file government employees who, unlike employees in
the private sector, have no specific right to organize as a collective bargaining unit and
negotiate for better terms and conditions of employment, nor the power to hold a strike to
[G.R. No. 103525. March 29, 1996]
MARCOPPER MINING CORPORATION, petitioner, vs. NATIONAL LABOR RELATIONS
COMMISSION and NATIONAL MINES AND ALLIED WORKERS UNION (NAMAWUMIF),respondents.
DECISION
KAPUNAN, J.:
Social justice and full protection to labor guaranteed by the fundamental law of this land is not
some romantic notion, high in rhetoric but low in substance. The case at bench provides yet
another example of harmonizing and balancing the right of labor to its just share in the fruits
of production and the right of enterprises to reasonable returns on investments, and to
expansion and growth.[1]
In this petition for certiorari and prohibition under Rule 65 of the Revised Rules of Court,
Marcopper Mining Corporation impugns the decision rendered by the National Labor
Relations Commission (NLRC) on 18 November 1991 in RAB-IV-12-2588-88 dismissing
petitioners appeal, and the resolution issued by the said tribunal dated 20 December
1991 denying petitioners motion for reconsideration.
There is no disagreement as to the following facts:
On 23 August 1984, Marcopper Mining Corporation, a corporation duly organized and
existing under the laws of the Philippines, engaged in the business of mineral prospecting,
exploration and extraction, and private respondent NAMAWU-MIF, a labor federation duly
organized and registered with the Department of Labor and Employment (DOLE), to which
the Marcopper Employees Union (the exclusive bargaining agent of all rank-and-file workers
of petitioner) is affiliated, entered into a Collective Bargaining Agreement (CBA) effective
from 1 May 1984 until 30 April 1987.
Sec. 1, Art. V of the said Collective Bargaining Agreement provides:
Section 1. The COMPANY agrees to grant general wage increase to all employees within the
bargaining unit as follows:
Effectivity Increase per day on
the Basic Wage
May 1,1985 5%
May 1,1986 5%
It is expressly understood that this wage increase shall be exclusive of any increase in the
minimum wage and/or mandatory living allowance that may be promulgated during the life of
this Agreement.[2]

protest unfair labor practices. Not only are they impotent as a labor unit, but their efficacy to
lobby in Congress is almost nil as R.A. No. 7653 effectively isolated them from the other GFI
rank-and-file in compensation. These BSP rank-and-file employees represent the politically
powerless and they should not be compelled to seek a political solution to their unequal and
iniquitous treatment. Indeed, they have waited for many years for the legislature to act. They
cannot be asked to wait some more for discrimination cannot be given any waiting time.
Unless the equal protection clause of the Constitution is a mere platitude, it is the Courts duty
to save them from reasonless discrimination.
IN VIEW WHEREOF, we hold that the continued operation and implementation of the
last proviso of Section 15(c), Article II of Republic Act No. 7653 is unconstitutional.
Davide, Jr., C.J., Quisumbing, Ynares-Santiago, Sandoval-Gutierrez, Austria-Martinez,
Azcuna, Tinga, and Chico-Nazario, JJ., concur.
Panganiban, Carpio, Carpio-Morales, and Garcia, JJ., see dissenting.
Corona, and Callejo, Sr., JJ., on leave.
Prior to the expiration of the aforestated Agreement, on 25 July 1986, petitioner and private
respondent executed a Memorandum of Agreement (MOA) wherein the terms of the CBA,
specifically on matters of wage increase and facilities allowance, were modified as follows:
1. The COMPANY hereby grants a wage increase of 10% of the basic rate to all employees
and workers within the bargaining units (sic) as follows:
(a) 5% effective May 1,1986.
This will mean that the members of the bargaining unit will get an effective increase of 10%
from May 1, 1986.
(b) 5% effective May 1,1987.
2. The COMPANY hereby grants an increase of the facilities allowance from P50.00 to
P100.00 per month effective May 1, 1986.[3]
In compliance with the amended CBA, petitioner implemented the initial 5% wage increase
due on 1 May 1986.[4]
On 1 June 1987, Executive Order (E.O.) No. 178 was promulgated mandating the integration
of the cost of living allowance under Wage Orders Nos. 1, 2, 3, 5 and 6 into the basic wage of
workers, its effectivity retroactive to 1 May 1987. [5] Consequently, effective on 1 May 1987,
the basic wage rate of petitioners laborers categorized as non-agricultural workers was
increased by P9.00 per day.[6]
Petitioner implemented the second five percent (5%) wage increase due on 1 May 1987 and
thereafter added the integrated COLA.[7]
Private respondent, however, assailed the manner in which the second wage increase was
effected. It argued that the COLA should first be integrated into the basic wage before
the 5% wage increase is computed.[8]
Consequently, on 15 December 1988, the union filed a complaint for underpayment of wages
before the Regional Arbitration Branch IV, Quezon City.
On 24 July 1989, the Labor Arbiter promulgated a decision in favor of the union. The
dispositive part reads, thus:
WHEREFORE, consistent with the tenor hereof, judgment is rendered directing respondent
company to pay the wage differentials due its rank-and-file workers retroactive to 1 May 1987.
SO ORDERED.[9]
The Labor Arbiter ruled in this wise:
First and foremost, the written instrument and the intention of the parties must be brought to
the fore. And talking of intention, we conjure to sharp focus the provision embossed in Section
1, Article V of the collective agreement, viz:
xxx xxx xxx.

10

It is expressly understood that this wage increase shall be exclusive of increase in the
minimum wage and/or mandatory living allowance that may be promulgated during the life of
this Agreement. (Italics ours.)
The foregoing phrase albeit innocuously framed offers the cue. This ushers us to the inner
sanctum of what really was the intention of the parties to the contract. Treading along its lines,
it becomes readily discernible that this portion of the contract is the stop-lock gate or known in
its technical term as the non-chargeability clause. There can be no quibbling that on the
strength of this provision, the wage/allowance granted under this accord cannot be credited to
similar form of benefit that may be thereafter ordained by the government through
legislation. That the parties therefore were consciously aware at the time of the conclusion of
the agreement of the never-ending rise in the cost of living is a logical corollary. And while
this upward trend may not be a welcome phenomenon, there was the intention to yield and
comply in the event of an imposition. Of course, there cannot likewise be any rivalry that if
the Executive Order were to retroact to 2 May 1987 or a day after the last contractual increase,
this question will not arise. It is in this sense of fairness that we cannot allow this one (1) day
to be an insulating medium to deny the workers the benediction endowed by Executive Order
No. 178.[10]
Petitioner appealed the Labor Arbiters decision and on 18 November 1991 the NLRC rendered
its decision sustaining the Labor Arbiters ruling. The dispositive portion states:
WHEREFORE, in view of the foregoing, the Decision of the Labor Arbiter is hereby
AFFIRMED and the appeal filed is hereby DISMISSED for lack of merit.
SO ORDERED.[11]
The NLRC declared:
x x x Increments to the laborers financial gratification, be they in the form of salary increases
or changes in the salary scale are aimed at one thing -improvement of the economic
predicament of the laborers. As such, they should be viewed in the light of the States avowed
policy to protect labor. Thus, having entered into an agreement with its employees, an
employer may not be allowed to renege on its obligation under a collective bargaining
agreement should, at the same time, the law grants the employees the same or better terms and
conditions of employment. Employee benefits derived from law are exclusive of benefits
arrived at through negotiation and agreement unless otherwise provided by the agreement
itself or by law. (Meycauayan College v. Hon. Franklin N. Drilon, 185 SCRA 50).[12]
Petitioners motion for reconsideration was denied by the NLRC in its resolution dated 20
December 1991.
In the present petition, Marcopper challenges the NLRC decision on the following grounds:
I
PUBLIC RESPONDENT NLRC ACTED WITH GRAVE ABUSE OF DISCRETION IN
AFFIRMING THE DECISION OF LABOR ARBITER JOAQUIN TANODRA DIRECTING
MARCOPPER TO PAY WAGE DIFFERENTIALS DUE ITS RANK-AND-FILE
EMPLOYEES RETROACTIVE TO 1 MAY 1987 CONSIDERING THAT SANS EO 178,
THE FUNDAMENTAL MEANING OF THE BASIC WAGE IS CLEARLY DIFFERENT
FROM, AND DOES NOT INCLUDE THE COLA AT THE TIME THE CBA WAS
ENTERED INTO. THUS, PUBLIC RESPONDENTS READING OF THE CBA, AS
AMENDED BY THE MEMORANDUM OF AGREEMENT DATED 25 JULY 1986,
ULTIMATELY DISREGARDED THE ORDINARY MEANING OF THE PHRASE BASIC
WAGE, OTHERWISE INTENDED BY THE PARTIES DURING THE TIME THE CBA
WAS EXECUTED.
II

THE LABOR ARBITER AND PUBLIC RESPONDENT NLRCS RELIANCE ON THE


LAST PARAGRAPH OF SECTION 1, ARTICLE V OF THE CBA WHICH STATES: IT IS
EXPRESSLY UNDERSTOOD THAT THIS WAGE INCREASE SHALL BE EXCLUSIVE
OF ANY INCREASE IN THE MINIMUM WAGE AND/OR MANDATORY LIVING
ALLOWANCE THAT MAY BE PROMULGATED DURING THE LIFE OF THIS
AGREEMENT IS MISPLACED AND WITHOUT BASIS BECAUSE SAID PROVISION
HARDLY OFFERS A HINT AS TO WHAT BASIC WAGE THE PARTIES HAD IN MIND
AT THE TIME THEY EXECUTED THE CBA AS AMENDED BY THE MEMORANDUM
OF AGREEMENT.
III
PETITIONER COMPUTED THE 5% WAGE INCREASE BASED ON THE
UNINTEGRATED BASIC WAGE IN ACCORDANCE WITH THE INTENT AND TERMS
OF THE CBA, AS AMENDED BY THE MEMORANDUM OF AGREEMENT. THIS WAS
IN FULL ACCORD AND IN FAITHFUL COMPLIANCE WITH EO 178. HENCE,
PETITIONER DID NOT COMMIT ANY UNDERPAYMENT.
IV
THE DOCTRINE OF LIBERAL INTERPRETATION IN FAVOR OF LABOR IN CASE OF
DOUBT IS NOT APPLICABLE TO THE INSTANT CASE.[13]
Stripped of the non-essentials, the question for our resolution is what should be the basis for
the computation of the CBA increase, the basic wage without the COLA or the so-called
integrated basic wage which, by mandate of E.O. No. 178, includes the COLA.
It is petitioners contention that the basic wage referred to in the CBA pertains to the
unintegrated basic wage. Petitioner maintains that the rules on interpretation of contracts,
particularly Art. 1371 of the New Civil Code which states that:
Art. 1371. In order to judge the intention of the contracting parties, their contemporaneous and
subsequent acts shall be principally considered.
should govern. Accordingly, applying the aforequoted provision in the case at bench,
petitioner concludes that it was clearly not the intention of the parties (petitioner and private
respondent) to include the COLA in computing the CBA/MOA mandated increase since the
MOA was entered into a year before E.O. No. 178 was enacted even though their effectivity
dates coincide. In other words, the situation contemporaneous to the execution of the
amendatory MOA was that there was yet no law requiring the integration of the COLA into the
basic wage.[14] Petitioner, therefore, cannot be compelled to undertake an obligation it never
assumed or contemplated under the CBA or MOA.
Siding with the petitioner, the Solicitor General opines that for the purpose of complying with
the obligations imposed by the CBA, the integrated COLA should not be considered due to the
exclusivity of the benefits under the said CBA and E.O. No. 178. He explains thus:
A collective bargaining agreement is a contractual obligation. It is distinct from an obligation
imposed by law. The terms and conditions of a CBA constitute the law between the
parties. Thus, employee benefits derived from either the law or a contract should be treated as
distinct and separate from each other. (Meycauayan College vs. Drilon, supra.)
xxx xxx xxx.
Very clearly, the CBA and E.O. 178 provided for the exclusiveness of the benefits to be given
or awarded to the employees of petitioner. Thus, when petitioner computed the 5% wage
increase based on the unintegrated basic wage, it complied with its contractual obligations
under the CBA. When it thereafter integrated the COLA into the basic wage, it complied also
with the mandate of E.O. 178. Petitioner, therefore, complied with its contractual obligations
in the CBA as well as with the legal mandate of the law. Consequently, petitioner is not guilty
of underpayment.

11

To follow the theory of private respondent, that is - to integrate first the COLA into the basic
wage and thereafter compute the 5% wage increase therefrom, would violate the exclusiveness
of the benefits granted under the CBA and under E.O. 178. [15]
Private respondent counters by asserting that the purpose, nature and essence of CBA
negotiation is to obtain wage increases and benefits over and above what the law provides and
that the principle of non-diminution of benefits should prevail.
The NLRC, which filed its own comment, likewise, made the following assertions:
x x x However, to state outright that the parties intended the basic wage to remain invariable
even after the advent of EO 178 is unfounded and presumptuous a claim as such inevitably
works to the utmost disadvantage of the workers and runs counter to the constitutional
guarantee of affording protection to labor. Evidently, the rationale for the integration of the
COLA with the basic wage was primarily to increase the base wage for purposes of
computation of such items as overtime and premium pay, fringe benefits, etc. To adopt the
statement and claim of the petitioner would then redound to depriving the workers of the full
benefits the law intended for them, which in the final analysis was solely for the purpose of
alleviating their plight due to the continuous undue hardship they suffer caused by the ever
escalating prices of prime commodities.[16]
We rule for the respondents.
The principle that the CBA is the law between the contracting parties stands strong and true.
[17]
However, the present controversy involves not merely an interpretation of CBA
provisions. More importantly, it requires a determination of the effect of an executive order on
the terms and the conditions of the CBA. This is, and should be, the focus of the instant case.
It is unnecessary to delve too much on the intention of the parties as to what they allegedly
meant by the term basic wage at the time the CBA and MOA were executed because there is
no question that as of 1 May 1987, as mandated by E.O. No. 178, the basic wage of workers,
or the statutory minimum wage, was increased with the integration of the COLA. As of said
date, then, the term basic wage includes the COLA. This is what the law ordains and to which
the collective bargaining agreement of the parties must conform.
Petitioners arguments eventually lose steam in the light of the fact that compliance with the
law is mandatory and beyond contractual stipulation by and between the parties; consequently,
whether or not petitioner intended the basic wage to include the COLA becomes
immaterial. There is evidently nothing to construe and interpret because the law is clear and
unambiguous. Unfortunately for petitioner, said law, by some uncanny coincidence,
retroactively took effect on the same date the CBA increase became effective. Therefore, there
cannot be any doubt that the computation of the CBA increase on the basis of the integrated
wage does not constitute a violation of the CBA.
Petitioners contention that under the Rules Implementing E.O. No. 178, the definition of the
term -basic wage has remained unchanged is off the mark since said definition expressly
allows integration of monetary benefits into the regular pay of employees:
Chapter 1. Definition of Terms and Coverage.
Section 1. Definition of Terms.
xxx xxx xxx.

(j) Basic Wage means all regular remuneration or earnings paid by an employer for services
rendered on normal working days and hours but does not include cost-of- living allowances,
profit-sharing payments, premium payments, 13th month pay, and other monetary benefits
which are not considered as part of or integrated into the regular salary of the employee on
the date the Order became effective. (Italics ours.)
What E.O. No. 178 did was exactly to integrate the COLA under Wage Orders Nos. 1, 2,
3, 5 and 6 into the basic pay so as to increase the statutory daily minimum wage. Section 2 of
the Rules is quite explicit:
Section 2. Amount to be Integrated. - Effective on the dates specified, as a result of the
integration, the basic wage rate of covered workers shall be increased by the following
amounts: (Italics ours.)
xxx xxx xxx.
Integration of monetary benefits into the basic pay of workers is not a new method of
increasing the minimum wage.[18] But even so, we are still guided by our ruling in Davao
Integrated Port Stevedoring Services v. Abarquez,[19] which we herein reiterate:
While the terms and conditions of the CBA constitute the law between the parties, it is not,
however, an ordinary contract to which is applied the principles of law governing ordinary
contracts. A CBA, as a labor contract within the contemplation of Article 1700 of the Civil
Code of the Philippines which governs the relations between labor and capital, is not merely
contractual in nature but impressed with public interest, thus, it must yield to the common
good. As such, it must be construed liberally rather than narrowly and technically, and the
courts must place a practical and realistic construction upon it, giving due consideration to the
context in which it is negotiated and purpose which it is intended to serve.
Finally, petitioner misinterprets the declaration of the Labor Arbiter in the assailed decision
that when the pendulum of judgment swings to and fro and the forces are equal on both sides,
the same must be stilled in favor of labor. While petitioner acknowledges that all doubts in the
interpretation of the Labor Code shall be resolved in favor of labor,[20] it insists that what is
involved-here is the amended CBA which is essentially a contract between private
persons. What petitioner has lost sight of is the avowed policy of the State, enshrined in our
Constitution, to accord utmost protection and justice to labor, a policy, we are, likewise, sworn
to uphold.
In Philippine Telegraph & Telephone Corporation v. NLRC,[21] we categorically stated that:
When conflicting interests of labor and capital are to be weighed on the scales of social
justice, the heavier influence of the latter should be counter-balanced by sympathy and
compassion the law must accord the underprivileged worker.
Likewise, in Terminal Facilities and Services Corporation v. NLRC,[22] we declared:
Any doubt concerning the rights of labor should be resolved in its favor pursuant to the social
justice policy.
The purpose of E.O. No. 178 is to improve the lot of the workers covered by the said statute.
We are bound to ensure its fruition.
WHEREFORE, premises considered, the petition is hereby DISMISSED.
SO ORDERED.
Padilla, Bellosillo, Vitug, and Hermosisima, Jr., concur.

EN BANC
JENNY M. AGABON and G.R. No. 158693
VIRGILIO C. AGABON,
Petitioners, Present:

Davide, Jr., C.J.,


Puno,
Panganiban,
Quisumbing,
Ynares-Santiago,

12

Sandoval-Gutierrez,
- versus - Carpio,
Austria-Martinez,
Corona,
Carpio-Morales,
Callejo, Sr.,
Azcuna,
Tinga,
Chico-Nazario, and
Garcia, JJ.
NATIONAL LABOR RELATIONS
COMMISSION (NLRC), RIVIERA
HOME IMPROVEMENTS, INC. Promulgated:
and VICENTE ANGELES,
Respondents. November 17, 2004
x ---------------------------------------------------------------------------------------- x
DECISION
YNARES-SANTIAGO, J.:
This petition for review seeks to reverse the decision[1] of the Court of Appeals dated January
23, 2003, in CA-G.R. SP No. 63017, modifying the decision of National Labor Relations
Commission (NLRC) in NLRC-NCR Case No. 023442-00.
Private respondent Riviera Home Improvements, Inc. is engaged in the business of selling and
installing ornamental and construction materials. It employed petitioners Virgilio Agabon and
Jenny Agabon as gypsum board and cornice installers on January 2, 1992 [2] until February 23,
1999 when they were dismissed for abandonment of work.
Petitioners then filed a complaint for illegal dismissal and payment of money claims [3] and on
December 28, 1999, the Labor Arbiter rendered a decision declaring the dismissals illegal and
ordered private respondent to pay the monetary claims. The dispositive portion of the decision
states:
WHEREFORE, premises considered, We find the termination of the complainants illegal.
Accordingly, respondent is hereby ordered to pay them their backwages up to November 29,
1999 in the sum of:
1. Jenny M. Agabon - P56, 231.93
2. Virgilio C. Agabon - 56, 231.93
and, in lieu of reinstatement to pay them their separation pay of one (1) month for every year
of service from date of hiring up to November 29, 1999.
Respondent is further ordered to pay the complainants their holiday pay and service incentive
leave pay for the years 1996, 1997 and 1998 as well as their premium pay for holidays and rest
days and Virgilio Agabons 13th month pay differential amounting to TWO THOUSAND ONE

HUNDRED FIFTY (P2,150.00) Pesos, or the aggregate amount of ONE HUNDRED


TWENTY ONE THOUSAND SIX HUNDRED SEVENTY EIGHT & 93/100 (P121,678.93)
Pesos for Jenny Agabon, and ONE HUNDRED TWENTY THREE THOUSAND EIGHT
HUNDRED TWENTY EIGHT & 93/100 (P123,828.93) Pesos for Virgilio Agabon, as per
attached computation of Julieta C. Nicolas, OIC, Research and Computation Unit, NCR.
SO ORDERED.[4]
On appeal, the NLRC reversed the Labor Arbiter because it found that the petitioners had
abandoned their work, and were not entitled to backwages and separation pay. The other
money claims awarded by the Labor Arbiter were also denied for lack of evidence. [5]
Upon denial of their motion for reconsideration, petitioners filed a petition for certiorari with
the Court of Appeals.
The Court of Appeals in turn ruled that the dismissal of the petitioners was not illegal because
they had abandoned their employment but ordered the payment of money claims. The
dispositive portion of the decision reads:
WHEREFORE, the decision of the National Labor Relations Commission is REVERSED only
insofar as it dismissed petitioners money claims. Private respondents are ordered to pay
petitioners holiday pay for four (4) regular holidays in 1996, 1997, and 1998, as well as their
service incentive leave pay for said years, and to pay the balance of petitioner Virgilio
Agabons 13th month pay for 1998 in the amount of P2,150.00.
SO ORDERED.[6]
Hence, this petition for review on the sole issue of whether petitioners were illegally
dismissed.[7]
Petitioners assert that they were dismissed because the private respondent refused to give them
assignments unless they agreed to work on a pakyaw basis when they reported for duty on
February 23, 1999. They did not agree on this arrangement because it would mean losing
benefits as Social Security System (SSS) members. Petitioners also claim that private
respondent did not comply with the twin requirements of notice and hearing. [8]
Private respondent, on the other hand, maintained that petitioners were not dismissed but had
abandoned their work.[9] In fact, private respondent sent two letters to the last known addresses
of the petitioners advising them to report for work. Private respondents manager even talked to
petitioner Virgilio Agabon by telephone sometime in June 1999 to tell him about the new
assignment at Pacific Plaza Towers involving 40,000 square meters of cornice installation
work. However, petitioners did not report for work because they had subcontracted to perform
installation work for another company. Petitioners also demanded for an increase in their wage
to P280.00 per day. When this was not granted, petitioners stopped reporting for work and
filed the illegal dismissal case.[10]
It is well-settled that findings of fact of quasi-judicial agencies like the NLRC are accorded
not only respect but even finality if the findings are supported by substantial evidence. This is
especially so when such findings were affirmed by the Court of Appeals. [11] However, if the
factual findings of the NLRC and the Labor Arbiter are conflicting, as in this case, the
reviewing court may delve into the records and examine for itself the questioned findings. [12]

13

Accordingly, the Court of Appeals, after a careful review of the facts, ruled that petitioners
dismissal was for a just cause. They had abandoned their employment and were already
working for another employer.
To dismiss an employee, the law requires not only the existence of a just and valid cause but
also enjoins the employer to give the employee the opportunity to be heard and to defend
himself.[13] Article 282 of the Labor Code enumerates the just causes for termination by the
employer: (a) serious misconduct or willful disobedience by the employee of the lawful orders
of his employer or the latters representative in connection with the employees work; (b) gross
and habitual neglect by the employee of his duties; (c) fraud or willful breach by the employee
of the trust reposed in him by his employer or his duly authorized representative; (d)
commission of a crime or offense by the employee against the person of his employer or any
immediate member of his family or his duly authorized representative; and (e) other causes
analogous to the foregoing.
Abandonment is the deliberate and unjustified refusal of an employee to resume his
employment.[14] It is a form of neglect of duty, hence, a just cause for termination of
employment by the employer.[15] For a valid finding of abandonment, these two factors should
be present: (1) the failure to report for work or absence without valid or justifiable reason; and
(2) a clear intention to sever employer-employee relationship, with the second as the more
determinative factor which is manifested by overt acts from which it may be deduced that the
employees has no more intention to work. The intent to discontinue the employment must be
shown by clear proof that it was deliberate and unjustified. [16]
In February 1999, petitioners were frequently absent having subcontracted for an installation
work for another company. Subcontracting for another company clearly showed the intention
to sever the employer-employee relationship with private respondent. This was not the first
time they did this. In January 1996, they did not report for work because they were working
for another company. Private respondent at that time warned petitioners that they would be
dismissed if this happened again. Petitioners disregarded the warning and exhibited a clear
intention to sever their employer-employee relationship. The record of an employee is a
relevant consideration in determining the penalty that should be meted out to him. [17]
In Sandoval Shipyard v. Clave,[18] we held that an employee who deliberately absented from
work without leave or permission from his employer, for the purpose of looking for a job
elsewhere, is considered to have abandoned his job. We should apply that rule with more
reason here where petitioners were absent because they were already working in another
company.
The law imposes many obligations on the employer such as providing just compensation to
workers, observance of the procedural requirements of notice and hearing in the termination of
employment. On the other hand, the law also recognizes the right of the employer to expect
from its workers not only good performance, adequate work and diligence, but also good
conduct[19] and loyalty. The employer may not be compelled to continue to employ such
persons whose continuance in the service will patently be inimical to his interests. [20]
After establishing that the terminations were for a just and valid cause, we now determine if
the procedures for dismissal were observed.
The procedure for terminating an employee is found in Book VI, Rule I, Section 2(d) of
the Omnibus Rules Implementing the Labor Code:

Standards of due process: requirements of notice. In all cases of termination of employment,


the following standards of due process shall be substantially observed:
I. For termination of employment based on just causes as defined in Article 282 of the Code:
(a) A written notice served on the employee specifying the ground or grounds for termination,
and giving to said employee reasonable opportunity within which to explain his side;
(b) A hearing or conference during which the employee concerned, with the assistance of
counsel if the employee so desires, is given opportunity to respond to the charge, present his
evidence or rebut the evidence presented against him; and
(c) A written notice of termination served on the employee indicating that upon due
consideration of all the circumstances, grounds have been established to justify his
termination.
In case of termination, the foregoing notices shall be served on the employees last known
address.
Dismissals based on just causes contemplate acts or omissions attributable to the employee
while dismissals based on authorized causes involve grounds under the Labor Code which
allow the employer to terminate employees. A termination for an authorized cause requires
payment of separation pay. When the termination of employment is declared illegal,
reinstatement and full backwages are mandated under Article 279. If reinstatement is no longer
possible where the dismissal was unjust, separation pay may be granted.
Procedurally, (1) if the dismissal is based on a just cause under Article 282, the employer must
give the employee two written notices and a hearing or opportunity to be heard if requested by
the employee before terminating the employment: a notice specifying the grounds for which
dismissal is sought a hearing or an opportunity to be heard and after hearing or opportunity to
be heard, a notice of the decision to dismiss; and (2) if the dismissal is based on authorized
causes under Articles 283 and 284, the employer must give the employee and the Department
of Labor and Employment written notices 30 days prior to the effectivity of his separation.
From the foregoing rules four possible situations may be derived: (1) the dismissal is for a just
cause under Article 282 of the Labor Code, for an authorized cause under Article 283, or for
health reasons under Article 284, and due process was observed; (2) the dismissal is without
just or authorized cause but due process was observed; (3) the dismissal is without just or
authorized cause and there was no due process; and (4) the dismissal is for just or authorized
cause but due process was not observed.
In the first situation, the dismissal is undoubtedly valid and the employer will not suffer any
liability.
In the second and third situations where the dismissals are illegal, Article 279 mandates that
the employee is entitled to reinstatement without loss of seniority rights and other privileges
and full backwages, inclusive of allowances, and other benefits or their monetary equivalent
computed from the time the compensation was not paid up to the time of actual reinstatement.

14

In the fourth situation, the dismissal should be upheld. While the procedural infirmity cannot
be cured, it should not invalidate the dismissal. However, the employer should be held liable
for non-compliance with the procedural requirements of due process.
The present case squarely falls under the fourth situation. The dismissal should be upheld
because it was established that the petitioners abandoned their jobs to work for another
company. Private respondent, however, did not follow the notice requirements and instead
argued that sending notices to the last known addresses would have been useless because they
did not reside there anymore. Unfortunately for the private respondent, this is not a valid
excuse because the law mandates the twin notice requirements to the employees last known
address.[21] Thus, it should be held liable for non-compliance with the procedural requirements
of due process.
A review and re-examination of the relevant legal principles is appropriate and timely to
clarify the various rulings on employment termination in the light of Serrano v. National
Labor Relations Commission.[22]
Prior to 1989, the rule was that a dismissal or termination is illegal if the employee was not
given any notice. In the 1989 case of Wenphil Corp. v. National Labor Relations Commission,
[23]
we reversed this long-standing rule and held that the dismissed employee, although not
given any notice and hearing, was not entitled to reinstatement and backwages because the
dismissal was for grave misconduct and insubordination, a just ground for termination under
Article 282. The employee had a violent temper and caused trouble during office hours,
defying superiors who tried to pacify him. We concluded that reinstating the employee and
awarding backwages may encourage him to do even worse and will render a mockery of the
rules of discipline that employees are required to observe. [24] We further held that:

the dismissal is ineffectual and the employer must pay full backwages from the time of
termination until it is judicially declared that the dismissal was for a just or authorized cause.
The rationale for the re-examination of the Wenphil doctrine in Serrano was the significant
number of cases involving dismissals without requisite notices. We concluded that the
imposition of penalty by way of damages for violation of the notice requirement was not
serving as a deterrent. Hence, we now required payment of full backwages from the time of
dismissal until the time the Court finds the dismissal was for a just or authorized cause.
Serrano was confronting the practice of employers to dismiss now and pay later by imposing
full backwages.
We believe, however, that the ruling in Serrano did not consider the full meaning of Article
279 of the Labor Code which states:
ART. 279. Security of Tenure. In cases of regular employment, the employer shall not
terminate the services of an employee except for a just cause or when authorized by this Title.
An employee who is unjustly dismissed from work shall be entitled to reinstatement without
loss of seniority rights and other privileges and to his full backwages, inclusive of allowances,
and to his other benefits or their monetary equivalent computed from the time his
compensation was withheld from him up to the time of his actual reinstatement.
This means that the termination is illegal only if it is not for any of the justified or authorized
causes provided by law. Payment of backwages and other benefits, including reinstatement, is
justified only if the employee was unjustly dismissed.

Under the circumstances, the dismissal of the private respondent for just cause should be
maintained. He has no right to return to his former employment.

The fact that the Serrano ruling can cause unfairness and injustice which elicited strong
dissent has prompted us to revisit the doctrine.

However, the petitioner must nevertheless be held to account for failure to extend to private
respondent his right to an investigation before causing his dismissal. The rule is explicit as
above discussed. The dismissal of an employee must befor just or authorized cause and after
due process. Petitioner committed an infraction of the second requirement. Thus, it must be
imposed a sanction for its failure to give a formal notice and conduct an investigation as
required by law before dismissing petitioner from employment. Considering the circumstances
of this case petitioner must indemnify the private respondent the amount of P1,000.00. The
measure of this award depends on the facts of each case and the gravity of the omission
committed by the employer.[25]

To be sure, the Due Process Clause in Article III, Section 1 of the Constitution embodies a
system of rights based on moral principles so deeply imbedded in the traditions and feelings of
our people as to be deemed fundamental to a civilized society as conceived by our entire
history. Due process is that which comports with the deepest notions of what is fair and right
and just.[26] It is a constitutional restraint on the legislative as well as on the executive and
judicial powers of the government provided by the Bill of Rights.

The rule thus evolved: where the employer had a valid reason to dismiss an employee but did
not follow the due process requirement, the dismissal may be upheld but the employer will be
penalized to pay an indemnity to the employee. This became known as the Wenphil or Belated
Due Process Rule.
On January 27, 2000, in Serrano, the rule on the extent of the sanction was changed. We held
that the violation by the employer of the notice requirement in termination for just or
authorized causes was not a denial of due process that will nullify the termination. However,

Due process under the Labor Code, like Constitutional due process, has two aspects:
substantive, i.e., the valid and authorized causes of employment termination under the Labor
Code; and procedural,i.e., the manner of dismissal. Procedural due process requirements for
dismissal are found in the Implementing Rules of P.D. 442, as amended, otherwise known as
the Labor Code of the Philippines in Book VI, Rule I, Sec. 2, as amended by Department
Order Nos. 9 and 10.[27] Breaches of these due process requirements violate the Labor Code.
Therefore statutory due process should be differentiated from failure to comply
with constitutional due process.
Constitutional due process protects the individual from the government and assures him of his
rights in criminal, civil or administrative proceedings; while statutory due process found in the

15

Labor Code and Implementing Rules protects employees from being unjustly terminated
without just cause after notice and hearing.
In Sebuguero v. National Labor Relations Commission,[28] the dismissal was for a just and
valid cause but the employee was not accorded due process. The dismissal was upheld by the
Court but the employer was sanctioned. The sanction should be in the nature of
indemnification or penalty, and depends on the facts of each case and the gravity of the
omission committed by the employer.
In Nath v. National Labor Relations Commission,[29] it was ruled that even if the employee was
not given due process, the failure did not operate to eradicate the just causes for dismissal. The
dismissal being for just cause, albeit without due process, did not entitle the employee to
reinstatement, backwages, damages and attorneys fees.
Mr. Justice Jose C. Vitug, in his separate opinion in MGG Marine Services, Inc. v. National
Labor Relations Commission,[30] which opinion he reiterated in Serrano, stated:
C. Where there is just cause for dismissal but due process has not been properly observed by
an employer, it would not be right to order either the reinstatement of the dismissed employee
or the payment of backwages to him. In failing, however, to comply with the procedure
prescribed by law in terminating the services of the employee, the employer must be deemed
to have opted or, in any case, should be made liable, for the payment of separation pay. It
might be pointed out that the notice to be given and the hearing to be conducted generally
constitute the two-part due process requirement of law to be accorded to the employee by the
employer. Nevertheless, peculiar circumstances might obtain in certain situations where to
undertake the above steps would be no more than a useless formality and where, accordingly,
it would not be imprudent to apply the res ipsa loquitur rule and award, in lieu of separation
pay, nominal damages to the employee. x x x. [31]
After carefully analyzing the consequences of the divergent doctrines in the law on
employment termination, we believe that in cases involving dismissals for cause but without
observance of the twin requirements of notice and hearing, the better rule is to abandon
the Serrano doctrine and to follow Wenphil by holding that the dismissal was for just cause but
imposing sanctions on the employer. Such sanctions, however, must be stiffer than that
imposed in Wenphil. By doing so, this Court would be able to achieve a fair result by
dispensing justice not just to employees, but to employers as well.
The unfairness of declaring illegal or ineffectual dismissals for valid or authorized causes but
not complying with statutory due process may have far-reaching consequences.
This would encourage frivolous suits, where even the most notorious violators of company
policy are rewarded by invoking due process. This also creates absurd situations where there is
a just or authorized cause for dismissal but a procedural infirmity invalidates the termination.
Let us take for example a case where the employee is caught stealing or threatens the lives of
his co-employees or has become a criminal, who has fled and cannot be found, or where
serious business losses demand that operations be ceased in less than a month. Invalidating the
dismissal would not serve public interest. It could also discourage investments that can
generate employment in the local economy.

The constitutional policy to provide full protection to labor is not meant to be a sword to
oppress employers. The commitment of this Court to the cause of labor does not prevent us
from sustaining the employer when it is in the right, as in this case. [32] Certainly, an employer
should not be compelled to pay employees for work not actually performed and in fact
abandoned.
The employer should not be compelled to continue employing a person who is admittedly
guilty of misfeasance or malfeasance and whose continued employment is patently inimical to
the employer. The law protecting the rights of the laborer authorizes neither oppression nor
self-destruction of the employer.[33]
It must be stressed that in the present case, the petitioners committed a grave offense, i.e.,
abandonment, which, if the requirements of due process were complied with, would
undoubtedly result in a valid dismissal.
An employee who is clearly guilty of conduct violative of Article 282 should not be protected
by the Social Justice Clause of the Constitution. Social justice, as the term suggests, should be
used only to correct an injustice. As the eminent Justice Jose P. Laurel observed, social justice
must be founded on the recognition of the necessity of interdependence among diverse units of
a society and of the protection that should be equally and evenly extended to all groups as a
combined force in our social and economic life, consistent with the fundamental and
paramount objective of the state of promoting the health, comfort, and quiet of all persons, and
of bringing about the greatest good to the greatest number.[34]
This is not to say that the Court was wrong when it ruled the way it did in Wenphil,
Serrano and related cases. Social justice is not based on rigid formulas set in stone. It has to
allow for changing times and circumstances.
Justice Isagani Cruz strongly asserts the need to apply a balanced approach to labormanagement relations and dispense justice with an even hand in every case:
We have repeatedly stressed that social justice or any justice for that matter is for the
deserving, whether he be a millionaire in his mansion or a pauper in his hovel. It is true that, in
case of reasonable doubt, we are to tilt the balance in favor of the poor to whom the
Constitution fittingly extends its sympathy and compassion. But never is it justified to give
preference to the poor simply because they are poor, or reject the rich simply because they are
rich, for justice must always be served for the poor and the rich alike, according to the
mandate of the law.[35]
Justice in every case should only be for the deserving party. It should not be presumed that
every case of illegal dismissal would automatically be decided in favor of labor, as
management has rights that should be fully respected and enforced by this Court. As
interdependent and indispensable partners in nation-building, labor and management need
each other to foster productivity and economic growth; hence, the need to weigh and balance
the rights and welfare of both the employee and employer.
Where the dismissal is for a just cause, as in the instant case, the lack of statutory due process
should not nullify the dismissal, or render it illegal, or ineffectual. However, the employer
should indemnify the employee for the violation of his statutory rights, as ruled in Reta v.

16

National Labor Relations Commission.[36] The indemnity to be imposed should be stiffer to


discourage the abhorrent practice of dismiss now, pay later, which we sought to deter in
the Serrano ruling. The sanction should be in the nature of indemnification or penalty and
should depend on the facts of each case, taking into special consideration the gravity of the
due process violation of the employer.
Under the Civil Code, nominal damages is adjudicated in order that a right of the plaintiff,
which has been violated or invaded by the defendant, may be vindicated or recognized, and
not for the purpose of indemnifying the plaintiff for any loss suffered by him. [37]
As enunciated by this Court in Viernes v. National Labor Relations Commissions,[38] an
employer is liable to pay indemnity in the form of nominal damages to an employee who has
been dismissed if, in effecting such dismissal, the employer fails to comply with the
requirements of due process. The Court, after considering the circumstances therein, fixed the
indemnity at P2,590.50, which was equivalent to the employees one month salary. This
indemnity is intended not to penalize the employer but to vindicate or recognize the employees
right to statutory due process which was violated by the employer.[39]
The violation of the petitioners right to statutory due process by the private respondent
warrants the payment of indemnity in the form of nominal damages. The amount of such
damages is addressed to the sound discretion of the court, taking into account the relevant
circumstances.[40] Considering the prevailing circumstances in the case at bar, we deem it
proper to fix it at P30,000.00. We believe this form of damages would serve to deter
employers from future violations of the statutory due process rights of employees. At the very
least, it provides a vindication or recognition of this fundamental right granted to the latter
under the Labor Code and its Implementing Rules.
Private respondent claims that the Court of Appeals erred in holding that it failed to pay
petitioners holiday pay, service incentive leave pay and 13 th month pay.
We are not persuaded.
We affirm the ruling of the appellate court on petitioners money claims. Private respondent is
liable for petitioners holiday pay, service incentive leave pay and 13 th month pay without
deductions.
As a general rule, one who pleads payment has the burden of proving it. Even where the
employee must allege non-payment, the general rule is that the burden rests on the employer to
prove payment, rather than on the employee to prove non-payment. The reason for the rule is
that the pertinent personnel files, payrolls, records, remittances and other similar documents
which will show that overtime, differentials, service incentive leave and other claims of
workers have been paid are not in the possession of the worker but in the custody and absolute
control of the employer.[41]

13th month pay wherein it presented cash vouchers showing payments of the benefit in the
years disputed.[42] Allegations by private respondent that it does not operate during holidays
and that it allows its employees 10 days leave with pay, other than being self-serving, do not
constitute proof of payment. Consequently, it failed to discharge the onus probandithereby
making it liable for such claims to the petitioners.
Anent the deduction of SSS loan and the value of the shoes from petitioner Virgilio Agabons
13th month pay, we find the same to be unauthorized. The evident intention of Presidential
Decree No. 851 is to grant an additional income in the form of the 13th month pay to
employees not already receiving the same[43] so as to further protect the level of real wages
from the ravages of world-wide inflation.[44] Clearly, as additional income, the 13th month pay
is included in the definition of wage under Article 97(f) of the Labor Code, to wit:
(f) Wage paid to any employee shall mean the remuneration or earnings, however designated,
capable of being expressed in terms of money whether fixed or ascertained on a time, task,
piece , or commission basis, or other method of calculating the same, which is payable by an
employer to an employee under a written or unwritten contract of employment for work done
or to be done, or for services rendered or to be rendered and includes the fair and reasonable
value, as determined by the Secretary of Labor, of board, lodging, or other facilities
customarily furnished by the employer to the employee
from which an employer is prohibited under Article 113 [45] of the same Code from making any
deductions without the employees knowledge and consent. In the instant case, private
respondent failed to show that the deduction of the SSS loan and the value of the shoes from
petitioner Virgilio Agabons 13th month pay was authorized by the latter. The lack of authority
to deduct is further bolstered by the fact that petitioner Virgilio Agabon included the same as
one of his money claims against private respondent.
The Court of Appeals properly reinstated the monetary claims awarded by the Labor Arbiter
ordering the private respondent to pay each of the petitioners holiday pay for four regular
holidays from 1996 to 1998, in the amount of P6,520.00, service incentive leave pay for the
same period in the amount of P3,255.00 and the balance of Virgilio Agabons thirteenth month
pay for 1998 in the amount of P2,150.00.
WHEREFORE, in view of the foregoing, the petition is DENIED. The decision of the Court of
Appeals dated January 23, 2003, in CA-G.R. SP No. 63017, finding that petitioners Jenny and
Virgilio Agabon abandoned their work, and ordering private respondent to pay each of the
petitioners holiday pay for four regular holidays from 1996 to 1998, in the amount of
P6,520.00, service incentive leave pay for the same period in the amount of P3,255.00 and the
balance of Virgilio Agabons thirteenth month pay for 1998 in the amount of P2,150.00
is AFFIRMED with the MODIFICATION that private respondent Riviera Home
Improvements, Inc. is further ORDERED to pay each of the petitioners the amount of
P30,000.00 as nominal damages for non-compliance with statutory due process.
No costs.

