G.R. No.
122452 January 29, 2001 On June 27, 1994, petitioner's counsel was able to secure a copy of the resolution
TAM WING TAK, petitioner,
vs.
HON. RAMON P. MAKASIAR (in his Capacity as Presiding Judge of the Regional Trial
Court of Manila, Branch 35) and ZENON DE GUIA (in his capacity as Chief State
Prosecutor), respondents.
QUISUMBING, J.:
This is a petition for review on certiorari of the decision of the Regional Trial Court of Manila,
Branch 35, dated September 14, 1995, which dismissed herein petitioner's special civil
action for mandamus and sustained the Letter-Order of respondent Chief State Prosecutor.
The latter dismissed petitioner's appeal from the resolution of the City Prosecutor of Quezon
City, which, in turn, dismissed petitioner's complaint against Vic Ang Siong for violation of
the Bouncing Checks Law or B.P. Blg. 22.
The factual background of this case is as follows:
On November 11, 1992, petitioner, in his capacity as director of Concord-World Properties,
Inc., (Concord for brevity), a domestic corporation, filed an affidavit-complaint with the
Quezon City Prosecutor's Office, charging Vic Ang Siong with violation of B.P. Blg. 22.
Docketed by the Prosecutor as I.S. No. 93-15886, the complaint alleged that a check for the
amount of P83,550,000.00, issued by Vic Ang Siong in favor of Concord, was dishonored
when presented for encashment.
Vic Ang Siong sought the dismissal of the case on two grounds: First, that petitioner had no
authority to file the case on behalf of Concord, the payee of the dishonored check, since the
firm's board of directors had not empowered him to act on its behalf. Second, he and
Concord had already agreed to amicably settle the issue after he made a partial payment of
P19,000,000.00 on the dishonored check. 1âwphi1.nêt
On March 23, 1994, the City Prosecutor dismissed I.S. No. 93-15886 on the following
grounds: (1) that petitioner lacked the requisite authority to initiate the criminal complaint for
and on Concord's behalf; and (2) that Concord and Vic Ang Siong had already agreed upon
the payment of the latter's balance on the dishonored check.
A copy of the City Prosecutor's resolution was sent by registered mail to petitioner in the
address he indicated in his complaint-affidavit. Notwithstanding that petitioner was
represented by counsel, the latter was not furnished a copy of the resolution.
dismissing I.S. No. 93-15886. Counting his 15-day appeal period from said date, petitioner
moved for reconsideration on July 7, 1994.
On October 21, 1994, the City Prosecutor denied petitioner's motion for reconsideration.
Petitioner's counsel received a copy of the denial order on November 3, 1994.
On November 7, 1994, petitioner's lawyer filed a motion to extend the period to appeal by an
additional 15 days counted from November 3, 1994 with the Chief State Prosecutor. He
manifested that it would take time to communicate with petitioner who is a Hong Kong
resident and enable the latter to verify the appeal as procedurally required.
On November 8, 1994, petitioner appealed the dismissal of his complaint by the City
Prosecutor to the Chief State Prosecutor. The appeal was signed by petitioner's attorney
only and was not verified by petitioner until November 23, 1994.
On December 8, 1994, the Chief State Prosecutor dismissed the appeal for having been
filed out of time. Petitioner's lawyer received a copy of the letter-resolution dismissing the
appeal on January 20, 1995.
On January 30, 1995, petitioner moved for reconsideration.
On March 9, 1995, respondent Chief State Prosecutor denied the motion for
reconsideration.
Petitioner then filed Civil Case No. 95-74394 for mandamus with the Regional Trial Court of
Quezon City to compel the Chief State Prosecutor to file or cause the filing of an information
charging Vic Ang Siong with violation of B.P. Blg. 22.
On September 14, 1995, the trial court disposed of the action as follows:
WHEREFORE, for utter lack of merit, the petition for mandamus of petitioner is
DENIED and DISMISSED.
SO ORDERED.1
Petitioner moved for reconsideration, but the trial court denied this motion in its order dated
October 24, 1995.
Hence, the instant petition.