In the case at bar, if private respondent indeed paid petitioners holiday pay and service
incentive leave pay, it could have easily presented documentary proofs of such monetary
benefits to disprove the claims of the petitioners. But it did not, except with respect to the
THIRD DIVISION

SO ORDERED
PHIMCO INDUSTRIES, INC., G.R. No. 170830

17

Petitioner,
Present:
versus CARPIO MORALES, J., Chairperson
PHIMCO INDUSTRIES LABOR BRION,
ASSOCIATION (PILA), and BERSAMIN,
ERLINDA VAZQUEZ, RICARDO ABAD, and
SACRISTAN, LEONIDA CATALAN, VILLARAMA, JR., JJ.
MAXIMO PEDRO, NATHANIELA
DIMACULANGAN,* RODOLFO
MOJICO, ROMEO CARAMANZA, Promulgated:
REYNALDO GANITANO, ALBERTO
BASCONCILLO,** and RAMON August 11, 2010
FALCIS, in their capacity as officers
of PILA, and ANGELITA BALOSA,***
DANILO BANAAG, ABRAHAM
CADAY, ALFONSO CLAUDIO,
FRANCISCO DALISAY,****
ANGELITO DEJAN,***** PHILIP
GARCES, NICANOR ILAGAN,
FLORENCIO LIBONGCOGON,******
NEMESIO MAMONONG, TEOFILO
MANALILI, ALFREDO PEARSON,*******
MARIO PEREA,******** RENATO
RAMOS, MARIANO ROSALES,
PABLO SARMIENTO, RODOLFO
TOLENTINO, FELIPE VILLAREAL,
ARSENIO ZAMORA, DANILO
BALTAZAR, ROGER CABER,*********
REYNALDO CAMARIN, BERNARDO
CUADRA,********** ANGELITO DE
GUZMAN, GERARDO FELICIANO,***********
ALEX IBAEZ, BENJAMIN JUAN, SR.,
RAMON MACAALAY, GONZALO
MANALILI, RAUL MICIANO,
HILARIO PEA, TERESA
PERMOCILLO,************ ERNESTO RIO,
RODOLFO SANIDAD, RAFAEL
STA. ANA, JULIAN TUGUIN and AMELIA
ZAMORA, as members of PILA,
Respondents.
x-----------------------------------------------------------------------------------------x
DECISION
BRION, J.:

Before us is the petition for review on certiorari[1] filed by petitioner Phimco Industries, Inc.
(PHIMCO), seeking to reverse and set aside the decision, [2] dated February 10, 2004, and the
resolution,[3]dated December 12, 2005, of the Court of Appeals (CA) in CA-G.R. SP No.
70336. The assailed CA decision dismissed PHIMCOs petition for certiorari that challenged
the resolution, dated December 29, 1998, and the decision, dated February 20, 2002, of the
National Labor Relations Commission (NLRC); the assailed CA resolution denied PHIMCOs
subsequent motion for reconsideration.
FACTUAL BACKGROUND
The facts of the case, gathered from the records, are briefly summarized below.
PHIMCO is a corporation engaged in the production of matches, with principal address at
Phimco Compound, Felix Manalo St., Sta. Ana, Manila. Respondent Phimco Industries Labor
Association (PILA) is the duly authorized bargaining representative of PHIMCOs daily-paid
workers. The 47 individually named respondents are PILA officers and members.
When the last collective bargaining agreement was about to expire on December 31, 1994,
PHIMCO and PILA negotiated for its renewal. The negotiation resulted in a deadlock on
economic issues, mainly due to disagreements on salary increases and benefits.
On March 9, 1995, PILA filed with the National Conciliation and Mediation Board (NCMB) a
Notice of Strike on the ground of the bargaining deadlock. Seven (7) days later, or on March
16, 1995, the union conducted a strike vote; a majority of the union members voted for a strike
as its response to the bargaining impasse. On March 17, 1995, PILA filed the strike vote
results with the NCMB. Thirty-five (35) days later, or on April 21, 1995, PILA staged a strike.
On May 3, 1995, PHIMCO filed with the NLRC a petition for preliminary injunction and
temporary restraining order (TRO), to enjoin the strikers from preventing through force,
intimidation and coercion the ingress and egress of non-striking employees into and from the
company premises. On May 15, 1995, the NLRC issued an ex-parte TRO, effective for a
period of twenty (20) days, or until June 5, 1995.
On June 23, 1995, PHIMCO sent a letter to thirty-six (36) union members, directing them to
explain within twenty-four (24) hours why they should not be dismissed for the illegal acts
they committed during the strike. Three days later, or on June 26, 1995, the thirty-six (36)
union members were informed of their dismissal.
On July 6, 1995, PILA filed a complaint for unfair labor practice and illegal dismissal (illegal
dismissal case) with the NLRC. The case was docketed as NLRC NCR Case No. 00-0704705-95, and raffled to Labor Arbiter (LA) Pablo C. Espiritu, Jr.
On July 7, 1995, then Acting Labor Secretary Jose S. Brillantes assumed jurisdiction over the
labor dispute, and ordered all the striking employees (except those who were handed
termination papers on June 26, 1995) to return to work within twenty-four (24) hours from
receipt of the order. The Secretary ordered PHIMCO to accept the striking employees, under
the same terms and conditions prevailing prior to the strike. [4] On the same day, PILA ended its
strike.

18

On August 28, 1995, PHIMCO filed a Petition to Declare the Strike Illegal (illegal strike case)
with the NLRC, with a prayer for the dismissal of PILA officers and members who knowingly
participated in the illegal strike. PHIMCO claimed that the strikers prevented ingress to and
egress from the PHIMCO compound, thereby paralyzing PHIMCOs operations. The case was
docketed as NLRC NCR Case No. 00-08-06031-95, and raffled to LA Jovencio Ll. Mayor.
On March 14, 1996, the respondents filed their Position Paper in the illegal strike case. They
countered that they complied with all the legal requirements for the staging of the strike, they
put up no barricade, and conducted their strike peacefully, in an orderly and lawful manner,
without incident.
LA Mayor decided the case on February 4, 1998,[5] and found the strike illegal; the
respondents committed prohibited acts during the strike by blocking the ingress to and egress
from PHIMCOs premises and preventing the non-striking employees from reporting for work.
He observed that it was not enough that the picket of the strikers was a moving picket, since
the strikers should allow the free passage to the entrance and exit points of the company
premises. Thus, LA Mayor declared that the respondent employees, PILA officers and
members, have lost their employment status.
On March 5, 1998, PILA and its officers and members appealed LA Mayors decision to the
NLRC.
THE NLRC RULING
The NLRC decided the appeal on December 29, 1998, and set aside LA Mayors decision.
[6]
The NLRC did not give weight to PHIMCOs evidence, and relied instead on the
respondents evidence showing that the union conducted a peaceful moving picket.

lieu of reinstatement, and 10% of the monetary award as attorneys fees. It ruled out
reinstatement because of the damages sustained by the company brought about by the strike.
On March 14, 2002, PHIMCO filed a motion for reconsideration of the consolidated decision.
On April 26, 2002, without waiting for the result of its motion for reconsideration, PHIMCO
elevated its case to the CA through a petition for certiorari under Rule 65 of the Rules of
Court.[9]
THE CA RULING
In a Decision[10] promulgated on February 10, 2004, the CA dismissed PHIMCOs petition
for certiorari. The CA noted that the NLRC findings, that the picket was peaceful and that
PHIMCOs evidence failed to show that the picket constituted an illegal blockade or that it
obstructed the points of entry to and exit from the company premises, were supported by
substantial evidence.
PHIMCO came to us through the present petition after the CA denied [11] PHIMCOs motion for
reconsideration.[12]
THE PETITION
The petitioner argues that the strike was illegal because the respondents committed the
prohibited acts under Article 264(e) of the Labor Code, such as blocking the ingress and egress
of the company premises, threat, coercion, and intimidation, as established by the evidence on
record.
THE CASE FOR THE RESPONDENTS

On January 28, 1999, PHIMCO filed a motion for reconsideration in the illegal strike case. [7]
In a parallel development, LA Espiritu decided the unions illegal dismissal case on March 2,
1999. He ruled the respondents dismissal as illegal, and ordered their reinstatement with
payment of backwages. PHIMCO appealed LA Espiritus decision to the NLRC.
Pending the resolution of PHIMCOs motion for reconsideration in the illegal strike case and
the appeal of the illegal dismissal case, PHIMCO moved for the consolidation of the two (2)
cases. The NLRC acted favorably on the motion and consolidated the two (2) cases in its
Order dated August 5, 1999.
On February 20, 2002, the NLRC rendered its Decision in the consolidated cases, ruling
totally in the unions favor.[8] It dismissed the appeal of the illegal dismissal case, and denied
PHIMCOs motion for reconsideration in the illegal strike case. The NLRC found that the
picket conducted by the striking employees was not an illegal blockade and did not obstruct
the points of entry to and exit from the companys premises; the pictures submitted by the
respondents revealed that the picket was moving, not stationary. With respect to the illegal
dismissal charge, the NLRC observed that the striking employees were not given ample
opportunity to explain their side after receipt of the June 23, 1995 letter. Thus, the NLRC
affirmed the Decision of LA Espiritu with respect to the payment of backwages until the
promulgation of the decision, plus separation pay at one (1) month salary per year of service in

The respondents, on the other hand, submit that the issues raised in this case are factual in
nature that we cannot generally touch in a petition for review, unless compelling reasons exist;
the company has not shown any such compelling reason as the picket was peaceful and
uneventful, and no human barricade blocked the company premises.
THE ISSUE
In Montoya v. Transmed Manila Corporation,[13] we laid down the basic approach that should
be followed in the review of CA decisions in labor cases, thus:
In a Rule 45 review, we consider the correctness of the assailed CA decision, in contrast with
the review for jurisdictional error that we undertake under Rule 65. Furthermore, Rule 45
limits us to the review of questions of law raised against the assailed CA decision. In ruling for
legal correctness, we have to view the CA decision in the same context that the petition
for certiorari it ruled upon was presented to it; we have to examine the CA decision from the
prism of whether it correctly determined the presence or absence of grave abuse of discretion
in the NLRC decision before it, not on the basis of whether the NLRC decision on the merits
of the case was correct. In other words, we have to be keenly aware that the CA undertook a
Rule 65 review, not a review on appeal, of the NLRC decision challenged before it. This is the
approach that should be basic in a Rule 45 review of a CA ruling in a labor case. In question

19

form, the question to ask is: Did the CA correctly determine whether the NLRC committed
grave abuse of discretion in ruling on the case?

means become illegal when they come within the prohibitions under Article 264(e) of the
Labor Code which provides:

In this light, the core issue in the present case is whether the CA correctly ruled that the NLRC
did not act with grave abuse of discretion in ruling that the unions strike was legal.

No person engaged in picketing shall commit any act of violence, coercion or intimidation or
obstruct the free ingress to or egress from the employer's premises for lawful purposes, or
obstruct public thoroughfares.

OUR RULING
We find the petition partly meritorious.
Requisites of a valid strike
A strike is the most powerful weapon of workers in their struggle with management in the
course of setting their terms and conditions of employment. Because it is premised on the
concept of economic war between labor and management, it is a weapon that can either
breathe life to or destroy the union and its members, and one that must also necessarily affect
management and its members.[14]
In light of these effects, the decision to declare a strike must be exercised responsibly and must
always rest on rational basis, free from emotionalism, and unswayed by the tempers and
tantrums of hot heads; it must focus on legitimate union interests. To be legitimate, a strike
should not be antithetical to public welfare, and must be pursued within legal bounds. The
right to strike as a means of attaining social justice is never meant to oppress or destroy
anyone, least of all, the employer.[15]
Since strikes affect not only the relationship between labor and management but also the
general peace and progress of the community, the law has provided limitations on the
right to strike. Procedurally, for a strike to be valid, it must comply with Article 263 [16] of the
Labor Code, which requires that: (a) a notice of strike be filed with the Department of Labor
and Employment (DOLE) 30 days before the intended date thereof, or 15 days in case of
unfair labor practice; (b) a strike vote be approved by a majority of the total union membership
in the bargaining unit concerned, obtained by secret ballot in a meeting called for that purpose;
and (c) a notice be given to the DOLE of the results of the voting at least seven days before the
intended strike.
These requirements are mandatory, and the unions failure to comply renders the strike illegal.
[17]
The 15 to 30-day cooling-off period is designed to afford the parties the opportunity to
amicably resolve the dispute with the assistance of the NCMB conciliator/mediator, while the
seven-day strike ban is intended to give the DOLE an opportunity to verify whether the
projected strike really carries the imprimatur of the majority of the union members. [18]
In the present case, the respondents fully satisfied the legal procedural requirements; a strike
notice was filed on March 9, 1995; a strike vote was reached on March 16, 1995; notification
of the strike vote was filed with the DOLE on March 17, 1995; and the actual strike was
launched only on April 25, 1995.
Strike may be illegal for commission of prohibited acts
Despite the validity of the purpose of a strike and compliance with the procedural
requirements, a strike may still be held illegal where the means employed are illegal.[19] The

Based on our examination of the evidence which the LA viewed differently from the NLRC
and the CA, we find the PILA strike illegal. We intervene and rule even on the evidentiary and
factual issues of this case as both the NLRC and the CA grossly misread the evidence, leading
them to inordinately incorrect conclusions, both factual and legal. While the strike
undisputably had not been marred by actual violence and patent intimidation, the picketing
that respondent PILA officers and members undertook as part of their strike activities
effectively blocked the free ingress to and egress from PHIMCOs premises, thus preventing
non-striking employees and company vehicles from entering the PHIMCO compound. In this
manner, the picketers violated Article 264(e) of the Labor Code.

The Evidence
We gather from the case record the following pieces of relevant evidence adduced in the
compulsory arbitration proceedings.[20]
For the Company
1.
Pictures taken during the strike, showing that the respondents prevented
free ingress to and egress from the company premises; [21]
2.
Affidavit of PHIMCO Human Resources Manager Francis Ferdinand Cinco, stating
that he was one of the employees prevented by the strikers from entering the PHIMCO
premises;[22]
3.
Affidavit of Cinco, identifying Erlinda Vazquez, Ricardo Sacristan,
Leonida Catalan, Maximo Pedro, Nathaniela R. Dimaculangan, Rodolfo Mojico, Romeo
Caramanza, Reynaldo Ganitano, Alberto Basconcillo, and Ramon Falcis as PILA officers; [23]
4.
Affidavit of Cinco identifying other members of PILA;[24]
5.
Folder 1, containing pictures taken during the strike identifying and showing
Leonida Catalan, Renato Ramos, Arsenio Zamora, Reynaldo Ganitano, Amelia Zamora,
Angelito Dejan, Teresa Permocillo, and Francisco Dalisay as the persons preventing Cinco and
his group from entering the company premises;[25]
6.
Folder 2, with pictures taken on May 30, 1995, showing Cinco, together with nonstriking PHIMCO employees, reporting for work but being refused entry by strikers Teofilo
Manalili, Nathaniela Dimaculangan, Bernando Cuadra, Maximo Pedro, Nicanor Ilagan, Julian
Tuguin, Nemesio Mamonong, Abraham Caday, Ernesto Rio, Benjamin Juan, Sr., Ramon
Macaalay, Gerardo Feliciano, Alberto Basconcillo, Rodolfo Sanidad, Mariano Rosales, Roger
Caber, Angelito de Guzman, Angelito Balosa and Philip Garces who blocked the company
gate;[26]

20

7.
Folder 3, with pictures taken on May 30, 1995, showing the respondents denying
free ingress to and egress from the company premises; [27]
8.
Folder 4, with pictures taken during the strike, showing that non-striking
employees failed to enter the company premises as a result of the respondents refusal to let
them in;[28]
9.
Affidavit of Joaquin Aguilar stating that the pictures presented by Cinco were
taken during the strike;[29]
10.
Pictures taken by Aguilar during the strike, showing non-striking employees being
refused entry by the respondents;[30]
11.
Joint affidavit of Orlando Marfil and Rodolfo Digo, identifying the pictures
they took during the strike, showing that the respondents blocked ingress to and egress from
the company premises;[31] and,
12.
Testimonies of PHIMCO employees Rodolfo Eva, Aguilar and Cinco, as well as
those of PILA officers Maximo Pedro and Leonida Catalan.
For the Respondents
1.
Affidavit of Leonida Catalan, stating that the PILA strike complied with all the legal
requirements, and the strike/picket was conducted peacefully with no incident of any
illegality;[32]
2.
Affidavit of Maximo Pedro, stating that the strike/picket was conducted
peacefully; the picket was always moving with no acts of illegality having been committed
during the strike;[33]
3.
Certification of Police Station Commander Bienvenido de los Reyes that during
the strike there was no report of any untoward incident;[34]
4.
Certification of Rev. Father Erick Adeviso of Dambanang Bayan Parish Church
that the strike was peaceful and without any untoward incident; [35]
5.
Certification of Priest-In-Charge Angelito Fausto of the Philippine Independent
Church in Punta, Santa Ana, that the strike complied with all the requirements for a lawful
strike, and the strikers conducted themselves in a peaceful manner; [36]
6.
Clearance issued by Punong Barangay Mario O. dela Rosa
and Barangay Secretary Pascual Gesmundo, Jr. that the strike from April 21 to July 7, 1995
was conducted in an orderly manner with no complaints filed; [37] and,
7.
Testimonies at the compulsory arbitration proceedings.
In its resolution of December 29, 1998,[38] the NLRC declared that the string of proofs the
company presented was overwhelmingly counterbalanced by the numerous pieces of evidence
adduced by respondents x x x all depicting a common story that respondents put up a peaceful
moving picket, and did not commit any illegal acts x x x specifically obstructing the ingress to
and egress from the company premises[.][39]
We disagree with this finding as the purported peaceful moving picket upon which the NLRC
resolution was anchored was not an innocuous picket, contrary to what the NLRC said it was;
the picket, under the evidence presented, did effectively obstruct the entry and exit points of
the company premises on various occasions.
To strike is to withhold or to stop work by the concerted action of employees as a result of an
industrial or labor dispute.[40] The work stoppage may be accompanied by picketing by the
striking employees outside of the company compound. While a strike focuses on stoppage of

work, picketing focuses on publicizing the labor dispute and its incidents to inform the public
of what is happening in the company struck against. A picket simply means to march to and
from the employers premises, usually accompanied by the display of placards and other signs
making known the facts involved in a labor dispute. [41] It is a strike activity separate and
different from the actual stoppage of work.
While the right of employees to publicize their dispute falls within the protection of freedom
of expression[42] and the right to peaceably assemble to air grievances, [43] these rights are by no
means absolute. Protected picketing does not extend to blocking ingress to and egress from the
company premises.[44] That the picket was moving, was peaceful and was not attended by
actual violence may not free it from taints of illegality if the picket effectively blocked entry to
and exit from the company premises.
In this regard, PHIMCO employees Rodolfo Eva and Joaquin Aguilar, and the companys
Human Resources Manager Francis Ferdinand Cinco testified during the compulsory
arbitration hearings:
ATTY. REYES: this incident on May 22, 1995, when a coaster or bus attempted to enter
PHIMCO compound, you mentioned that it was refused entry. Why was this (sic) it refused
entry?
WITNESS: Because at that time, there was a moving picket at the gate that is why the bus was
not able to enter.[45]
xxxx
Q: Despite this TRO, which was issued by the NLRC, were you allowed entry by the strikers?
A: We made several attempts to enter the compound, I remember on May 7, 1995, we tried to
enter the PHIMCO compound but we were not allowed entry.
Q: Aside from May 27, 1995, were there any other instances wherein you were not allowed
entry at PHIMCO compound?
A: On May 29, I recall I was riding with our Production Manager with the Pick-up. We tried to
enter but we were not allowed by the strikers. [46]
xxxx
ARBITER MAYOR: How did the strikers block the ingress of the company?
A: They hold around, joining hands, moving picket.[47]
xxxx
ARBITER MAYOR: Reform the question, and because of that moving picket conducted by
the strikers, no employees or vehicles can come in or go out of the premises?
A: None, sir.[48]

21

These accounts were confirmed by the admissions of respondent PILA officers Maximo Pedro
and Leonida Catalan that the strikers prevented non-striking employees from entering the
company premises. According to these union officers:
ATTY. CHUA: Mr. witness, do you recall an incident when a group of managers of PHIMCO,
with several of the monthly paid employees who tried to enter the PHIMCO compound during
the strike?

it virtually constituted an obstruction, especially when the strikers joined hands, as described
by Aguilar, or were moving in circles, hand-to-shoulder, as shown by the photographs, that, for
all intents and purposes, blocked the free ingress to and egress from the company premises. In
fact, on closer examination, it could be seen that the respondents were conducting the picket
right at the company gates.[53]
The obstructive nature of the picket was aggravated by the placement of benches, with strikers
standing on top, directly in front of the open wing of the company gates, clearly obstructing
the entry and exit points of the company compound.[54]

MR. PEDRO: Yes, sir.


ATTY. CHUA: Can you tell us if these (sic) group of managers headed by Francis Cinco
entered the compound of PHIMCO on that day, when they tried to enter?
MR. PEDRO: No, sir. They were not able to enter.[49]
xxxx
ATTY. CHUA: Despite having been escorted by police Delos Reyes, you still did not give
way, and instead proceeded with your moving picket?
MR. PEDRO: Yes, sir.

With a virtual human blockade and real physical obstructions (benches and makeshift
structures both outside and inside the gates),[55] it was pure conjecture on the part of the NLRC
to say that [t]he non-strikers and their vehicles were x x x free to get in and out of the
company compound undisturbed by the picket line.[56] Notably, aside from non-strikers who
wished to report for work, company vehicles likewise could not enter and get out of the
factory because of the picket and the physical obstructions the respondents installed. The
blockade went to the point of causing the build up of traffic in the immediate vicinity of the
strike area, as shown by photographs.[57] This, by itself, renders the picket a prohibited activity.
Pickets may not aggressively interfere with the right of peaceful ingress to and egress from the
employers shop or obstruct public thoroughfares; picketing is not peaceful where the sidewalk
or entrance to a place of business is obstructed by picketers parading around in a circle or
lying on the sidewalk.[58]

ATTY. CHUA: In short, these people were not able to enter the premises of PHIMCO, Yes or
No.

What the records reveal belies the NLRC observation that the evidence x x x tends to show
that what respondents actually did was walking or patrolling to and fro within the company
vicinity and by word of mouth, banner or placard, informing the public concerning the dispute.

MR. PEDRO: Yes, sir. [50]

[59]

xxxx

The peaceful moving picket that the NLRC noted, influenced apparently by the certifications
(Mayor delos Reyes, Fr. Adeviso, Fr. Fausto and Barangay Secretary Gesmundo presented in
evidence by the respondents, was peaceful only because of the absence of violence during the
strike, but the obstruction of the entry and exit points of the company premises caused by the
respondents picket was by no means a petty blocking act or an insignificant obstructive act. [60]

ATTY. CHUA: Madam witness, even if Major Delos Reyes instructed you to give way so as to
allow the employees and managers to enter the premises, you and your co-employees did not
give way?
MS. CATALAN: No sir.
ATTY. CHUA: the managers and the employees were not able to enter the premises?
MS. CATALAN: Yes, sir.[51]
The NLRC resolution itself noted the above testimonial evidence, all building up a scenario
that the moving picket put up by [the] respondents obstructed the ingress to and egress from
the company premises[,][52] yet it ignored the clear import of the testimonies as to the true
nature of the picket. Contrary to the NLRC characterization that it was a peaceful moving
picket, it stood, in fact, as an obstruction to the companys points of ingress and egress.
Significantly, the testimonies adduced were validated by the photographs taken of the strike
area, capturing the strike in its various stages and showing how the strikers actually conducted
the picket. While the picket was moving, it was maintained so close to the company gates that

As we have stated, while the picket was moving, the movement was in circles, very close to
the gates, with the strikers in a hand-to-shoulder formation without a break in their ranks, thus
preventing non-striking workers and vehicles from coming in and getting out. Supported by
actual blocking benches and obstructions, what the union demonstrated was a very persuasive
and quietly intimidating strategy whose chief aim was to paralyze the operations of the
company, not solely by the work stoppage of the participating workers, but by excluding the
company officials and non-striking employees from access to and exit from the company
premises. No doubt, the strike caused the company operations considerable damage, as the
NLRC itself recognized when it ruled out the reinstatement of the dismissed strikers. [61]
Intimidation
Article 264(e) of the Labor Code tells us that picketing carried on with violence, coercion or
intimidation is unlawful.[62] According to American jurisprudence, what constitutes unlawful
intimidation depends on the totality of the circumstances. [63] Force threatened is the equivalent

22

of force exercised. There may be unlawful intimidation without direct threats or overt acts of
violence. Words or acts which are calculated and intended to cause an ordinary person to fear
an injury to his person, business or property are equivalent to threats. [64]
The manner in which the respondent union officers and members conducted the picket in the
present case had created such an intimidating atmosphere that non-striking employees and
even company vehicles did not dare cross the picket line, even with police intervention. Those
who dared cross the picket line were stopped. The compulsory arbitration hearings bear this
out.

ignoring the evidence before it, the NLRC committed grave abuse of discretion; for supporting
these gross NLRC errors, the CA committed its own reversible error.
Liabilities of union
officers and members
In the determination of the liabilities of the individual respondents, the applicable provision is
Article 264(a) of the Labor Code:
Art. 264. Prohibited activities. (a) x x x

Maximo Pedro, a PILA officer, testified, on July 30, 1997, that a group of PHIMCO managers
led by Cinco, together with several monthly-paid employees, tried to enter the company
premises on May 27, 1995 with police escort; even then, the picketers did not allow them to
enter.[65]Leonida Catalan, another union officer, testified that she and the other picketers did
not give way despite the instruction of Police Major de los Reyes to the picketers to allow the
group to enter the company premises.[66] (To be sure, police intervention and participation are,
as a rule, prohibited acts in a strike, but we note this intervention solely as indicators of how
far the union and its members have gone to block ingress to and egress from the company
premises.)
Further, PHIMCO employee Rodolfo Eva testified that on May 22, 1995, a company coaster
or bus attempted to enter the PHIMCO compound but it was refused entry by the moving
picket.[67] Cinco, the company personnel manager, also testified that on May 27, 1995, when
the NLRC TRO was in force, he and other employees tried to enter the PHIMCO compound,
but they were not allowed entry; on May 29, 1995, Cinco was with the PHIMCO production
manager in a pick-up and they tried to enter the company compound but, again, they were not
allowed by the strikers.[68] Another employee, Joaquin Aguilar, when asked how the strikers
blocked the ingress of the company, replied that the strikers hold around, joining hands,
moving picket and, because of the moving picket, no employee or vehicle could come in and
go out of the premises.[69]
The evidence adduced in the present case cannot be ignored. On balance, it supports the
companys submission that the respondent PILA officers and members committed acts during
the strike prohibited under Article 264(e) of the Labor Code. The testimonies of non-striking
employees, who were prevented from gaining entry into the company premises, and confirmed
no less by two officers of the union, are on record.
The photographs of the strike scene, also on record, depict the true character of the picket;
while moving, it, in fact, constituted a human blockade, obstructing free ingress to and egress
from the company premises, reinforced by benches planted directly in front of the company
gates. The photographs do not lie these photographs clearly show that the picketers were going
in circles, without any break in their ranks or closely bunched together, right in front of the
gates. Thus, company vehicles were unable to enter the company compound, and were backed
up several meters into the street leading to the company gates.
Despite all these clear pieces of evidence of illegal obstruction, the NLRC looked the other
way and chose not to see the unmistakable violations of the law on strikes by the union and its
respondent officers and members. Needless to say, while the law protects the rights of the
laborer, it authorizes neither the oppression nor the destruction of the employer.[70] For grossly

xxxx
Any union officer who knowingly participates in an illegal strike and any worker or union
officer who knowingly participates in the commission of illegal acts during a strike may be
declared to have lost his employment status: Provided, That mere participation of a worker in
a lawful strike shall not constitute sufficient ground for termination of his employment, even if
a replacement had been hired by the employer during such lawful strike.
We explained in Samahang Manggagawa sa Sulpicio Lines, Inc.-NAFLU v. Sulpicio Lines,
Inc.[71] that the effects of illegal strikes, outlined in Article 264 of the Labor Code, make a
distinction between participating workers and union officers. The services of an ordinary
striking worker cannot be terminated for mere participation in an illegal strike; proof must be
adduced showing that he or she committed illegal acts during the strike. The services of a
participating union officer, on the other hand, may be terminated, not only when he actually
commits an illegal act during a strike, but also if he knowingly participates in an illegal strike.
[72]

In all cases, the striker must be identified. But proof beyond reasonable doubt is not required;
substantial evidence, available under the attendant circumstances, suffices to justify the
imposition of the penalty of dismissal on participating workers and union officers as above
described.[73]
In the present case, respondents Erlinda Vazquez, Ricardo Sacristan, Leonida Catalan,
Maximo Pedro, Nathaniela Dimaculangan, Rodolfo Mojico, Romeo Caramanza, Reynaldo
Ganitano, Alberto Basconcillo, and Ramon Falcis stand to be dismissed as participating union
officers, pursuant to Article 264(a), paragraph 3, of the Labor Code. This provision imposes
the penalty of dismissal on any union officer who knowingly participates in an illegal strike.
The law grants the employer the option of declaring a union officer who participated in an
illegal strike as having lost his employment.[74]
PHIMCO was able to individually identify the participating union members thru the affidavits
of PHIMCO employees Martimer Panis[75] and Rodrigo A. Ortiz,[76] and Personnel Manager
Francis Ferdinand Cinco,[77] and the photographs[78] of Joaquin Aguilar. Identified were
respondents Angelita Balosa, Danilo Banaag, Abraham Caday, Alfonso Claudio, Francisco
Dalisay, Angelito Dejan, Philip Garces, Nicanor Ilagan, Florencio Libongcogon, Nemesio
Mamonong, Teofilo Manalili, Alfredo Pearson, Mario Perea, Renato Ramos, Mariano Rosales,
Pablo Sarmiento, Rodolfo Tolentino, Felipe Villareal, Arsenio Zamora, Danilo Baltazar, Roger

23

Caber, Reynaldo Camarin, Bernardo Cuadra, Angelito de Guzman, Gerardo Feliciano, Alex
Ibaez, Benjamin Juan, Sr., Ramon Macaalay, Gonzalo Manalili, Raul Miciano, Hilario Pea,
Teresa Permocillo, Ernesto Rio, Rodolfo Sanidad, Rafael Sta. Ana, Julian Tuguin and Amelia
Zamora as the union members who actively participated in the strike by blocking the ingress
to and egress from the company premises and preventing the passage of non-striking
employees. For participating in illegally blocking ingress to and egress from company
premises, these union members stand to bedismissed for their illegal acts in the conduct of the
unions strike.
PHIMCO failed to observe due process
We find, however, that PHIMCO violated the requirements of due process of the Labor Code
when it dismissed the respondents.
Under Article 277(b)[79] of the Labor Code, the employer must send the employee, who is
about to be terminated, a written notice stating the cause/s for termination and must give the
employee the opportunity to be heard and to defend himself.
We explained in Suico v. National Labor Relations Commission,[80] that Article 277(b), in
relation to Article 264(a) and (e) of the Labor Code recognizes the right to due process of all
workers, without distinction as to the cause of their termination, even if the cause was their
supposed involvement in strike-related violence prohibited under Article 264(a) and (e) of the
Labor Code.
To meet the requirements of due process in the dismissal of an employee, an employer must
furnish him or her with two (2) written notices: (1) a written notice specifying the grounds for
termination andgiving the employee a reasonable opportunity to explain his side and (2)
another written notice indicating that, upon due consideration of all circumstances, grounds
have been established to justify the employer's decision to dismiss the employee. [81]
In the present case, PHIMCO sent a letter, on June 23, 1995, to thirty-six (36) union members,
generally directing them to explain within twenty-four (24) hours why they should not be
dismissed for the illegal acts they committed during the strike; three days later, or on June 26,
1995, the thirty-six (36) union members were informed of their dismissal from employment.
We do not find this company procedure to be sufficient compliance with the due process
requirements that the law guards zealously. It does not appear from the evidence that the union
officers were specifically informed of the charges against them and given the chance to
explain and present their side. Without the specifications they had to respond to, they were
arbitrarily separated from work in total disregard of their rights to due process and security of
tenure.
SUPREME COURT
Manila
EN BANC
G.R. No. 171101

July 5, 2011

HACIENDA LUISITA, INCORPORATED, Petitioner,

As to the union members, only thirty-six (36) of the thirty-seven (37) union members included
in this case were notified of the charges against them thru the letters dated June 23, 1995, but
they were not given an ample opportunity to be heard and to defend themselves; the notice of
termination came on June 26, 1995, only three (3) days from the first notice - a perfunctory
and superficial attempt to comply with the notice requirement under the Labor Code. The short
interval of time between the first and second notice speaks for itself under the circumstances
of this case; mere token recognition of the due process requirements was made, indicating the
companys intent to dismiss the union members involved, without any meaningful resort to the
guarantees accorded them by law.
Under the circumstances, where evidence sufficient to justify the penalty of dismissal has been
adduced but the workers concerned were not accorded their essential due process rights, our
ruling inAgabon v. NLRC[82] finds full application; the employer, despite the just cause for
dismissal, must pay the dismissed workers nominal damages as indemnity for the violation of
the workers right to statutory due process. Prevailing jurisprudence sets the amount of nominal
damages at P30,000.00, which same amount we find sufficient and appropriate in the present
case.[83]
WHEREFORE, in light of all the foregoing, we hereby REVERSE and SET
ASIDE the decision dated February 10, 2004 and the resolution dated December 12, 2005 of
the Court of Appeals in CA-G.R. SP No. 70336, upholding the rulings of the National Labor
Relations Commission.
The Decision, dated February 4, 1998, of Labor Arbiter Jovencio Ll. Mayor should prevail and
is REINSTATED with the MODIFICATION that Erlinda Vazquez, Ricardo Sacristan, Leonida
Catalan, Maximo Pedro, Nathaniela Dimaculangan, Rodolfo Mojico, Romeo Caramanza,
Reynaldo Ganitano, Alberto Basconcillo, Ramon Falcis, Angelita Balosa, Danilo Banaag,
Abraham Caday, Alfonso Claudio, Francisco Dalisay, Angelito Dejan, Philip Garces, Nicanor
Ilagan, Florencio Libongcogon, Nemesio Mamonong, Teofilo Manalili, Alfredo Pearson,
Mario Perea, Renato Ramos, Mariano Rosales, Pablo Sarmiento, Rodolfo Tolentino, Felipe
Villareal, Arsenio Zamora, Danilo Baltazar, Roger Caber, Reynaldo Camarin, Bernardo
Cuadra, Angelito de Guzman, Gerardo Feliciano, Alex Ibaez, Benjamin Juan, Sr., Ramon
Macaalay, Gonzalo Manalili, Raul Miciano, Hilario Pea, Teresa Permocillo, Ernesto Rio,
Rodolfo Sanidad, Rafael Sta. Ana, Julian Tuguin, and Amelia Zamora are each awarded
nominal damages in the amount of P30,000.00. No pronouncement as to costs.
SO ORDERED.
LUISITA INDUSTRIAL PARK CORPORATION and RIZAL COMMERCIAL BANKING
CORPORATION, Petitioners-in-Intervention,
vs.
PRESIDENTIAL AGRARIAN REFORM COUNCIL; SECRETARY NASSER
PANGANDAMAN OF THE DEPARTMENT OF AGRARIAN REFORM; ALYANSA NG
MGA MANGGAGAWANG BUKID NG HACIENDA LUISITA, RENE GALANG, NOEL
MALLARI, and JULIO SUNIGA1 and his SUPERVISORY GROUP OF THE HACIENDA
LUISITA, INC. and WINDSOR ANDAYA, Respondents.

24

DECISION
VELASCO, JR., J.:
"Land for the landless," a shibboleth the landed gentry doubtless has received with much
misgiving, if not resistance, even if only the number of agrarian suits filed serves to be the
norm. Through the years, this battle cry and root of discord continues to reflect the seemingly
ceaseless discourse on, and great disparity in, the distribution of land among the people,
"dramatizing the increasingly urgent demand of the dispossessed x x x for a plot of earth as
their place in the sun."2 As administrations and political alignments change, policies
advanced, and agrarian reform laws enacted, the latest being what is considered a
comprehensive piece, the face of land reform varies and is masked in myriads of ways. The
stated goal, however, remains the same: clear the way for the true freedom of the farmer.3
Land reform, or the broader term "agrarian reform," has been a government policy even before
the Commonwealth era. In fact, at the onset of the American regime, initial steps toward land
reform were already taken to address social unrest.4 Then, under the 1935 Constitution,
specific provisions on social justice and expropriation of landed estates for distribution to
tenants as a solution to land ownership and tenancy issues were incorporated.

reform, affecting all agricultural lands and covering both tenant-farmers and regular
farmworkers.13
So it was that Proclamation No. 131, Series of 1987, was issued instituting a comprehensive
agrarian reform program (CARP) to cover all agricultural lands, regardless of tenurial
arrangement and commodity produced, as provided in the Constitution.
On July 22, 1987, Executive Order No. 229 (EO 229) was issued providing, as its title14
indicates, the mechanisms for CARP implementation. It created the Presidential Agrarian
Reform Council (PARC) as the highest policy-making body that formulates all policies, rules,
and regulations necessary for the implementation of CARP.
On June 15, 1988, RA 6657 or the Comprehensive Agrarian Reform Law of 1988, also known
as CARL or the CARP Law, took effect, ushering in a new process of land classification,
acquisition, and distribution. As to be expected, RA 6657 met stiff opposition, its validity or
some of its provisions challenged at every possible turn. Association of Small Landowners in
the Philippines, Inc. v. Secretary of Agrarian Reform 15 stated the observation that the assault
was inevitable, the CARP being an untried and untested project, "an experiment [even], as all
life is an experiment," the Court said, borrowing from Justice Holmes.
The Case

In 1955, the Land Reform Act (Republic Act No. [RA] 1400) was passed, setting in motion the
expropriation of all tenanted estates.5
On August 8, 1963, the Agricultural Land Reform Code (RA 3844) was enacted,6 abolishing
share tenancy and converting all instances of share tenancy into leasehold tenancy.7 RA 3844
created the Land Bank of the Philippines (LBP) to provide support in all phases of agrarian
reform.

In this Petition for Certiorari and Prohibition under Rule 65 with prayer for preliminary
injunctive relief, petitioner Hacienda Luisita, Inc. (HLI) assails and seeks to set aside PARC
Resolution No. 2005-32-0116 and Resolution No. 2006-34-0117 issued on December 22, 2005
and May 3, 2006, respectively, as well as the implementing Notice of Coverage dated January
2, 2006 (Notice of Coverage).18
The Facts

As its major thrust, RA 3844 aimed to create a system of owner-cultivatorship in rice and corn,
supposedly to be accomplished by expropriating lands in excess of 75 hectares for their
eventual resale to tenants. The law, however, had this restricting feature: its operations were
confined mainly to areas in Central Luzon, and its implementation at any level of intensity
limited to the pilot project in Nueva Ecija.8
Subsequently, Congress passed the Code of Agrarian Reform (RA 6389) declaring the entire
country a land reform area, and providing for the automatic conversion of tenancy to leasehold
tenancy in all areas. From 75 hectares, the retention limit was cut down to seven hectares.9
Barely a month after declaring martial law in September 1972, then President Ferdinand
Marcos issued Presidential Decree No. 27 (PD 27) for the "emancipation of the tiller from the
bondage of the soil."10 Based on this issuance, tenant-farmers, depending on the size of the
landholding worked on, can either purchase the land they tilled or shift from share to fixedrent leasehold tenancy.11 While touted as "revolutionary," the scope of the agrarian reform
program PD 27 enunciated covered only tenanted, privately-owned rice and corn lands.12

At the core of the case is Hacienda Luisita de Tarlac (Hacienda Luisita), once a 6,443-hectare
mixed agricultural-industrial-residential expanse straddling several municipalities of Tarlac
and owned by Compaia General de Tabacos de Filipinas (Tabacalera). In 1957, the Spanish
owners of Tabacalera offered to sell Hacienda Luisita as well as their controlling interest in the
sugar mill within the hacienda, the Central Azucarera de Tarlac (CAT), as an indivisible
transaction. The Tarlac Development Corporation (Tadeco), then owned and/or controlled by
the Jose Cojuangco, Sr. Group, was willing to buy. As agreed upon, Tadeco undertook to pay
the purchase price for Hacienda Luisita in pesos, while that for the controlling interest in CAT,
in US dollars.19
To facilitate the adverted sale-and-purchase package, the Philippine government, through the
then Central Bank of the Philippines, assisted the buyer to obtain a dollar loan from a US
bank.20 Also, the Government Service Insurance System (GSIS) Board of Trustees extended
on November 27, 1957 a PhP 5.911 million loan in favor of Tadeco to pay the peso price
component of the sale. One of the conditions contained in the approving GSIS Resolution No.
3203, as later amended by Resolution No. 356, Series of 1958, reads as follows:

Then came the revolutionary government of then President Corazon C. Aquino and the
drafting and eventual ratification of the 1987 Constitution. Its provisions foreshadowed the
establishment of a legal framework for the formulation of an expansive approach to land

25

That the lots comprising the Hacienda Luisita shall be subdivided by the applicant-corporation
and sold at cost to the tenants, should there be any, and whenever conditions should exist
warranting such action under the provisions of the Land Tenure Act;21

Markedly, Section 10 of EO 22926 allows corporate landowners, as an alternative to the actual


land transfer scheme of CARP, to give qualified beneficiaries the right to purchase shares of
stocks of the corporation under a stock ownership arrangement and/or land-to-share ratio.

As of March 31, 1958, Tadeco had fully paid the purchase price for the acquisition of
Hacienda Luisita and Tabacaleras interest in CAT.22

Like EO 229, RA 6657, under the latters Sec. 31, also provides two (2) alternative modalities,
i.e., land or stock transfer, pursuant to either of which the corporate landowner can comply
with CARP, but subject to well-defined conditions and timeline requirements. Sec. 31 of RA
6657 provides:

The details of the events that happened next involving the hacienda and the political color
some of the parties embossed are of minimal significance to this narration and need no
belaboring. Suffice it to state that on May 7, 1980, the martial law administration filed a suit
before the Manila Regional Trial Court (RTC) against Tadeco, et al., for them to surrender
Hacienda Luisita to the then Ministry of Agrarian Reform (MAR, now the Department of
Agrarian Reform [DAR]) so that the land can be distributed to farmers at cost. Responding,
Tadeco or its owners alleged that Hacienda Luisita does not have tenants, besides which sugar
landsof which the hacienda consistedare not covered by existing agrarian reform
legislations. As perceived then, the government commenced the case against Tadeco as a
political message to the family of the late Benigno Aquino, Jr.23
Eventually, the Manila RTC rendered judgment ordering Tadeco to surrender Hacienda Luisita
to the MAR. Therefrom, Tadeco appealed to the Court of Appeals (CA).
On March 17, 1988, the Office of the Solicitor General (OSG) moved to withdraw the
governments case against Tadeco, et al. By Resolution of May 18, 1988, the CA dismissed the
case the Marcos government initially instituted and won against Tadeco, et al. The dismissal
action was, however, made subject to the obtention by Tadeco of the PARCs approval of a
stock distribution plan (SDP) that must initially be implemented after such approval shall have
been secured.24 The appellate court wrote:
The defendants-appellants x x x filed a motion on April 13, 1988 joining the x x x
governmental agencies concerned in moving for the dismissal of the case subject, however, to
the following conditions embodied in the letter dated April 8, 1988 (Annex 2) of the Secretary
of the [DAR] quoted, as follows:
1. Should TADECO fail to obtain approval of the stock distribution plan for failure to comply
with all the requirements for corporate landowners set forth in the guidelines issued by the
[PARC]: or
2. If such stock distribution plan is approved by PARC, but TADECO fails to initially
implement it.
xxxx
WHEREFORE, the present case on appeal is hereby dismissed without prejudice, and should
be revived if any of the conditions as above set forth is not duly complied with by the
TADECO.25

SEC. 31. Corporate Landowners.Corporate landowners may voluntarily transfer ownership


over their agricultural landholdings to the Republic of the Philippines pursuant to Section 20
hereof or to qualified beneficiaries x x x.
Upon certification by the DAR, corporations owning agricultural lands may give their
qualified beneficiaries the right to purchase such proportion of the capital stock of the
corporation that the agricultural land, actually devoted to agricultural activities, bears in
relation to the companys total assets, under such terms and conditions as may be agreed upon
by them. In no case shall the compensation received by the workers at the time the shares of
stocks are distributed be reduced. x x x
Corporations or associations which voluntarily divest a proportion of their capital stock, equity
or participation in favor of their workers or other qualified beneficiaries under this section
shall be deemed to have complied with the provisions of this Act: Provided, That the following
conditions are complied with:
(a) In order to safeguard the right of beneficiaries who own shares of stocks to dividends and
other financial benefits, the books of the corporation or association shall be subject to periodic
audit by certified public accountants chosen by the beneficiaries;
(b) Irrespective of the value of their equity in the corporation or association, the beneficiaries
shall be assured of at least one (1) representative in the board of directors, or in a management
or executive committee, if one exists, of the corporation or association;
(c) Any shares acquired by such workers and beneficiaries shall have the same rights and
features as all other shares; and
(d) Any transfer of shares of stocks by the original beneficiaries shall be void ab initio unless
said transaction is in favor of a qualified and registered beneficiary within the same
corporation.
If within two (2) years from the approval of this Act, the [voluntary] land or stock transfer
envisioned above is not made or realized or the plan for such stock distribution approved by
the PARC within the same period, the agricultural land of the corporate owners or corporation
shall be subject to the compulsory coverage of this Act. (Emphasis added.)
Vis--vis the stock distribution aspect of the aforequoted Sec. 31, DAR issued Administrative
Order No. 10, Series of 1988 (DAO 10),27 entitled Guidelines and Procedures for Corporate
Landowners Desiring to Avail Themselves of the Stock Distribution Plan under Section 31 of
RA 6657.

26

From the start, the stock distribution scheme appeared to be Tadecos preferred option, for, on
August 23, 1988,28 it organized a spin-off corporation, HLI, as vehicle to facilitate stock
acquisition by the farmworkers. For this purpose, Tadeco assigned and conveyed to HLI the
agricultural land portion (4,915.75 hectares) and other farm-related properties of Hacienda
Luisita in exchange for HLI shares of stock.29

4.The SECOND PARTY shall guarantee to the qualified beneficiaries of the [SDP] that every
year they will receive on top of their regular compensation, an amount that approximates the
equivalent of three (3%) of the total gross sales from the production of the agricultural land,
whether it be in the form of cash dividends or incentive bonuses or both.

To accommodate the assets transfer from Tadeco to HLI, the latter, with the Securities and
Exchange Commissions (SECs) approval, increased its capital stock on May 10, 1989 from
PhP 1,500,000 divided into 1,500,000 shares with a par value of PhP 1/share to PhP
400,000,000 divided into 400,000,000 shares also with par value of PhP 1/share, 150,000,000
of which were to be issued only to qualified and registered beneficiaries of the CARP, and the
remaining 250,000,000 to any stockholder of the corporation.31

5. Even if only a part or fraction of the shares earmarked for distribution will have been
acquired from the FIRST PARTY and distributed to the THIRD PARTY, FIRST PARTY shall
execute at the beginning of each fiscal year an irrevocable proxy, valid and effective for one
(1) year, in favor of the farmworkers appearing as shareholders of the SECOND PARTY at the
start of said year which will empower the THIRD PARTY or their representative to vote in
stockholders and board of directors meetings of the SECOND PARTY convened during the
year the entire 33.296% of the outstanding capital stock of the SECOND PARTY earmarked
for distribution and thus be able to gain such number of seats in the board of directors of the
SECOND PARTY that the whole 33.296% of the shares subject to distribution will be entitled
to.

As appearing in its proposed SDP, the properties and assets of Tadeco contributed to the
capital stock of HLI, as appraised and approved by the SEC, have an aggregate value of PhP
590,554,220, or after deducting the total liabilities of the farm amounting to PhP 235,422,758,
a net value of PhP 355,531,462. This translated to 355,531,462 shares with a par value of PhP
1/share.32

6. In addition, the SECOND PARTY shall within a reasonable time subdivide and allocate for
free and without charge among the qualified family-beneficiaries residing in the place where
the agricultural land is situated, residential or homelots of not more than 240 sq.m. each, with
each family-beneficiary being assured of receiving and owning a homelot in the barangay
where it actually resides on the date of the execution of this Agreement.

On May 9, 1989, some 93% of the then farmworker-beneficiaries (FWBs) complement of


Hacienda Luisita signified in a referendum their acceptance of the proposed HLIs Stock
Distribution Option Plan. On May 11, 1989, the Stock Distribution Option Agreement
(SDOA), styled as a Memorandum of Agreement (MOA),33 was entered into by Tadeco, HLI,
and the 5,848 qualified FWBs34 and attested to by then DAR Secretary Philip Juico. The
SDOA embodied the basis and mechanics of the SDP, which would eventually be submitted to
the PARC for approval. In the SDOA, the parties agreed to the following:

7. This Agreement is entered into by the parties in the spirit of the (C.A.R.P.) of the
government and with the supervision of the [DAR], with the end in view of improving the lot
of the qualified beneficiaries of the [SDP] and obtaining for them greater benefits. (Emphasis
added.)

Pedro Cojuangco, Josephine C. Reyes, Teresita C. Lopa, Jose Cojuangco, Jr., and Paz C.
Teopaco were the incorporators of HLI.30

1. The percentage of the value of the agricultural land of Hacienda Luisita (P196,630,000.00)
in relation to the total assets (P590,554,220.00) transferred and conveyed to the SECOND
PARTY [HLI] is 33.296% that, under the law, is the proportion of the outstanding capital stock
of the SECOND PARTY, which is P355,531,462.00 or 355,531,462 shares with a par value of
P1.00 per share, that has to be distributed to the THIRD PARTY [FWBs] under the stock
distribution plan, the said 33.296% thereof being P118,391,976.85 or 118,391,976.85 shares.
2. The qualified beneficiaries of the stock distribution plan shall be the farmworkers who
appear in the annual payroll, inclusive of the permanent and seasonal employees, who are
regularly or periodically employed by the SECOND PARTY.
3. At the end of each fiscal year, for a period of 30 years, the SECOND PARTY shall arrange
with the FIRST PARTY [Tadeco] the acquisition and distribution to the THIRD PARTY on the
basis of number of days worked and at no cost to them of one-thirtieth (1/30) of
118,391,976.85 shares of the capital stock of the SECOND PARTY that are presently owned
and held by the FIRST PARTY, until such time as the entire block of 118,391,976.85 shares
shall have been completely acquired and distributed to the THIRD PARTY.

As may be gleaned from the SDOA, included as part of the distribution plan are: (a)
production-sharing equivalent to three percent (3%) of gross sales from the production of the
agricultural land payable to the FWBs in cash dividends or incentive bonus; and (b)
distribution of free homelots of not more than 240 square meters each to family-beneficiaries.
The production-sharing, as the SDP indicated, is payable "irrespective of whether [HLI] makes
money or not," implying that the benefits do not partake the nature of dividends, as the term is
ordinarily understood under corporation law.
While a little bit hard to follow, given that, during the period material, the assigned value of
the agricultural land in the hacienda was PhP 196.63 million, while the total assets of HLI was
PhP 590.55 million with net assets of PhP 355.53 million, Tadeco/HLI would admit that the
ratio of the land-to-shares of stock corresponds to 33.3% of the outstanding capital stock of the
HLI equivalent to 118,391,976.85 shares of stock with a par value of PhP 1/share.
Subsequently, HLI submitted to DAR its SDP, designated as "Proposal for Stock Distribution
under C.A.R.P.,"35 which was substantially based on the SDOA.
Notably, in a follow-up referendum the DAR conducted on October 14, 1989, 5,117 FWBs,
out of 5,315 who participated, opted to receive shares in HLI.36 One hundred thirty-two (132)
chose actual land distribution.37

27

After a review of the SDP, then DAR Secretary Miriam Defensor-Santiago (Sec. DefensorSantiago) addressed a letter dated November 6, 198938 to Pedro S. Cojuangco (Cojuangco),
then Tadeco president, proposing that the SDP be revised, along the following lines:

(g) Social service benefits, such as but not limited to free hospitalization/medical/maternity
services, old age/death benefits and no interest bearing salary/educational loans and rice sugar
accounts. 42

1. That over the implementation period of the [SDP], [Tadeco]/HLI shall ensure that there will
be no dilution in the shares of stocks of individual [FWBs];

Two separate groups subsequently contested this claim of HLI.

2. That a safeguard shall be provided by [Tadeco]/HLI against the dilution of the percentage
shareholdings of the [FWBs], i.e., that the 33% shareholdings of the [FWBs] will be
maintained at any given time;
3. That the mechanics for distributing the stocks be explicitly stated in the [MOA] signed
between the [Tadeco], HLI and its [FWBs] prior to the implementation of the stock plan;
4. That the stock distribution plan provide for clear and definite terms for determining the
actual number of seats to be allocated for the [FWBs] in the HLI Board;
5. That HLI provide guidelines and a timetable for the distribution of homelots to qualified
[FWBs]; and
6. That the 3% cash dividends mentioned in the [SDP] be expressly provided for [in] the
MOA.
In a letter-reply of November 14, 1989 to Sec. Defensor-Santiago, Tadeco/HLI explained that
the proposed revisions of the SDP are already embodied in both the SDP and MOA.39
Following that exchange, the PARC, under then Sec. Defensor-Santiago, by Resolution No.
89-12-240 dated November 21, 1989, approved the SDP of Tadeco/HLI.41
At the time of the SDP approval, HLI had a pool of farmworkers, numbering 6,296, more or
less, composed of permanent, seasonal and casual master list/payroll and non-master list
members.

On August 15, 1995, HLI applied for the conversion of 500 hectares of land of the hacienda
from agricultural to industrial use,43 pursuant to Sec. 65 of RA 6657, providing:
SEC. 65. Conversion of Lands.After the lapse of five (5) years from its award, when the land
ceases to be economically feasible and sound for agricultural purposes, or the locality has
become urbanized and the land will have a greater economic value for residential, commercial
or industrial purposes, the DAR, upon application of the beneficiary or the landowner, with
due notice to the affected parties, and subject to existing laws, may authorize the
reclassification, or conversion of the land and its disposition: Provided, That the beneficiary
shall have fully paid its obligation.
The application, according to HLI, had the backing of 5,000 or so FWBs, including respondent
Rene Galang, and Jose Julio Suniga, as evidenced by the Manifesto of Support they signed
and which was submitted to the DAR.44 After the usual processing, the DAR, thru then Sec.
Ernesto Garilao, approved the application on August 14, 1996, per DAR Conversion Order
No. 030601074-764-(95), Series of 1996,45 subject to payment of three percent (3%) of the
gross selling price to the FWBs and to HLIs continued compliance with its undertakings
under the SDP, among other conditions.
On December 13, 1996, HLI, in exchange for subscription of 12,000,000 shares of stocks of
Centennary Holdings, Inc. (Centennary), ceded 300 hectares of the converted area to the
latter.46 Consequently, HLIs Transfer Certificate of Title (TCT) No. 28791047 was canceled
and TCT No. 29209148 was issued in the name of Centennary. HLI transferred the remaining
200 hectares covered by TCT No. 287909 to Luisita Realty Corporation (LRC)49 in two
separate transactions in 1997 and 1998, both uniformly involving 100 hectares for PhP 250
million each.50

From 1989 to 2005, HLI claimed to have extended the following benefits to the FWBs:
(a) 3 billion pesos (P3,000,000,000) worth of salaries, wages and fringe benefits
(b) 59 million shares of stock distributed for free to the FWBs;
(c) 150 million pesos (P150,000,000) representing 3% of the gross produce;
(d) 37.5 million pesos (P37,500,000) representing 3% from the sale of 500 hectares of
converted agricultural land of Hacienda Luisita;
(e) 240-square meter homelots distributed for free;
(f) 2.4 million pesos (P2,400,000) representing 3% from the sale of 80 hectares at 80 million
pesos (P80,000,000) for the SCTEX;

Centennary, a corporation with an authorized capital stock of PhP 12,100,000 divided into
12,100,000 shares and wholly-owned by HLI, had the following incorporators: Pedro
Cojuangco, Josephine C. Reyes, Teresita C. Lopa, Ernesto G. Teopaco, and Bernardo R.
Lahoz.
Subsequently, Centennary sold51 the entire 300 hectares to Luisita Industrial Park Corporation
(LIPCO) for PhP 750 million. The latter acquired it for the purpose of developing an industrial
complex.52 As a result, Centennarys TCT No. 292091 was canceled to be replaced by TCT
No. 31098653 in the name of LIPCO.
From the area covered by TCT No. 310986 was carved out two (2) parcels, for which two (2)
separate titles were issued in the name of LIPCO, specifically: (a) TCT No. 36580054 and (b)
TCT No. 365801,55 covering 180 and four hectares, respectively. TCT No. 310986 was,
accordingly, partially canceled.

28

Later on, in a Deed of Absolute Assignment dated November 25, 2004, LIPCO transferred the
parcels covered by its TCT Nos. 365800 and 365801 to the Rizal Commercial Banking
Corporation (RCBC) by way of dacion en pago in payment of LIPCOs PhP 431,695,732.10
loan obligations. LIPCOs titles were canceled and new ones, TCT Nos. 391051 and 391052,
were issued to RCBC.

Subsequently, Sec. Pangandaman recommended to the PARC Executive Committee (Excom)


(a) the recall/revocation of PARC Resolution No. 89-12-2 dated November 21, 1989
approving HLIs SDP; and (b) the acquisition of Hacienda Luisita through the compulsory
acquisition scheme. Following review, the PARC Validation Committee favorably endorsed
the DAR Secretarys recommendation afore-stated.67

Apart from the 500 hectares alluded to, another 80.51 hectares were later detached from the
area coverage of Hacienda Luisita which had been acquired by the government as part of the
Subic-Clark-Tarlac Expressway (SCTEX) complex. In absolute terms, 4,335.75 hectares
remained of the original 4,915 hectares Tadeco ceded to HLI.56

On December 22, 2005, the PARC issued the assailed Resolution No. 2005-32-01, disposing
as follows:

Such, in short, was the state of things when two separate petitions, both undated, reached the
DAR in the latter part of 2003. In the first, denominated as Petition/Protest,57 respondents
Jose Julio Suniga and Windsor Andaya, identifying themselves as head of the Supervisory
Group of HLI (Supervisory Group), and 60 other supervisors sought to revoke the SDOA,
alleging that HLI had failed to give them their dividends and the one percent (1%) share in
gross sales, as well as the thirty-three percent (33%) share in the proceeds of the sale of the
converted 500 hectares of land. They further claimed that their lives have not improved
contrary to the promise and rationale for the adoption of the SDOA. They also cited violations
by HLI of the SDOAs terms.58 They prayed for a renegotiation of the SDOA, or, in the
alternative, its revocation.
Revocation and nullification of the SDOA and the distribution of the lands in the hacienda
were the call in the second petition, styled as Petisyon (Petition).59 The Petisyon was
ostensibly filed on December 4, 2003 by Alyansa ng mga Manggagawang Bukid ng Hacienda
Luisita (AMBALA), where the handwritten name of respondents Rene Galang as "Pangulo
AMBALA" and Noel Mallari as "Sec-Gen. AMBALA"60 appeared. As alleged, the petition
was filed on behalf of AMBALAs members purportedly composing about 80% of the 5,339
FWBs of Hacienda Luisita.
HLI would eventually answer61 the petition/protest of the Supervisory Group. On the other
hand, HLIs answer62 to the AMBALA petition was contained in its letter dated January 21,
2005 also filed with DAR.
Meanwhile, the DAR constituted a Special Task Force to attend to issues relating to the SDP
of HLI. Among other duties, the Special Task Force was mandated to review the terms and
conditions of the SDOA and PARC Resolution No. 89-12-2 relative to HLIs SDP; evaluate
HLIs compliance reports; evaluate the merits of the petitions for the revocation of the SDP;
conduct ocular inspections or field investigations; and recommend appropriate remedial
measures for approval of the Secretary.63
After investigation and evaluation, the Special Task Force submitted its "Terminal Report:
Hacienda Luisita, Incorporated (HLI) Stock Distribution Plan (SDP) Conflict"64 dated
September 22, 2005 (Terminal Report), finding that HLI has not complied with its obligations
under RA 6657 despite the implementation of the SDP.65 The Terminal Report and the Special
Task Forces recommendations were adopted by then DAR Sec. Nasser Pangandaman (Sec.
Pangandaman).66

NOW, THEREFORE, on motion duly seconded, RESOLVED, as it is HEREBY RESOLVED,


to approve and confirm the recommendation of the PARC Executive Committee adopting in
toto the report of the PARC ExCom Validation Committee affirming the recommendation of
the DAR to recall/revoke the SDO plan of Tarlac Development Corporation/Hacienda Luisita
Incorporated.
RESOLVED, further, that the lands subject of the recalled/revoked TDC/HLI SDO plan be
forthwith placed under the compulsory coverage or mandated land acquisition scheme of the
[CARP].
APPROVED.68
A copy of Resolution No. 2005-32-01 was served on HLI the following day, December 23,
without any copy of the documents adverted to in the resolution attached. A letter-request
dated December 28, 200569 for certified copies of said documents was sent to, but was not
acted upon by, the PARC secretariat.
Therefrom, HLI, on January 2, 2006, sought reconsideration.70 On the same day, the DAR
Tarlac provincial office issued the Notice of Coverage71 which HLI received on January 4,
2006.
Its motion notwithstanding, HLI has filed the instant recourse in light of what it considers as
the DARs hasty placing of Hacienda Luisita under CARP even before PARC could rule or
even read the motion for reconsideration.72 As HLI later rued, it "can not know from the
above-quoted resolution the facts and the law upon which it is based."73
PARC would eventually deny HLIs motion for reconsideration via Resolution No. 2006-3401 dated May 3, 2006.
By Resolution of June 14, 2006,74 the Court, acting on HLIs motion, issued a temporary
restraining order,75 enjoining the implementation of Resolution No. 2005-32-01 and the
notice of coverage.
On July 13, 2006, the OSG, for public respondents PARC and the DAR, filed its Comment76
on the petition.
On December 2, 2006, Noel Mallari, impleaded by HLI as respondent in his capacity as "SecGen. AMBALA," filed his Manifestation and Motion with Comment Attached dated
December 4, 2006 (Manifestation and Motion).77 In it, Mallari stated that he has broken away
from AMBALA with other AMBALA ex-members and formed Farmworkers Agrarian Reform

29

Movement, Inc. (FARM).78 Should this shift in alliance deny him standing, Mallari also
prayed that FARM be allowed to intervene.
As events would later develop, Mallari had a parting of ways with other FARM members,
particularly would-be intervenors Renato Lalic, et al. As things stand, Mallari returned to the
AMBALA fold, creating the AMBALA-Noel Mallari faction and leaving Renato Lalic, et al.
as the remaining members of FARM who sought to intervene.
On January 10, 2007, the Supervisory Group79 and the AMBALA-Rene Galang faction
submitted their Comment/Opposition dated December 17, 2006.80
On October 30, 2007, RCBC filed a Motion for Leave to Intervene and to File and Admit
Attached Petition-In-Intervention dated October 18, 2007.81 LIPCO later followed with a
similar motion.82 In both motions, RCBC and LIPCO contended that the assailed resolution
effectively nullified the TCTs under their respective names as the properties covered in the
TCTs were veritably included in the January 2, 2006 notice of coverage. In the main, they
claimed that the revocation of the SDP cannot legally affect their rights as innocent purchasers
for value. Both motions for leave to intervene were granted and the corresponding petitions-inintervention admitted.
On August 18, 2010, the Court heard the main and intervening petitioners on oral arguments.
On the other hand, the Court, on August 24, 2010, heard public respondents as well as the
respective counsels of the AMBALA-Mallari-Supervisory Group, the AMBALA-Galang
faction, and the FARM and its 27 members83 argue their case.
Prior to the oral arguments, however, HLI; AMBALA, represented by Mallari; the Supervisory
Group, represented by Suniga and Andaya; and the United Luisita Workers Union, represented
by Eldifonso Pingol, filed with the Court a joint submission and motion for approval of a
Compromise Agreement (English and Tagalog versions) dated August 6, 2010.
On August 31, 2010, the Court, in a bid to resolve the dispute through an amicable settlement,
issued a Resolution84 creating a Mediation Panel composed of then Associate Justice Ma.
Alicia Austria-Martinez, as chairperson, and former CA Justices Hector Hofilea and Teresita
Dy-Liacco Flores, as members. Meetings on five (5) separate dates, i.e., September 8, 9, 14,
20, and 27, 2010, were conducted. Despite persevering and painstaking efforts on the part of
the panel, mediation had to be discontinued when no acceptable agreement could be reached.

[IF SO], x x x CAN THEY STILL EXERCISE SUCH JURISDICTION, POWER AND/OR
AUTHORITY AT THIS TIME, I.E., AFTER SIXTEEN (16) YEARS FROM THE
EXECUTION OF THE SDOA AND ITS IMPLEMENTATION WITHOUT VIOLATING
SECTIONS 1 AND 10 OF ARTICLE III (BILL OF RIGHTS) OF THE CONSTITUTION
AGAINST DEPRIVATION OF PROPERTY WITHOUT DUE PROCESS OF LAW AND
THE IMPAIRMENT OF CONTRACTUAL RIGHTS AND OBLIGATIONS? MOREOVER,
ARE THERE LEGAL GROUNDS UNDER THE CIVIL CODE, viz, ARTICLE 1191 x x x,
ARTICLES 1380, 1381 AND 1382 x x x ARTICLE 1390 x x x AND ARTICLE 1409 x x x
THAT CAN BE INVOKED TO NULLIFY, RECALL, REVOKE, OR RESCIND THE
SDOA?
III.
WHETHER THE PETITIONS TO NULLIFY, RECALL, REVOKE OR RESCIND THE
SDOA HAVE ANY LEGAL BASIS OR GROUNDS AND WHETHER THE PETITIONERS
THEREIN ARE THE REAL PARTIES-IN-INTEREST TO FILE SAID PETITIONS.
IV.
WHETHER THE RIGHTS, OBLIGATIONS AND REMEDIES OF THE PARTIES TO THE
SDOA ARE NOW GOVERNED BY THE CORPORATION CODE (BATAS PAMBANSA
BLG. 68) AND NOT BY THE x x x [CARL] x x x.
On the other hand, RCBC submits the following issues:
I.
RESPONDENT PARC COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING
TO LACK OR EXCESS OF JURISDICTION WHEN IT DID NOT EXCLUDE THE
SUBJECT PROPERTY FROM THE COVERAGE OF THE CARP DESPITE THE FACT
THAT PETITIONER-INTERVENOR RCBC HAS ACQUIRED VESTED RIGHTS AND
INDEFEASIBLE TITLE OVER THE SUBJECT PROPERTY AS AN INNOCENT
PURCHASER FOR VALUE.
A. THE ASSAILED RESOLUTION NO. 2005-32-01 AND THE NOTICE OF COVERAGE
DATED 02 JANUARY 2006 HAVE THE EFFECT OF NULLIFYING TCT NOS. 391051
AND 391052 IN THE NAME OF PETITIONER-INTERVENOR RCBC.

The Issues
HLI raises the following issues for our consideration:

B. AS AN INNOCENT PURCHASER FOR VALUE, PETITIONER-INTERVENOR RCBC


CANNOT BE PREJUDICED BY A SUBSEQUENT REVOCATION OR RESCISSION OF
THE SDOA.

I.
II.
WHETHER OR NOT PUBLIC RESPONDENTS PARC AND SECRETARY
PANGANDAMAN HAVE JURISDICTION, POWER AND/OR AUTHORITY TO NULLIFY,
RECALL, REVOKE OR RESCIND THE SDOA.
II.

THE ASSAILED RESOLUTION NO. 2005-32-01 AND THE NOTICE OF COVERAGE


DATED 02 JANUARY 2006 WERE ISSUED WITHOUT AFFORDING PETITIONERINTERVENOR RCBC ITS RIGHT TO DUE PROCESS AS AN INNOCENT PURCHASER
FOR VALUE.

30

LIPCO, like RCBC, asserts having acquired vested and indefeasible rights over certain
portions of the converted property, and, hence, would ascribe on PARC the commission of
grave abuse of discretion when it included those portions in the notice of coverage. And apart
from raising issues identical with those of HLI, such as but not limited to the absence of valid
grounds to warrant the rescission and/or revocation of the SDP, LIPCO would allege that the
assailed resolution and the notice of coverage were issued without affording it the right to due
process as an innocent purchaser for value. The government, LIPCO also argues, is estopped
from recovering properties which have since passed to innocent parties.
Simply formulated, the principal determinative issues tendered in the main petition and to
which all other related questions must yield boil down to the following: (1) matters of
standing; (2) the constitutionality of Sec. 31 of RA 6657; (3) the jurisdiction of PARC to recall
or revoke HLIs SDP; (4) the validity or propriety of such recall or revocatory action; and (5)
corollary to (4), the validity of the terms and conditions of the SDP, as embodied in the SDOA.
Our Ruling
I.
We first proceed to the examination of the preliminary issues before delving on the more
serious challenges bearing on the validity of PARCs assailed issuance and the grounds for it.
Supervisory Group, AMBALA and their
respective leaders are real parties-in-interest
HLI would deny real party-in-interest status to the purported leaders of the Supervisory Group
and AMBALA, i.e., Julio Suniga, Windsor Andaya, and Rene Galang, who filed the
revocatory petitions before the DAR. As HLI would have it, Galang, the self-styled head of
AMBALA, gained HLI employment in June 1990 and, thus, could not have been a party to the
SDOA executed a year earlier.85 As regards the Supervisory Group, HLI alleges that
supervisors are not regular farmworkers, but the company nonetheless considered them FWBs
under the SDOA as a mere concession to enable them to enjoy the same benefits given
qualified regular farmworkers. However, if the SDOA would be canceled and land distribution
effected, so HLI claims, citing Fortich v. Corona,86 the supervisors would be excluded from
receiving lands as farmworkers other than the regular farmworkers who are merely entitled to
the "fruits of the land."87
The SDOA no less identifies "the SDP qualified beneficiaries" as "the farmworkers who
appear in the annual payroll, inclusive of the permanent and seasonal employees, who are
regularly or periodically employed by [HLI]."88 Galang, per HLIs own admission, is
employed by HLI, and is, thus, a qualified beneficiary of the SDP; he comes within the
definition of a real party-in-interest under Sec. 2, Rule 3 of the Rules of Court, meaning, one
who stands to be benefited or injured by the judgment in the suit or is the party entitled to the
avails of the suit.
The same holds true with respect to the Supervisory Group whose members were admittedly
employed by HLI and whose names and signatures even appeared in the annex of the SDOA.
Being qualified beneficiaries of the SDP, Suniga and the other 61 supervisors are certainly

parties who would benefit or be prejudiced by the judgment recalling the SDP or replacing it
with some other modality to comply with RA 6657.
Even assuming that members of the Supervisory Group are not regular farmworkers, but are in
the category of "other farmworkers" mentioned in Sec. 4, Article XIII of the Constitution,89
thus only entitled to a share of the fruits of the land, as indeed Fortich teaches, this does not
detract from the fact that they are still identified as being among the "SDP qualified
beneficiaries." As such, they are, thus, entitled to bring an action upon the SDP.90 At any rate,
the following admission made by Atty. Gener Asuncion, counsel of HLI, during the oral
arguments should put to rest any lingering doubt as to the status of protesters Galang, Suniga,
and Andaya:
Justice Bersamin: x x x I heard you a while ago that you were conceding the qualified farmer
beneficiaries of Hacienda Luisita were real parties in interest?
Atty. Asuncion: Yes, Your Honor please, real party in interest which that question refers to the
complaints of protest initiated before the DAR and the real party in interest there be
considered as possessed by the farmer beneficiaries who initiated the protest.91
Further, under Sec. 50, paragraph 4 of RA 6657, farmer-leaders are expressly allowed to
represent themselves, their fellow farmers or their organizations in any proceedings before the
DAR. Specifically:
SEC. 50. Quasi-Judicial Powers of the DAR.x x x
xxxx
Responsible farmer leaders shall be allowed to represent themselves, their fellow farmers or
their organizations in any proceedings before the DAR: Provided, however, that when there
are two or more representatives for any individual or group, the representatives should choose
only one among themselves to represent such party or group before any DAR proceedings.
(Emphasis supplied.)
Clearly, the respective leaders of the Supervisory Group and AMBALA are contextually real
parties-in-interest allowed by law to file a petition before the DAR or PARC.
This is not necessarily to say, however, that Galang represents AMBALA, for as records show
and as HLI aptly noted,92 his "petisyon" filed with DAR did not carry the usual authorization
of the individuals in whose behalf it was supposed to have been instituted. To date, such
authorization document, which would logically include a list of the names of the authorizing
FWBs, has yet to be submitted to be part of the records.
PARCs Authority to Revoke a Stock Distribution Plan
On the postulate that the subject jurisdiction is conferred by law, HLI maintains that PARC is
without authority to revoke an SDP, for neither RA 6657 nor EO 229 expressly vests PARC
with such authority. While, as HLI argued, EO 229 empowers PARC to approve the plan for
stock distribution in appropriate cases, the empowerment only includes the power to
disapprove, but not to recall its previous approval of the SDP after it has been implemented by

31

the parties.93 To HLI, it is the court which has jurisdiction and authority to order the
revocation or rescission of the PARC-approved SDP.

The broad sweep of HLIs argument ignores certain established legal precepts and must,
therefore, be rejected.

We disagree.
Under Sec. 31 of RA 6657, as implemented by DAO 10, the authority to approve the plan for
stock distribution of the corporate landowner belongs to PARC. However, contrary to
petitioner HLIs posture, PARC also has the power to revoke the SDP which it previously
approved. It may be, as urged, that RA 6657 or other executive issuances on agrarian reform
do not explicitly vest the PARC with the power to revoke/recall an approved SDP. Such power
or authority, however, is deemed possessed by PARC under the principle of necessary
implication, a basic postulate that what is implied in a statute is as much a part of it as that
which is expressed.94
We have explained that "every statute is understood, by implication, to contain all such
provisions as may be necessary to effectuate its object and purpose, or to make effective
rights, powers, privileges or jurisdiction which it grants, including all such collateral and
subsidiary consequences as may be fairly and logically inferred from its terms."95 Further,
"every statutory grant of power, right or privilege is deemed to include all incidental power,
right or privilege.96
Gordon v. Veridiano II is instructive:
The power to approve a license includes by implication, even if not expressly granted, the
power to revoke it. By extension, the power to revoke is limited by the authority to grant the
license, from which it is derived in the first place. Thus, if the FDA grants a license upon its
finding that the applicant drug store has complied with the requirements of the general laws
and the implementing administrative rules and regulations, it is only for their violation that the
FDA may revoke the said license. By the same token, having granted the permit upon his
ascertainment that the conditions thereof as applied x x x have been complied with, it is only
for the violation of such conditions that the mayor may revoke the said permit.97 (Emphasis
supplied.)
Following the doctrine of necessary implication, it may be stated that the conferment of
express power to approve a plan for stock distribution of the agricultural land of corporate
owners necessarily includes the power to revoke or recall the approval of the plan.
As public respondents aptly observe, to deny PARC such revocatory power would reduce it
into a toothless agency of CARP, because the very same agency tasked to ensure compliance
by the corporate landowner with the approved SDP would be without authority to impose
sanctions for non-compliance with it.98 With the view We take of the case, only PARC can
effect such revocation. The DAR Secretary, by his own authority as such, cannot plausibly do
so, as the acceptance and/or approval of the SDP sought to be taken back or undone is the act
of PARC whose official composition includes, no less, the President as chair, the DAR
Secretary as vice-chair, and at least eleven (11) other department heads.99
On another but related issue, the HLI foists on the Court the argument that subjecting its
landholdings to compulsory distribution after its approved SDP has been implemented would
impair the contractual obligations created under the SDOA.

A law authorizing interference, when appropriate, in the contractual relations between or


among parties is deemed read into the contract and its implementation cannot successfully be
resisted by force of the non-impairment guarantee. There is, in that instance, no impingement
of the impairment clause, the non-impairment protection being applicable only to laws that
derogate prior acts or contracts by enlarging, abridging or in any manner changing the
intention of the parties. Impairment, in fine, obtains if a subsequent law changes the terms of a
contract between the parties, imposes new conditions, dispenses with those agreed upon or
withdraws existing remedies for the enforcement of the rights of the parties.100 Necessarily,
the constitutional proscription would not apply to laws already in effect at the time of contract
execution, as in the case of RA 6657, in relation to DAO 10, vis--vis HLIs SDOA. As held in
Serrano v. Gallant Maritime Services, Inc.:
The prohibition [against impairment of the obligation of contracts] is aligned with the general
principle that laws newly enacted have only a prospective operation, and cannot affect acts or
contracts already perfected; however, as to laws already in existence, their provisions are read
into contracts and deemed a part thereof. Thus, the non-impairment clause under Section 10,
Article II [of the Constitution] is limited in application to laws about to be enacted that would
in any way derogate from existing acts or contracts by enlarging, abridging or in any manner
changing the intention of the parties thereto.101 (Emphasis supplied.)
Needless to stress, the assailed Resolution No. 2005-32-01 is not the kind of issuance within
the ambit of Sec. 10, Art. III of the Constitution providing that "[n]o law impairing the
obligation of contracts shall be passed."
Parenthetically, HLI tags the SDOA as an ordinary civil law contract and, as such, a breach of
its terms and conditions is not a PARC administrative matter, but one that gives rise to a cause
of action cognizable by regular courts.102 This contention has little to commend itself. The
SDOA is a special contract imbued with public interest, entered into and crafted pursuant to
the provisions of RA 6657. It embodies the SDP, which requires for its validity, or at least its
enforceability, PARCs approval. And the fact that the certificate of compliance103to be
issued by agrarian authorities upon completion of the distribution of stocksis revocable by
the same issuing authority supports the idea that everything about the implementation of the
SDP is, at the first instance, subject to administrative adjudication.
HLI also parlays the notion that the parties to the SDOA should now look to the Corporation
Code, instead of to RA 6657, in determining their rights, obligations and remedies. The Code,
it adds, should be the applicable law on the disposition of the agricultural land of HLI.
Contrary to the view of HLI, the rights, obligations and remedies of the parties to the SDOA
embodying the SDP are primarily governed by RA 6657. It should abundantly be made clear
that HLI was precisely created in order to comply with RA 6657, which the OSG aptly
described as the "mother law" of the SDOA and the SDP.104 It is, thus, paradoxical for HLI to
shield itself from the coverage of CARP by invoking exclusive applicability of the
Corporation Code under the guise of being a corporate entity.

32

Without in any way minimizing the relevance of the Corporation Code since the FWBs of HLI
are also stockholders, its applicability is limited as the rights of the parties arising from the
SDP should not be made to supplant or circumvent the agrarian reform program.
Without doubt, the Corporation Code is the general law providing for the formation,
organization and regulation of private corporations. On the other hand, RA 6657 is the special
law on agrarian reform. As between a general and special law, the latter shall prevail
generalia specialibus non derogant.105 Besides, the present impasse between HLI and the
private respondents is not an intra-corporate dispute which necessitates the application of the
Corporation Code. What private respondents questioned before the DAR is the proper
implementation of the SDP and HLIs compliance with RA 6657. Evidently, RA 6657 should
be the applicable law to the instant case.
HLI further contends that the inclusion of the agricultural land of Hacienda Luisita under the
coverage of CARP and the eventual distribution of the land to the FWBs would amount to a
disposition of all or practically all of the corporate assets of HLI. HLI would add that this
contingency, if ever it comes to pass, requires the applicability of the Corporation Code
provisions on corporate dissolution.

inconsistent with the basic concept of agrarian reform ingrained in Sec. 4, Art. XIII of the
Constitution.107
Reacting, HLI insists that agrarian reform is not only about transfer of land ownership to
farmers and other qualified beneficiaries. It draws attention in this regard to Sec. 3(a) of RA
6657 on the concept and scope of the term "agrarian reform." The constitutionality of a law,
HLI added, cannot, as here, be attacked collaterally.
The instant challenge on the constitutionality of Sec. 31 of RA 6657 and necessarily its
counterpart provision in EO 229 must fail as explained below.
When the Court is called upon to exercise its power of judicial review over, and pass upon the
constitutionality of, acts of the executive or legislative departments, it does so only when the
following essential requirements are first met, to wit:
(1) there is an actual case or controversy;
(2) that the constitutional question is raised at the earliest possible opportunity by a proper
party or one with locus standi; and

We are not persuaded.


(3) the issue of constitutionality must be the very lis mota of the case.108
Indeed, the provisions of the Corporation Code on corporate dissolution would apply insofar
as the winding up of HLIs affairs or liquidation of the assets is concerned. However, the mere
inclusion of the agricultural land of Hacienda Luisita under the coverage of CARP and the
lands eventual distribution to the FWBs will not, without more, automatically trigger the
dissolution of HLI. As stated in the SDOA itself, the percentage of the value of the agricultural
land of Hacienda Luisita in relation to the total assets transferred and conveyed by Tadeco to
HLI comprises only 33.296%, following this equation: value of the agricultural lands divided
by total corporate assets. By no stretch of imagination would said percentage amount to a
disposition of all or practically all of HLIs corporate assets should compulsory land
acquisition and distribution ensue.
This brings us to the validity of the revocation of the approval of the SDP sixteen (16) years
after its execution pursuant to Sec. 31 of RA 6657 for the reasons set forth in the Terminal
Report of the Special Task Force, as endorsed by PARC Excom. But first, the matter of the
constitutionality of said section.
Constitutional Issue
FARM asks for the invalidation of Sec. 31 of RA 6657, insofar as it affords the corporation, as
a mode of CARP compliance, to resort to stock distribution, an arrangement which, to FARM,
impairs the fundamental right of farmers and farmworkers under Sec. 4, Art. XIII of the
Constitution.106
To a more specific, but direct point, FARM argues that Sec. 31 of RA 6657 permits stock
transfer in lieu of outright agricultural land transfer; in fine, there is stock certificate
ownership of the farmers or farmworkers instead of them owning the land, as envisaged in the
Constitution. For FARM, this modality of distribution is an anomaly to be annulled for being

Not all the foregoing requirements are satisfied in the case at bar.
While there is indeed an actual case or controversy, intervenor FARM, composed of a small
minority of 27 farmers, has yet to explain its failure to challenge the constitutionality of Sec.
3l of RA 6657, since as early as November 21, l989 when PARC approved the SDP of
Hacienda Luisita or at least within a reasonable time thereafter and why its members received
benefits from the SDP without so much of a protest. It was only on December 4, 2003 or 14
years after approval of the SDP via PARC Resolution No. 89-12-2 dated November 21, 1989
that said plan and approving resolution were sought to be revoked, but not, to stress, by FARM
or any of its members, but by petitioner AMBALA. Furthermore, the AMBALA petition did
NOT question the constitutionality of Sec. 31 of RA 6657, but concentrated on the purported
flaws and gaps in the subsequent implementation of the SDP. Even the public respondents, as
represented by the Solicitor General, did not question the constitutionality of the provision. On
the other hand, FARM, whose 27 members formerly belonged to AMBALA, raised the
constitutionality of Sec. 31 only on May 3, 2007 when it filed its Supplemental Comment with
the Court. Thus, it took FARM some eighteen (18) years from November 21, 1989 before it
challenged the constitutionality of Sec. 31 of RA 6657 which is quite too late in the day. The
FARM members slept on their rights and even accepted benefits from the SDP with nary a
complaint on the alleged unconstitutionality of Sec. 31 upon which the benefits were derived.
The Court cannot now be goaded into resolving a constitutional issue that FARM failed to
assail after the lapse of a long period of time and the occurrence of numerous events and
activities which resulted from the application of an alleged unconstitutional legal provision.
It has been emphasized in a number of cases that the question of constitutionality will not be
passed upon by the Court unless it is properly raised and presented in an appropriate case at
the first opportunity.109 FARM is, therefore, remiss in belatedly questioning the

33

constitutionality of Sec. 31 of RA 6657. The second requirement that the constitutional


question should be raised at the earliest possible opportunity is clearly wanting.