Before this Court, petitioner claims respondent judge committed grave errors of law in
sustaining respondent Chief State Prosecutor whose action flagrantly contravenes: (1) the
established rule on service of pleadings and orders upon parties represented by counsel; (b)
the basic principle that except in private crimes, any competent person may initiate a
criminal case; and (3) the B.P. Blg. 22 requirement that arrangement for full payment of a
bounced check must be made by the drawer with the drawee within five (5) banking days
from notification of the check's dishonor.2
We find pertinent for our resolution the following issues:
(1) Was there valid service of the City Prosecutor's resolution upon petitioner?
(2) Will mandamus lie to compel the City Prosecutor to file the necessary information
in court?
In upholding respondent Chief State Prosecutor, the court a quo held:
It is generally accepted principle in the service of orders, resolutions, processes and
other papers to serve them on the party or his counsel, either in his office, if known,
or else in the residence, also if known. As the party or his counsel is not expected to
be present at all times in his office or residence, service is allowed to be made with a
person in charge of the office, or with a person of sufficient discretion to receive the
same in the residence.
In the case under consideration, it is not disputed that the controverted Resolution
dismissing the complaint of the petitioner against Vic Ang Siong was served on the
former by registered mail and was actually delivered by the postmaster on April 9,
1994 at said petitioner's given address in the record at No. 5 Kayumanggi Street,
West Triangle, Quezon City. The registered mail was in fact received by S. Ferraro.
The service then was complete and the period for filing a motion for reconsideration
or appeal began to toll from that date. It expired on April 24, 1994. Considering that
his motion for reconsideration was filed only on July 7, 1994, the same was filed
beyond the prescribed period, thereby precluding further appeal to the Office of the
respondent.3
Petitioner, before us, submits that there is no such "generally accepted practice" which gives
a tribunal the option of serving pleadings, orders, resolutions, and other papers to either the
opposing party himself or his counsel. Petitioner insists that the fundamental rule in this
jurisdiction is that if a party appears by counsel, then service can only be validly made upon
counsel and service upon the party himself becomes invalid and without effect. Petitioner
relies upon Rule 13, Section 2 of the Rules of Court4 and our ruling in J.M. Javier Logging
Corp. v. Mardo, 24 SCRA 776 (1968) to support his stand. In the J.M. Javier case, we held:
[W]here a party appears by attorney, notice to the former is not a notice in law,
unless service upon the party himself is ordered by the court…5
The Solicitor General, for respondents, contends that the applicable rule on service in the
present case is Section 2 of the Department of Justice (DOJ) Order No. 223,6 which allows
service to be made upon either party or his counsel. Respondents argue that while a
preliminary investigation has been considered as partaking of the nature of a judicial
proceeding,7 nonetheless, it is not a court proceeding and hence, falls outside of the ambit
of the Rules of Court.
We agree with petitioner that there is no "generally accepted practice" in the service of
orders, resolutions, and processes, which allows service upon either the litigant or his
lawyer. As a rule, notice or service made upon a party who is represented by counsel is a
nullity,8 However, said rule admits of exceptions, as when the court or tribunal order service
upon the party9 or when the technical defect is waived.10
To resolve the issue on validity of service, we must make a determination as to which is the
applicable rule – the on service in the Rules of Court, as petitioner insists or the rule on
service in DOJ Order No. 223?
The Rules of Court were promulgated by this Court pursuant to Section 13, Article VII of the
1935 Constitution11(now Section 5 [5], Article VIII of the Constitution)12 to govern "pleadings,
practice and procedure in all courts of the Philippines." The purpose of the Rules is clear
and does not need any interpretation. The Rules were meant to govern court (stress
supplied) procedures and pleadings. As correctly pointed out by the Solicitor General, a
preliminary investigation, notwithstanding its judicial nature, is not a court proceeding. The
holding of a preliminary investigation is a function of the Executive Department and not of
the Judiciary.13 Thus, the rule on service provided for in the Rules of Court cannot be made
to apply to the service of resolutions by public prosecutors, especially as the agency
concerned, in this case, the Department of Justice, has its own procedural rules governing
said service.