For one, there appears to be no breach of the fundamental law. Sec. 4, Article XIII of the
Constitution reads:

The last but the most important requisite that the constitutional issue must be the very lis mota
of the case does not likewise obtain. The lis mota aspect is not present, the constitutional issue
tendered not being critical to the resolution of the case. The unyielding rule has been to avoid,
whenever plausible, an issue assailing the constitutionality of a statute or governmental
act.110 If some other grounds exist by which judgment can be made without touching the
constitutionality of a law, such recourse is favored.111 Garcia v. Executive Secretary explains
why:

The State shall, by law, undertake an agrarian reform program founded on the right of the
farmers and regular farmworkers, who are landless, to OWN directly or COLLECTIVELY
THE LANDS THEY TILL or, in the case of other farmworkers, to receive a just share of the
fruits thereof. To this end, the State shall encourage and undertake the just distribution of all
agricultural lands, subject to such priorities and reasonable retention limits as the Congress
may prescribe, taking into account ecological, developmental, or equity considerations, and
subject to the payment of just compensation. In determining retention limits, the State shall
respect the right of small landowners. The State shall further provide incentives for voluntary
land-sharing. (Emphasis supplied.)

Lis Mota the fourth requirement to satisfy before this Court will undertake judicial review
means that the Court will not pass upon a question of unconstitutionality, although properly
presented, if the case can be disposed of on some other ground, such as the application of the
statute or the general law. The petitioner must be able to show that the case cannot be legally
resolved unless the constitutional question raised is determined. This requirement is based on
the rule that every law has in its favor the presumption of constitutionality; to justify its
nullification, there must be a clear and unequivocal breach of the Constitution, and not one
that is doubtful, speculative, or argumentative.112 (Italics in the original.)
The lis mota in this case, proceeding from the basic positions originally taken by AMBALA
(to which the FARM members previously belonged) and the Supervisory Group, is the alleged
non-compliance by HLI with the conditions of the SDP to support a plea for its revocation.
And before the Court, the lis mota is whether or not PARC acted in grave abuse of discretion
when it ordered the recall of the SDP for such non-compliance and the fact that the SDP, as
couched and implemented, offends certain constitutional and statutory provisions. To be sure,
any of these key issues may be resolved without plunging into the constitutionality of Sec. 31
of RA 6657. Moreover, looking deeply into the underlying petitions of AMBALA, et al., it is
not the said section per se that is invalid, but rather it is the alleged application of the said
provision in the SDP that is flawed.
It may be well to note at this juncture that Sec. 5 of RA 9700,113 amending Sec. 7 of RA
6657, has all but superseded Sec. 31 of RA 6657 vis--vis the stock distribution component of
said Sec. 31. In its pertinent part, Sec. 5 of RA 9700 provides: "[T]hat after June 30, 2009, the
modes of acquisition shall be limited to voluntary offer to sell and compulsory acquisition."
Thus, for all intents and purposes, the stock distribution scheme under Sec. 31 of RA 6657 is
no longer an available option under existing law. The question of whether or not it is
unconstitutional should be a moot issue.

The wording of the provision is unequivocalthe farmers and regular farmworkers have a
right TO OWN DIRECTLY OR COLLECTIVELY THE LANDS THEY TILL. The basic law
allows two (2) modes of land distributiondirect and indirect ownership. Direct transfer to
individual farmers is the most commonly used method by DAR and widely accepted. Indirect
transfer through collective ownership of the agricultural land is the alternative to direct
ownership of agricultural land by individual farmers. The aforequoted Sec. 4 EXPRESSLY
authorizes collective ownership by farmers. No language can be found in the 1987
Constitution that disqualifies or prohibits corporations or cooperatives of farmers from being
the legal entity through which collective ownership can be exercised. The word "collective" is
defined as "indicating a number of persons or things considered as constituting one group or
aggregate,"115 while "collectively" is defined as "in a collective sense or manner; in a mass or
body."116 By using the word "collectively," the Constitution allows for indirect ownership of
land and not just outright agricultural land transfer. This is in recognition of the fact that land
reform may become successful even if it is done through the medium of juridical entities
composed of farmers.
Collective ownership is permitted in two (2) provisions of RA 6657. Its Sec. 29 allows
workers cooperatives or associations to collectively own the land, while the second paragraph
of Sec. 31 allows corporations or associations to own agricultural land with the farmers
becoming stockholders or members. Said provisions read:
SEC. 29. Farms owned or operated by corporations or other business associations.In the
case of farms owned or operated by corporations or other business associations, the following
rules shall be observed by the PARC.
In general, lands shall be distributed directly to the individual worker-beneficiaries.

It is true that the Court, in some cases, has proceeded to resolve constitutional issues otherwise
already moot and academic114 provided the following requisites are present:
x x x first, there is a grave violation of the Constitution; second, the exceptional character of
the situation and the paramount public interest is involved; third, when the constitutional issue
raised requires formulation of controlling principles to guide the bench, the bar, and the
public; fourth, the case is capable of repetition yet evading review.

In case it is not economically feasible and sound to divide the land, then it shall be owned
collectively by the worker beneficiaries who shall form a workers cooperative or association
which will deal with the corporation or business association. x x x (Emphasis supplied.)
SEC. 31. Corporate Landowners. x x x
xxxx

These requisites do not obtain in the case at bar.

34

Upon certification by the DAR, corporations owning agricultural lands may give their
qualified beneficiaries the right to purchase such proportion of the capital stock of the
corporation that the agricultural land, actually devoted to agricultural activities, bears in
relation to the companys total assets, under such terms and conditions as may be agreed upon
by them. In no case shall the compensation received by the workers at the time the shares of
stocks are distributed be reduced. The same principle shall be applied to associations, with
respect to their equity or participation. x x x (Emphasis supplied.)
Clearly, workers cooperatives or associations under Sec. 29 of RA 6657 and corporations or
associations under the succeeding Sec. 31, as differentiated from individual farmers, are
authorized vehicles for the collective ownership of agricultural land. Cooperatives can be
registered with the Cooperative Development Authority and acquire legal personality of their
own, while corporations are juridical persons under the Corporation Code. Thus, Sec. 31 is
constitutional as it simply implements Sec. 4 of Art. XIII of the Constitution that land can be
owned COLLECTIVELY by farmers. Even the framers of the l987 Constitution are in unison
with respect to the two (2) modes of ownership of agricultural lands tilled by farmers
DIRECT and COLLECTIVE, thus:
MR. NOLLEDO. And when we talk of the phrase "to own directly," we mean the principle of
direct ownership by the tiller?
MR. MONSOD. Yes.
MR. NOLLEDO. And when we talk of "collectively," we mean communal ownership,
stewardship or State ownership?
MS. NIEVA. In this section, we conceive of cooperatives; that is farmers cooperatives owning
the land, not the State.
MR. NOLLEDO. And when we talk of "collectively," referring to farmers cooperatives, do
the farmers own specific areas of land where they only unite in their efforts?
MS. NIEVA. That is one way.
MR. NOLLEDO. Because I understand that there are two basic systems involved: the
"moshave" type of agriculture and the "kibbutz." So are both contemplated in the report?
MR. TADEO. Ang dalawa kasing pamamaraan ng pagpapatupad ng tunay na reporma sa lupa
ay ang pagmamay-ari ng lupa na hahatiin sa individual na pagmamay-ari directly at ang
tinatawag na sama-samang gagawin ng mga magbubukid. Tulad sa Negros, ang gusto ng mga
magbubukid ay gawin nila itong "cooperative or collective farm." Ang ibig sabihin ay samasama nilang sasakahin.
xxxx
MR. TINGSON. x x x When we speak here of "to own directly or collectively the lands they
till," is this land for the tillers rather than land for the landless? Before, we used to hear "land
for the landless," but now the slogan is "land for the tillers." Is that right?

MR. TADEO. Ang prinsipyong umiiral dito ay iyong land for the tillers. Ang ibig sabihin ng
"directly" ay tulad sa implementasyon sa rice and corn lands kung saan inaari na ng mga
magsasaka ang lupang binubungkal nila. Ang ibig sabihin naman ng "collectively" ay samasamang paggawa sa isang lupain o isang bukid, katulad ng sitwasyon sa Negros.117
(Emphasis supplied.)
As Commissioner Tadeo explained, the farmers will work on the agricultural land "samasama" or collectively. Thus, the main requisite for collective ownership of land is collective or
group work by farmers of the agricultural land. Irrespective of whether the landowner is a
cooperative, association or corporation composed of farmers, as long as concerted group work
by the farmers on the land is present, then it falls within the ambit of collective ownership
scheme.
Likewise, Sec. 4, Art. XIII of the Constitution makes mention of a commitment on the part of
the State to pursue, by law, an agrarian reform program founded on the policy of land for the
landless, but subject to such priorities as Congress may prescribe, taking into account such
abstract variable as "equity considerations." The textual reference to a law and Congress
necessarily implies that the above constitutional provision is not self-executory and that
legislation is needed to implement the urgently needed program of agrarian reform. And RA
6657 has been enacted precisely pursuant to and as a mechanism to carry out the constitutional
directives. This piece of legislation, in fact, restates118 the agrarian reform policy established
in the aforementioned provision of the Constitution of promoting the welfare of landless
farmers and farmworkers. RA 6657 thus defines "agrarian reform" as "the redistribution of
lands to farmers and regular farmworkers who are landless to lift the economic status of
the beneficiaries and all other arrangements alternative to the physical redistribution of lands,
such as production or profit sharing, labor administration and the distribution of shares of
stock which will allow beneficiaries to receive a just share of the fruits of the lands they
work."
With the view We take of this case, the stock distribution option devised under Sec. 31 of RA
6657 hews with the agrarian reform policy, as instrument of social justice under Sec. 4 of
Article XIII of the Constitution. Albeit land ownership for the landless appears to be the
dominant theme of that policy, We emphasize that Sec. 4, Article XIII of the Constitution, as
couched, does not constrict Congress to passing an agrarian reform law planted on direct land
transfer to and ownership by farmers and no other, or else the enactment suffers from the vice
of unconstitutionality. If the intention were otherwise, the framers of the Constitution would
have worded said section in a manner mandatory in character.
For this Court, Sec. 31 of RA 6657, with its direct and indirect transfer features, is not
inconsistent with the States commitment to farmers and farmworkers to advance their
interests under the policy of social justice. The legislature, thru Sec. 31 of RA 6657, has
chosen a modality for collective ownership by which the imperatives of social justice may, in
its estimation, be approximated, if not achieved. The Court should be bound by such policy
choice.
FARM contends that the farmers in the stock distribution scheme under Sec. 31 do not own the
agricultural land but are merely given stock certificates. Thus, the farmers lose control over
the land to the board of directors and executive officials of the corporation who actually
manage the land. They conclude that such arrangement runs counter to the mandate of the

35

Constitution that any agrarian reform must preserve the control over the land in the hands of
the tiller.
This contention has no merit.
While it is true that the farmer is issued stock certificates and does not directly own the land,
still, the Corporation Code is clear that the FWB becomes a stockholder who acquires an
equitable interest in the assets of the corporation, which include the agricultural lands. It was
explained that the "equitable interest of the shareholder in the property of the corporation is
represented by the term stock, and the extent of his interest is described by the term shares.
The expression shares of stock when qualified by words indicating number and ownership
expresses the extent of the owners interest in the corporate property."119 A share of stock
typifies an aliquot part of the corporations property, or the right to share in its proceeds to that
extent when distributed according to law and equity and that its holder is not the owner of any
part of the capital of the corporation.120 However, the FWBs will ultimately own the
agricultural lands owned by the corporation when the corporation is eventually dissolved and
liquidated.
Anent the alleged loss of control of the farmers over the agricultural land operated and
managed by the corporation, a reading of the second paragraph of Sec. 31 shows otherwise.
Said provision provides that qualified beneficiaries have "the right to purchase such proportion
of the capital stock of the corporation that the agricultural land, actually devoted to
agricultural activities, bears in relation to the companys total assets." The wording of the
formula in the computation of the number of shares that can be bought by the farmers does not
mean loss of control on the part of the farmers. It must be remembered that the determination
of the percentage of the capital stock that can be bought by the farmers depends on the value
of the agricultural land and the value of the total assets of the corporation.
There is, thus, nothing unconstitutional in the formula prescribed by RA 6657. The policy on
agrarian reform is that control over the agricultural land must always be in the hands of the
farmers. Then it falls on the shoulders of DAR and PARC to see to it the farmers should
always own majority of the common shares entitled to elect the members of the board of
directors to ensure that the farmers will have a clear majority in the board. Before the SDP is
approved, strict scrutiny of the proposed SDP must always be undertaken by the DAR and
PARC, such that the value of the agricultural land contributed to the corporation must always
be more than 50% of the total assets of the corporation to ensure that the majority of the
members of the board of directors are composed of the farmers. The PARC composed of the
President of the Philippines and cabinet secretaries must see to it that control over the board of
directors rests with the farmers by rejecting the inclusion of non-agricultural assets which will
yield the majority in the board of directors to non-farmers. Any deviation, however, by PARC
or DAR from the correct application of the formula prescribed by the second paragraph of Sec.
31 of RA 6675 does not make said provision constitutionally infirm. Rather, it is the
application of said provision that can be challenged. Ergo, Sec. 31 of RA 6657 does not trench
on the constitutional policy of ensuring control by the farmers.
A view has been advanced that there can be no agrarian reform unless there is land distribution
and that actual land distribution is the essential characteristic of a constitutional agrarian
reform program. On the contrary, there have been so many instances where, despite actual
land distribution, the implementation of agrarian reform was still unsuccessful. As a matter of

fact, this Court may take judicial notice of cases where FWBs sold the awarded land even to
non-qualified persons and in violation of the prohibition period provided under the law. This
only proves to show that the mere fact that there is land distribution does not guarantee a
successful implementation of agrarian reform.
As it were, the principle of "land to the tiller" and the old pastoral model of land ownership
where non-human juridical persons, such as corporations, were prohibited from owning
agricultural lands are no longer realistic under existing conditions. Practically, an individual
farmer will often face greater disadvantages and difficulties than those who exercise
ownership in a collective manner through a cooperative or corporation. The former is too often
left to his own devices when faced with failing crops and bad weather, or compelled to obtain
usurious loans in order to purchase costly fertilizers or farming equipment. The experiences
learned from failed land reform activities in various parts of the country are lack of financing,
lack of farm equipment, lack of fertilizers, lack of guaranteed buyers of produce, lack of farmto-market roads, among others. Thus, at the end of the day, there is still no successful
implementation of agrarian reform to speak of in such a case.
Although success is not guaranteed, a cooperative or a corporation stands in a better position
to secure funding and competently maintain the agri-business than the individual farmer.
While direct singular ownership over farmland does offer advantages, such as the ability to
make quick decisions unhampered by interference from others, yet at best, these advantages
only but offset the disadvantages that are often associated with such ownership arrangement.
Thus, government must be flexible and creative in its mode of implementation to better its
chances of success. One such option is collective ownership through juridical persons
composed of farmers.
Aside from the fact that there appears to be no violation of the Constitution, the requirement
that the instant case be capable of repetition yet evading review is also wanting. It would be
speculative for this Court to assume that the legislature will enact another law providing for a
similar stock option.
As a matter of sound practice, the Court will not interfere inordinately with the exercise by
Congress of its official functions, the heavy presumption being that a law is the product of
earnest studies by Congress to ensure that no constitutional prescription or concept is
infringed.121 Corollarily, courts will not pass upon questions of wisdom, expediency and
justice of legislation or its provisions. Towards this end, all reasonable doubts should be
resolved in favor of the constitutionality of a law and the validity of the acts and processes
taken pursuant thereof.122
Consequently, before a statute or its provisions duly challenged are voided, an unequivocal
breach of, or a clear conflict with the Constitution, not merely a doubtful or argumentative
one, must be demonstrated in such a manner as to leave no doubt in the mind of the Court. In
other words, the grounds for nullity must be beyond reasonable doubt.123 FARM has not
presented compelling arguments to overcome the presumption of constitutionality of Sec. 31
of RA 6657.
The wisdom of Congress in allowing an SDP through a corporation as an alternative mode of
implementing agrarian reform is not for judicial determination. Established jurisprudence tells

36

us that it is not within the province of the Court to inquire into the wisdom of the law, for,
indeed, We are bound by words of the statute.124
II.
The stage is now set for the determination of the propriety under the premises of the
revocation or recall of HLIs SDP. Or to be more precise, the inquiry should be: whether or not
PARC gravely abused its discretion in revoking or recalling the subject SDP and placing the
hacienda under CARPs compulsory acquisition and distribution scheme.
The findings, analysis and recommendation of the DARs Special Task Force contained and
summarized in its Terminal Report provided the bases for the assailed PARC
revocatory/recalling Resolution. The findings may be grouped into two: (1) the SDP is
contrary to either the policy on agrarian reform, Sec. 31 of RA 6657, or DAO 10; and (2) the
alleged violation by HLI of the conditions/terms of the SDP. In more particular terms, the
following are essentially the reasons underpinning PARCs revocatory or recall action:
(1) Despite the lapse of 16 years from the approval of HLIs SDP, the lives of the FWBs have
hardly improved and the promised increased income has not materialized;
(2) HLI has failed to keep Hacienda Luisita intact and unfragmented;
(3) The issuance of HLI shares of stock on the basis of number of hours workedor the socalled "man days"is grossly onerous to the FWBs, as HLI, in the guise of rotation, can
unilaterally deny work to anyone. In elaboration of this ground, PARCs Resolution No. 200634-01, denying HLIs motion for reconsideration of Resolution No. 2005-32-01, stated that the
man days criterion worked to dilute the entitlement of the original share beneficiaries;125
(4) The distribution/transfer of shares was not in accordance with the timelines fixed by law;
(5) HLI has failed to comply with its obligations to grant 3% of the gross sales every year as
production-sharing benefit on top of the workers salary; and
(6) Several homelot awardees have yet to receive their individual titles.
Petitioner HLI claims having complied with, at least substantially, all its obligations under the
SDP, as approved by PARC itself, and tags the reasons given for the revocation of the SDP as
unfounded.
Public respondents, on the other hand, aver that the assailed resolution rests on solid grounds
set forth in the Terminal Report, a position shared by AMBALA, which, in some pleadings, is
represented by the same counsel as that appearing for the Supervisory Group.
FARM, for its part, posits the view that legal bases obtain for the revocation of the SDP,
because it does not conform to Sec. 31 of RA 6657 and DAO 10. And training its sight on the
resulting dilution of the equity of the FWBs appearing in HLIs masterlist, FARM would state
that the SDP, as couched and implemented, spawned disparity when there should be none;
parity when there should have been differentiation.126

The petition is not impressed with merit.


In the Terminal Report adopted by PARC, it is stated that the SDP violates the agrarian reform
policy under Sec. 2 of RA 6657, as the said plan failed to enhance the dignity and improve the
quality of lives of the FWBs through greater productivity of agricultural lands. We disagree.
Sec. 2 of RA 6657 states:
SECTION 2. Declaration of Principles and Policies.It is the policy of the State to pursue a
Comprehensive Agrarian Reform Program (CARP). The welfare of the landless farmers and
farm workers will receive the highest consideration to promote social justice and to move the
nation towards sound rural development and industrialization, and the establishment of owner
cultivatorship of economic-sized farms as the basis of Philippine agriculture.
To this end, a more equitable distribution and ownership of land, with due regard to the rights
of landowners to just compensation and to the ecological needs of the nation, shall be
undertaken to provide farmers and farm workers with the opportunity to enhance their dignity
and improve the quality of their lives through greater productivity of agricultural lands.
The agrarian reform program is founded on the right of farmers and regular farm workers, who
are landless, to own directly or collectively the lands they till or, in the case of other farm
workers, to receive a share of the fruits thereof. To this end, the State shall encourage the just
distribution of all agricultural lands, subject to the priorities and retention limits set forth in
this Act, having taken into account ecological, developmental, and equity considerations, and
subject to the payment of just compensation. The State shall respect the right of small
landowners and shall provide incentives for voluntary land-sharing. (Emphasis supplied.)
Paragraph 2 of the above-quoted provision specifically mentions that "a more equitable
distribution and ownership of land x x x shall be undertaken to provide farmers and farm
workers with the opportunity to enhance their dignity and improve the quality of their lives
through greater productivity of agricultural lands." Of note is the term "opportunity" which is
defined as a favorable chance or opening offered by circumstances.127 Considering this, by no
stretch of imagination can said provision be construed as a guarantee in improving the lives of
the FWBs. At best, it merely provides for a possibility or favorable chance of uplifting the
economic status of the FWBs, which may or may not be attained.
Pertinently, improving the economic status of the FWBs is neither among the legal obligations
of HLI under the SDP nor an imperative imposition by RA 6657 and DAO 10, a violation of
which would justify discarding the stock distribution option. Nothing in that option agreement,
law or department order indicates otherwise.
Significantly, HLI draws particular attention to its having paid its FWBs, during the regime of
the SDP (1989-2005), some PhP 3 billion by way of salaries/wages and higher benefits
exclusive of free hospital and medical benefits to their immediate family. And attached as
Annex "G" to HLIs Memorandum is the certified true report of the finance manager of Jose
Cojuangco & Sons Organizations-Tarlac Operations, captioned as "HACIENDA LUISITA,
INC. Salaries, Benefits and Credit Privileges (in Thousand Pesos) Since the Stock Option was
Approved by PARC/CARP," detailing what HLI gave their workers from 1989 to 2005. The
sum total, as added up by the Court, yields the following numbers: Total Direct Cash Out

37

(Salaries/Wages & Cash Benefits) = PhP 2,927,848; Total Non-Direct Cash Out
(Hospital/Medical Benefits) = PhP 303,040. The cash out figures, as stated in the report,
include the cost of homelots; the PhP 150 million or so representing 3% of the gross produce
of the hacienda; and the PhP 37.5 million representing 3% from the proceeds of the sale of the
500-hectare converted lands. While not included in the report, HLI manifests having given the
FWBs 3% of the PhP 80 million paid for the 80 hectares of land traversed by the SCTEX.128
On top of these, it is worth remembering that the shares of stocks were given by HLI to the
FWBs for free. Verily, the FWBs have benefited from the SDP.
To address urgings that the FWBs be allowed to disengage from the SDP as HLI has not
anyway earned profits through the years, it cannot be over-emphasized that, as a matter of
common business sense, no corporation could guarantee a profitable run all the time. As has
been suggested, one of the key features of an SDP of a corporate landowner is the likelihood
of the corporate vehicle not earning, or, worse still, losing money.129
The Court is fully aware that one of the criteria under DAO 10 for the PARC to consider the
advisability of approving a stock distribution plan is the likelihood that the plan "would result
in increased income and greater benefits to [qualified beneficiaries] than if the lands were
divided and distributed to them individually."130 But as aptly noted during the oral arguments,
DAO 10 ought to have not, as it cannot, actually exact assurance of success on something that
is subject to the will of man, the forces of nature or the inherent risky nature of business.131
Just like in actual land distribution, an SDP cannot guarantee, as indeed the SDOA does not
guarantee, a comfortable life for the FWBs. The Court can take judicial notice of the fact that
there were many instances wherein after a farmworker beneficiary has been awarded with an
agricultural land, he just subsequently sells it and is eventually left with nothing in the end.
In all then, the onerous condition of the FWBs economic status, their life of hardship, if that
really be the case, can hardly be attributed to HLI and its SDP and provide a valid ground for
the plans revocation.
Neither does HLIs SDP, whence the DAR-attested SDOA/MOA is based, infringe Sec. 31 of
RA 6657, albeit public respondents erroneously submit otherwise.
The provisions of the first paragraph of the adverted Sec. 31 are without relevance to the issue
on the propriety of the assailed order revoking HLIs SDP, for the paragraph deals with the
transfer of agricultural lands to the government, as a mode of CARP compliance, thus:
SEC. 31. Corporate Landowners.Corporate landowners may voluntarily transfer ownership
over their agricultural landholdings to the Republic of the Philippines pursuant to Section 20
hereof or to qualified beneficiaries under such terms and conditions, consistent with this Act,
as they may agree, subject to confirmation by the DAR.
The second and third paragraphs, with their sub-paragraphs, of Sec. 31 provide as follows:
Upon certification by the DAR, corporations owning agricultural lands may give their
qualified beneficiaries the right to purchase such proportion of the capital stock of the
corporation that the agricultural land, actually devoted to agricultural activities, bears in
relation to the companys total assets, under such terms and conditions as may be agreed upon

by them. In no case shall the compensation received by the workers at the time the shares of
stocks are distributed be reduced. x x x
Corporations or associations which voluntarily divest a proportion of their capital stock, equity
or participation in favor of their workers or other qualified beneficiaries under this section
shall be deemed to have complied with the provisions of this Act: Provided, That the following
conditions are complied with:
(a) In order to safeguard the right of beneficiaries who own shares of stocks to dividends and
other financial benefits, the books of the corporation or association shall be subject to periodic
audit by certified public accountants chosen by the beneficiaries;
(b) Irrespective of the value of their equity in the corporation or association, the beneficiaries
shall be assured of at least one (1) representative in the board of directors, or in a management
or executive committee, if one exists, of the corporation or association;
(c) Any shares acquired by such workers and beneficiaries shall have the same rights and
features as all other shares; and
(d) Any transfer of shares of stocks by the original beneficiaries shall be void ab initio unless
said transaction is in favor of a qualified and registered beneficiary within the same
corporation.
The mandatory minimum ratio of land-to-shares of stock supposed to be distributed or
allocated to qualified beneficiaries, adverting to what Sec. 31 of RA 6657 refers to as that
"proportion of the capital stock of the corporation that the agricultural land, actually devoted
to agricultural activities, bears in relation to the companys total assets" had been observed.
Paragraph one (1) of the SDOA, which was based on the SDP, conforms to Sec. 31 of RA
6657. The stipulation reads:
1. The percentage of the value of the agricultural land of Hacienda Luisita (P196,630,000.00)
in relation to the total assets (P590,554,220.00) transferred and conveyed to the SECOND
PARTY is 33.296% that, under the law, is the proportion of the outstanding capital stock of the
SECOND PARTY, which is P355,531,462.00 or 355,531,462 shares with a par value of P1.00
per share, that has to be distributed to the THIRD PARTY under the stock distribution plan, the
said 33.296% thereof being P118,391,976.85 or 118,391,976.85 shares.
The appraised value of the agricultural land is PhP 196,630,000 and of HLIs other assets is
PhP 393,924,220. The total value of HLIs assets is, therefore, PhP 590,554,220.132 The
percentage of the value of the agricultural lands (PhP 196,630,000) in relation to the total
assets (PhP 590,554,220) is 33.296%, which represents the stockholdings of the 6,296 original
qualified farmworker-beneficiaries (FWBs) in HLI. The total number of shares to be
distributed to said qualified FWBs is 118,391,976.85 HLI shares. This was arrived at by
getting 33.296% of the 355,531,462 shares which is the outstanding capital stock of HLI with
a value of PhP 355,531,462. Thus, if we divide the 118,391,976.85 HLI shares by 6,296
FWBs, then each FWB is entitled to 18,804.32 HLI shares. These shares under the SDP are to
be given to FWBs for free.

38

The Court finds that the determination of the shares to be distributed to the 6,296 FWBs
strictly adheres to the formula prescribed by Sec. 31(b) of RA 6657.
Anent the requirement under Sec. 31(b) of the third paragraph, that the FWBs shall be assured
of at least one (1) representative in the board of directors or in a management or executive
committee irrespective of the value of the equity of the FWBs in HLI, the Court finds that the
SDOA contained provisions making certain the FWBs representation in HLIs governing
board, thus:
5. Even if only a part or fraction of the shares earmarked for distribution will have been
acquired from the FIRST PARTY and distributed to the THIRD PARTY, FIRST PARTY shall
execute at the beginning of each fiscal year an irrevocable proxy, valid and effective for one
(1) year, in favor of the farmworkers appearing as shareholders of the SECOND PARTY at the
start of said year which will empower the THIRD PARTY or their representative to vote in
stockholders and board of directors meetings of the SECOND PARTY convened during the
year the entire 33.296% of the outstanding capital stock of the SECOND PARTY earmarked
for distribution and thus be able to gain such number of seats in the board of directors of the
SECOND PARTY that the whole 33.296% of the shares subject to distribution will be entitled
to.

Having hurdled the alleged breach of the agrarian reform policy under Sec. 2 of RA 6657 as
well as the statutory issues, We shall now delve into what PARC and respondents deem to be
other instances of violation of DAO 10 and the SDP.
On the Conversion of Lands
Contrary to the almost parallel stance of the respondents, keeping Hacienda Luisita
unfragmented is also not among the imperative impositions by the SDP, RA 6657, and DAO
10.
The Terminal Report states that the proposed distribution plan submitted in 1989 to the PARC
effectively assured the intended stock beneficiaries that the physical integrity of the farm shall
remain inviolate. Accordingly, the Terminal Report and the PARC-assailed resolution would
take HLI to task for securing approval of the conversion to non-agricultural uses of 500
hectares of the hacienda. In not too many words, the Report and the resolution view the
conversion as an infringement of Sec. 5(a) of DAO 10 which reads: "a. that the continued
operation of the corporation with its agricultural land intact and unfragmented is viable with
potential for growth and increased profitability."
The PARC is wrong.

Also, no allegations have been made against HLI restricting the inspection of its books by
accountants chosen by the FWBs; hence, the assumption may be made that there has been no
violation of the statutory prescription under sub-paragraph (a) on the auditing of HLIs
accounts.
Public respondents, however, submit that the distribution of the mandatory minimum ratio of
land-to-shares of stock, referring to the 118,391,976.85 shares with par value of PhP 1 each,
should have been made in full within two (2) years from the approval of RA 6657, in line with
the last paragraph of Sec. 31 of said law.133
Public respondents submission is palpably erroneous. We have closely examined the last
paragraph alluded to, with particular focus on the two-year period mentioned, and nothing in it
remotely supports the public respondents posture. In its pertinent part, said Sec. 31 provides:
SEC. 31. Corporate Landowners x x x
If within two (2) years from the approval of this Act, the [voluntary] land or stock transfer
envisioned above is not made or realized or the plan for such stock distribution approved by
the PARC within the same period, the agricultural land of the corporate owners or corporation
shall be subject to the compulsory coverage of this Act. (Word in bracket and emphasis
added.)
Properly viewed, the words "two (2) years" clearly refer to the period within which the
corporate landowner, to avoid land transfer as a mode of CARP coverage under RA 6657, is to
avail of the stock distribution option or to have the SDP approved. The HLI secured approval
of its SDP in November 1989, well within the two-year period reckoned from June 1988 when
RA 6657 took effect.

In the first place, Sec. 5(a)just like the succeeding Sec. 5(b) of DAO 10 on increased
income and greater benefits to qualified beneficiariesis but one of the stated criteria to guide
PARC in deciding on whether or not to accept an SDP. Said Sec. 5(a) does not exact from the
corporate landowner-applicant the undertaking to keep the farm intact and unfragmented ad
infinitum. And there is logic to HLIs stated observation that the key phrase in the provision of
Sec. 5(a) is "viability of corporate operations": "[w]hat is thus required is not the agricultural
land remaining intact x x x but the viability of the corporate operations with its agricultural
land being intact and unfragmented. Corporate operation may be viable even if the corporate
agricultural land does not remain intact or [un]fragmented."134
It is, of course, anti-climactic to mention that DAR viewed the conversion as not violative of
any issuance, let alone undermining the viability of Hacienda Luisitas operation, as the DAR
Secretary approved the land conversion applied for and its disposition via his Conversion
Order dated August 14, 1996 pursuant to Sec. 65 of RA 6657 which reads:
Sec. 65. Conversion of Lands.After the lapse of five years from its award when the land
ceases to be economically feasible and sound for agricultural purposes, or the locality has
become urbanized and the land will have a greater economic value for residential, commercial
or industrial purposes, the DAR upon application of the beneficiary or landowner with due
notice to the affected parties, and subject to existing laws, may authorize the x x x conversion
of the land and its dispositions. x x x
On the 3% Production Share
On the matter of the alleged failure of HLI to comply with sharing the 3% of the gross
production sales of the hacienda and pay dividends from profit, the entries in its financial
books tend to indicate compliance by HLI of the profit-sharing equivalent to 3% of the gross
sales from the production of the agricultural land on top of (a) the salaries and wages due

39

FWBs as employees of the company and (b) the 3% of the gross selling price of the converted
land and that portion used for the SCTEX. A plausible evidence of compliance or noncompliance, as the case may be, could be the books of account of HLI. Evidently, the cry of
some groups of not having received their share from the gross production sales has not
adequately been validated on the ground by the Special Task Force.
Indeed, factual findings of administrative agencies are conclusive when supported by
substantial evidence and are accorded due respect and weight, especially when they are
affirmed by the CA.135 However, such rule is not absolute. One such exception is when the
findings of an administrative agency are conclusions without citation of specific evidence on
which they are based,136 such as in this particular instance. As culled from its Terminal
Report, it would appear that the Special Task Force rejected HLIs claim of compliance on the
basis of this ratiocination:
The Task Force position: Though, allegedly, the Supervisory Group receives the 3% gross
production share and that others alleged that they received 30 million pesos still others
maintain that they have not received anything yet. Item No. 4 of the MOA is clear and must be
followed. There is a distinction between the total gross sales from the production of the land
and the proceeds from the sale of the land. The former refers to the fruits/yield of the
agricultural land while the latter is the land itself. The phrase "the beneficiaries are entitled
every year to an amount approximately equivalent to 3% would only be feasible if the subject
is the produce since there is at least one harvest per year, while such is not the case in the sale
of the agricultural land. This negates then the claim of HLI that, all that the FWBs can be
entitled to, if any, is only 3% of the purchase price of the converted land.
Besides, the Conversion Order dated 14 August 1996 provides that "the benefits, wages and
the like, presently received by the FWBs shall not in any way be reduced or adversely
affected. Three percent of the gross selling price of the sale of the converted land shall be
awarded to the beneficiaries of the SDO." The 3% gross production share then is different
from the 3% proceeds of the sale of the converted land and, with more reason, the 33% share
being claimed by the FWBs as part owners of the Hacienda, should have been given the
FWBs, as stockholders, and to which they could have been entitled if only the land were
acquired and redistributed to them under the CARP.

Despite the foregoing findings, the revocation of the approval of the SDP is not without basis
as shown below.
On Titles to Homelots
Under RA 6657, the distribution of homelots is required only for corporations or business
associations owning or operating farms which opted for land distribution. Sec. 30 of RA 6657
states:
SEC. 30. Homelots and Farmlots for Members of Cooperatives.The individual members of
the cooperatives or corporations mentioned in the preceding section shall be provided with
homelots and small farmlots for their family use, to be taken from the land owned by the
cooperative or corporation.
The "preceding section" referred to in the above-quoted provision is as follows:
SEC. 29. Farms Owned or Operated by Corporations or Other Business Associations.In the
case of farms owned or operated by corporations or other business associations, the following
rules shall be observed by the PARC.
In general, lands shall be distributed directly to the individual worker-beneficiaries.
In case it is not economically feasible and sound to divide the land, then it shall be owned
collectively by the worker-beneficiaries who shall form a workers cooperative or association
which will deal with the corporation or business association. Until a new agreement is entered
into by and between the workers cooperative or association and the corporation or business
association, any agreement existing at the time this Act takes effect between the former and
the previous landowner shall be respected by both the workers cooperative or association and
the corporation or business association.
Noticeably, the foregoing provisions do not make reference to corporations which opted for
stock distribution under Sec. 31 of RA 6657. Concomitantly, said corporations are not obliged
to provide for it except by stipulation, as in this case.

xxxx
The FWBs do not receive any other benefits under the MOA except the aforementioned [(viz:
shares of stocks (partial), 3% gross production sale (not all) and homelots (not all)].
Judging from the above statements, the Special Task Force is at best silent on whether HLI has
failed to comply with the 3% production-sharing obligation or the 3% of the gross selling
price of the converted land and the SCTEX lot. In fact, it admits that the FWBs, though not all,
have received their share of the gross production sales and in the sale of the lot to SCTEX. At
most, then, HLI had complied substantially with this SDP undertaking and the conversion
order. To be sure, this slight breach would not justify the setting to naught by PARC of the
approval action of the earlier PARC. Even in contract law, rescission, predicated on violation
of reciprocity, will not be permitted for a slight or casual breach of contract; rescission may be
had only for such breaches that are substantial and fundamental as to defeat the object of the
parties in making the agreement.137

Under the SDP, HLI undertook to "subdivide and allocate for free and without charge among
the qualified family-beneficiaries x x x residential or homelots of not more than 240 sq. m.
each, with each family beneficiary being assured of receiving and owning a homelot in the
barrio or barangay where it actually resides," "within a reasonable time."
More than sixteen (16) years have elapsed from the time the SDP was approved by PARC, and
yet, it is still the contention of the FWBs that not all was given the 240-square meter homelots
and, of those who were already given, some still do not have the corresponding titles.
During the oral arguments, HLI was afforded the chance to refute the foregoing allegation by
submitting proof that the FWBs were already given the said homelots:

40

Justice Velasco: x x x There is also an allegation that the farmer beneficiaries, the qualified
family beneficiaries were not given the 240 square meters each. So, can you also [prove] that
the qualified family beneficiaries were already provided the 240 square meter homelots.
Atty. Asuncion: We will, your Honor please.138
Other than the financial report, however, no other substantial proof showing that all the
qualified beneficiaries have received homelots was submitted by HLI. Hence, this Court is
constrained to rule that HLI has not yet fully complied with its undertaking to distribute
homelots to the FWBs under the SDP.
On "Man Days" and the Mechanics of Stock Distribution
In our review and analysis of par. 3 of the SDOA on the mechanics and timelines of stock
distribution, We find that it violates two (2) provisions of DAO 10. Par. 3 of the SDOA states:
3. At the end of each fiscal year, for a period of 30 years, the SECOND PARTY [HLI] shall
arrange with the FIRST PARTY [TDC] the acquisition and distribution to the THIRD PARTY
[FWBs] on the basis of number of days worked and at no cost to them of one-thirtieth (1/30)
of 118,391,976.85 shares of the capital stock of the SECOND PARTY that are presently
owned and held by the FIRST PARTY, until such time as the entire block of 118,391,976.85
shares shall have been completely acquired and distributed to the THIRD PARTY.
Based on the above-quoted provision, the distribution of the shares of stock to the FWBs,
albeit not entailing a cash out from them, is contingent on the number of "man days," that is,
the number of days that the FWBs have worked during the year. This formula deviates from
Sec. 1 of DAO 10, which decrees the distribution of equal number of shares to the FWBs as
the minimum ratio of shares of stock for purposes of compliance with Sec. 31 of RA 6657. As
stated in Sec. 4 of DAO 10:
Section 4. Stock Distribution Plan.The [SDP] submitted by the corporate landownerapplicant shall provide for the distribution of an equal number of shares of the same class and
value, with the same rights and features as all other shares, to each of the qualified
beneficiaries. This distribution plan in all cases, shall be at least the minimum ratio for
purposes of compliance with Section 31 of R.A. No. 6657.
On top of the minimum ratio provided under Section 3 of this Implementing Guideline, the
corporate landowner-applicant may adopt additional stock distribution schemes taking into
account factors such as rank, seniority, salary, position and other circumstances which may be
deemed desirable as a matter of sound company policy. (Emphasis supplied.)

equal number of shares of stock of the same class and value, with the same rights and features
as all other shares, to each of the qualified beneficiaries."
On the other hand, the second set or category of shares partakes of a gratuitous extra grant,
meaning that this set or category constitutes an augmentation share/s that the corporate
landowner may give under an additional stock distribution scheme, taking into account such
variables as rank, seniority, salary, position and like factors which the management, in the
exercise of its sound discretion, may deem desirable.140
Before anything else, it should be stressed that, at the time PARC approved HLIs SDP, HLI
recognized 6,296 individuals as qualified FWBs. And under the 30-year stock distribution
program envisaged under the plan, FWBs who came in after 1989, new FWBs in fine, may be
accommodated, as they appear to have in fact been accommodated as evidenced by their
receipt of HLI shares.
Now then, by providing that the number of shares of the original 1989 FWBs shall depend on
the number of "man days," HLI violated the afore-quoted rule on stock distribution and
effectively deprived the FWBs of equal shares of stock in the corporation, for, in net effect,
these 6,296 qualified FWBs, who theoretically had given up their rights to the land that could
have been distributed to them, suffered a dilution of their due share entitlement. As has been
observed during the oral arguments, HLI has chosen to use the shares earmarked for
farmworkers as reward system chips to water down the shares of the original 6,296 FWBs.141
Particularly:
Justice Abad: If the SDOA did not take place, the other thing that would have happened is that
there would be CARP?
Atty. Dela Merced: Yes, Your Honor.
Justice Abad: Thats the only point I want to know x x x. Now, but they chose to enter SDOA
instead of placing the land under CARP. And for that reason those who would have gotten
their shares of the land actually gave up their rights to this land in place of the shares of the
stock, is that correct?
Atty. Dela Merced: It would be that way, Your Honor.
Justice Abad: Right now, also the government, in a way, gave up its right to own the land
because that way the government takes own [sic] the land and distribute it to the farmers and
pay for the land, is that correct?
Atty. Dela Merced: Yes, Your Honor.

The above proviso gives two (2) sets or categories of shares of stock which a qualified
beneficiary can acquire from the corporation under the SDP. The first pertains, as earlier
explained, to the mandatory minimum ratio of shares of stock to be distributed to the FWBs in
compliance with Sec. 31 of RA 6657. This minimum ratio contemplates of that "proportion of
the capital stock of the corporation that the agricultural land, actually devoted to agricultural
activities, bears in relation to the companys total assets."139 It is this set of shares of stock
which, in line with Sec. 4 of DAO 10, is supposed to be allocated "for the distribution of an

Justice Abad: And then you gave thirty-three percent (33%) of the shares of HLI to the farmers
at that time that numbered x x x those who signed five thousand four hundred ninety eight
(5,498) beneficiaries, is that correct?
Atty. Dela Merced: Yes, Your Honor.

41

Justice Abad: But later on, after assigning them their shares, some workers came in from 1989,
1990, 1991, 1992 and the rest of the years that you gave additional shares who were not in the
original list of owners?
Atty. Dela Merced: Yes, Your Honor.
Justice Abad: Did those new workers give up any right that would have belong to them in
1989 when the land was supposed to have been placed under CARP?
Atty. Dela Merced: If you are talking or referring (interrupted)
Justice Abad: None! You tell me. None. They gave up no rights to land?
Atty. Dela Merced: They did not do the same thing as we did in 1989, Your Honor.
Justice Abad: No, if they were not workers in 1989 what land did they give up? None, if they
become workers later on.
Atty. Dela Merced: None, Your Honor, I was referring, Your Honor, to the original
(interrupted)
Justice Abad: So why is it that the rights of those who gave up their lands would be diluted,
because the company has chosen to use the shares as reward system for new workers who
come in? It is not that the new workers, in effect, become just workers of the corporation
whose stockholders were already fixed. The TADECO who has shares there about sixty six
percent (66%) and the five thousand four hundred ninety eight (5,498) farmers at the time of
the SDOA? Explain to me. Why, why will you x x x what right or where did you get that right
to use this shares, to water down the shares of those who should have been benefited, and to
use it as a reward system decided by the company?142
From the above discourse, it is clear as day that the original 6,296 FWBs, who were qualified
beneficiaries at the time of the approval of the SDP, suffered from watering down of shares. As
determined earlier, each original FWB is entitled to 18,804.32 HLI shares. The original FWBs
got less than the guaranteed 18,804.32 HLI shares per beneficiary, because the acquisition and
distribution of the HLI shares were based on "man days" or "number of days worked" by the
FWB in a years time. As explained by HLI, a beneficiary needs to work for at least 37 days in
a fiscal year before he or she becomes entitled to HLI shares. If it falls below 37 days, the
FWB, unfortunately, does not get any share at year end. The number of HLI shares distributed
varies depending on the number of days the FWBs were allowed to work in one year. Worse,
HLI hired farmworkers in addition to the original 6,296 FWBs, such that, as indicated in the
Compliance dated August 2, 2010 submitted by HLI to the Court, the total number of
farmworkers of HLI as of said date stood at 10,502. All these farmworkers, which include the
original 6,296 FWBs, were given shares out of the 118,931,976.85 HLI shares representing the
33.296% of the total outstanding capital stock of HLI. Clearly, the minimum individual
allocation of each original FWB of 18,804.32 shares was diluted as a result of the use of "man
days" and the hiring of additional farmworkers.
Going into another but related matter, par. 3 of the SDOA expressly providing for a 30-year
timeframe for HLI-to-FWBs stock transfer is an arrangement contrary to what Sec. 11 of DAO

10 prescribes. Said Sec. 11 provides for the implementation of the approved stock distribution
plan within three (3) months from receipt by the corporate landowner of the approval of the
plan by PARC. In fact, based on the said provision, the transfer of the shares of stock in the
names of the qualified FWBs should be recorded in the stock and transfer books and must be
submitted to the SEC within sixty (60) days from implementation. As stated:
Section 11. Implementation/Monitoring of Plan.The approved stock distribution plan shall
be implemented within three (3) months from receipt by the corporate landowner-applicant of
the approval thereof by the PARC, and the transfer of the shares of stocks in the names of the
qualified beneficiaries shall be recorded in stock and transfer books and submitted to the
Securities and Exchange Commission (SEC) within sixty (60) days from the said
implementation of the stock distribution plan. (Emphasis supplied.)
It is evident from the foregoing provision that the implementation, that is, the distribution of
the shares of stock to the FWBs, must be made within three (3) months from receipt by HLI of
the approval of the stock distribution plan by PARC. While neither of the clashing parties has
made a compelling case of the thrust of this provision, the Court is of the view and so holds
that the intent is to compel the corporate landowner to complete, not merely initiate, the
transfer process of shares within that three-month timeframe. Reinforcing this conclusion is
the 60-day stock transfer recording (with the SEC) requirement reckoned from the
implementation of the SDP.
To the Court, there is a purpose, which is at once discernible as it is practical, for the threemonth threshold. Remove this timeline and the corporate landowner can veritably evade
compliance with agrarian reform by simply deferring to absurd limits the implementation of
the stock distribution scheme.
The argument is urged that the thirty (30)-year distribution program is justified by the fact
that, under Sec. 26 of RA 6657, payment by beneficiaries of land distribution under CARP
shall be made in thirty (30) annual amortizations. To HLI, said section provides a justifying
dimension to its 30-year stock distribution program.
HLIs reliance on Sec. 26 of RA 6657, quoted in part below, is obviously misplaced as the said
provision clearly deals with land distribution.
SEC. 26. Payment by Beneficiaries.Lands awarded pursuant to this Act shall be paid for by
the beneficiaries to the LBP in thirty (30) annual amortizations x x x.
Then, too, the ones obliged to pay the LBP under the said provision are the beneficiaries. On
the other hand, in the instant case, aside from the fact that what is involved is stock
distribution, it is the corporate landowner who has the obligation to distribute the shares of
stock among the FWBs.
Evidently, the land transfer beneficiaries are given thirty (30) years within which to pay the
cost of the land thus awarded them to make it less cumbersome for them to pay the
government. To be sure, the reason underpinning the 30-year accommodation does not apply
to corporate landowners in distributing shares of stock to the qualified beneficiaries, as the
shares may be issued in a much shorter period of time.

42

Taking into account the above discussion, the revocation of the SDP by PARC should be
upheld for violating DAO 10. It bears stressing that under Sec. 49 of RA 6657, the PARC and
the DAR have the power to issue rules and regulations, substantive or procedural. Being a
product of such rule-making power, DAO 10 has the force and effect of law and must be duly
complied with.143 The PARC is, therefore, correct in revoking the SDP. Consequently, the
PARC Resolution No. 89-12-2 dated November 21, l989 approving the HLIs SDP is nullified
and voided.

lack of it, is in the final analysis a question of intention; but in ascertaining the intention by
which one is actuated on a given occasion, we are necessarily controlled by the evidence as to
the conduct and outward acts by which alone the inward motive may, with safety, be
determined. Truly, good faith is not a visible, tangible fact that can be seen or touched, but
rather a state or condition of mind which can only be judged by actual or fancied tokens or
signs. Otherwise stated, good faith x x x refers to the state of mind which is manifested by the
acts of the individual concerned.148 (Emphasis supplied.)

III.

In fine, there are two (2) requirements before one may be considered a purchaser in good faith,
namely: (1) that the purchaser buys the property of another without notice that some other
person has a right to or interest in such property; and (2) that the purchaser pays a full and fair
price for the property at the time of such purchase or before he or she has notice of the claim
of another.

We now resolve the petitions-in-intervention which, at bottom, uniformly pray for the
exclusion from the coverage of the assailed PARC resolution those portions of the converted
land within Hacienda Luisita which RCBC and LIPCO acquired by purchase.
Both contend that they are innocent purchasers for value of portions of the converted farm
land. Thus, their plea for the exclusion of that portion from PARC Resolution 2005-32-01, as
implemented by a DAR-issued Notice of Coverage dated January 2, 2006, which called for
mandatory CARP acquisition coverage of lands subject of the SDP.
To restate the antecedents, after the conversion of the 500 hectares of land in Hacienda Luisita,
HLI transferred the 300 hectares to Centennary, while ceding the remaining 200-hectare
portion to LRC. Subsequently, LIPCO purchased the entire three hundred (300) hectares of
land from Centennary for the purpose of developing the land into an industrial complex.144
Accordingly, the TCT in Centennarys name was canceled and a new one issued in LIPCOs
name. Thereafter, said land was subdivided into two (2) more parcels of land. Later on, LIPCO
transferred about 184 hectares to RCBC by way of dacion en pago, by virtue of which TCTs in
the name of RCBC were subsequently issued.
Under Sec. 44 of PD 1529 or the Property Registration Decree, "every registered owner
receiving a certificate of title in pursuance of a decree of registration and every subsequent
purchaser of registered land taking a certificate of title for value and in good faith shall hold
the same free from all encumbrances except those noted on the certificate and enumerated
therein."145
It is settled doctrine that one who deals with property registered under the Torrens system need
not go beyond the four corners of, but can rely on what appears on, the title. He is charged
with notice only of such burdens and claims as are annotated on the title. This principle admits
of certain exceptions, such as when the party has actual knowledge of facts and circumstances
that would impel a reasonably cautious man to make such inquiry, or when the purchaser has
knowledge of a defect or the lack of title in his vendor or of sufficient facts to induce a
reasonably prudent man to inquire into the status of the title of the property in litigation.146 A
higher level of care and diligence is of course expected from banks, their business being
impressed with public interest.147
Millena v. Court of Appeals describes a purchaser in good faith in this wise:
x x x A purchaser in good faith is one who buys property of another, without notice that some
other person has a right to, or interest in, such property at the time of such purchase, or before
he has notice of the claim or interest of some other persons in the property. Good faith, or the

It can rightfully be said that both LIPCO and RCBC arebased on the above requirements
and with respect to the adverted transactions of the converted land in questionpurchasers in
good faith for value entitled to the benefits arising from such status.
First, at the time LIPCO purchased the entire three hundred (300) hectares of industrial land,
there was no notice of any supposed defect in the title of its transferor, Centennary, or that any
other person has a right to or interest in such property. In fact, at the time LIPCO acquired said
parcels of land, only the following annotations appeared on the TCT in the name of
Centennary: the Secretarys Certificate in favor of Teresita Lopa, the Secretarys Certificate in
favor of Shintaro Murai, and the conversion of the property from agricultural to industrial and
residential use.149
The same is true with respect to RCBC. At the time it acquired portions of Hacienda Luisita,
only the following general annotations appeared on the TCTs of LIPCO: the Deed of
Restrictions, limiting its use solely as an industrial estate; the Secretarys Certificate in favor
of Koji Komai and Kyosuke Hori; and the Real Estate Mortgage in favor of RCBC to
guarantee the payment of PhP 300 million.
It cannot be claimed that RCBC and LIPCO acted in bad faith in acquiring the lots that were
previously covered by the SDP. Good faith "consists in the possessors belief that the person
from whom he received it was the owner of the same and could convey his title. Good faith
requires a well-founded belief that the person from whom title was received was himself the
owner of the land, with the right to convey it. There is good faith where there is an honest
intention to abstain from taking any unconscientious advantage from another."150 It is the
opposite of fraud.
To be sure, intervenor RCBC and LIPCO knew that the lots they bought were subjected to
CARP coverage by means of a stock distribution plan, as the DAR conversion order was
annotated at the back of the titles of the lots they acquired. However, they are of the honest
belief that the subject lots were validly converted to commercial or industrial purposes and for
which said lots were taken out of the CARP coverage subject of PARC Resolution No. 89-122 and, hence, can be legally and validly acquired by them. After all, Sec. 65 of RA 6657
explicitly allows conversion and disposition of agricultural lands previously covered by CARP
land acquisition "after the lapse of five (5) years from its award when the land ceases to be
economically feasible and sound for agricultural purposes or the locality has become

43

urbanized and the land will have a greater economic value for residential, commercial or
industrial purposes." Moreover, DAR notified all the affected parties, more particularly the
FWBs, and gave them the opportunity to comment or oppose the proposed conversion. DAR,
after going through the necessary processes, granted the conversion of 500 hectares of
Hacienda Luisita pursuant to its primary jurisdiction under Sec. 50 of RA 6657 to determine
and adjudicate agrarian reform matters and its original exclusive jurisdiction over all matters
involving the implementation of agrarian reform. The DAR conversion order became final and
executory after none of the FWBs interposed an appeal to the CA. In this factual setting,
RCBC and LIPCO purchased the lots in question on their honest and well-founded belief that
the previous registered owners could legally sell and convey the lots though these were
previously subject of CARP coverage. Ergo, RCBC and LIPCO acted in good faith in
acquiring the subject lots.
And second, both LIPCO and RCBC purchased portions of Hacienda Luisita for value.
Undeniably, LIPCO acquired 300 hectares of land from Centennary for the amount of PhP 750
million pursuant to a Deed of Sale dated July 30, 1998.151 On the other hand, in a Deed of
Absolute Assignment dated November 25, 2004, LIPCO conveyed portions of Hacienda
Luisita in favor of RCBC by way of dacion en pago to pay for a loan of PhP 431,695,732.10.
As bona fide purchasers for value, both LIPCO and RCBC have acquired rights which cannot
just be disregarded by DAR, PARC or even by this Court. As held in Spouses Chua v. Soriano:
With the property in question having already passed to the hands of purchasers in good faith, it
is now of no moment that some irregularity attended the issuance of the SPA, consistent with
our pronouncement in Heirs of Spouses Benito Gavino and Juana Euste v. Court of Appeals, to
wit:
x x x the general rule that the direct result of a previous void contract cannot be valid, is
inapplicable in this case as it will directly contravene the Torrens system of registration.
Where innocent third persons, relying on the correctness of the certificate of title thus issued,
acquire rights over the property, the court cannot disregard such rights and order the
cancellation of the certificate. The effect of such outright cancellation will be to impair public
confidence in the certificate of title. The sanctity of the Torrens system must be preserved;
otherwise, everyone dealing with the property registered under the system will have to inquire
in every instance as to whether the title had been regularly or irregularly issued, contrary to the
evident purpose of the law.
Being purchasers in good faith, the Chuas already acquired valid title to the property. A
purchaser in good faith holds an indefeasible title to the property and he is entitled to the
protection of the law.152 x x x (Emphasis supplied.)
To be sure, the practicalities of the situation have to a point influenced Our disposition on the
fate of RCBC and LIPCO. After all, the Court, to borrow from Association of Small
Landowners in the Philippines, Inc.,153 is not a "cloistered institution removed" from the
realities on the ground. To note, the approval and issuances of both the national and local
governments showing that certain portions of Hacienda Luisita have effectively ceased, legally
and physically, to be agricultural and, therefore, no longer CARPable are a matter of fact
which cannot just be ignored by the Court and the DAR. Among the approving/endorsing
issuances:154

(a) Resolution No. 392 dated 11 December 1996 of the Sangguniang Bayan of Tarlac
favorably endorsing the 300-hectare industrial estate project of LIPCO;
(b) BOI Certificate of Registration No. 96-020 dated 20 December 1996 issued in accordance
with the Omnibus Investments Code of 1987;
(c) PEZA Certificate of Board Resolution No. 97-202 dated 27 June 1997, approving LIPCOs
application for a mixed ecozone and proclaiming the three hundred (300) hectares of the
industrial land as a Special Economic Zone;
(d) Resolution No. 234 dated 08 August 1997 of the Sangguniang Bayan of Tarlac, approving
the Final Development Permit for the Luisita Industrial Park II Project;
(e) Development Permit dated 13 August 1997 for the proposed Luisita Industrial Park II
Project issued by the Office of the Sangguniang Bayan of Tarlac;155
(f) DENR Environmental Compliance Certificate dated 01 October 1997 issued for the
proposed project of building an industrial complex on three hundred (300) hectares of
industrial land;156
(g) Certificate of Registration No. 00794 dated 26 December 1997 issued by the HLURB on
the project of Luisita Industrial Park II with an area of three million (3,000,000) square
meters;157
(h) License to Sell No. 0076 dated 26 December 1997 issued by the HLURB authorizing the
sale of lots in the Luisita Industrial Park II;
(i) Proclamation No. 1207 dated 22 April 1998 entitled "Declaring Certain Parcels of Private
Land in Barangay San Miguel, Municipality of Tarlac, Province of Tarlac, as a Special
Economic Zone pursuant to Republic Act No. 7916," designating the Luisita Industrial Park II
consisting of three hundred hectares (300 has.) of industrial land as a Special Economic Zone;
and
(j) Certificate of Registration No. EZ-98-05 dated 07 May 1998 issued by the PEZA, stating
that pursuant to Presidential Proclamation No. 1207 dated 22 April 1998 and Republic Act No.
7916, LIPCO has been registered as an Ecozone Developer/Operator of Luisita Industrial Park
II located in San Miguel, Tarlac, Tarlac.
While a mere reclassification of a covered agricultural land or its inclusion in an economic
zone does not automatically allow the corporate or individual landowner to change its use,158
the reclassification process is a prima facie indicium that the land has ceased to be
economically feasible and sound for agricultural uses. And if only to stress, DAR Conversion
Order No. 030601074-764-(95) issued in 1996 by then DAR Secretary Garilao had effectively
converted 500 hectares of hacienda land from agricultural to industrial/commercial use and
authorized their disposition.
In relying upon the above-mentioned approvals, proclamation and conversion order, both
RCBC and LIPCO cannot be considered at fault for believing that certain portions of Hacienda

44

Luisita are industrial/commercial lands and are, thus, outside the ambit of CARP. The PARC,
and consequently DAR, gravely abused its discretion when it placed LIPCOs and RCBCs
property which once formed part of Hacienda Luisita under the CARP compulsory acquisition
scheme via the assailed Notice of Coverage.
As regards the 80.51-hectare land transferred to the government for use as part of the SCTEX,
this should also be excluded from the compulsory agrarian reform coverage considering that
the transfer was consistent with the governments exercise of the power of eminent domain159
and none of the parties actually questioned the transfer.
While We affirm the revocation of the SDP on Hacienda Luisita subject of PARC Resolution
Nos. 2005-32-01 and 2006-34-01, the Court cannot close its eyes to certain "operative facts"
that had occurred in the interim. Pertinently, the "operative fact" doctrine realizes that, in
declaring a law or executive action null and void, or, by extension, no longer without force and
effect, undue harshness and resulting unfairness must be avoided. This is as it should
realistically be, since rights might have accrued in favor of natural or juridical persons and
obligations justly incurred in the meantime.160 The actual existence of a statute or executive
act is, prior to such a determination, an operative fact and may have consequences which
cannot justly be ignored; the past cannot always be erased by a new judicial declaration.161
The oft-cited De Agbayani v. Philippine National Bank162 discussed the effect to be given to
a legislative or executive act subsequently declared invalid:
x x x It does not admit of doubt that prior to the declaration of nullity such challenged
legislative or executive act must have been in force and had to be complied with. This is so as
until after the judiciary, in an appropriate case, declares its invalidity, it is entitled to obedience
and respect. Parties may have acted under it and may have changed their positions. What could
be more fitting than that in a subsequent litigation regard be had to what has been done while
such legislative or executive act was in operation and presumed to be valid in all respects. It is
now accepted as a doctrine that prior to its being nullified, its existence as a fact must be
reckoned with. This is merely to reflect awareness that precisely because the judiciary is the
government organ which has the final say on whether or not a legislative or executive measure
is valid, a period of time may have elapsed before it can exercise the power of judicial review
that may lead to a declaration of nullity. It would be to deprive the law of its quality of fairness
and justice then, if there be no recognition of what had transpired prior to such adjudication.

A view, however, has been advanced that the operative fact doctrine is of minimal or
altogether without relevance to the instant case as it applies only in considering the effects of a
declaration of unconstitutionality of a statute, and not of a declaration of nullity of a contract.
This is incorrect, for this view failed to consider is that it is NOT the SDOA dated May 11,
1989 which was revoked in the instant case. Rather, it is PARCs approval of the HLIs
Proposal for Stock Distribution under CARP which embodied the SDP that was nullified.
A recall of the antecedent events would show that on May 11, 1989, Tadeco, HLI, and the
qualified FWBs executed the SDOA. This agreement provided the basis and mechanics of the
SDP that was subsequently proposed and submitted to DAR for approval. It was only after its
review that the PARC, through then Sec. Defensor-Santiago, issued the assailed Resolution
No. 89-12-2 approving the SDP. Considerably, it is not the SDOA which gave legal force and
effect to the stock distribution scheme but instead, it is the approval of the SDP under the
PARC Resolution No. 89-12-2 that gave it its validity.
The above conclusion is bolstered by the fact that in Sec. Pangandamans recommendation to
the PARC Excom, what he proposed is the recall/revocation of PARC Resolution No. 89-12-2
approving HLIs SDP, and not the revocation of the SDOA. Sec. Pangandamans
recommendation was favorably endorsed by the PARC Validation Committee to the PARC
Excom, and these recommendations were referred to in the assailed Resolution No. 2005-3201. Clearly, it is not the SDOA which was made the basis for the implementation of the stock
distribution scheme.
That the operative fact doctrine squarely applies to executive actsin this case, the approval
by PARC of the HLI proposal for stock distributionis well-settled in our jurisprudence. In
Chavez v. National Housing Authority,163 We held:
Petitioner postulates that the "operative fact" doctrine is inapplicable to the present case
because it is an equitable doctrine which could not be used to countenance an inequitable
result that is contrary to its proper office.
On the other hand, the petitioner Solicitor General argues that the existence of the various
agreements implementing the SMDRP is an operative fact that can no longer be disturbed or
simply ignored, citing Rieta v. People of the Philippines.
The argument of the Solicitor General is meritorious.

In the language of an American Supreme Court decision: "The actual existence of a statute,
prior to such a determination of [unconstitutionality], is an operative fact and may have
consequences which cannot justly be ignored. The past cannot always be erased by a new
judicial declaration. The effect of the subsequent ruling as to invalidity may have to be
considered in various aspects,with respect to particular relations, individual and corporate,
and particular conduct, private and official." x x x
Given the above perspective and considering that more than two decades had passed since the
PARCs approval of the HLIs SDP, in conjunction with numerous activities performed in
good faith by HLI, and the reliance by the FWBs on the legality and validity of the PARCapproved SDP, perforce, certain rights of the parties, more particularly the FWBs, have to be
respected pursuant to the application in a general way of the operative fact doctrine.

The "operative fact" doctrine is embodied in De Agbayani v. Court of Appeals, wherein it is


stated that a legislative or executive act, prior to its being declared as unconstitutional by the
courts, is valid and must be complied with, thus:
xxx

xxx

xxx

This doctrine was reiterated in the more recent case of City of Makati v. Civil Service
Commission, wherein we ruled that:
Moreover, we certainly cannot nullify the City Government's order of suspension, as we have
no reason to do so, much less retroactively apply such nullification to deprive private
respondent of a compelling and valid reason for not filing the leave application. For as we

45

have held, a void act though in law a mere scrap of paper nonetheless confers legitimacy upon
past acts or omissions done in reliance thereof. Consequently, the existence of a statute or
executive order prior to its being adjudged void is an operative fact to which legal
consequences are attached. It would indeed be ghastly unfair to prevent private respondent
from relying upon the order of suspension in lieu of a formal leave application. (Citations
omitted; Emphasis supplied.)
The applicability of the operative fact doctrine to executive acts was further explicated by this
Court in Rieta v. People,164 thus:
Petitioner contends that his arrest by virtue of Arrest Search and Seizure Order (ASSO) No.
4754 was invalid, as the law upon which it was predicated General Order No. 60, issued by
then President Ferdinand E. Marcos was subsequently declared by the Court, in Taada v.
Tuvera, 33 to have no force and effect. Thus, he asserts, any evidence obtained pursuant
thereto is inadmissible in evidence.
We do not agree. In Taada, the Court addressed the possible effects of its declaration of the
invalidity of various presidential issuances. Discussing therein how such a declaration might
affect acts done on a presumption of their validity, the Court said:
". . .. In similar situations in the past this Court had taken the pragmatic and realistic course set
forth in Chicot County Drainage District vs. Baxter Bank to wit:
The courts below have proceeded on the theory that the Act of Congress, having been found
to be unconstitutional, was not a law; that it was inoperative, conferring no rights and
imposing no duties, and hence affording no basis for the challenged decree. . . . It is quite
clear, however, that such broad statements as to the effect of a determination of
unconstitutionality must be taken with qualifications. The actual existence of a statute, prior to
[the determination of its invalidity], is an operative fact and may have consequences which
cannot justly be ignored. The past cannot always be erased by a new judicial declaration. The
effect of the subsequent ruling as to invalidity may have to be considered in various aspects
with respect to particular conduct, private and official. Questions of rights claimed to have
become vested, of status, of prior determinations deemed to have finality and acted upon
accordingly, of public policy in the light of the nature both of the statute and of its previous
application, demand examination. These questions are among the most difficult of those which
have engaged the attention of courts, state and federal, and it is manifest from numerous
decisions that an all-inclusive statement of a principle of absolute retroactive invalidity cannot
be justified.
xxx

xxx

xxx

"Similarly, the implementation/enforcement of presidential decrees prior to their publication in


the Official Gazette is an operative fact which may have consequences which cannot be justly
ignored. The past cannot always be erased by a new judicial declaration . . . that an allinclusive statement of a principle of absolute retroactive invalidity cannot be justified."
The Chicot doctrine cited in Taada advocates that, prior to the nullification of a statute, there
is an imperative necessity of taking into account its actual existence as an operative fact
negating the acceptance of "a principle of absolute retroactive invalidity." Whatever was done

while the legislative or the executive act was in operation should be duly recognized and
presumed to be valid in all respects. The ASSO that was issued in 1979 under General Order
No. 60 long before our Decision in Taada and the arrest of petitioner is an operative
fact that can no longer be disturbed or simply ignored. (Citations omitted; Emphasis supplied.)
To reiterate, although the assailed Resolution No. 2005-32-01 states that it revokes or recalls
the SDP, what it actually revoked or recalled was the PARCs approval of the SDP embodied
in Resolution No. 89-12-2. Consequently, what was actually declared null and void was an
executive act, PARC Resolution No. 89-12-2,165 and not a contract (SDOA). It is, therefore,
wrong to say that it was the SDOA which was annulled in the instant case. Evidently, the
operative fact doctrine is applicable.
IV.
While the assailed PARC resolutions effectively nullifying the Hacienda Luisita SDP are
upheld, the revocation must, by application of the operative fact principle, give way to the
right of the original 6,296 qualified FWBs to choose whether they want to remain as HLI
stockholders or not. The Court cannot turn a blind eye to the fact that in 1989, 93% of the
FWBs agreed to the SDOA (or the MOA), which became the basis of the SDP approved by
PARC per its Resolution No. 89-12-2 dated November 21, 1989. From 1989 to 2005, the
FWBs were said to have received from HLI salaries and cash benefits, hospital and medical
benefits, 240-square meter homelots, 3% of the gross produce from agricultural lands, and 3%
of the proceeds of the sale of the 500-hectare converted land and the 80.51-hectare lot sold to
SCTEX. HLI shares totaling 118,391,976.85 were distributed as of April 22, 2005.166 On
August 6, 20l0, HLI and private respondents submitted a Compromise Agreement, in which
HLI gave the FWBs the option of acquiring a piece of agricultural land or remain as HLI
stockholders, and as a matter of fact, most FWBs indicated their choice of remaining as
stockholders. These facts and circumstances tend to indicate that some, if not all, of the FWBs
may actually desire to continue as HLI shareholders. A matter best left to their own discretion.
With respect to the other FWBs who were not listed as qualified beneficiaries as of November
21, 1989 when the SDP was approved, they are not accorded the right to acquire land but
shall, however, continue as HLI stockholders. All the benefits and homelots167 received by
the 10,502 FWBs (6,296 original FWBs and 4,206 non-qualified FWBs) listed as HLI
stockholders as of August 2, 2010 shall be respected with no obligation to refund or return
them since the benefits (except the homelots) were received by the FWBs as farmhands in the
agricultural enterprise of HLI and other fringe benefits were granted to them pursuant to the
existing collective bargaining agreement with Tadeco. If the number of HLI shares in the
names of the original FWBs who opt to remain as HLI stockholders falls below the guaranteed
allocation of 18,804.32 HLI shares per FWB, the HLI shall assign additional shares to said
FWBs to complete said minimum number of shares at no cost to said FWBs.
With regard to the homelots already awarded or earmarked, the FWBs are not obliged to
return the same to HLI or pay for its value since this is a benefit granted under the SDP. The
homelots do not form part of the 4,915.75 hectares covered by the SDP but were taken from
the 120.9234 hectare residential lot owned by Tadeco. Those who did not receive the homelots
as of the revocation of the SDP on December 22, 2005 when PARC Resolution No. 2005-3201 was issued, will no longer be entitled to homelots. Thus, in the determination of the

46

ultimate agricultural land that will be subjected to land distribution, the aggregate area of the
homelots will no longer be deducted.
There is a claim that, since the sale and transfer of the 500 hectares of land subject of the
August 14, 1996 Conversion Order and the 80.51-hectare SCTEX lot came after compulsory
coverage has taken place, the FWBs should have their corresponding share of the lands value.
There is merit in the claim. Since the SDP approved by PARC Resolution No. 89-12-2 has
been nullified, then all the lands subject of the SDP will automatically be subject of
compulsory coverage under Sec. 31 of RA 6657. Since the Court excluded the 500-hectare lot
subject of the August 14, 1996 Conversion Order and the 80.51-hectare SCTEX lot acquired
by the government from the area covered by SDP, then HLI and its subsidiary, Centennary,
shall be liable to the FWBs for the price received for said lots. HLI shall be liable for the value
received for the sale of the 200-hectare land to LRC in the amount of PhP 500,000,000 and the
equivalent value of the 12,000,000 shares of its subsidiary, Centennary, for the 300-hectare lot
sold to LIPCO for the consideration of PhP 750,000,000. Likewise, HLI shall be liable for PhP
80,511,500 as consideration for the sale of the 80.51-hectare SCTEX lot.
We, however, note that HLI has allegedly paid 3% of the proceeds of the sale of the 500hectare land and 80.51-hectare SCTEX lot to the FWBs. We also take into account the
payment of taxes and expenses relating to the transfer of the land and HLIs statement that
most, if not all, of the proceeds were used for legitimate corporate purposes. In order to
determine once and for all whether or not all the proceeds were properly utilized by HLI and
its subsidiary, Centennary, DAR will engage the services of a reputable accounting firm to be
approved by the parties to audit the books of HLI to determine if the proceeds of the sale of
the 500-hectare land and the 80.51-hectare SCTEX lot were actually used for legitimate
corporate purposes, titling expenses and in compliance with the August 14, 1996 Conversion
Order. The cost of the audit will be shouldered by HLI. If after such audit, it is determined that
there remains a balance from the proceeds of the sale, then the balance shall be distributed to
the qualified FWBs.
A view has been advanced that HLI must pay the FWBs yearly rent for use of the land from
1989. We disagree. It should not be forgotten that the FWBs are also stockholders of HLI, and
the benefits acquired by the corporation from its possession and use of the land ultimately
redounded to the FWBs benefit based on its business operations in the form of salaries, and
other fringe benefits under the CBA. To still require HLI to pay rent to the FWBs will result in
double compensation.
For sure, HLI will still exist as a corporation even after the revocation of the SDP although it
will no longer be operating under the SDP, but pursuant to the Corporation Code as a private
stock corporation. The non-agricultural assets amounting to PhP 393,924,220 shall remain
with HLI, while the agricultural lands valued at PhP 196,630,000 with an original area of
4,915.75 hectares shall be turned over to DAR for distribution to the FWBs. To be deducted
from said area are the 500-hectare lot subject of the August 14, 1996 Conversion Order, the
80.51-hectare SCTEX lot, and the total area of 6,886.5 square meters of individual lots that
should have been distributed to FWBs by DAR had they not opted to stay in HLI.
HLI shall be paid just compensation for the remaining agricultural land that will be transferred
to DAR for land distribution to the FWBs. We find that the date of the "taking" is November
21, 1989, when PARC approved HLIs SDP per PARC Resolution No. 89-12-2. DAR shall

coordinate with LBP for the determination of just compensation. We cannot use May 11, 1989
when the SDOA was executed, since it was the SDP, not the SDOA, that was approved by
PARC.
The instant petition is treated pro hac vice in view of the peculiar facts and circumstances of
the case.
WHEREFORE, the instant petition is DENIED. PARC Resolution No. 2005-32-01 dated
December 22, 2005 and Resolution No. 2006-34-01 dated May 3, 2006, placing the lands
subject of HLIs SDP under compulsory coverage on mandated land acquisition scheme of the
CARP, are hereby AFFIRMED with the MODIFICATION that the original 6,296 qualified
FWBs shall have the option to remain as stockholders of HLI. DAR shall immediately
schedule meetings with the said 6,296 FWBs and explain to them the effects, consequences
and legal or practical implications of their choice, after which the FWBs will be asked to
manifest, in secret voting, their choices in the ballot, signing their signatures or placing their
thumbmarks, as the case may be, over their printed names.
Of the 6,296 FWBs, he or she who wishes to continue as an HLI stockholder is entitled to
18,804.32 HLI shares, and, in case the HLI shares already given to him or her is less than
18,804.32 shares, the HLI is ordered to issue or distribute additional shares to complete said
prescribed number of shares at no cost to the FWB within thirty (30) days from finality of this
Decision. Other FWBs who do not belong to the original 6,296 qualified beneficiaries are not
entitled to land distribution and shall remain as HLI shareholders. All salaries, benefits, 3%
production share and 3% share in the proceeds of the sale of the 500-hectare converted land
and the 80.51-hectare SCTEX lot and homelots already received by the 10,502 FWBs,
composed of 6,296 original FWBs and 4,206 non-qualified FWBs, shall be respected with no
obligation to refund or return them.
Within thirty (30) days after determining who from among the original FWBs will stay as
stockholders, DAR shall segregate from the HLI agricultural land with an area of 4,915.75
hectares subject of PARCs SDP-approving Resolution No. 89-12-2 the following: (a) the 500hectare lot subject of the August 14, l996 Conversion Order; (b) the 80.51-hectare lot sold to,
or acquired by, the government as part of the SCTEX complex; and (c) the aggregate area of
6,886.5 square meters of individual lots that each FWB is entitled to under the CARP had he
or she not opted to stay in HLI as a stockholder. After the segregation process, as indicated, is
done, the remaining area shall be turned over to DAR for immediate land distribution to the
original qualified FWBs who opted not to remain as HLI stockholders.
The aforementioned area composed of 6,886.5-square meter lots allotted to the FWBs who
stayed with the corporation shall form part of the HLI assets.
HLI is directed to pay the 6,296 FWBs the consideration of PhP 500,000,000 received by it
from Luisita Realty, Inc. for the sale to the latter of 200 hectares out of the 500 hectares
covered by the August 14, 1996 Conversion Order, the consideration of PhP 750,000,000
received by its owned subsidiary, Centennary Holdings, Inc. for the sale of the remaining 300
hectares of the aforementioned 500-hectare lot to Luisita Industrial Park Corporation, and the
price of PhP 80,511,500 paid by the government through the Bases Conversion Development
Authority for the sale of the 80.51-hectare lot used for the construction of the SCTEX road
network. From the total amount of PhP 1,330,511,500 (PhP 500,000,000 + PhP 750,000,000 +

47

PhP 80,511,500 = PhP 1,330,511,500) shall be deducted the 3% of the total gross sales from
the production of the agricultural land and the 3% of the proceeds of said transfers that were
paid to the FWBs, the taxes and expenses relating to the transfer of titles to the transferees,
and the expenditures incurred by HLI and Centennary Holdings, Inc. for legitimate corporate
purposes. For this purpose, DAR is ordered to engage the services of a reputable accounting
firm approved by the parties to audit the books of HLI and Centennary Holdings, Inc. to
determine if the PhP 1,330,511,500 proceeds of the sale of the three (3) aforementioned lots
were used or spent for legitimate corporate purposes. Any unspent or unused balance as
determined by the audit shall be distributed to the 6,296 original FWBs.

HLI is entitled to just compensation for the agricultural land that will be transferred to DAR to
be reckoned from November 21, 1989 per PARC Resolution No. 89-12-2. DAR and LBP are
ordered to determine the compensation due to HLI.
DAR shall submit a compliance report after six (6) months from finality of this judgment. It
shall also submit, after submission of the compliance report, quarterly reports on the execution
of this judgment to be submitted within the first 15 days at the end of each quarter, until fully
implemented.
The temporary restraining order is lifted.

Supreme Court
Manila
EN BANC
ANTONIO M. SERRANO,
Petitioner,

G.R. No. 167614

SO ORDERED.
For decades, the toil of solitary migrants has helped lift entire families and communities out of
poverty. Their earnings have built houses, provided health care, equipped schools and planted
the seeds of businesses. They have woven together the world by transmitting ideas and
knowledge from country to country. They have provided the dynamic human link between
cultures, societies and economies. Yet, only recently have we begun to understand not only
how much international migration impacts development, but how smart public policies can
magnify this effect.

Present:

- versus -

PUNO, C.J.,
QUISUMBING,
YNARES-SANTIAGO,
CARPIO,
AUSTRIA-MARTINEZ,
CORONA,
CARPIO MORALES,
TINGA,
CHICO-NAZARIO,
VELASCO, Jr.,
NACHURA,
LEONARDO-DE CASTRO,
BRION, and
PERALTA, JJ.

GALLANT MARITIME SERVICES,


INC. and MARLOW NAVIGATION
CO., INC.,
Promulgated:
Respondents.
March 24, 2009
x----------------------------------------------------------x

DECISION

AUSTRIA-MARTINEZ, J.:

United Nations Secretary-General Ban Ki-Moon


Global Forum on Migration and Development
Brussels, July 10, 2007[1]
For Antonio Serrano (petitioner), a Filipino seafarer, the last clause in the 5 th paragraph of
Section 10, Republic Act (R.A.) No. 8042,[2] to wit:
Sec. 10. Money Claims. - x x x In case of termination of overseas employment without just,
valid or authorized cause as defined by law or contract, the workers shall be entitled to the full
reimbursement of his placement fee with interest of twelve percent (12%) per annum, plus his
salaries for the unexpired portion of his employment contract or for three (3) months for every
year of the unexpired term, whichever is less.
x x x x (Emphasis and underscoring supplied)
does not magnify the contributions of overseas Filipino workers (OFWs) to national
development, but exacerbates the hardships borne by them by unduly limiting their entitlement
in case of illegal dismissal to their lump-sum salary either for the unexpired portion of their
employment contract or for three months for every year of the unexpired term, whichever is
less (subject clause). Petitioner claims that the last clause violates the OFWs' constitutional
rights in that it impairs the terms of their contract, deprives them of equal protection and
denies them due process.
By way of Petition for Review under Rule 45 of the Rules of Court, petitioner assails the
December 8, 2004 Decision[3] and April 1, 2005 Resolution[4] of the Court of Appeals (CA),
which applied the subject clause, entreating this Court to declare the subject clause
unconstitutional.

48

Petitioner was hired by Gallant Maritime Services, Inc. and Marlow Navigation Co., Ltd.
(respondents) under a Philippine Overseas Employment Administration (POEA)-approved
Contract of Employment with the following terms and conditions:
Duration of contract 12 months
Position Chief Officer
Basic monthly salary US$1,400.00
Hours of work 48.0 hours per week
Overtime US$700.00 per month
Vacation leave with pay 7.00 days per month[5]
On March 19, 1998, the date of his departure, petitioner was constrained to accept a
downgraded employment contract for the position of Second Officer with a monthly salary of
US$1,000.00, upon the assurance and representation of respondents that he would be made
Chief Officer by the end of April 1998.[6]
Respondents did not deliver on their promise to make petitioner Chief Officer.[7] Hence,
petitioner refused to stay on as Second Officer and was repatriated to the Philippines on May
26, 1998.[8]
Petitioner's employment contract was for a period of 12 months or from March 19, 1998 up to
March 19, 1999, but at the time of his repatriation on May 26, 1998, he had served only two
(2) months and seven (7) days of his contract, leaving an unexpired portion of nine (9) months
and twenty-three (23) days.
Petitioner filed with the Labor Arbiter (LA) a Complaint [9] against respondents for constructive
dismissal and for payment of his money claims in the total amount of US$26,442.73, broken
down as follows:
May
27/31,
1998 (5
days) incl.
Leave pay
June
01/30,
1998
July
01/31,
1998
August
01/31,
1998
Sept.
01/30,
1998
Oct. 01/31
, 1998
Nov.
01/30,

US$ 413.90

1998
Dec.
01/31,
1998
Jan. 01/31
, 1999
Feb.
01/28,
1999
Mar. 1/19,
1999 (19
days) incl.
leave pay

2,590.00
2,590.00
2,590.00
1,640.00

-------------------------------------------------------------------------------25,382.23
Amount
adjusted
to chief
mate's
salary
(March
19/31,
1998 to
April
1/30,
1998) +
TOTAL
CLAIM

1,060.50[10]

--------------------------------------------------------------------------------------------US$ 26,442.73[11]

as well as moral and exemplary damages and attorney's fees.


2,590.00

The LA rendered a Decision dated July 15, 1999, declaring the dismissal of petitioner illegal
and awarding him monetary benefits, to wit:

2,590.00

WHEREFORE, premises considered, judgment is hereby rendered declaring that the dismissal
of the complainant (petitioner) by the respondents in the above-entitled case was illegal and
the respondents are hereby ordered to pay the complainant [petitioner], jointly and severally,
in Philippine Currency, based on the rate of exchange prevailing at the time of payment, the
amount of EIGHT THOUSAND SEVEN HUNDRED SEVENTY U.S. DOLLARS (US
$8,770.00), representing the complainants salary for three (3) months of the unexpired portion
of the aforesaid contract of employment.

2,590.00
2,590.00
2,590.00
2,590.00

The respondents are likewise ordered to pay the complainant [petitioner], jointly and severally,
in Philippine Currency, based on the rate of exchange prevailing at the time of payment, the
amount of FORTY FIVE U.S. DOLLARS (US$ 45.00),[12] representing the complainants
claim for a salary differential. In addition, the respondents are hereby ordered to pay the
complainant, jointly and severally, in Philippine Currency, at the exchange rate prevailing at

49

the time of payment, the complainants (petitioner's) claim for attorneys fees equivalent to ten
percent (10%) of the total amount awarded to the aforesaid employee under this Decision.
The claims of the complainant for moral and exemplary damages are hereby DISMISSED for
lack of merit.

Petitioner filed a Petition for Certiorari[23] with the CA, reiterating the constitutional challenge
against the subject clause.[24] After initially dismissing the petition on a technicality, the CA
eventually gave due course to it, as directed by this Court in its Resolution dated August 7,
2003 which granted the petition for certiorari, docketed as G.R. No. 151833, filed by
petitioner.

All other claims are hereby DISMISSED.

In a Decision dated December 8, 2004, the CA affirmed the NLRC ruling on the reduction of
the applicable salary rate; however, the CA skirted the constitutional issue raised by petitioner.

SO ORDERED.[13] (Emphasis supplied)

[25]

In awarding petitioner a lump-sum salary of US$8,770.00, the LA based his computation on


the salary period of three months only -- rather than the entire unexpired portion of nine
months and 23 days of petitioner's employment contract - applying the subject clause.
However, the LA applied the salary rate of US$2,590.00, consisting of petitioner's [b]asic
salary, US$1,400.00/month + US$700.00/month, fixed overtime pay, + US$490.00/month,
vacation leave pay = US$2,590.00/compensation per month.[14]

His Motion for Reconsideration[26] having been denied by the CA,[27] petitioner brings his cause
to this Court on the following grounds:

Respondents appealed[15] to the National Labor Relations Commission (NLRC) to question the
finding of the LA that petitioner was illegally dismissed.
Petitioner also appealed[16] to the NLRC on the sole issue that the LA erred in not applying the
ruling of the Court in Triple Integrated Services, Inc. v. National Labor Relations
Commission[17] that in case of illegal dismissal, OFWs are entitled to their salaries for the
unexpired portion of their contracts.[18]
In a Decision dated June 15, 2000, the NLRC modified the LA Decision, to wit:
WHEREFORE, the Decision dated 15 July 1999 is MODIFIED. Respondents are hereby
ordered to pay complainant, jointly and severally, in Philippine currency, at the prevailing rate
of exchange at the time of payment the following:
1. Three (3) months salary
$1,400 x 3 US$4,200.00
2. Salary differential 45.00
US$4,245.00
3. 10% Attorneys fees 424.50
TOTAL US$4,669.50
The other findings are affirmed.
SO ORDERED.[19]
The NLRC corrected the LA's computation of the lump-sum salary awarded to petitioner by
reducing the applicable salary rate from US$2,590.00 to US$1,400.00 because R.A. No. 8042
does not provide for the award of overtime pay, which should be proven to have been actually
performed, and for vacation leave pay.[20]
Petitioner filed a Motion for Partial Reconsideration, but this time he questioned the
constitutionality of the subject clause.[21] The NLRC denied the motion.[22]

I
The Court of Appeals and the labor tribunals have decided the case in a way not in accord with
applicable decision of the Supreme Court involving similar issue of granting unto the migrant
worker back wages equal to the unexpired portion of his contract of employment instead of
limiting it to three (3) months
II
In the alternative that the Court of Appeals and the Labor Tribunals were merely applying their
interpretation of Section 10 of Republic Act No. 8042, it is submitted that the Court of Appeals
gravely erred in law when it failed to discharge its judicial duty to decide questions of
substance not theretofore determined by the Honorable Supreme Court, particularly, the
constitutional issues raised by the petitioner on the constitutionality of said law, which
unreasonably, unfairly and arbitrarily limits payment of the award for back wages of overseas
workers to three (3) months.
III
Even without considering the constitutional limitations [of] Sec. 10 of Republic Act No. 8042,
the Court of Appeals gravely erred in law in excluding from petitioners award the overtime
pay and vacation pay provided in his contract since under the contract they form part of his
salary.[28]
On February 26, 2008, petitioner wrote the Court to withdraw his petition as he is already old
and sickly, and he intends to make use of the monetary award for his medical treatment and
medication.[29] Required to comment, counsel for petitioner filed a motion, urging the court to
allow partial execution of the undisputed monetary award and, at the same time, praying that
the constitutional question be resolved.[30]
Considering that the parties have filed their respective memoranda, the Court now takes up the
full merit of the petition mindful of the extreme importance of the constitutional question
raised therein.
On the first and second issues
The unanimous finding of the LA, NLRC and CA that the dismissal of petitioner was illegal is
not disputed. Likewise not disputed is the salary differential of US$45.00 awarded to

50

petitioner in all three fora. What remains disputed is only the computation of the lump-sum
salary to be awarded to petitioner by reason of his illegal dismissal.
Applying the subject clause, the NLRC and the CA computed the lump-sum salary of
petitioner at the monthly rate of US$1,400.00 covering the period of three months out of the
unexpired portion of nine months and 23 days of his employment contract or a total of
US$4,200.00.
Impugning the constitutionality of the subject clause, petitioner contends that, in addition to
the US$4,200.00 awarded by the NLRC and the CA, he is entitled to US$21,182.23 more or a
total of US$25,382.23, equivalent to his salaries for the entire nine months and 23 days left of
his employment contract, computed at the monthly rate of US$2,590.00. [31]
The Arguments of Petitioner
Petitioner contends that the subject clause is unconstitutional because it unduly impairs the
freedom of OFWs to negotiate for and stipulate in their overseas employment contracts a
determinate employment period and a fixed salary package. [32] It also impinges on the equal
protection clause, for it treats OFWs differently from local Filipino workers (local workers) by
putting a cap on the amount of lump-sum salary to which OFWs are entitled in case of illegal
dismissal, while setting no limit to the same monetary award for local workers when their
dismissal is declared illegal; that the disparate treatment is not reasonable as there is no
substantial distinction between the two groups;[33] and that it defeats Section 18,[34] Article II of
the Constitution which guarantees the protection of the rights and welfare of all Filipino
workers, whether deployed locally or overseas. [35]
Moreover, petitioner argues that the decisions of the CA and the labor tribunals are not in line
with existing jurisprudence on the issue of money claims of illegally dismissed
OFWs. Though there are conflicting rulings on this, petitioner urges the Court to sort them out
for the guidance of affected OFWs.[36]
Petitioner further underscores that the insertion of the subject clause into R.A. No. 8042 serves
no other purpose but to benefit local placement agencies. He marks the statement made by the
Solicitor General in his Memorandum, viz.:
Often, placement agencies, their liability being solidary, shoulder the payment of money
claims in the event that jurisdiction over the foreign employer is not acquired by the court or if
the foreign employer reneges on its obligation. Hence, placement agencies that are in good
faith and which fulfill their obligations are unnecessarily penalized for the acts of the foreign
employer. To protect them and to promote their continued helpful contribution in deploying
Filipino migrant workers, liability for money claims was reduced under Section 10 of R.A. No.
8042. [37] (Emphasis supplied)
Petitioner argues that in mitigating the solidary liability of placement agencies, the subject
clause sacrifices the well-being of OFWs. Not only that, the provision makes foreign
employers better off than local employers because in cases involving the illegal dismissal of
employees, foreign employers are liable for salaries covering a maximum of only three months
of the unexpired employment contract while local employers are liable for the full lump-sum
salaries of their employees. As petitioner puts it:
In terms of practical application, the local employers are not limited to the amount of
backwages they have to give their employees they have illegally dismissed, following well-

entrenched and unequivocal jurisprudence on the matter. On the other hand, foreign employers
will only be limited to giving the illegally dismissed migrant workers the maximum of three
(3) months unpaid salaries notwithstanding the unexpired term of the contract that can be more
than three (3) months.[38]
Lastly, petitioner claims that the subject clause violates the due process clause, for it deprives
him of the salaries and other emoluments he is entitled to under his fixed-period employment
contract.[39]
The Arguments of Respondents
In their Comment and Memorandum, respondents contend that the constitutional issue should
not be entertained, for this was belatedly interposed by petitioner in his appeal before the CA,
and not at the earliest opportunity, which was when he filed an appeal before the NLRC. [40]
The Arguments of the Solicitor General
The Solicitor General (OSG)[41] points out that as R.A. No. 8042 took effect on July 15, 1995,
its provisions could not have impaired petitioner's 1998 employment contract. Rather, R.A.
No. 8042 having preceded petitioner's contract, the provisions thereof are deemed part of the
minimum terms of petitioner's employment, especially on the matter of money claims, as this
was not stipulated upon by the parties.[42]
Moreover, the OSG emphasizes that OFWs and local workers differ in terms of the nature of
their employment, such that their rights to monetary benefits must necessarily be treated
differently. The OSG enumerates the essential elements that distinguish OFWs from local
workers: first, while local workers perform their jobs within Philippine territory, OFWs
perform their jobs for foreign employers, over whom it is difficult for our courts to acquire
jurisdiction, or against whom it is almost impossible to enforce judgment; and second, as held
in Coyoca v. National Labor Relations Commission[43] and Millares v. National Labor
Relations Commission,[44] OFWs are contractual employees who can never acquire regular
employment status, unlike local workers who are or can become regular employees. Hence,
the OSG posits that there are rights and privileges exclusive to local workers, but not available
to OFWs; that these peculiarities make for a reasonable and valid basis for the differentiated
treatment under the subject clause of the money claims of OFWs who are illegally
dismissed. Thus, the provision does not violate the equal protection clause nor Section 18,
Article II of the Constitution.[45]
Lastly, the OSG defends the rationale behind the subject clause as a police power measure
adopted to mitigate the solidary liability of placement agencies for this redounds to the benefit
of the migrant workers whose welfare the government seeks to promote. The survival of
legitimate placement agencies helps [assure] the government that migrant workers are
properly deployed and are employed under decent and humane conditions. [46]
The Court's Ruling
The Court sustains petitioner on the first and second issues.
When the Court is called upon to exercise its power of judicial review of the acts of its coequals, such as the Congress, it does so only when these conditions obtain: (1) that there is an

51

actual case or controversy involving a conflict of rights susceptible of judicial determination;


[47]
(2) that the constitutional question is raised by a proper party[48] and at the earliest
opportunity;[49] and (3) that the constitutional question is the very lis mota of the case,
[50]
otherwise the Court will dismiss the case or decide the same on some other ground. [51]
Without a doubt, there exists in this case an actual controversy directly involving petitioner
who is personally aggrieved that the labor tribunals and the CA computed his monetary award
based on the salary period of three months only as provided under the subject clause.
The constitutional challenge is also timely. It should be borne in mind that the requirement that
a constitutional issue be raised at the earliest opportunity entails the interposition of the issue
in the pleadings before a competent court, such that, if the issue is not raised in the pleadings
before that competent court, it cannot be considered at the trial and, if not considered in the
trial, it cannot be considered on appeal.[52] Records disclose that the issue on the
constitutionality of the subject clause was first raised, not in petitioner's appeal with the
NLRC, but in his Motion for Partial Reconsideration with said labor tribunal, [53] and reiterated
in his Petition for Certiorari before the CA.[54]Nonetheless, the issue is deemed seasonably
raised because it is not the NLRC but the CA which has the competence to resolve the
constitutional issue. The NLRC is a labor tribunal that merely performs a quasi-judicial
function its function in the present case is limited to determining questions of fact to which the
legislative policy of R.A. No. 8042 is to be applied and to resolving such questions in
accordance with the standards laid down by the law itself; [55]thus, its foremost function is to
administer and enforce R.A. No. 8042, and not to inquire into the validity of its
provisions. The CA, on the other hand, is vested with the power of judicial review or the
power to declare unconstitutional a law or a provision thereof, such as the subject clause.
[56]
Petitioner's interposition of the constitutional issue before the CA was undoubtedly
seasonable. The CA was therefore remiss in failing to take up the issue in its decision.
The third condition that the constitutional issue be critical to the resolution of the case likewise
obtains because the monetary claim of petitioner to his lump-sum salary for the entire
unexpired portion of his 12-month employment contract, and not just for a period of three
months, strikes at the very core of the subject clause.
Thus, the stage is all set for the determination of the constitutionality of the subject clause.
Does the subject clause violate Section 10,
Article III of the Constitution on non-impairment
of contracts?
The answer is in the negative.
Petitioner's claim that the subject clause unduly interferes with the stipulations in his contract
on the term of his employment and the fixed salary package he will receive [57] is not tenable.
Section 10, Article III of the Constitution provides:
No law impairing the obligation of contracts shall be passed.

The prohibition is aligned with the general principle that laws newly enacted have only a
prospective operation,[58] and cannot affect acts or contracts already perfected; [59] however, as
to laws already in existence, their provisions are read into contracts and deemed a part thereof.
[60]
Thus, the non-impairment clause under Section 10, Article II is limited in application to
laws about to be enacted that would in any way derogate from existing acts or contracts by
enlarging, abridging or in any manner changing the intention of the parties thereto.
As aptly observed by the OSG, the enactment of R.A. No. 8042 in 1995 preceded the
execution of the employment contract between petitioner and respondents in 1998. Hence, it
cannot be argued that R.A. No. 8042, particularly the subject clause, impaired the employment
contract of the parties. Rather, when the parties executed their 1998 employment contract, they
were deemed to have incorporated into it all the provisions of R.A. No. 8042.
But even if the Court were to disregard the timeline, the subject clause may not be declared
unconstitutional on the ground that it impinges on the impairment clause, for the law was
enacted in the exercise of the police power of the State to regulate a business, profession or
calling, particularly the recruitment and deployment of OFWs, with the noble end in view of
ensuring respect for the dignity and well-being of OFWs wherever they may be employed.
[61]
Police power legislations adopted by the State to promote the health, morals, peace,
education, good order, safety, and general welfare of the people are generally applicable not
only to future contracts but even to those already in existence, for all private contracts must
yield to the superior and legitimate measures taken by the State to promote public welfare. [62]
Does the subject clause violate Section 1,
Article III of the Constitution, and Section 18,
Article II and Section 3, Article XIII on labor
as a protected sector?
The answer is in the affirmative.
Section 1, Article III of the Constitution guarantees:
No person shall be deprived of life, liberty, or property without due process of law nor shall
any person be denied the equal protection of the law.
Section 18,[63] Article II and Section 3,[64] Article XIII accord all members of the labor sector,
without distinction as to place of deployment, full protection of their rights and welfare.
To Filipino workers, the rights guaranteed under the foregoing constitutional provisions
translate to economic security and parity: all monetary benefits should be equally enjoyed by
workers of similar category, while all monetary obligations should be borne by them in equal
degree; none should be denied the protection of the laws which is enjoyed by, or spared the
burden imposed on, others in like circumstances.[65]
Such rights are not absolute but subject to the inherent power of Congress to incorporate,
when it sees fit, a system of classification into its legislation; however, to be valid, the
classification must comply with these requirements: 1) it is based on substantial distinctions;
2) it is germane to the purposes of the law; 3) it is not limited to existing conditions only; and
4) it applies equally to all members of the class. [66]

52

There are three levels of scrutiny at which the Court reviews the constitutionality of a
classification embodied in a law: a) the deferential or rational basis scrutiny in which the
challenged classification needs only be shown to be rationally related to serving a legitimate
state interest;[67] b) the middle-tier or intermediate scrutiny in which the government must
show that the challenged classification serves an important state interest and that the
classification is at least substantially related to serving that interest; [68] and c) strict judicial
scrutiny[69] in which a legislative classification which impermissibly interferes with the
exercise of a fundamental right[70] or operates to the peculiar disadvantage of a suspect
class[71] is presumed unconstitutional, and the burden is upon the government to prove that the
classification is necessary to achieve a compelling state interest and that it is the least
restrictive means to protect such interest.[72]
Under American jurisprudence, strict judicial scrutiny is triggered by suspect
classifications[73] based on race[74] or gender[75] but not when the classification is drawn along
income categories.[76]
It is different in the Philippine setting. In Central Bank (now Bangko Sentral ng Pilipinas)
Employee Association, Inc. v. Bangko Sentral ng Pilipinas, [77] the constitutionality of a
provision in the charter of the Bangko Sentral ng Pilipinas (BSP), a government financial
institution (GFI), was challenged for maintaining its rank-and-file employees under the Salary
Standardization Law (SSL), even when the rank-and-file employees of other GFIs had been
exempted from the SSL by their respective charters. Finding that the disputed provision
contained a suspect classification based on salary grade, the Court deliberately employed the
standard of strict judicial scrutiny in its review of the constitutionality of said provision. More
significantly, it was in this case that the Court revealed the broad outlines of its judicial
philosophy, to wit:
Congress retains its wide discretion in providing for a valid classification, and its policies
should be accorded recognition and respect by the courts of justice except when they run afoul
of the Constitution. The deference stops where the classification violates a fundamental right,
or prejudices persons accorded special protection by the Constitution. When these violations
arise, this Court must discharge its primary role as the vanguard of constitutional
guaranties, and require a stricter and more exacting adherence to constitutional
limitations. Rational basis should not suffice.
Admittedly, the view that prejudice to persons accorded special protection by the Constitution
requires a stricter judicial scrutiny finds no support in American or English jurisprudence.
Nevertheless, these foreign decisions and authorities are not per se controlling in this
jurisdiction. At best, they are persuasive and have been used to support many of our decisions.
We should not place undue and fawning reliance upon them and regard them as indispensable
mental crutches without which we cannot come to our own decisions through the employment
of our own endowments. We live in a different ambience and must decide our own problems
in the light of our own interests and needs, and of our qualities and even idiosyncrasies as a
people, and always with our own concept of law and justice. Our laws must be construed in
accordance with the intention of our own lawmakers and such intent may be deduced from the
language of each law and the context of other local legislation related thereto. More
importantly, they must be construed to serve our own public interest which is the be-all and

the end-all of all our laws. And it need not be stressed that our public interest is distinct and
different from others.
xxxx
Further, the quest for a better and more equal world calls for the use of equal protection as a
tool of effective judicial intervention.
Equality is one ideal which cries out for bold attention and action in the Constitution. The
Preamble proclaims equality as an ideal precisely in protest against crushing inequities in
Philippine society. The command to promote social justice in Article II, Section 10, in all
phases of national development, further explicitated in Article XIII, are clear commands to the
State to take affirmative action in the direction of greater equality. x x x [T]here is thus in the
Philippine Constitution no lack of doctrinal support for a more vigorous state effort towards
achieving a reasonable measure of equality.
Our present Constitution has gone further in guaranteeing vital social and economic rights to
marginalized groups of society, including labor. Under the policy of social justice, the law
bends over backward to accommodate the interests of the working class on the humane
justification that those with less privilege in life should have more in law. And the obligation
to afford protection to labor is incumbent not only on the legislative and executive branches
but also on the judiciary to translate this pledge into a living reality. Social justice calls for
the humanization of laws and the equalization of social and economic forces by the State so
that justice in its rational and objectively secular conception may at least be approximated.
xxxx
Under most circumstances, the Court will exercise judicial restraint in deciding questions of
constitutionality, recognizing the broad discretion given to Congress in exercising its
legislative power. Judicial scrutiny would be based on the rational basis test, and the
legislative discretion would be given deferential treatment.
But if the challenge to the statute is premised on the denial of a fundamental right, or the
perpetuation of prejudice against persons favored by the Constitution with special protection,
judicial scrutiny ought to be more strict. A weak and watered down view would call for the
abdication of this Courts solemn duty to strike down any law repugnant to the Constitution
and the rights it enshrines. This is true whether the actor committing the unconstitutional act
is a private person or the government itself or one of its instrumentalities. Oppressive acts will
be struck down regardless of the character or nature of the actor.
xxxx
In the case at bar, the challenged proviso operates on the basis of the salary grade or officeremployee status. It is akin to a distinction based on economic class and status, with the
higher grades as recipients of a benefit specifically withheld from the lower grades. Officers
of the BSP now receive higher compensation packages that are competitive with the industry,
while the poorer, low-salaried employees are limited to the rates prescribed by the SSL. The
implications are quite disturbing: BSP rank-and-file employees are paid the strictly regimented
rates of the SSL while employees higher in rank - possessing higher and better education and

53

opportunities for career advancement - are given higher compensation packages to entice them
to stay. Considering that majority, if not all, the rank-and-file employees consist of people
whose status and rank in life are less and limited, especially in terms of job marketability, it is
they - and not the officers - who have the real economic and financial need for the adjustment .
This is in accord with the policy of the Constitution "to free the people from poverty, provide
adequate social services, extend to them a decent standard of living, and improve the quality
of life for all. Any act of Congress that runs counter to this constitutional desideratum
deserves strict scrutiny by this Court before it can pass muster. (Emphasis supplied)

Prior to Marsaman, however, there were two cases in which the Court made conflicting
rulings on Section 10(5). One was Asian Center for Career and Employment System and
Services v. National Labor Relations Commission (Second Division, October 1998),
[81]
which involved an OFW who was awarded a two-year employment contract, but was
dismissed after working for one year and two months. The LA declared his dismissal illegal
and awarded him SR13,600.00 as lump-sum salary covering eight months, the unexpired
portion of his contract. On appeal, the Court reduced the award to SR3,600.00 equivalent to
his three months salary, this being the lesser value, to wit:

Imbued with the same sense of obligation to afford protection to labor, the Court in the present
case also employs the standard of strict judicial scrutiny, for it perceives in the subject clause a
suspect classification prejudicial to OFWs.

Under Section 10 of R.A. No. 8042, a worker dismissed from overseas employment without
just, valid or authorized cause is entitled to his salary for the unexpired portion of his
employment contract or for three (3) months for every year of the unexpired term,whichever is
less.

Upon cursory reading, the subject clause appears facially neutral, for it applies to all
OFWs. However, a closer examination reveals that the subject clause has a discriminatory
intent against, and an invidious impact on, OFWs at two levels:
First, OFWs with employment contracts of less than one year vis--vis OFWs with employment
contracts of one year or more;
Second, among OFWs with employment contracts of more than one year; and
Third, OFWs vis--vis local workers with fixed-period employment;
OFWs with employment contracts of less than one year vis--vis OFWs with employment
contracts of one year or more
As pointed out by petitioner,[78] it was in Marsaman Manning Agency, Inc. v. National Labor
Relations Commission[79] (Second Division, 1999) that the Court laid down the following rules
on the application of the periods prescribed under Section 10(5) of R.A. No. 804, to wit:
A plain reading of Sec. 10 clearly reveals that the choice of which amount to award an
illegally dismissed overseas contract worker, i.e., whether his salaries for the unexpired
portion of his employment contract or three (3) months salary for every year of the unexpired
term, whichever is less, comes into play only when the employment contract concerned has a
term of at least one (1) year or more. This is evident from the words for every year of the
unexpired term which follows the words salaries x x x for three months. To follow petitioners
thinking that private respondent is entitled to three (3) months salary only simply because it is
the lesser amount is to completely disregard and overlook some words used in the statute
while giving effect to some. This is contrary to the well-established rule in legal hermeneutics
that in interpreting a statute, care should be taken that every part or word thereof be given
effect since the law-making body is presumed to know the meaning of the words employed in
the statue and to have used them advisedly. Ut res magis valeat quam pereat. [80] (Emphasis
supplied)
In Marsaman, the OFW involved was illegally dismissed two months into his 10-month
contract, but was awarded his salaries for the remaining 8 months and 6 days of his contract.

In the case at bar, the unexpired portion of private respondents employment contract is eight
(8) months. Private respondent should therefore be paid his basic salary corresponding to three
(3) months or a total of SR3,600.[82]
Another was Triple-Eight Integrated Services, Inc. v. National Labor Relations
Commission (Third Division, December 1998),[83] which involved an OFW (therein respondent
Erlinda Osdana) who was originally granted a 12-month contract, which was deemed renewed
for another 12 months. After serving for one year and seven-and-a-half months, respondent
Osdana was illegally dismissed, and the Court awarded her salaries for the entire unexpired
portion of four and one-half months of her contract.
The Marsaman interpretation of Section 10(5) has since been adopted in the following cases:

Case Title

Contract
Period

Period of
Service

Unexpired Period

Period Applied in t
Computation of the
Monetary Award

Skippers v.
Maguad[84]

6 months

2 months

4 months

4 months

Bahia Shipping v.
Reynaldo Chua[85]

9 months

8 months

4 months

4 months

Centennial
9 months
Transmarine v. dela
Cruz l[86]

4 months

5 months

5 months

Talidano v.
Falcon[87]

12 months

3 months

9 months

3 months

Univan v.
CA [88]

12 months

3 months

9 months

3 months

Oriental v.

12 months

more than 2

10 months

3 months

54

CA [89]
PCL v. NLRC[90]

months
more than 2
months

more or less 9
months

3 months

Olarte v. Nayona[91] 12 months

21 days

11 months and 9
days

3 months

JSS v.
Ferrer[92]

12 months

16 days

11 months and 24
days

3 months

Pentagon v.
Adelantar[93]

12 months

9 months and 7
days

2 months and 23
days

Phil. Employ v.
Paramio,
et al.[94]

12 months

10 months

2 months

Flourish Maritime
v. Almanzor [95]

12 months

2 years

26 days

Athenna Manpower 1 year, 10


1 month
v. Villanos [96]
months and 28
days

23 months and 4
days

The disparity becomes more aggravating when the Court takes into account jurisprudence
that, prior to the effectivity of R.A. No. 8042 on July 14, 1995, [97] illegally dismissed OFWs, no
matter how long the period of their employment contracts, were entitled to their salaries for
the entire unexpired portions of their contracts. The matrix below speaks for itself:
Case Title

Contract Period

Period of
Service

Unexpired Period

Period Applied in th
Computation of the
Monetary Award

2 years

2 months

22 months

22 months

Phil. Integrated v.
NLRC[99]

2 years

7 days

23 months and 23
days

23 months and 23 da

JGB v. NLC[100]

2 years

9 months

15 months

15 months

2 years
6 months or 3 months Agoy v. NLRC
for each year of
EDI v. NLRC, et al. 2 years
contract
[102]

2 months

22 months

22 months

5 months

19 months

19 months

12 months

4 months

8 months

8 months

12 months

6 months and 22 5 months and 18


days
days

ATCI v. CA,
2 months and 23 days et al.[98]
Unexpired portion

1 year, 9 months
and 28 days

[101]

6 months or 3 months Barros v. NLRC, et


for each year of
al.[103]
contract
Philippine
As the foregoing matrix readily shows, the subject clause classifies OFWs into two
Transmarine v.
categories. The first category includes OFWs with fixed-period employment contracts of less
Carilla[104]
than one year; in case of illegal dismissal, they are entitled to their salaries for the entire
unexpired portion of their contract. The second category consists of OFWs with fixed-period
employment contracts of one year or more; in case of illegal dismissal, they are entitled to
monetary award equivalent to only 3 months of the unexpired portion of their contracts.
The disparity in the treatment of these two groups cannot be discounted. In Skippers, the
respondent OFW worked for only 2 months out of his 6-month contract, but was awarded his
salaries for the remaining 4 months. In contrast, the respondent OFWs
in Oriental and PCL who had also worked for about 2 months out of their 12-month contracts
were awarded their salaries for only 3 months of the unexpired portion of their contracts. Even
the OFWs involved in Talidano and Univan who had worked for a longer period of 3 months
out of their 12-month contracts before being illegally dismissed were awarded their salaries
for only 3 months.
To illustrate the disparity even more vividly, the Court assumes a hypothetical OFW-A with an
employment contract of 10 months at a monthly salary rate of US$1,000.00 and a hypothetical
OFW-B with an employment contract of 15 months with the same monthly salary rate of
US$1,000.00. Both commenced work on the same day and under the same employer, and were
illegally dismissed after one month of work. Under the subject clause, OFW-A will be entitled
to US$9,000.00, equivalent to his salaries for the remaining 9 months of his contract, whereas
OFW-B will be entitled to only US$3,000.00, equivalent to his salaries for 3 months of the
unexpired portion of his contract, instead of US$14,000.00 for the unexpired portion of 14
months of his contract, as the US$3,000.00 is the lesser amount.

5 months and 18 day

It is plain that prior to R.A. No. 8042, all OFWs, regardless of contract periods or the
unexpired portions thereof, were treated alike in terms of the computation of their monetary
benefits in case of illegal dismissal.Their claims were subjected to a uniform rule of
computation: their basic salaries multiplied by the entire unexpired portion of their
employment contracts.
The enactment of the subject clause in R.A. No. 8042 introduced a differentiated rule of
computation of the money claims of illegally dismissed OFWs based on their employment
periods, in the process singling out one category whose contracts have an unexpired portion of
one year or more and subjecting them to the peculiar disadvantage of having their monetary
awards limited to their salaries for 3 months or for the unexpired portion thereof, whichever is
less, but all the while sparing the other category from such prejudice, simply because the
latter's unexpired contracts fall short of one year.
Among OFWs With Employment
Contracts of More Than One Year
Upon closer examination of the terminology employed in the subject clause, the Court now
has misgivings on the accuracy of the Marsaman interpretation.

55

The Court notes that the subject clause or for three (3) months for every year of the unexpired
term, whichever is less contains the qualifying phrases every year and unexpired term. By its
ordinary meaning, the word term means a limited or definite extent of time. [105] Corollarily,
that every year is but part of an unexpired term is significant in many
ways: first, the unexpired term must be at least one year, for if it were any
shorter, there would be no occasion for such unexpired term to be measured by every year;
and second, the original term must be more than one year, for otherwise, whatever would be
the unexpired term thereof will not reach even a year. Consequently, the more decisive factor
in the determination of when the subject clause for three (3) months for every year of the
unexpired term, whichever is less shall apply is not the length of the original contract period as
held in Marsaman,[106]but the length of the unexpired portion of the contract period -- the
subject clause applies in cases when the unexpired portion of the contract period is at least one
year, which arithmetically requires that the original contract period be more than one year.
Viewed in that light, the subject clause creates a sub-layer of discrimination among OFWs
whose contract periods are for more than one year: those who are illegally dismissed with less
than one year left in their contracts shall be entitled to their salaries for the entire unexpired
portion thereof, while those who are illegally dismissed with one year or more remaining in
their contracts shall be covered by the subject clause, and their monetary benefits limited to
their salaries for three months only.
To concretely illustrate the application of the foregoing interpretation of the subject clause, the
Court assumes hypothetical OFW-C and OFW-D, who each have a 24-month contract at a
salary rate of US$1,000.00 per month. OFW-C is illegally dismissed on the 12th month, and
OFW-D, on the 13th month. Considering that there is at least 12 months remaining in the
contract period of OFW-C, the subject clause applies to the computation of the latter's
monetary benefits. Thus, OFW-C will be entitled, not to US$12,000,00 or the latter's total
salaries for the 12 months unexpired portion of the contract, but to the lesser amount of
US$3,000.00 or the latter's salaries for 3 months out of the 12-month unexpired term of the
contract. On the other hand, OFW-D is spared from the effects of the subject clause, for there
are only 11 months left in the latter's contract period. Thus, OFW-D will be entitled to
US$11,000.00, which is equivalent to his/her total salaries for the entire 11-month unexpired
portion.
OFWs vis--vis Local Workers
With Fixed-Period Employment
As discussed earlier, prior to R.A. No. 8042, a uniform system of computation of the monetary
awards of illegally dismissed OFWs was in place. This uniform system was applicable even to
local workers with fixed-term employment.[107]
The earliest rule prescribing a uniform system of computation was actually Article 299 of the
Code of Commerce (1888),[108] to wit:
Article 299. If the contracts between the merchants and their shop clerks and employees
should have been made of a fixed period, none of the contracting parties, without the consent
of the other, may withdraw from the fulfillment of said contract until the termination of the
period agreed upon.

Persons violating this clause shall be subject to indemnify the loss and damage suffered, with
the exception of the provisions contained in the following articles.
In Reyes v. The Compaia Maritima,[109] the Court applied the foregoing provision to determine
the liability of a shipping company for the illegal discharge of its managers prior to the
expiration of their fixed-term employment. The Court therein held the shipping company
liable for the salaries of its managers for the remainder of their fixed-term employment.
There is a more specific rule as far as seafarers are concerned: Article 605 of the Code of
Commerce which provides:
Article 605. If the contracts of the captain and members of the crew with the agent should be
for a definite period or voyage, they cannot be discharged until the fulfillment of their
contracts, except for reasons of insubordination in serious matters, robbery, theft, habitual
drunkenness, and damage caused to the vessel or to its cargo by malice or manifest or proven
negligence.
Article 605 was applied to Madrigal Shipping Company, Inc. v. Ogilvie,[110] in
which the Court held the shipping company liable for the salaries and subsistence allowance of
its illegally dismissed employees for the entire unexpired portion of their employment
contracts.
While Article 605 has remained good law up to the present, [111] Article 299 of the Code of
Commerce was replaced by Art. 1586 of the Civil Code of 1889, to wit:
Article 1586. Field hands, mechanics, artisans, and other laborers hired for a certain time and
for a certain work cannot leave or be dismissed without sufficient cause, before the fulfillment
of the contract. (Emphasis supplied.)
Citing Manresa, the Court in Lemoine v. Alkan[112] read the disjunctive "or" in Article 1586 as a
conjunctive "and" so as to apply the provision to local workers who are employed for a time
certain although for no particular skill.This interpretation of Article 1586 was reiterated
in Garcia Palomar v. Hotel de France Company.[113] And in both Lemoine and Palomar, the
Court adopted the general principle that in actions for wrongful discharge founded on Article
1586, local workers are entitled to recover damages to the extent of the amount stipulated to
be paid to them by the terms of their contract. On the computation of the amount of such
damages, the Court in Aldaz v. Gay[114]held:
The doctrine is well-established in American jurisprudence, and nothing has been brought to
our attention to the contrary under Spanish jurisprudence, that when an employee is
wrongfully discharged it is his duty to seek other employment of the same kind in the same
community, for the purpose of reducing the damages resulting from such wrongful discharge.
However, while this is the general rule, the burden of showing that he failed to make an effort
to secure other employment of a like nature, and that other employment of a like nature was
obtainable, is upon the defendant. When an employee is wrongfully discharged under a
contract of employment his prima facie damage is the amount which he would be entitled to
had he continued in such employment until the termination of the period. (Howard vs. Daly, 61
N. Y., 362; Allen vs. Whitlark, 99 Mich., 492; Farrell vs. School District No. 2, 98 Mich., 43.)
[115]
(Emphasis supplied)
On August 30, 1950, the New Civil Code took effect with new provisions on fixed-term
employment: Section 2 (Obligations with a Period), Chapter 3, Title I, and Sections 2

56

(Contract of Labor) and 3 (Contract for a Piece of Work), Chapter 3, Title VIII, Book IV.
[116]
Much like Article 1586 of the Civil Code of 1889, the new provisions of the Civil Code do
not expressly provide for the remedies available to a fixed-term worker who is illegally
discharged. However, it is noted that in Mackay Radio & Telegraph Co., Inc. v. Rich,[117] the
Court carried over the principles on the payment of damages underlying Article 1586 of the
Civil Code of 1889 and applied the same to a case involving the illegal discharge of a local
worker whose fixed-period employment contract was entered into in 1952, when the new Civil
Code was already in effect.[118]
More significantly, the same principles were applied to cases involving overseas Filipino
workers whose fixed-term employment contracts were illegally terminated, such as in First
Asian Trans & Shipping Agency, Inc. v. Ople,[119] involving seafarers who were illegally
discharged. In Teknika Skills and Trade Services, Inc. v. National Labor Relations
Commission,[120] an OFW who was illegally dismissed prior to the expiration of her fixedperiod employment contract as a baby sitter, was awarded salaries corresponding to the
unexpired portion of her contract. The Court arrived at the same ruling in Anderson v.
National Labor Relations Commission,[121] which involved a foreman hired in 1988 in Saudi
Arabia for a fixed term of two years, but who was illegally dismissed after only nine months
on the job -- the Court awarded him salaries corresponding to 15 months, the unexpired
portion of his contract. In Asia World Recruitment, Inc. v. National Labor Relations
Commission,[122] a Filipino working as a security officer in 1989 in Angola was awarded his
salaries for the remaining period of his 12-month contract after he was wrongfully
discharged. Finally, in Vinta Maritime Co., Inc. v. National Labor Relations Commission,[123] an
OFW whose 12-month contract was illegally cut short in the second month was declared
entitled to his salaries for the remaining 10 months of his contract.
In sum, prior to R.A. No. 8042, OFWs and local workers with fixed-term employment who
were illegally discharged were treated alike in terms of the computation of their money
claims: they were uniformly entitled to their salaries for the entire unexpired portions of their
contracts. But with the enactment of R.A. No. 8042, specifically the adoption of the subject
clause, illegally dismissed OFWs with an unexpired portion of one year or more in their
employment contract have since been differently treated in that their money claims are subject
to a 3-month cap, whereas no such limitation is imposed on local workers with fixed-term
employment.
The Court concludes that the subject clause contains a suspect classification in that, in the
computation of the monetary benefits of fixed-term employees who are illegally discharged, it
imposes a 3-month cap on the claim of OFWs with an unexpired portion of one year or more
in their contracts, but none on the claims of other OFWs or local workers with fixed-term
employment. The subject clause singles out one classification of OFWs and burdens it with a
peculiar disadvantage.
There being a suspect classification involving a vulnerable sector protected by the
Constitution, the Court now subjects the classification to a strict judicial scrutiny, and
determines whether it serves a compelling state interest through the least restrictive means.
What constitutes compelling state interest is measured by the scale of rights and powers
arrayed in the Constitution and calibrated by history.[124] It is akin to the paramount interest of
the state[125] for which some individual liberties must give way, such as the public interest in

safeguarding health or maintaining medical standards, [126] or in maintaining access to


information on matters of public concern.[127]
In the present case, the Court dug deep into the records but found no compelling state interest
that the subject clause may possibly serve.
The OSG defends the subject clause as a police power measure designed to protect the
employment of Filipino seafarers overseas x x x. By limiting the liability to three months [sic],
Filipino seafarers have better chance of getting hired by foreign employers. The limitation also
protects the interest of local placement agencies, which otherwise may be made to shoulder
millions of pesos in termination pay.[128]
The OSG explained further:
Often, placement agencies, their liability being solidary, shoulder the payment of money
claims in the event that jurisdiction over the foreign employer is not acquired by the court or if
the foreign employer reneges on its obligation. Hence, placement agencies that are in good
faith and which fulfill their obligations are unnecessarily penalized for the acts of the foreign
employer. To protect them and to promote their continued helpful contribution in deploying
Filipino migrant workers, liability for money are reduced under Section 10 of RA 8042.
This measure redounds to the benefit of the migrant workers whose welfare the government
seeks to promote. The survival of legitimate placement agencies helps [assure] the government
that migrant workers are properly deployed and are employed under decent and humane
conditions.[129] (Emphasis supplied)
However, nowhere in the Comment or Memorandum does the OSG cite the source of its
perception of the state interest sought to be served by the subject clause.
The OSG locates the purpose of R.A. No. 8042 in the speech of Rep. Bonifacio Gallego in
sponsorship of House Bill No. 14314 (HB 14314), from which the law originated;[130] but the
speech makes no reference to the underlying reason for the adoption of the subject
clause. That is only natural for none of the 29 provisions in HB 14314 resembles the subject
clause.
On the other hand, Senate Bill No. 2077 (SB 2077) contains a provision on money claims, to
wit:
Sec. 10. Money Claims. - Notwithstanding any provision of law to the contrary, the Labor
Arbiters of the National Labor Relations Commission (NLRC) shall have the original and
exclusive jurisdiction to hear and decide, within ninety (90) calendar days after the filing of
the complaint, the claims arising out of an employer-employee relationship or by virtue of the
complaint, the claim arising out of an employer-employee relationship or by virtue of any law
or contract involving Filipino workers for overseas employment including claims for actual,
moral, exemplary and other forms of damages.
The liability of the principal and the recruitment/placement agency or any and all claims under
this Section shall be joint and several.

57

Any compromise/amicable settlement or voluntary agreement on any money claims exclusive


of damages under this Section shall not be less than fifty percent (50%) of such money
claims: Provided, That any installment payments, if applicable, to satisfy any such
compromise or voluntary settlement shall not be more than two (2) months. Any
compromise/voluntary agreement in violation of this paragraph shall be null and void.
Non-compliance with the mandatory period for resolutions of cases provided under this
Section shall subject the responsible officials to any or all of the following penalties:
(1) The salary of any such official who fails to render his decision or resolution within the
prescribed period shall be, or caused to be, withheld until the said official complies therewith;
(2) Suspension for not more than ninety (90) days; or
(3) Dismissal from the service with disqualification to hold any appointive public office for
five (5) years.
Provided, however, That the penalties herein provided shall be without prejudice to any
liability which any such official may have incurred under other existing laws or rules and
regulations as a consequence of violating the provisions of this paragraph.
But significantly, Section 10 of SB 2077 does not provide for any rule on the computation of
money claims.
A rule on the computation of money claims containing the subject clause was inserted and
eventually adopted as the 5th paragraph of Section 10 of R.A. No. 8042. The Court examined
the rationale of the subject clause in the transcripts of the Bicameral Conference Committee
(Conference Committee) Meetings on the Magna Carta on OCWs (Disagreeing Provisions of
Senate Bill No. 2077 and House Bill No. 14314). However, the Court finds no discernible
state interest, let alone a compelling one, that is sought to be protected or advanced by the
adoption of the subject clause.
In fine, the Government has failed to discharge its burden of proving the existence of a
compelling state interest that would justify the perpetuation of the discrimination against
OFWs under the subject clause.
Assuming that, as advanced by the OSG, the purpose of the subject clause is to protect the
employment of OFWs by mitigating the solidary liability of placement agencies, such callous
and cavalier rationale will have to be rejected. There can never be a justification for any form
of government action that alleviates the burden of one sector, but imposes the same burden on
another sector, especially when the favored sector is composed of private businesses such as
placement agencies, while the disadvantaged sector is composed of OFWs whose
protection no less than the Constitution commands. The idea that private business interest can
be elevated to the level of a compelling state interest is odious.
Moreover, even if the purpose of the subject clause is to lessen the solidary liability of
placement agencies vis-a-vis their foreign principals, there are mechanisms already in place
that can be employed to achieve that purpose without infringing on the constitutional rights of
OFWs.

The POEA Rules and Regulations Governing the Recruitment and Employment of LandBased Overseas Workers, dated February 4, 2002, imposes administrative disciplinary
measures on erring foreign employers who default on their contractual obligations to migrant
workers and/or their Philippine agents. These disciplinary measures range from temporary
disqualification to preventive suspension. The POEA Rules and Regulations Governing the
Recruitment and Employment of Seafarers, dated May 23, 2003, contains similar
administrative disciplinary measures against erring foreign employers.
Resort to these administrative measures is undoubtedly the less restrictive means of aiding
local placement agencies in enforcing the solidary liability of their foreign principals.
Thus, the subject clause in the 5th paragraph of Section 10 of R.A. No. 8042 is violative of the
right of petitioner and other OFWs to equal protection.
Further, there would be certain misgivings if one is to approach the declaration of the
unconstitutionality of the subject clause from the lone perspective that the clause directly
violates state policy on labor under Section 3,[131]Article XIII of the Constitution.
While all the provisions of the 1987 Constitution are presumed self-executing, ,[132] there are
some which this Court has declared not judicially enforceable, Article XIII being one,
[133]
particularly Section 3 thereof, the nature of which, this Court, in Agabon v. National Labor
Relations Commission,[134] has described to be not self-actuating:
Thus, the constitutional mandates of protection to labor and security of tenure may be deemed
as self-executing in the sense that these are automatically acknowledged and observed without
need for any enabling legislation. However, to declare that the constitutional provisions are
enough to guarantee the full exercise of the rights embodied therein, and the realization of
ideals therein expressed, would be impractical, if not unrealistic. The espousal of such view
presents the dangerous tendency of being overbroad and exaggerated. The guarantees of "full
protection to labor" and "security of tenure", when examined in isolation, are facially
unqualified, and the broadest interpretation possible suggests a blanket shield in favor of labor
against any form of removal regardless of circumstance. This interpretation implies an
unimpeachable right to continued employment-a utopian notion, doubtless-but still hardly
within the contemplation of the framers. Subsequent legislation is still needed to define the
parameters of these guaranteed rights to ensure the protection and promotion, not only the
rights of the labor sector, but of the employers' as well. Without specific and pertinent
legislation, judicial bodies will be at a loss, formulating their own conclusion to approximate
at least the aims of the Constitution.
Ultimately, therefore, Section 3 of Article XIII cannot, on its own, be a source of a positive
enforceable right to stave off the dismissal of an employee for just cause owing to the failure
to serve proper notice or hearing. As manifested by several framers of the 1987 Constitution,
the provisions on social justice require legislative enactments for their enforceability.
[135]
(Emphasis added)
Thus, Section 3, Article XIII cannot be treated as a principal source of direct enforceable
rights, for the violation of which the questioned clause may be declared unconstitutional. It
may unwittingly risk opening the floodgates of litigation to every worker or union over every
conceivable violation of so broad a concept as social justice for labor.

58

It must be stressed that Section 3, Article XIII does not directly bestow on the working class
any actual enforceable right, but merely clothes it with the status of a sector for whom the
Constitution urges protection through executive or legislative action and judicial
recognition. Its utility is best limited to being an impetus not just for the executive and
legislative departments, but for the judiciary as well, to protect the welfare of the working
class. And it was in fact consistent with that constitutional agenda that the Court in Central
Bank (now Bangko Sentral ng Pilipinas) Employee Association, Inc. v. Bangko Sentral ng
Pilipinas, penned by then Associate Justice now Chief Justice Reynato S. Puno, formulated the
judicial precept that when the challenge to a statute is premised on the perpetuation of
prejudice against persons favored by the Constitution with special protection -- such as the
working class or a section thereof -- the Court may recognize the existence of a suspect
classification and subject the same to strict judicial scrutiny.
The view that the concepts of suspect classification and strict judicial scrutiny formulated
in Central Bank Employee Association exaggerate the significance of Section 3, Article XIII is
a groundless apprehension. Central Bank applied Article XIII in conjunction with the equal
protection clause. Article XIII, by itself, without the application of the equal protection clause,
has no life or force of its own as elucidated in Agabon.
Along the same line of reasoning, the Court further holds that the subject clause violates
petitioner's right to substantive due process, for it deprives him of property, consisting of
monetary benefits, without any existing valid governmental purpose. [136]
The argument of the Solicitor General, that the actual purpose of the subject clause of limiting
the entitlement of OFWs to their three-month salary in case of illegal dismissal, is to give
them a better chance of getting hired by foreign employers. This is plain speculation. As
earlier discussed, there is nothing in the text of the law or the records of the deliberations
leading to its enactment or the pleadings of respondent that would indicate that there is an
existing governmental purpose for the subject clause, or even just a pretext of one.
The subject clause does not state or imply any definitive governmental purpose; and it is for
that precise reason that the clause violates not just petitioner's right to equal protection, but
also her right to substantive due processunder Section 1, [137] Article III of the Constitution.
The subject clause being unconstitutional, petitioner is entitled to his salaries for the entire
unexpired period of nine months and 23 days of his employment contract, pursuant to law and
jurisprudence prior to the enactment of R.A. No. 8042.

Petitioner contends that his overtime and leave pay should form part of the salary basis in the
computation of his monetary award, because these are fixed benefits that have been stipulated
into his contract.
Petitioner is mistaken.
The word salaries in Section 10(5) does not include overtime and leave pay. For seafarers like
petitioner, DOLE Department Order No. 33, series 1996, provides a Standard Employment
Contract of Seafarers, in which salary is understood as the basic wage, exclusive of overtime,
leave pay and other bonuses; whereas overtime pay is compensation for all work performed in
excess of the regular eight hours, and holiday pay is compensation for any work performed on
designated rest days and holidays.
By the foregoing definition alone, there is no basis for the automatic inclusion of overtime and
holiday pay in the computation of petitioner's monetary award, unless there is evidence that he
performed work during those periods. As the Court held in Centennial Transmarine, Inc. v.
Dela Cruz,[138]
However, the payment of overtime pay and leave pay should be disallowed in light of our
ruling in Cagampan v. National Labor Relations Commission, to wit:
The rendition of overtime work and the submission of sufficient proof that said was actually
performed are conditions to be satisfied before a seaman could be entitled to overtime pay
which should be computed on the basis of 30% of the basic monthly salary. In short, the
contract provision guarantees the right to overtime pay but the entitlement to such benefit must
first be established.
In the same vein, the claim for the day's leave pay for the unexpired portion of the contract is
unwarranted since the same is given during the actual service of the seamen.
WHEREFORE, the Court GRANTS the Petition. The subject clause or for three months for
every year of the unexpired term, whichever is less in the 5th paragraph of Section 10 of
Republic Act No. 8042 isDECLARED UNCONSTITUTIONAL; and the December 8, 2004
Decision and April 1, 2005 Resolution of the Court of Appeals are MODIFIED to the effect
that petitioner is AWARDED his salaries for the entire unexpired portion of his employment
contract consisting of nine months and 23 days computed at the rate of US$1,400.00 per
month.
No costs.

On the Third Issue

SO ORDERED.

[G.R. No. 126102. December 4, 2000]


ORTIGAS & CO. LTD., petitioner, vs. THE COURT OF APPEALS and ISMAEL G.
MATHAY III, respondents.
DECISION
QUISUMBING, J.:
This petition seeks to reverse the decision of the Court of Appeals, dated March 25, 1996, in
CA-G.R. SP No. 39193, which nullified the writ of preliminary injunction issued by the
Regional Trial Court of Pasig City, Branch 261, in Civil Case No. 64931. It also assails the

resolution of the appellate court, dated August 13, 1996, denying petitioners motion for
reconsideration.
The facts of this case, as culled from the records, are as follows:
On August 25, 1976, petitioner Ortigas & Company sold to Emilia Hermoso, a parcel of land
known as Lot 1, Block 21, Psd-66759, with an area of 1,508 square meters, located in
Greenhills Subdivision IV, San Juan, Metro Manila, and covered by Transfer Certificate of
Title No. 0737. The contract of sale provided that the lot:

59

1. (1) be used exclusivelyfor residential purposes only, and not more than one single-family
residential building will be constructed thereon,
xxx
6. The BUYER shall not erectany sign or billboard on the rooffor advertising purposes
xxx
11.
No single-family residential building shall be erecteduntil the building plans,
specificationhave been approved by the SELLER
xxx
14....restrictions shall run with the land and shall be construed as real covenants until
December 31, 2025 when they shall cease and terminate i[1]
These and the other conditions were duly annotated on the certificate of title issued to Emilia.
In 1981, the Metropolitan Manila Commission (now Metropolitan Manila Development
Authority) enacted MMC Ordinance No. 81-01, also known as the Comprehensive Zoning
Area for the National Capital Region. The ordinance reclassified as a commercial area a
portion of Ortigas Avenue from Madison to Roosevelt Streets of Greenhills Subdivision where
the lot is located.
On June 8, 1984, private respondent Ismael Mathay III leased the lot from Emilia Hermoso
and J.P. Hermoso Realty Corp.. The lease contract did not specify the purposes of the lease.
Thereupon, private respondent constructed a single story commercial building for Greenhills
Autohaus, Inc., a car sales company.
On January 18, 1995, petitioner filed a complaint against Emilia Hermoso with the Regional
Trial Court of Pasig, Branch 261. Docketed as Civil Case No. 64931, the complaint sought the
demolition of the said commercial structure for having violated the terms and conditions of the
Deed of Sale. Complainant prayed for the issuance of a temporary restraining order and a writ
of preliminary injunction to prohibit petitioner from constructing the commercial building
and/or engaging in commercial activity on the lot. The complaint was later amended to
implead Ismael G. Mathay III and J.P. Hermoso Realty Corp., which has a ten percent (10%)
interest in the lot.
In his answer, Mathay III denied any knowledge of the restrictions on the use of the lot and
filed a cross-claim against the Hermosos.
On June 16, 1995, the trial court issued the writ of preliminary injunction. On June 29, 1995,
Mathay III moved to set aside the injunctive order, but the trial court denied the motion.
Mathay III then filed with the Court of Appeals a special civil action for certiorari, docketed as
CA-G.R. SP No. 39193, ascribing to the trial court grave abuse of discretion in issuing the writ
of preliminary injunction. He claimed that MMC Ordinance No. 81-01 classified the area
where the lot was located as commercial area and said ordinance must be read into the August
25, 1976 Deed of Sale as a concrete exercise of police power.
Ortigas and Company averred that inasmuch as the restrictions on the use of the lot were duly
annotated on the title it issued to Emilia Hermoso, said restrictions must prevail over the
ordinance, specially since these restrictions were agreed upon before the passage of MMC
Ordinance No. 81-01.
On March 25, 1996, the appellate court disposed of the case as follows:
WHEREFORE, in light of the foregoing, the petition is hereby GRANTED. The assailed
orders are hereby nullified and set aside.
SO ORDERED.ii[2]
In finding for Mathay III, the Court of Appeals held that the MMC Ordinance No. 81-01
effectively nullified the restrictions allowing only residential use of the property in question.
Ortigas seasonably moved for reconsideration, but the appellate court denied it on August 13,
1996.

Hence, the instant petition.


In its Memorandum, petitioner now submits that the principal issue in this case is whether
respondent Court of Appeals correctly set aside the Order dated June 16, 1995 of the trial court
which issued the writ of preliminary injunction on the sole ground that MMC Ordinance No.
81-01 nullified the building restriction imposing exclusive residential use on the property in
question.iii[3] It also asserts that Mathay III lacks legal capacity to question the validity of
conditions of the deed of sale; and he is barred by estoppel or waiver to raise the same
question like his principals, the owners.iv[4] Lastly, it avers that the appellate court
unaccountably failed to address several questions of fact.
Principally, we must resolve the issue of whether the Court of Appeals erred in holding that
the trial court committed grave abuse of discretion when it refused to apply MMC Ordinance
No.81-01 to Civil Case No. 64931.
But first, we must address petitioners allegation that the Court of Appeals unaccountably failed
to address questions of fact. For basic is the rule that factual issues may not be raised before
this Court in a petition for review and this Court is not duty-bound to consider said questions. v
[5] CA-G.R. SP No. 39193 was a special civil action for certiorari, and the appellate court
only had to determine if the trial court committed grave abuse of discretion amounting to want
or excess of jurisdiction in issuing the writ of preliminary injunction. Thus, unless vital to our
determination of the issue at hand, we shall refrain from further consideration of factual
questions.
Petitioner contends that the appellate court erred in limiting its decision to the cited zoning
ordinance. It avers that a contractual right is not automatically discarded once a claim is made
that it conflicts with police power. Petitioner submits that the restrictive clauses in the
questioned contract is not in conflict with the zoning ordinance. For one, according to
petitioner, the MMC Ordinance No. 81-01 did not prohibit the construction of residential
buildings. Petitioner argues that even with the zoning ordinance, the seller and buyer of the reclassified lot can voluntarily agree to an exclusive residential use thereof. Hence, petitioner
concludes that the Court of Appeals erred in holding that the condition imposing exclusive
residential use was effectively nullified by the zoning ordinance.
In its turn, private respondent argues that the appellate court correctly ruled that the trial court
had acted with grave abuse of discretion in refusing to subject the contract to the MMC
Ordinance No. 81-01. He avers that the appellate court properly held the police power superior
to the non-impairment of contract clause in the Constitution. He concludes that the appellate
court did not err in dissolving the writ of preliminary injunction issued by the trial court in
excess of its jurisdiction.
We note that in issuing the disputed writ of preliminary injunction, the trial court observed that
the contract of sale was entered into in August 1976, while the zoning ordinance was enacted
only in March 1981. The trial court reasoned that since private respondent had failed to show
that MMC Ordinance No. 81-01 had retroactive effect, said ordinance should be given
prospective application only,vi[6] citing Co vs. Intermediate Appellate Court, 162 SCRA 390
(1988).
In general, we agree that laws are to be construed as having only prospective operation. Lex
prospicit, non respicit. Equally settled, only laws existing at the time of the execution of a
contract are applicable thereto and not later statutes, unless the latter are specifically intended
to have retroactive effect.vii[7] A later law which enlarges, abridges, or in any manner changes
the intent of the parties to the contract necessarily impairs the contract itself viii[8] and cannot
be given retroactive effect without violating the constitutional prohibition against impairment
of contracts.ix[9]

60

But, the foregoing principles do admit of certain exceptions. One involves police power. A law
enacted in the exercise of police power to regulate or govern certain activities or transactions
could be given retroactive effect and may reasonably impair vested rights or contracts. Police
power legislation is applicable not only to future contracts, but equally to those already in
existence.x[10] Nonimpairment of contracts or vested rights clauses will have to yield to the
superior and legitimate exercise by the State of police power to promote the health, morals,
peace, education, good order, safety, and general welfare of the people. xi[11] Moreover,
statutes in exercise of valid police power must be read into every contract. xii[12] Noteworthy,
in Sangalang vs. Intermediate Appellate Court,xiii[13] we already upheld MMC Ordinance No.
81-01 as a legitimate police power measure.
The trial courts reliance on the Co vs. IAC,xiv[14] is misplaced. In Co, the disputed area was
agricultural and Ordinance No. 81-01 did not specifically provide that it shall have retroactive
effect so as to discontinue all rights previously acquired over lands located within the zone
which are neither residential nor light industrial in nature, xv[15] and stated with respect to
agricultural areas covered that the zoning ordinance should be given prospective operation
only.xvi[16] The area in this case involves not agricultural but urban residential land. Ordinance
No. 81-01 retroactively affected the operation of the zoning ordinance in Greenhills by
reclassifying certain locations therein as commercial.
Following our ruling in Ortigas & Co., Ltd. vs. Feati Bank & Trust Co., 94 SCRA 533 (1979),
the contractual stipulations annotated on the Torrens Title, on which Ortigas relies, must yield
to the ordinance. When that stretch of Ortigas Avenue from Roosevelt Street to Madison Street
was reclassified as a commercial zone by the Metropolitan Manila Commission in March
1981, the restrictions in the contract of sale between Ortigas and Hermoso, limiting all
construction on the disputed lot to single-family residential buildings, were deemed
extinguished by the retroactive operation of the zoning ordinance and could no longer be
enforced. While our legal system upholds the sanctity of contract so that a contract is deemed
law between the contracting parties,xvii[17] nonetheless, stipulations in a contract cannot
contravene law, morals, good customs, public order, or public policy.xviii[18] Otherwise such
stipulations would be deemed null and void. Respondent court correctly found that the trial
court committed in this case a grave abuse of discretion amounting to want of or excess of
jurisdiction in refusing to treat Ordinance No. 81-01 as applicable to Civil Case No. 64931. In
resolving matters in litigation, judges are not only duty-bound to ascertain the facts and the
applicable laws,xix[19] they are also bound by their oath of office to apply the applicable law.xx
[20]
As a secondary issue, petitioner contends that respondent Mathay III, as a mere lessee of the
lot in question, is a total stranger to the deed of sale and is thus barred from questioning the
conditions of said deed. Petitioner points out that the owners of the lot voluntarily agreed to
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 198935
November 27, 2013
MAYNILAD WATER SUPERVISORS ASSOCIATION, represented by ROBERTA
ESTINO, Petitioners,
vs.
MAYNILAD WATER SERVICES, INC., Respondent.
DECISION
PEREZ, J.:
For resolution is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court,
seeking to reverse, annul and set aside the Amended Decision and Resolution issued by the

the restrictions on the use of the lot and do not question the validity of these restrictions.
Petitioner argues that Mathay III as a lessee is merely an agent of the owners, and could not
override and rise above the status of his principals. Petitioner submits that he could not have a
higher interest than those of the owners, the Hermosos, and thus had no locus standi to file
CA-G.R. SP No. 39193 to dissolve the injunctive writ issued by the RTC of Pasig City.
For his part, private respondent argues that as the lessee who built the commercial structure, it
is he and he alone who stands to be either benefited or injured by the results of the judgment in
Civil Case No. 64931. He avers he is the party with real interest in the subject matter of the
action, as it would be his business, not the Hermosos, which would suffer had not the
respondent court dissolved the writ of preliminary injunction.
A real party in interest is defined as the party who stands to be benefited or injured by the
judgment or the party entitled to the avails of the suit. Interest within the meaning of the rule
means material interest, an interest in issue and to be affected by the decree, as distinguished
from mere interest in the question involved, or a mere incidental interest. xxi[21] By real interest
is meant a present substantial interest, as distinguished from a mere expectancy or a future,
contingent, subordinate, or consequential interest. xxii[22]
Tested by the foregoing definition, private respondent in this case is clearly a real party in
interest. It is not disputed that he is in possession of the lot pursuant to a valid lease. He is a
possessor in the concept of a holder of the thing under Article 525 of the Civil Code. xxiii[23] He
was impleaded as a defendant in the amended complaint in Civil Case No. 64931. Further,
what petitioner seeks to enjoin is the building by respondent of a commercial structure on the
lot. Clearly, it is private respondents acts which are in issue, and his interest in said issue
cannot be a mere incidental interest. In its amended complaint, petitioner prayed for, among
others, judgment ordering the demolition of all improvements illegally built on the lot in
question.xxiv[24] These show that it is petitioner Mathay III, doing business as Greenhills
Autohaus, Inc., and not only the Hermosos, who will be adversely affected by the courts
decree.
Petitioner also cites the rule that a stranger to a contract has no rights or obligations under it, xxv
[25] and thus has no standing to challenge its validity.xxvi[26] But in seeking to enforce the
stipulations in the deed of sale, petitioner impleaded private respondent as a defendant. Thus
petitioner must recognize that where a plaintiff has impleaded a party as a defendant, he
cannot subsequently question the latters standing in court. xxvii[27]
WHEREFORE, the instant petition is DENIED. The challenged decision of the Court of
Appeals dated March 25, 1996, as well as the assailed resolution of August 13, 1996, in CAG.R. SP No. 39193 is AFFIRMED. Costs against petitioner.
SO ORDERED.
Court of Appeals (CA) in CA-G.R. S.P. No. 101911, specifically the (a) Amended
Decision2 dated 31 January 2011 which reversed its earlier Decision dated 31 May 2010 and
(b) Resolution3 dated 12 September 2011 which denied petitioner s Motion for
Reconsideration.
Culled from the records are the following antecedent facts: 4
Petitioner Maynilad Water Supervisors Association (MWSA) is an association composed of
former supervisory employees of Metropolitan Waterworks and Sewerage System (MWSS).
These employees claim that during their employment with MWSS, they were receiving a
monthly cost of living allowance (COLA) equivalent to 40% of their basic pay.
The payment of these allowances and other additional compensation, including the COLA
were, however, discontinued without qualification effective 1 November 1989 when the
Department of Budget and Management (DBM) issued Corporate Compensation Circular No.

61

10 (CCC No. 10). In 1997, MWSS was privatized and part of it, MWSS West, was acquired
by Maynilad Water Services, Inc. (Maynilad). Some of the employees of MWSS, which
included members of MWSA, were absorbed by Maynilad subject to the terms and conditions
of a Concession Agreement, a portion of which reads:
Article 6.1.1 (ii)
One month prior to the Commencement Date, the Concessionaire shall make an offer to
employ each Concessionaire Employee, subject to a probationary period of six months
following the Commencement Date, at a salary or pay scale and with benefits at least equal to
those enjoyed by such Employee on the date of his or her separation from MWSS. x x x
xxxx
Article 6.1.3. Non-Diminution of Benefits
The Concessionaire shall grant to all Concessionaire Employees employee benefits no less
favorable than those granted to such employees by the MWSS at the time of their separation
from MWSS, particularly those set forth in Exhibit F and the following:
xxxx
The payment of COLA was not among those listed as benefits in Exhibit "F."
In 1998, the Supreme Court promulgated a Decision5 declaring DBM CCC No.10 ineffective
for failure to comply with the publication requirement. Consequently, MWSS partially
released the COLA payments for its employees, including members of MWSA, covering the
years 1989 to 1997, and up to year 1999 for its retained employees.
In 2002, MWSA filed a complaint before the Labor Arbiter praying for the payment of their
COLA from the year 1997, the time its members were absorbed by Maynilad, up to the
present. MWSA argued that since DBM CCC No. 10 was rendered ineffective, the COLA
should be paid as part of the benefits enjoyed by their members at the time of their separation
from MWSS, and which should form part of their salaries and benefits with Maynilad.
In a decision dated 10 November 2006, the Labor Arbiter granted MWSAs claim and directed
Maynilad to pay the COLA of the supervisors retroactive to the date when they were hired in
1997, with legal interest from the date of promulgation of the decision. It also directed
Maynilad to take necessary measures to ensure that the benefit is incorporated in the
employees monthly compensation.6
On 11 December 2006, Maynilad appealed the decision before the National Labor Relations
Commission (NLRC) and filed an Urgent Manifestation and Motion to Reduce Bond.
The NLRC granted Maynilads motion and reversed on appeal the decision of the Labor
Arbiter. On 28 September 2007, MWSA filed a motion for reconsideration but this was denied
by the NLRC in its 23 October 2007 resolution.
Aggrieved, MWSA filed a petition for certiorari with the CA on 11 January 2008.
In a Decision7 dated 31 May 2010, the CA Ninth Division annulled and set aside the decision
of the NLRC. It thus reinstated the decision of the Labor Arbiter.
Maynilad filed a motion for reconsideration of the 31 May 2010 CA Decision.
On 31 January 2011, the CA Ninth Division reconsidered its earlier Decision. The decretal
portion of the amended decision reads:
WHEREFORE, premises considered, the Motion for Reconsideration is GRANTED.
Consequently, the Courts 31 May 2010 Decision is REVERSED and SET ASIDE, and the 07
September 2007 Decision and 23 October 2007 Resolution of the NLRC are AFFIRMED, and
are thus REINSTATED.8
MWSA filed a Motion for Reconsideration of the amended decision. Pending resolution of the
Motion for Reconsideration, MWSA moved for the inhibition of the members of the Ninth
Division of the CA. The members of the division recused from the case in a Resolution dated

3 June 2011. Thereafter, the Second Division of the CA, to which the case was raffled, issued
a Resolution9 on 12 September 2011 denying MWSAs Motion for Reconsideration.
Hence, this Petition for Review on Certiorari under Rule 45 of the Rules of Court.
ISSUES
Whether the CA erred in not holding that the MWSA members are entitled to COLA under the
Concession Agreement.
Whether the CA erred in not finding grave abuse of discretion on the part of NLRC when the
latter granted Maynilads appeal despite insufficiency of the appeal bond.
OUR RULING
Simply stated, the main issue in this case is whether Maynilad bound itself under the
Concession Agreement to pay the COLA of the employees it absorbed from MWSS. A careful
review of the Concession Agreement led us to conclude that both MWSS and Maynilad never
intended to include COLA as one of the benefits to be granted to the absorbed employees.
The benefits agreed upon by the parties are stated in Exhibit "F" of the Concession Agreement,
to wit:
Existing MWSS Fringe Benefits
A. ALLOWANCES
PERA - P500.00 Salary Grade 1 to 23 except those with RATA
ACA P500.00 Salary Grade 1 to 25
RATA- 40% of basic Supervisory Level, Section Chiefs and up or equivalent ranks.
Technical and Executive Assistants
Medical 2,500/year
Rice 500/month
Uniform 2,000/year
Meal 25.00/day (for medical personnel P30.00/day)
Longevity 50.00/year of service/month
Children 30.00/child/month, maximum four (4) children below 21 years old
Hazard 50.00/month
B. BONUSES
Year-End Financial Assistance One (1) month Gross pay (Basic Salary plus PERA, ACA,
rice, meal, longevity, Children and RATA
Mid-Year One (1) month Gross Pay Christmas Bonus and Cash Gift One (1) month Basic
salary plus P1,000 cash gift
Anniversary (Bigay-pala) 4,000.00 or 50% of basic, whichever is greater
Productivity as of December 1995 Amount equivalent to P5,000 or 60% of gross pay,
exclusive of RATA, whichever is higher
C. PREMIUMS
Graveyard 50% (12MN 6:00 AM)
Nightwork 25% (6PM 6AM)
Holiday 125%
Sunday 150%
Overtime 125%
Distress 25% of basic pay (For Sewerage Department only)
D. PAID LEAVES
Vacation 15 days/year
Sick 15 days/year
Maternity 60 calendar days
Paternity 7 working days
Emergency Leave - 3 days/year

62

(Birthday/Funeral/Mourning/Graduation/Enrollment/Wedding/
Anniversary/Hospitalization/Accident/Relocation)
E. STUDY LEAVE
- Study now pay later scheme
- Grant (with contract to serve MWSS)10
It is clear from the aforesaid enumeration that COLA is not among the benefits to be received
by the absorbed employees. Contrary to the contention of MWSA, the declaration by the Court
of the ineffectiveness of DBM CCC No. 10 due to its non-publication in the Official Gazette
or in a newspaper of general circulation in the country,11did not give rise to the employees
right to demand payment of the subject benefit from Maynilad.
As far as their employment relationship with Maynilad is concerned, the same is not affected
by the De Jesus ruling because it is governed by a separate compensation package provided
for under the Concession Agreement. It would be erroneous to presume that had the COLA
been received during the time of the execution of the contract, the benefit would have been
included in Exhibit "F." First of all, we note that the Courts ruling in the De Jesus case applies
only to government-owned and controlled corporations and not to private entities. Secondly,
the parties to the Concession Agreement could not have thought of including the COLA in
Exhibit "F" because as early as 1989, the government already resolved to remove the COLA,
among others, from the list of allowances being received by government employees. Hence,
the enactment of Republic Act R.A. No. 6758 or the Compensation and Position Classification
Act of 198912 which integrated the COLA into the standardized salary rate. Section 12 thereof
provides:
Consolidation of Allowances and Compensation. All allowances, except for representation
and transportation allowances; clothing and laundry allowances; subsistence allowance of
marine officers and crew on board government vessels and hospital personnel; hazard pay;
allowances of foreign service personnel stationed abroad; and such other additional
compensation not otherwise specified herein as may be determined by the DBM, shall be
deemed included in the standardized salary rates herein prescribed. x x x
From the aforesaid provision, we note that all allowances were deemed integrated into the
standardized salary rates except:
(1) representation and transportation allowances;
(2) clothing and laundry allowances;
(3) subsistence allowances of marine officers and crew on board government vessels;
(4) subsistence allowances of hospital personnel;
(5) hazard pay;
(6) allowances of foreign service personnel stationed abroad; and
(7) such other additional compensation not otherwise specified in Section 12 as may be
determined by the DBM.
In Gutierrez v. DBM,13 which is a consolidated case involving over 20 government-owned and
controlled corporations, the Court found proper the inclusion of COLA in the standardized
salary rates. It settled that COLA, not being an enumerated exclusion, was deemed already
incorporated in the standardized salary rates of government employees under the general rule
of integration. In explaining its inclusion in the standardized salary rates, the Court cited its
ruling in National Tobacco Administration v. COA,14 in that the enumerated fringe benefits in
items (1) to (6) have one thing in common they belong to one category of privilege called
allowances which are usually granted to officials and employees of the government to defray
or reimburse the expenses incurred in the performance of their official functions.
Consequently, if these allowances are consolidated with the standardized salary rates, then the
government official or employee will be compelled to spend his personal funds in attending to

his duties. On the other hand, item (7) is a "catch-all proviso" for benefits in the nature of
allowances similar to those enumerated.15
Clearly, COLA is not in the nature of an allowance intended to reimburse expenses incurred by
officials and employees of the government in the performance of their official functions. It is
not payment in consideration of the fulfillment of official duty.16 As defined, cost of living
refers to "the level of prices relating to a range of everyday items"17 or "the cost of purchasing
those goods and services which are included in an accepted standard level of
consumption."18 Based on this premise, COLA is a benefit intended to cover increases in the
cost of living. Thus, it is and should be integrated into the standardized salary rates.
From the aforesaid discussion, it is evident therefore, that at the time the MWSS employees
were absorbed by Maynilad in 1997, the COLA was already part and parcel of their monthly
salary. The non-publication of DBM CCC No. 10 in the Official Gazette or newspaper of
general circulation did not nullify the integration of COLA into the standardized salary rates
upon the effectivity of R.A. No. 6758.19 As held by this Court in Phil. International Trading
Corp. v. COA,20 the validity of R.A. No. 6758 should not be made to depend on the validity of
its implementing rules. To grant COLA to herein petitioners now would create an absurd
situation wherein they would be receiving an additional COLA in the amount equivalent to
40% of their basic salary even if the Court has already ruled that the COLA is already
integrated in the employees basic salary. Such conclusion would give the absorbed employees
far greater rights than their former co-employees or other government employees from whom
COLA was eventually disallowed.
The ruling of the Labor Arbiter which MWSA insists on is also erroneous in that it seeks to
have the COLA incorporated in the monthly compensation to be received by the absorbed
employees. It failed to consider that the employment contracts of the MWSA members with
MWSS were terminated prior to their employment with MAYNILAD. Although they may
have continued performing the same function, their employment is already covered by an
entirely new employment contract.
This Court has ruled that unless expressly assumed, labor contracts such as employment
contracts and collective bargaining agreements are not enforceable against a transferee of an
enterprise, labor contracts being in personam, thus binding only between the parties. 21 In the
instant case, the only commitment of Maynilad under the Concession Agreement it entered
with MWSS was to provide the absorbed employees with a compensation package "no less
favorable than those granted to [them] by the MWSS at the time of their separation from
MWSS, particularly those set forth in Exhibit F x x x."22 It is undisputed that Maynilad
complied with such commitment. It cannot, however, be compelled to assume the payment of
an allowance which was not agreed upon. Such would not only be unreasonable but also unfair
for Maynilad. MWSS and Maynilad could not have presumed that the COLA was part of the
agreement when it was no longer being received by the employees at the time of the execution
of the contract, which is the reckoning point of their new employment.
In Norton Resources and Development Corporation v. All Asia Bank Corporation, 23 this Court
ruled that the agreement or contract between the parties is the formal expression of the parties
rights, duties and obligations. It is the best evidence of the intention of the parties. Thus, when
the terms of an agreement have been reduced to writing, it is considered as containing all the
terms agreed upon and there can be no evidence of such terms other than the contents of the
written agreement between the parties and their successors in interest. Time and again, we
have stressed the rule that a contract is the law between the parties, and courts have no choice
but to enforce such contract so long as it is not contrary to law, morals, good customs or public
policy. Otherwise, courts would be interfering with the freedom of contract of the parties.
Simply put, courts cannot stipulate for the parties or amend the latters agreement, for to do so

63

would be to alter the real intention of the contracting parties when the contrary function of
courts is to give force and effect to the intention of the parties.
In fine, contrary to the allegation of MWSA, there is no ambiguity in the Concession
Agreement.1wphi1 Thus, there is nothing to be construed.
Anent the issue of the insufficiency of the appeal bond posted by Maynilad, we agree with the
NLRC that there was merit in the arguments forwarded in support of the prayer for the
reduction of the appeal bond. Maynilad sought the reduction of the appeal bond to ten percent
(10%) for the following reasons: a) that it had filed a Petition for Rehabilitation before the
Regional Trial Court of Quezon City; and b) that as a result thereof, the Rehabilitation Court
issued a Stay Order prohibiting it from selling, encumbering, transferring or disposing in any
manner any of its properties making it impossible for it to fully comply with the appeal bond
requirement.24 Our ruling in Garcia, et al. v. KJ Commercial25 that the requirement on appeals
may be relaxed when there is substantial compliance with the Rules of Procedure of the NLRC
or when the appellant shows willingness to post a partial bond. Here, we note that Maynilad s
appeal was accompanied by an appeal bond in the amount of Twenty Five Million Pesos
(P25,000,000.00) with an Urgent Manifestation and Motion to Reduce Bond on the ground
EN BANC
BANK OF THE PHILIPPINE ISLANDS,
Petitioner,

G.R. No. 164301


Present:

- versus -

BPI EMPLOYEES UNION-DAVAO CHAPTERFEDERATION OF UNIONS


IN BPI UNIBANK,
Respondent.

CORONA, C.J.,
CARPIO,
CARPIO MORALES,
VELASCO, JR.,*
NACHURA,
LEONARDO-DE CASTRO,
BRION,
PERALTA,
BERSAMIN,
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ, and
MENDOZA, JJ.
Promulgated:

August 10, 2010


x------------------------------------------------x
DECISION
LEONARDO-DE CASTRO, J.:

that the labor arbiter failed to specify the exact amount of monetary award from which the
amount of the appeal bond is to be based.
In University Plans v. Solano,26 this Court reiterated the guidelines which the NLRC must
exercise in considering the motions for reduction of bond:
The bond requirement on appeals involving monetary awards has been and may be relaxed in
meritorious cases. These cases include instances in which (1) there was substantial compliance
with the Rules, (2) surrounding facts and circumstances constitute meritorious grounds to
reduce the bond, (3) a liberal interpretation of the requirement of an appeal bond would serve
the desired objective of resolving controversies on the merits, or (4) the appellants, at the very
least, exhibited their willingness and/or good faith by posting a partial bond during the
reglementary period.
It is evident that the aforesaid instances are present in the instant case.
WHEREFORE, premises considered, the instant Petition is hereby DENIED and the 31
January 2011 Amended Decision and 12 September 2011 Resolution of the Court of Appeals
in CA-G.R. SP No. 101911 is AFFIRMED in toto.
SO ORDERED.
May a corporation invoke its merger with another corporation as a valid ground to exempt its
absorbed employees from the coverage of a union shop clause contained in its existing
Collective Bargaining Agreement (CBA) with its own certified labor union? That is the
question we shall endeavor to answer in this petition for review filed by an employer after the
Court of Appeals decided in favor of respondent union, which is the employees recognized
collective bargaining representative.
At the outset, we should call to mind the spirit and the letter of the Labor Code provisions on
union security clauses, specifically Article 248 (e), which states, x x x Nothing in this Code
or in any other law shall stop the parties from requiring membership in a recognized collective
bargaining agent as a condition for employment, except those employees who are already
members of another union at the time of the signing of the collective bargaining agreement.
[1]
This case which involves the application of a collective bargaining agreement with a union
shop clause should be resolved principally from the standpoint of the clear provisions of our
labor laws, and the express terms of the CBA in question, and not by inference from the
general consequence of the merger of corporations under the Corporation Code, which
obviously does not deal with and, therefore, is silent on the terms and conditions of
employment in corporations or juridical entities.
This issue must be resolved NOW, instead of postponing it to a future time when the CBA is
renegotiated as suggested by the Honorable Justice Arturo D. Brion because the same issue
may still be resurrected in the renegotiation if the absorbed employees insist on their
privileged status of being exempt from any union shop clause or any variant thereof.
We find it significant to note that it is only the employer, Bank of the Philippine Islands (BPI),
that brought the case up to this Court via the instant petition for review; while the employees
actually involved in the case did not pursue the same relief, but had instead chosen in effect to
acquiesce to the decision of the Court of Appeals which effectively required them to comply
with the union shop clause under the existing CBA at the time of the merger of BPI with Far
East Bank and Trust Company (FEBTC), which decision had already become final and
executory as to the aforesaid employees. By not appealing the decision of the Court of

64

Appeals, the aforesaid employees are bound by the said Court of Appeals decision to join BPIs
duly certified labor union. In view of the apparent acquiescence of the affected FEBTC
employees in the Court of Appeals decision, BPI should not have pursued this petition for
review. However, even assuming that BPI may do so, the same still cannot prosper.
What is before us now is a petition for review under Rule 45 of the Rules of Court of the
Decision[2] dated September 30, 2003 of the Court of Appeals, as reiterated in its
Resolution[3] of June 9, 2004, reversing and setting aside the Decision[4] dated November 23,
2001 of Voluntary Arbitrator Rosalina Letrondo-Montejo, in CA-G.R. SP No. 70445,
entitled BPI Employees Union-Davao Chapter-Federation of Unions in BPI Unibank v. Bank
of the Philippine Islands, et al.
The antecedent facts are as follows:
On March 23, 2000, the Bangko Sentral ng Pilipinas approved the Articles of Merger executed
on January 20, 2000 by and between BPI, herein petitioner, and FEBTC. [5] This Article and
Plan of Merger was approved by the Securities and Exchange Commission on April 7, 2000. [6]
Pursuant to the Article and Plan of Merger, all the assets and liabilities of FEBTC were
transferred to and absorbed by BPI as the surviving corporation. FEBTC employees, including
those in its different branches across the country, were hired by petitioner as its own
employees, with their status and tenure recognized and salaries and benefits maintained.
Respondent BPI Employees Union-Davao Chapter - Federation of Unions in BPI Unibank
(hereinafter the Union, for brevity) is the exclusive bargaining agent of BPIs rank and file
employees in Davao City. The former FEBTC rank-and-file employees in Davao City did not
belong to any labor union at the time of the merger. Prior to the effectivity of the merger, or on
March 31, 2000, respondent Union invited said FEBTC employees to a meeting regarding the
Union Shop Clause (Article II, Section 2) of the existing CBA between petitioner BPI and
respondent Union.[7]
The parties both advert to certain provisions of the existing CBA, which are quoted below:
ARTICLE I
Section 1. Recognition and Bargaining Unit The BANK recognizes the UNION as the sole and
exclusive collective bargaining representative of all the regular rank and file employees of the
Bank offices in Davao City.
Section 2. Exclusions
Section 3. Additional Exclusions

lifetime of this Agreement shall as a condition of their continued employment with the Bank,
maintain their membership in the Union in good standing.
Section 2. Union Shop - New employees falling within the bargaining unit as defined in
Article I of this Agreement, who may hereafter be regularly employed by the Bank shall,
within thirty (30) days after they become regular employees, join the Union as a condition of
their continued employment. It is understood that membership in good standing in the Union
is a condition of their continued employment with the Bank. [8] (Emphases supplied.)
After the meeting called by the Union, some of the former FEBTC employees joined the
Union, while others refused. Later, however, some of those who initially joined retracted their
membership.[9]
Respondent Union then sent notices to the former FEBTC employees who refused to join, as
well as those who retracted their membership, and called them to a hearing regarding the
matter. When these former FEBTC employees refused to attend the hearing, the president of
the Union requested BPI to implement the Union Shop Clause of the CBA and to terminate
their employment pursuant thereto.[10]
After two months of management inaction on the request, respondent Union informed
petitioner BPI of its decision to refer the issue of the implementation of the Union Shop
Clause of the CBA to the Grievance Committee. However, the issue remained unresolved at
this level and so it was subsequently submitted for voluntary arbitration by the parties. [11]
Voluntary Arbitrator Rosalina Letrondo-Montejo, in a Decision[12] dated November 23, 2001,
ruled in favor of petitioner BPIs interpretation that the former FEBTC employees were not
covered by the Union Security Clause of the CBA between the Union and the Bank on the
ground that the said employees were not new employees who were hired and subsequently
regularized, but were absorbed employees by operation of law because the former
employees of FEBTC can be considered assets and liabilities of the absorbed corporation. The
Voluntary Arbitrator concluded that the former FEBTC employees could not be compelled to
join the Union, as it was their constitutional right to join or not to join any organization.
Respondent Union filed a Motion for Reconsideration, but the Voluntary Arbitrator denied the
same in an Order dated March 25, 2002.[13]
Dissatisfied, respondent then appealed the Voluntary Arbitrators decision to the Court of
Appeals. In the herein assailed Decision dated September 30, 2003, the Court of Appeals
reversed and set aside the Decision of the Voluntary Arbitrator.[14] Likewise, the Court of
Appeals denied herein petitioners Motion for Reconsideration in a Resolution dated June 9,
2004.

Section 4. Copy of Contract


The Court of Appeals pertinently ruled in its Decision:
ARTICLE II
Section 1. Maintenance of Membership All employees within the bargaining unit who are
members of the Union on the date of the effectivity of this Agreement as well as employees
within the bargaining unit who subsequently join or become members of the Union during the

A union-shop clause has been defined as a form of union security provision wherein nonmembers may be hired, but to retain employment must become union members after a certain
period.

65

There is no question as to the existence of the union-shop clause in the CBA between the
petitioner-union and the company. The controversy lies in its application to the absorbed
employees.
This Court agrees with the voluntary arbitrator that the ABSORBED employees are distinct
and different from NEW employees BUT only in so far as their employment service is
concerned. The distinction ends there. In the case at bar, the absorbed employees length of
service from its former employer is tacked with their employment with BPI. Otherwise stated,
the absorbed employees service is continuous and there is no gap in their service record.
This Court is persuaded that the similarities of new and absorbed employees far outweighs
the distinction between them. The similarities lies on the following, to wit: (a) they have a new
employer; (b) new working conditions; (c) new terms of employment and; (d) new company
policy to follow. As such, they should be considered as new employees for purposes of
applying the provisions of the CBA regarding the union-shop clause.
To rule otherwise would definitely result to a very awkward and unfair situation wherein the
absorbed employees shall be in a different if not, better situation than the existing BPI
employees. The existing BPI employees by virtue of the union-shop clause are required to pay
the monthly union dues, remain as members in good standing of the union otherwise, they
shall be terminated from the company, and other union-related obligations. On the other hand,
the absorbed employees shall enjoy the fruits of labor of the petitioner-union and its members
for nothing in exchange. Certainly, this would disturb industrial peace in the company which is
the paramount reason for the existence of the CBA and the union.
The voluntary arbitrators interpretation of the provisions of the CBA concerning the coverage
of the union-shop clause is at war with the spirit and the rationale why the Labor Code itself
allows the existence of such provision.
The Supreme Court in the case of Manila Mandarin Employees Union vs. NLRC (G.R. No.
76989, September 29, 1987) rule, to quote:
This Court has held that a valid form of union security, and such a provision in a collective
bargaining agreement is not a restriction of the right of freedom of association guaranteed by
the Constitution.
A closed-shop agreement is an agreement whereby an employer binds himself to hire only
members of the contracting union who must continue to remain members in good standing to
keep their jobs. It is THE MOST PRIZED ACHIEVEMENT OF UNIONISM. IT ADDS
MEMBERSHIP AND COMPULSORY DUES. By holding out to loyal members a promise of
employment in the closed-shop, it wields group solidarity.(Emphasis supplied)
Hence, the voluntary arbitrator erred in construing the CBA literally at the expense of
industrial peace in the company.

Hence, petitioners present recourse, raising the following issues:


I
WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT
THE FORMER FEBTC EMPLOYEES SHOULD BE CONSIDERED NEW EMPLOYEES
OF BPI FOR PURPOSES OF APPLYING THE UNION SHOP CLAUSE OF THE CBA
II
WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED IN FINDING THAT
THE VOLUNTARY ARBITRATORS INTERPRETATION OF THE COVERAGE OF THE
UNION SHOP CLAUSE IS AT WAR WITH THE SPIRIT AND THE RATIONALE WHY
THE LABOR CODE ITSELF ALLOWS THE EXISTENCE OF SUCH PROVISION[16]
In essence, the sole issue in this case is whether or not the former FEBTC employees that were
absorbed by petitioner upon the merger between FEBTC and BPI should be covered by the
Union Shop Clause found in the existing CBA between petitioner and respondent Union.
Petitioner is of the position that the former FEBTC employees are not new employees of BPI
for purposes of applying the Union Shop Clause of the CBA, on this note, petitioner points to
Section 2, Article II of the CBA, which provides:
New employees falling within the bargaining unit as defined in Article I of this
Agreement, who may hereafter be regularly employed by the Bank shall, within thirty (30)
days after they become regular employees, join the Union as a condition of their continued
employment. It is understood that membership in good standing in the Union is a condition of
their continued employment with the Bank.[17] (Emphases supplied.)
Petitioner argues that the term new employees in the Union Shop Clause of the CBA is
qualified by the phrases who may hereafter be regularly employed and after they become
regular employees which led petitioner to conclude that the new employees referred to in, and
contemplated by, the Union Shop Clause of the CBA were only those employees who were
new to BPI, on account of having been hired initially on a temporary or probationary status for
possible regular employment at some future date. BPI argues that the FEBTC employees
absorbed by BPI cannot be considered as new employees of BPI for purposes of applying the
Union Shop Clause of the CBA.[18]
According to petitioner, the contrary interpretation made by the Court of Appeals of this
particular CBA provision ignores, or even defies, what petitioner assumes as its clear meaning
and scope which allegedly contradicts the Courts strict and restrictive enforcement of union
security agreements.
We do not agree.

With the foregoing ruling from this Court, necessarily, the alternative prayer of the petitioner
to require the individual respondents to become members or if they refuse, for this Court to
direct respondent BPI to dismiss them, follows.[15]

Section 2, Article II of the CBA is silent as to how one becomes a regular employee of the BPI
for the first time. There is nothing in the said provision which requires that a new regular

66

employee first undergo a temporary or probationary status before being deemed as such under
the union shop clause of the CBA.
Union security is a generic term which is applied to and comprehends closed shop, union
shop, maintenance of membership or any other form of agreement which imposes upon
employees the obligation to acquire or retain union membership as a condition affecting
employment. There is union shop when all new regular employees are required to join the
union within a certain period for their continued employment.There is maintenance of
membership shop when employees, who are union members as of the effective date of the
agreement, or who thereafter become members, must maintain union membership as a
condition for continued employment until they are promoted or transferred out of the
bargaining unit or the agreement is terminated. A closed-shop, on the other hand, may be
defined as an enterprise in which, by agreement between the employer and his employees or
their representatives, no person may be employed in any or certain agreed departments of the
enterprise unless he or she is, becomes, and, for the duration of the agreement, remains a
member in good standing of a union entirely comprised of or of which the employees in
interest are a part.[19]
In the case of Liberty Flour Mills Employees v. Liberty Flour Mills, Inc.,[20] we ruled that:
It is the policy of the State to promote unionism to enable the workers to negotiate with
management on the same level and with more persuasiveness than if they were to individually
and independently bargain for the improvement of their respective conditions. To this end, the
Constitution guarantees to them the rights to self-organization, collective bargaining and
negotiations and peaceful concerted actions including the right to strike in accordance with
law. There is no question that these purposes could be thwarted if every worker were to choose
to go his own separate way instead of joining his co-employees in planning collective action
and presenting a united front when they sit down to bargain with their employers. It is for this
reason that the law has sanctioned stipulations for the union shop and the closed shop as a
means of encouraging the workers to join and support the labor union of their own choice as
their representative in the negotiation of their demands and the protection of their interest vis-vis the employer. (Emphasis ours.)
In other words, the purpose of a union shop or other union security arrangement is to
guarantee the continued existence of the union through enforced membership for the benefit of
the workers.
All employees in the bargaining unit covered by a Union Shop Clause in their CBA with
management are subject to its terms. However, under law and jurisprudence, the following
kinds of employees are exempted from its coverage, namely, employees who at the time the
union shop agreement takes effect are bona fide members of a religious organization which
prohibits its members from joining labor unions on religious grounds; [21] employees already in
the service and already members of a union other than the majority at the time the union shop
agreement took effect;[22] confidential employees who are excluded from the rank and file
bargaining unit;[23] and employees excluded from the union shop by express terms of the
agreement.
When certain employees are obliged to join a particular union as a requisite for continued
employment, as in the case of Union Security Clauses, this condition is a valid restriction of
the freedom or right not to join any labor organization because it is in favor of unionism. This

Court, on occasion, has even held that a union security clause in a CBA is not a restriction of
the right of freedom of association guaranteed by the Constitution. [24]
Moreover, a closed shop agreement is an agreement whereby an employer binds himself to
hire only members of the contracting union who must continue to remain members in good
standing to keep their jobs.It is the most prized achievement of unionism. It adds membership
and compulsory dues. By holding out to loyal members a promise of employment in the closed
shop, it wields group solidarity.[25]
Indeed, the situation of the former FEBTC employees in this case clearly does not fall within
the first three exceptions to the application of the Union Shop Clause discussed earlier. No
allegation or evidence of religious exemption or prior membership in another union or
engagement as a confidential employee was presented by both parties. The sole category
therefore in which petitioner may prove its claim is the fourth recognized exception or whether
the former FEBTC employees are excluded by the express terms of the existing CBA between
petitioner and respondent.
To reiterate, petitioner insists that the term new employees, as the same is used in the Union
Shop Clause of the CBA at issue, refers only to employees hired by BPI as nonregular employees who later qualify for regular employment and become regular employees,
and not those who, as a legal consequence of a merger, are allegedly automatically deemed
regular employees of BPI. However, the CBA does not make a distinction as to how a regular
employee attains such a status. Moreover, there is nothing in the Corporation Law and the
merger agreement mandating the automatic employment as regular employees by the
surviving corporation in the merger.
It is apparent that petitioner hinges its argument that the former FEBTC employees were
absorbed by BPI merely as a legal consequence of a merger based on the characterization by
the Voluntary Arbiter of these absorbed employees as included in the assets and liabilities of
the dissolved corporation - assets because they help the Bank in its operation and liabilities
because redundant employees may be terminated and company benefits will be paid to them,
thus reducing the Banks financial status. Based on this ratiocination, she ruled that the same
are not new employees of BPI as contemplated by the CBA at issue, noting that the Certificate
of Filing of the Articles of Merger and Plan of Merger between FEBTC and BPI stated that x x
x the entire assets and liabilities of FAR EASTERN BANK & TRUST COMPANY will be
transferred to and absorbed by the BANK OF THE PHILIPPINE ISLANDS x x x (underlining
supplied).[26] In sum, the Voluntary Arbiter upheld the reasoning of petitioner that the FEBTC
employees became BPI employees by operation of law because they are included in the term
assets and liabilities.
Absorbed FEBTC Employees are Neither Assets nor Liabilities
In legal parlance, however, human beings are never embraced in the term assets and
liabilities. Moreover, BPIs absorption of former FEBTC employees was neither by operation
of law nor by legal consequence of contract. There was no government regulation or law that
compelled the merger of the two banks or the absorption of the employees of the dissolved
corporation by the surviving corporation.Had there been such law or regulation, the absorption
of employees of the non-surviving entities of the merger would have been mandatory on the
surviving corporation.[27] In the present case, the merger was voluntarily entered into by both
banks presumably for some mutually acceptable consideration. In fact, the Corporation Code

67

does not also mandate the absorption of the employees of the non-surviving corporation by the
surviving corporation in the case of a merger. Section 80 of the Corporation Code provides:
SEC. 80. Effects of merger or consolidation. The merger or consolidation, as provided in the
preceding sections 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;
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 taken and deemed to be transferred to and vested in
such surviving or consolidated corporation without further act or deed; and
5. The surviving or the 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 claim, action or proceeding pending by or against any of such constituent corporations
may be prosecuted by or against the surviving or consolidated corporation, as the case may
be. Neither the rights of creditors nor any lien upon the property of any of such constituent
corporations shall be impaired by such merger or consolidated.
Significantly, too, the Articles of Merger and Plan of Merger dated April 7, 2000
did not contain any specific stipulation with respect to the employment contracts of existing
personnel of the non-surviving entity which is FEBTC. Unlike the Voluntary Arbitrator, this
Court cannot uphold the reasoning that the general stipulation regarding transfer of FEBTC
assets and liabilities to BPI as set forth in the Articles of Merger necessarily includes the
transfer of all FEBTC employees into the employ of BPI and neither BPI nor the FEBTC
employees allegedly could do anything about it. Even if it is so, it does not follow that the
absorbed employees should not be subject to the terms and conditions of employment
obtaining in the surviving corporation.
The rule is that unless expressly assumed, labor contracts such as employment contracts and
collective bargaining agreements are not enforceable against a transferee of an enterprise,
labor contracts being in personam, thus binding only between the parties. A labor contract
merely creates an action in personam and does not create any real right which should be
respected by third parties. This conclusion draws its force from the right of an employer to

select his employees and to decide when to engage them as protected under our Constitution,
and the same can only be restricted by law through the exercise of the police power. [28]
Furthermore, this Court believes that it is contrary to public policy to declare the former
FEBTC employees as forming part of the assets or liabilities of FEBTC that were transferred
and absorbed by BPI in the Articles of Merger. Assets and liabilities, in this instance, should
be deemed to refer only to property rights and obligations of FEBTC and do not include the
employment contracts of its personnel. A corporation cannot unilaterally transfer its
employees to another employer like chattel. Certainly, if BPI as an employer had the right to
choose who to retain among FEBTCs employees, FEBTC employees had the concomitant
right to choose not to be absorbed by BPI. Even though FEBTC employees had no choice or
control over the merger of their employer with BPI, they had a choice whether or not they
would allow themselves to be absorbed by BPI. Certainly nothing prevented the FEBTCs
employees from resigning or retiring and seeking employment elsewhere instead of going
along with the proposed absorption.
Employment is a personal consensual contract and absorption by BPI of a former FEBTC
employee without the consent of the employee is in violation of an individuals freedom to
contract. It would have been a different matter if there was an express provision in the articles
of merger that as a condition for the merger, BPI was being required to assume all the
employment contracts of all existing FEBTC employees with the conformity of the
employees. In the absence of such a provision in the articles of merger, then BPI clearly had
the business management decision as to whether or not employ FEBTCs employees. FEBTC
employees likewise retained the prerogative to allow themselves to be absorbed or not;
otherwise, that would be tantamount to involuntary servitude.
There appears to be no dispute that with respect to FEBTC employees that BPI chose not to
employ or FEBTC employees who chose to retire or be separated from employment instead of
being absorbed, BPIs assumed liability to these employees pursuant to the merger is FEBTCs
liability to them in terms of separation pay,[29] retirement pay[30] or other benefits that may be
due them depending on the circumstances.
Legal Consequences of Mergers
Although not binding on this Court, American jurisprudence on the consequences of
voluntary mergers on the right to employment and seniority rights is persuasive and
illuminating. We quote the following pertinent discussion from the American Law Reports:
Several cases have involved the situation where as a result of mergers, consolidations, or
shutdowns, one group of employees, who had accumulated seniority at one plant or for one
employer, finds that their jobs have been discontinued except to the extent that they are offered
employment at the place or by the employer where the work is to be carried on in the
future. Such cases have involved the question whether such transferring employees should be
entitled to carry with them their accumulated seniority or whether they are to be compelled to
start over at the bottom of the seniority list in the "new" job. It has been recognized in some
cases that the accumulated seniority does not survive and cannot be transferred to the "new"
job.

68

In Carver v Brien (1942) 315 Ill App 643, 43 NE2d 597, the shop work of three formerly
separate railroad corporations, which had previously operated separate facilities, was
consolidated in the shops of one of the roads. Displaced employees of the other two roads
were given preference for the new jobs created in the shops of the railroad which took over the
work. A controversy arose between the employees as to whether the displaced employees were
entitled to carry with them to the new jobs the seniority rights they had accumulated with their
prior employers, that is, whether the rosters of the three corporations, for seniority purposes,
should be "dovetailed" or whether the transferring employees should go to the bottom of the
roster of their new employer. Labor representatives of the various systems involved attempted
to work out an agreement which, in effect, preserved the seniority status obtained in the prior
employment on other roads, and the action was for specific performance of this agreement
against a demurring group of the original employees of the railroad which was operating the
consolidated shops. The relief sought was denied, the court saying that, absent some specific
contract provision otherwise, seniority rights were ordinarily limited to the employment in
which they were earned, and concluding that the contract for which specific performance was
sought was not such a completed and binding agreement as would support such equitable
relief, since the railroad, whose concurrence in the arrangements made was essential to their
effectuation, was not a party to the agreement.
Where the provisions of a labor contract provided that in the event that a trucker absorbed the
business of another private contractor or common carrier, or was a party to a merger of
lines, the seniority of the employees absorbed or affected thereby should be determined by
mutual agreement between the trucker and the unions involved, it was held in Moore v
International Brotherhood of Teamsters, etc. (1962, Ky) 356 SW2d 241, that the trucker was
not required to absorb the affected employees as well as the business, the court saying that
they could find no such meaning in the above clause, stating that it dealt only with seniority,
and not with initial employment. Unless and until the absorbing company agreed to take the
employees of the company whose business was being absorbed, no seniority problem was
created, said the court, hence the provision of the contract could have no
application.Furthermore, said the court, it did not require that the absorbing company take
these employees, but only that if it did take them the question of seniority between the old
and new employees would be worked out by agreement or else be submitted to the grievance
procedure.[31] (Emphasis ours.)
Indeed, from the tenor of local and foreign authorities, in voluntary mergers, absorption of the
dissolved corporations employees or the recognition of the absorbed employees service with
their previous employer may be demanded from the surviving corporation if required by
provision of law or contract. The dissent of Justice Arturo D. Brion tries to make a distinction
as to the terms and conditions of employment of the absorbed employees in the case of a
corporate merger or consolidation which will, in effect, take away from corporate management
the prerogative to make purely business decisions on the hiring of employees or will give it an
excuse not to apply the CBA in force to the prejudice of its own employees and their
recognized collective bargaining agent. In this regard, we disagree with Justice Brion.
Justice Brion takes the position that because the surviving corporation continues the
personality of the dissolved corporation and acquires all the latters rights and obligations, it is
duty-bound to absorb the dissolved corporations employees, even in the absence of a

stipulation in the plan of merger. He proposes that this interpretation would provide the
necessary protection to labor as it spares workers from being left in legal limbo.
However, there are instances where an employer can validly discontinue or terminate the
employment of an employee without violating his right to security of tenure. Among others, in
case of redundancy, for example, superfluous employees may be terminated and such
termination would be authorized under Article 283 of the Labor Code. [32]
Moreover, assuming for the sake of argument that there is an obligation to hire or absorb all
employees of the non-surviving corporation, there is still no basis to conclude that the terms
and conditions of employment under a valid collective bargaining agreement in force in the
surviving corporation should not be made to apply to the absorbed employees.
The Corporation Code and the Subject Merger Agreement are Silent on Efficacy, Terms and
Conditions of Employment Contracts
The lack of a provision in the plan of merger regarding the transfer of employment contracts to
the surviving corporation could have very well been deliberate on the part of the parties to the
merger, in order to grant the surviving corporation the freedom to choose who among the
dissolved corporations employees to retain, in accordance with the surviving corporations
business needs. If terminations, for instance due to redundancy or labor-saving devices or to
prevent losses, are done in good faith, they would be valid. The surviving corporation too is
duty-bound to protect the rights of its own employees who may be affected by the merger in
terms of seniority and other conditions of their employment due to the merger. Thus, we are
not convinced that in the absence of a stipulation in the merger plan the surviving corporation
was compelled, or may be judicially compelled, to absorb all employees under the same terms
and conditions obtaining in the dissolved corporation as the surviving corporation should also
take into consideration the state of its business and its obligations to its own employees, and to
their certified collective bargaining agent or labor union.
Even assuming we accept Justice Brions theory that in a merger situation the surviving
corporation should be compelled to absorb the dissolved corporations employees as a legal
consequence of the merger and as a social justice consideration, it bears to emphasize his
dissent also recognizes that the employee may choose to end his employment at any time by
voluntarily resigning. For the employee to be absorbed by BPI, it requires the employees
implied or express consent. It is because of this human element in employment contracts and
the personal, consensual nature thereof that we cannot agree that, in a merger situation,
employment contracts are automatically transferable from one entity to another in the same
manner that a contract pertaining to purely proprietary rights such as a promissory note or a
deed of sale of property is perfectly and automatically transferable to the surviving
corporation.
That BPI is the same entity as FEBTC after the merger is but a legal fiction intended as a tool
to adjudicate rights and obligations between and among the merged corporations and the
persons that deal with them. Although in a merger it is as if there is no change in the
personality of the employer, there is in reality a change in the situation of the employee. Once
an FEBTC employee is absorbed, there are presumably changes in his condition of
employment even if his previous tenure and salary rate is recognized by BPI. It is reasonable

69

to assume that BPI would have different rules and regulations and company practices than
FEBTC and it is incumbent upon the former FEBTC employees to obey these new rules and
adapt to their new environment. Not the least of the changes in employment condition that the
absorbed FEBTC employees must face is the fact that prior to the merger they were employees
of an unorganized establishment and after the merger they became employees of a unionized
company that had an existing collective bargaining agreement with the certified union. This
presupposes that the union who is party to the collective bargaining agreement is the certified
union that has, in the appropriate certification election, been shown to represent a majority of
the members of the bargaining unit.
Likewise, with respect to FEBTC employees that BPI chose to employ and who also chose to
be absorbed, then due to BPIs blanket assumption of liabilities and obligations under the
articles of merger, BPI was bound to respect the years of service of these FEBTC employees
and to pay the same, or commensurate salaries and other benefits that these employees
previously enjoyed with FEBTC.
As the Union likewise pointed out in its pleadings, there were benefits under the CBA that the
former FEBTC employees did not enjoy with their previous employer. As BPI employees,
they will enjoy all these CBA benefits upon their absorption. Thus, although in a sense BPI is
continuing FEBTCs employment of these absorbed employees, BPIs employment of these
absorbed employees was not under exactly the same terms and conditions as stated in the
latters employment contracts with FEBTC. This further strengthens the view that BPI and the
former FEBTC employees voluntarily contracted with each other for their employment in the
surviving corporation.
Proper Appreciation of the Term New Employees Under the CBA
In any event, it is of no moment that the former FEBTC employees retained the regular status
that they possessed while working for their former employer upon their absorption by
petitioner. This fact would not remove them from the scope of the phrase new employees as
contemplated in the Union Shop Clause of the CBA, contrary to petitioners insistence that the
term new employees only refers to those who are initially hired as non-regular employees for
possible regular employment.
The Union Shop Clause in the CBA simply states that new employees who during the
effectivity of the CBA may be regularly employed by the Bank must join the union within
thirty (30) days from their regularization. There is nothing in the said clause that limits its
application to only new employees who possess non-regular status, meaning probationary
status, at the start of their employment. Petitioner likewise failed to point to any provision in
the CBA expressly excluding from the Union Shop Clause new employees who are absorbed
as regular employees from the beginning of their employment. What is indubitable from the
Union Shop Clause is that upon the effectivity of the CBA, petitioners new regular employees
(regardless of the manner by which they became employees of BPI) are required to join the
Union as a condition of their continued employment.
The dissenting opinion of Justice Brion dovetails with Justice Carpios view only in their
restrictive interpretation of who are new employees under the CBA. To our dissenting
colleagues, the phrase new employees (who are covered by the union shop clause) should only
include new employees who were hired as probationary during the life of the CBA and were
later granted regular status. They propose that the former FEBTC employees who were

deemed regular employees from the beginning of their employment with BPI should be treated
as a special class of employees and be excluded from the union shop clause.
Justice Brion himself points out that there is no clear, categorical definition of new employee
in the CBA. In other words, the term new employee as used in the union shop clause is used
broadly without any qualification or distinction. However, the Court should not uphold an
interpretation of the term new employee based on the general and extraneous provisions of the
Corporation Code on merger that would defeat, rather than fulfill, the purpose of the union
shop clause. To reiterate, the provision of the Article 248(e) of the Labor Code in point
mandates that nothing in the said Code or any other law should stop the parties from requiring
membership in a recognized collective bargaining agent as a condition of employment.
Significantly, petitioner BPI never stretches its arguments so far as to state that the absorbed
employees should be deemed old employees who are not covered by the Union Shop
Clause. This is not surprising.
By law and jurisprudence, a merger only becomes effective upon approval by the Securities
and Exchange Commission (SEC) of the articles of merger. In Associated Bank v. Court of
Appeals,[33] we held:
The procedure to be followed is prescribed under the Corporation Code. Section 79 of said
Code requires the approval by the Securities and Exchange Commission (SEC) of the articles
of merger which, in turn, must have been duly approved by a majority of the respective
stockholders of the constituent corporations. The same provision further states that the merger
shall be effective only upon the issuance by the SEC of a certificate of merger. The effectivity
date of the merger is crucial for determining when the merged or absorbed corporation ceases
to exist; and when its rights, privileges, properties as well as liabilities pass on to the surviving
corporation. (Emphasis ours.)
In other words, even though BPI steps into the shoes of FEBTC as the surviving corporation,
BPI does so at a particular point in time, i.e., the effectivity of the merger upon the SECs
issuance of a certificate of merger. In fact, the articles of merger themselves provided that both
BPI and FEBTC will continue their respective business operations until the SEC issues the
certificate of merger and in the event SEC does not issue such a certificate, they agree to hold
each other blameless for the non-consummation of the merger.
Considering the foregoing principle, BPI could have only become the employer of the FEBTC
employees it absorbed after the approval by the SEC of the merger. If the SEC did not approve
the merger, BPI would not be in the position to absorb the employees of FEBTC at all. Indeed,
there is evidence on record that BPI made the assignments of its absorbed employees in BPI
effective April 10, 2000, or after the SECs approval of the merger.[34] In other words, BPI
became the employer of the absorbed employees only at some point after the effectivity of the
merger, notwithstanding the fact that the absorbed employees years of service with FEBTC
were voluntarily recognized by BPI.
Even assuming for the sake of argument that we consider the absorbed FEBTC employees as
old employees of BPI who are not members of any union (i.e., it is their date of hiring by
FEBTC and not the date of their absorption that is considered), this does not necessarily

70

exclude them from the union security clause in the CBA. The CBA subject of this case was
effective from April 1, 1996 until March 31, 2001. Based on the allegations of the former
FEBTC employees themselves, there were former FEBTC employees who were hired by
FEBTC after April 1, 1996 and if their date of hiring by FEBTC is considered as their date of
hiring by BPI, they would undeniably be considered new employees of BPI within the
contemplation of the Union Shop Clause of the said CBA. Otherwise, it would lead to the
absurd situation that we would discriminate not only between new BPI employees (hired
during the life of the CBA) and former FEBTC employees (absorbed during the life of the
CBA) but also among the former FEBTC employees themselves. In other words, we would be
treating employees who are exactly similarly situated (i.e., the group of absorbed FEBTC
employees) differently. This hardly satisfies the demands of equality and justice.
Petitioner limited itself to the argument that its absorbed employees do not fall within the term
new employees contemplated under the Union Shop Clause with the apparent objective of
excluding all, and not just some, of the former FEBTC employees from the application of the
Union Shop Clause.
However, in law or even under the express terms of the CBA, there is no special class of
employees called absorbed employees. In order for the Court to apply or not apply the Union
Shop Clause, we can only classify the former FEBTC employees as either old or new. If they
are not old employees, they are necessarily new employees. If they are new employees, the
Union Shop Clause did not distinguish between new employees who are non-regular at their
hiring but who subsequently become regular and new employees who are absorbed as regular
and permanent from the beginning of their employment. The Union Shop Clause did not so
distinguish, and so neither must we.
No Substantial Distinction Under the CBA Between Regular Employees Hired After
Probationary Status and Regular Employees Hired After the Merger
Verily, we agree with the Court of Appeals that there are no substantial differences between a
newly hired non-regular employee who was regularized weeks or months after his hiring and a
new employee who was absorbed from another bank as a regular employee pursuant to a
merger, for purposes of applying the Union Shop Clause. Both employees were
hired/employed only after the CBA was signed. At the time they are being required to join the
Union, they are both already regular rank and file employees of BPI. They belong to the same
bargaining unit being represented by the Union. They both enjoy benefits that the Union was
able to secure for them under the CBA. When they both entered the employ of BPI, the CBA
and the Union Shop Clause therein were already in effect and neither of them had the
opportunity to express their preference for unionism or not. We see no cogent reason why the
Union Shop Clause should not be applied equally to these two types of new employees, for
they are undeniably similarly situated.
The effect or consequence of BPIs so-called absorption of former FEBTC employees should
be limited to what they actually agreed to, i.e. recognition of the FEBTC employees years of
service, salary rate and other benefits with their previous employer. The effect should not be
stretched so far as to exempt former FEBTC employees from the existing CBA terms,
company policies and rules which apply to employees similarly situated. If the Union Shop

Clause is valid as to other new regular BPI employees, there is no reason why the same clause
would be a violation of the absorbed employees freedom of association.
Non-Application of Union Shop Clause Contrary to the Policy of the Labor Code and Inimical
to Industrial Peace
It is but fair that similarly situated employees who enjoy the same privileges of a CBA should
be likewise subject to the same obligations the CBA imposes upon them. A contrary
interpretation of the Union Shop Clause will be inimical to industrial peace and workers
solidarity. This unfavorable situation will not be sufficiently addressed by asking the former
FEBTC employees to simply pay agency fees to the Union in lieu of union membership, as the
dissent of Justice Carpio suggests. The fact remains that other new regular employees, to
whom the absorbed employees should be compared, do not have the option to simply pay the
agency fees and they must join the Union or face termination.
Petitioners restrictive reading of the Union Shop Clause could also inadvertently open an
avenue, which an employer could readily use, in order to dilute the membership base of the
certified union in the collective bargaining unit (CBU). By entering into a voluntary merger
with a non-unionized company that employs more workers, an employer could get rid of its
existing union by the simple expedient of arguing that the absorbed employees are not new
employees, as are commonly understood to be covered by a CBAs union security clause. This
could then lead to a new majority within the CBU that could potentially threaten the majority
status of the existing union and, ultimately, spell its demise as the CBUs bargaining
representative. Such a dreaded but not entirely far-fetched scenario is no different from the
ingenious and creative union-busting schemes that corporations have fomented throughout the
years, which this Court has foiled time and again in order to preserve and protect the valued
place of labor in this jurisdiction consistent with the Constitutions mandate of insuring social
justice.
There is nothing in the Labor Code and other applicable laws or the CBA provision at issue
that requires that a new employee has to be of probationary or non-regular status at the
beginning of the employment relationship. An employer may confer upon a new employee the
status of regular employment even at the onset of his engagement. Moreover, no law prohibits
an employer from voluntarily recognizing the length of service of a new employee with a
previous employer in relation to computation of benefits or seniority but it should not unduly
be interpreted to exclude them from the coverage of the CBA which is a binding contractual
obligation of the employer and employees.
Indeed, a union security clause in a CBA should be interpreted to give meaning and effect to
its purpose, which is to afford protection to the certified bargaining agent and ensure that the
employer is dealing with a union that represents the interests of the legally mandated
percentage of the members of the bargaining unit.
The union shop clause offers protection to the certified bargaining agent by ensuring that
future regular employees who (a) enter the employ of the company during the life of the CBA;
(b) are deemed part of the collective bargaining unit; and (c) whose number will affect the
number of members of the collective bargaining unit will be compelled to join the union. Such
compulsion has legal effect, precisely because the employer by voluntarily entering in to a

71

union shop clause in a CBA with the certified bargaining agent takes on the responsibility of
dismissing the new regular employee who does not join the union.

employment status in itself does not necessarily exempt him from the coverage of a union
shop clause.

Without the union shop clause or with the restrictive interpretation thereof as proposed in the
dissenting opinions, the company can jeopardize the majority status of the certified union by
excluding from union membership all new regular employees whom the Company will absorb
in future mergers and all new regular employees whom the Company hires as regular from the
beginning of their employment without undergoing a probationary period. In this manner, the
Company can increase the number of members of the collective bargaining unit and if this
increase is not accompanied by a corresponding increase in union membership, the certified
union may lose its majority status and render it vulnerable to attack by another union who
wishes to represent the same bargaining unit.[35]

In the past this Court has upheld even the more stringent type of union security clause, i.e., the
closed shop provision, and held that it can be made applicable to old employees who are
already regular and permanent but have chosen not to join a union. In the early case of Juat v.
Court of Industrial Relations,[38] the Court held that an old employee who had no union may be
compelled to join the union even if the collective bargaining agreement (CBA) imposing the
closed shop provision was only entered into seven years after of the hiring of the said
employee. To quote from that decision:

Or worse, a certified union whose membership falls below twenty percent (20%) of the total
members of the collective bargaining unit may lose its status as a legitimate labor organization
altogether, even in a situation where there is no competing union. [36] In such a case, an
interested party may file for the cancellation of the unions certificate of registration with the
Bureau of Labor Relations.[37]
Plainly, the restrictive interpretation of the union shop clause would place the certified unions
very existence at the mercy and control of the employer. Relevantly, only BPI, the employer
appears to be interested in pursuing this case. The former FEBTC employees have not joined
BPI in this appeal.
For the foregoing reasons, Justice Carpios proposal to simply require the former FEBTC to
pay agency fees is wholly inadequate to compensate the certified union for the loss of
additional membership supposedly guaranteed by compliance with the union shop clause. This
is apart from the fact that treating these absorbed employees as a special class of new
employees does not encourage worker solidarity in the company since another class of new
employees (i.e. those whose were hired as probationary and later regularized during the life of
the CBA) would not have the option of substituting union membership with payment of
agency fees.

A closed-shop agreement has been considered as one form of union security whereby only
union members can be hired and workers must remain union members as a condition of
continued employment. The requirement for employees or workers to become members of a
union as a condition for employment redounds to the benefit and advantage of said
employees because by holding out to loyal members a promise of employment in the closedshop the union wields group solidarity. In fact, it is said that "the closed-shop contract is the
most prized achievement of unionism."
xxxx
This Court had categorically held in the case of Freeman Shirt Manufacturing Co., Inc., et al.
vs. Court of Industrial Relations, et al., G.R. No. L-16561, Jan. 28, 1961, that the closed-shop
proviso of a collective bargaining agreement entered into between an employer and a
duly authorized labor union is applicable not only to the employees or laborers that are
employed after the collective bargaining agreement had been entered into but also to old
employees who are not members of any labor union at the time the said collective bargaining
agreement was entered into. In other words, if an employee or laborer is already a member of
a labor union different from the union that entered into a collective bargaining agreement with
the employer providing for a closed-shop, said employee or worker cannot be obliged to
become a member of that union which had entered into a collective bargaining agreement with
the employer as a condition for his continued employment. (Emphasis and underscoring
supplied.)

Justice Brion, on the other hand, appears to recognize the inherent unfairness of perpetually
excluding the absorbed employees from the ambit of the union shop clause. He proposes that
this matter be left to negotiation by the parties in the next CBA. To our mind, however, this
proposal does not sufficiently address the issue. With BPI already taking the position that
employees absorbed pursuant to its voluntary mergers with other banks are exempt from the
union shop clause, the chances of the said bank ever agreeing to the inclusion of such
employees in a future CBA is next to nil more so, if BPIs narrow interpretation of the union
shop clause is sustained by this Court.

Although the present case does not involve a closed shop provision that included even old
employees, the Juat example is but one of the cases that laid down the doctrine that the right
not to join a union is not absolute. Theoretically, there is nothing in law or jurisprudence to
prevent an employer and a union from stipulating that existing employees (who already
attained regular and permanent status but who are not members of any union) are to be
included in the coverage of a union security clause. Even Article 248(e) of the Labor Code
only expressly exempts old employees who already have a union from inclusion in a union
security clause.[39]

Right of an Employee not to Join a Union is not Absolute and Must Give Way to the Collective
Good of All Members of the Bargaining Unit

Contrary to the assertion in the dissent of Justice Carpio, Juat has not been overturned
by Victoriano v. Elizalde Rope Workers Union[40] nor by Reyes v. Trajano.[41] The factual
milieus of these three cases are vastly different.

The dissenting opinions place a premium on the fact that even if the former FEBTC
employees are not old employees, they nonetheless were employed as regular and permanent
employees without a gap in their service. However, an employees permanent and regular

In Victoriano, the issue that confronted the Court was whether or not employees who were
members of the Iglesia ni Kristo (INK) sect could be compelled to join the union under a
closed shop provision, despite the fact that their religious beliefs prohibited them from joining

72

a union. In that case, the Court was asked to balance the constitutional right to religious
freedom against a host of other constitutional provisions including the freedom of association,
the non-establishment clause, the non-impairment of contracts clause, the equal protection
clause, and the social justice provision. In the end, the Court held that religious freedom,
although not unlimited, is a fundamental personal right and liberty, and has a preferred
position in the hierarchy of values.[42]
However, Victoriano is consistent with Juat since they both affirm that the right to refrain
from joining a union is not absolute. The relevant portion of Victoriano is quoted below:
The right to refrain from joining labor organizations recognized by Section 3 of the Industrial
Peace Act is, however, limited. The legal protection granted to such right to refrain from
joining is withdrawn by operation of law, where a labor union and an employer have agreed on
a closed shop, by virtue of which the employer may employ only member of the collective
bargaining union, and the employees must continue to be members of the union for the
duration of the contract in order to keep their jobs. Thus Section 4 (a) (4) of the Industrial
Peace Act, before its amendment by Republic Act No. 3350, provides that although it would
be an unfair labor practice for an employer "to discriminate in regard to hire or tenure of
employment or any term or condition of employment to encourage or discourage membership
in any labor organization" the employer is, however, not precluded "from making an
agreement with a labor organization to require as a condition of employment membership
therein, if such labor organization is the representative of the employees." By virtue, therefore,
of a closed shop agreement, before the enactment of Republic Act No. 3350, if any person,
regardless of his religious beliefs, wishes to be employed or to keep his employment, he must
become a member of the collective bargaining union. Hence, the right of said employee not to
join the labor union is curtailed and withdrawn.[43] (Emphases supplied.)
If Juat exemplified an exception to the rule that a person has the right not to join a
union, Victoriano merely created an exception to the exception on the ground of religious
freedom.
Reyes, on the other hand, did not involve the interpretation of any union security clause. In
that case, there was no certified bargaining agent yet since the controversy arose during a
certification election. In Reyes,the Court highlighted the idea that the freedom of association
included the right not to associate or join a union in resolving the issue whether or not the
votes of members of the INK sect who were part of the bargaining unit could be excluded in
the results of a certification election, simply because they were not members of the two
contesting unions and were expected to have voted for NO UNION in view of their religious
affiliation. The Court upheld the inclusion of the votes of the INK members since in the
previous case of Victoriano we held that INK members may not be compelled to join a union
on the ground of religious freedom and even without Victoriano every employee has the right
to vote no union in a certification election as part of his freedom of
association. However, Reyes is not authority for Justice Carpios proposition that an employee
who is not a member of any union may claim an exemption from an existing union security
clause because he already has regular and permanent status but simply prefers not to join a
union.

The other cases cited in Justice Carpios dissent on this point are likewise inapplicable. Basa v.
Federacion Obrera de la Industria Tabaquera y Otros Trabajadores de Filipinas,
[44]
Anucension v. National Labor Union,[45] and Gonzales v. Central Azucarera de Tarlac
Labor Union[46] all involved members of the INK. In line with Victoriano, these cases upheld
the INK members claimed exemption from the union security clause on religious grounds. In
the present case, the former FEBTC employees never claimed any religious grounds for their
exemption from the Union Shop Clause. As for Philips Industrial Development, Inc. v.
National Labor Relations Corporation[47] and Knitjoy Manufacturing, Inc. v. Ferrer-Calleja,
[48]
the employees who were exempted from joining the respondent union or who were
excluded from participating in the certification election were found to be not members of the
bargaining unit represented by respondent union and were free to form/join their own
union. In the case at bar, it is undisputed that the former FEBTC employees were part of the
bargaining unit that the Union represented. Thus, the rulings in Philips and Knitjoy have no
relevance to the issues at hand.
Time and again, this Court has ruled that the individual employees right not to join a union
may be validly restricted by a union security clause in a CBA [49] and such union security
clause is not a violation of the employees constitutional right to freedom of association. [50]
It is unsurprising that significant provisions on labor protection of the 1987 Constitution are
found in Article XIII on Social Justice. The constitutional guarantee given the right to form
unions[51] and the State policy to promote unionism[52] have social justice
considerations. In Peoples Industrial and Commercial Employees and Workers Organization
v. Peoples Industrial and Commercial Corporation,[53] we recognized that [l]abor, being the
weaker in economic power and resources than capital, deserve protection that is actually
substantial and material.
The rationale for upholding the validity of union shop clauses in a CBA, even if they impinge
upon the individual employees right or freedom of association, is not to protect the union for
the unions sake.Laws and jurisprudence promote unionism and afford certain protections to
the certified bargaining agent in a unionized company because a strong and effective union
presumably benefits all employees in the bargaining unit since such a union would be in a
better position to demand improved benefits and conditions of work from the employer. This
is the rationale behind the State policy to promote unionism declared in the Constitution,
which was elucidated in the above-cited case of Liberty Flour Mills Employees v. Liberty
Flour Mills, Inc.[54]
In the case at bar, since the former FEBTC employees are deemed covered by the Union Shop
Clause, they are required to join the certified bargaining agent, which supposedly has gathered
the support of the majority of workers within the bargaining unit in the appropriate
certification proceeding. Their joining the certified union would, in fact, be in the best
interests of the former FEBTC employees for it unites their interests with the majority of
employees in the bargaining unit. It encourages employee solidarity and affords sufficient
protection to the majority status of the union during the life of the CBA which are the
precisely the objectives of union security clauses, such as the Union Shop Clause involved
herein. We are indeed not being called to balance the interests of individual employees as
against the State policy of promoting unionism, since the employees, who were parties in the
court below, no longer contested the adverse Court of Appeals decision. Nonetheless, settled
jurisprudence has already swung the balance in favor of unionism, in recognition that

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ultimately the individual employee will be benefited by that policy. In the hierarchy of
constitutional values, this Court has repeatedly held that the right to abstain from joining a
labor organization is subordinate to the policy of encouraging unionism as an instrument of
social justice.
Also in the dissenting opinion of Justice Carpio, he maintains that one of the dire
consequences to the former FEBTC employees who refuse to join the union is the forfeiture of
their retirement benefits. This is clearly not the case precisely because BPI expressly
recognized under the merger the length of service of the absorbed employees with
FEBTC. Should some refuse to become members of the union, they may still opt to retire if
they are qualified under the law, the applicable retirement plan, or the CBA, based on their
combined length of service with FEBTC and BPI. Certainly, there is nothing in the union shop
clause that should be read as to curtail an employees eligibility to apply for retirement if
qualified under the law, the existing retirement plan, or the CBA as the case may be.
In sum, this Court finds it reasonable and just to conclude that the Union Shop Clause of the
CBA covers the former FEBTC employees who were hired/employed by BPI during the
effectivity of the CBA in a manner which petitioner describes as absorption. A contrary
appreciation of the facts of this case would, undoubtedly, lead to an inequitable and very
volatile labor situation which this Court has consistently ruled against.

In the case of former FEBTC employees who initially joined the union but later withdrew their
membership, there is even greater reason for the union to request their dismissal from the
employer since the CBA also contained a Maintenance of Membership Clause.
A final point in relation to procedural due process, the Court is not unmindful that the former
FEBTC employees refusal to join the union and BPIs refusal to enforce the Union Shop
Clause in this instance may have been based on the honest belief that the former FEBTC
employees were not covered by said clause. In the interest of fairness, we believe the former
FEBTC employees should be given a fresh thirty (30) days from notice of finality of this
decision to join the union before the union demands BPI to terminate their employment under
the Union Shop Clause, assuming said clause has been carried over in the present CBA and
there has been no material change in the situation of the parties.
WHEREFORE, the petition is hereby DENIED, and the Decision dated September 30, 2003 of
the Court of Appeals is AFFIRMED, subject to the thirty (30) day notice requirement imposed
herein.Former FEBTC employees who opt not to become union members but who qualify for
retirement shall receive their retirement benefits in accordance with law, the applicable
retirement plan, or the CBA, as the case may be.
SO ORDERED.

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