A plain reading of Section 2 of DOJ Order No. 223 clearly shows that in preliminary
investigation, service can be made upon the party himself or through his counsel. It must be
assumed that when the Justice Department crafted the said section, it was done with
knowledge of the pertinent rule in the Rules of Court and of jurisprudence interpreting it. The
DOJ could have just adopted the rule on service provided for in the Rules of Court, but did
not. Instead, it opted to word Section 2 of DOJ Order No. 223 in such a way as to leave no
doubt that in preliminary investigations, service of resolutions of public prosecutors could be
made upon either the party or his counsel.
Moreover, the Constitution provides that "Rules of procedure of special courts and quasi-
judicial bodies shall remain effective unless disapproved by the Supreme Court."14 There is
naught in the records to show that we have disapproved and nullified Section 2 of DOJ
Order No. 223 and since its validity is not an issue in the instant case, we shall refrain from
ruling upon its validity.
We hold that there was valid service upon petitioner pursuant to Section 2 of DOJ Order No.
223.
On the issue of whether mandamus will lie. In general, mandamus may be resorted to only
where one's right is founded clearly in law and not when it is doubtful.15 The exception is to
be found in criminal cases where mandamus is available to compel the performance by the
public prosecutor of an ostensibly discretionary function, where by reason of grave abuse of
discretion on his part, he willfully refuses to perform a duty mandated by law.16Thus,
mandamus may issue to compel a prosecutor to file an information when he refused to do
so in spite of the prima facie evidence of guilt.17
Petitioner takes the stance that it was grave abuse for discretion on the part of respondent
Chief State Prosecutor to sustain the dismissal of I.S. No. 93-15886 on the grounds that: (1)
Vic Ang Siong's obligation which gave rise to the bounced check had already been
extinguished by partial payment and agreement to amicably settle balance, and (2)
petitioner had no standing to file the criminal complaint since he was neither the payee nor
holder of the bad check. Petitioner opines that neither ground justifies dismissal of his
complaint.
Petitioner's stand is unavailing. Respondent Chief State Prosecutor in refusing to order the
filing of an information for violation of B.P. Blg. 22 against Vic Ang Siong did not act without
or in excess of jurisdiction or with grave abuse of discretion.
First, with respect to the agreement between Concord and Victor Ang Siong to amicably
settle their difference, we find this resort to an alternative dispute settlement mechanism as
not contrary to law, public policy, or public order. Efforts of parties to solve their disputes
outside of the courts are looked on with favor, in view of the clogged dockets of the judiciary.
Second, it is not disputed in the instant case that Concord, a domestic corporation, was the
payee of the bum check, not petitioner. Therefore, it is Concord, as payee of the bounced
check, which is the injured party. Since petitioner was neither a payee nor a holder of the
bad check, he had neither the personality to sue nor a cause of action against Vic Ang
Siong. Under Section 36 of the Corporation Code18, read in relation to Section 23,19 it is clear
that where a corporation is an injured party, its power to sue is lodged with its board of
directors or turstees.20 Note that petitioner failed to show any proof that he was authorized or
deputized or granted specific powers by Concord's board of director to sue Victor And Siong
for and on behalf of the firm. Clearly, petitioner as a minority stockholder and member of the
board of directors had no such power or authority to sue on Concord's behalf. Nor can we
uphold his act as a derivative suit. For a derivative suit to prosper, it is required that the
minority stockholder suing for and on behalf of the corporation must allege in his complaint
that he is suing on a derivative cause of action on behalf of the corporation and all other
stockholders similarly situated who may wish to join him in the suit.21 There is no showing
that petitioner has complied with the foregoing requisites. It is obvious that petitioner has not
shown any clear legal right which would warrant the overturning of the decision of public
respondents to dismiss the complaint against Vic Ang Siong. A public prosecutor, by the
nature of his office, is under no compulsion to file a criminal information where no clear legal
justification has been shown, and no sufficient evidence of guilt nor prima faciecase has
been presented by the petitioner.22 No reversible error may be attributed to the court a
quo when it dismissed petitioner's special civil action for mandamus. 1âwphi1.nêt
WHEREFORE, the instant petition is DISMISSED for lack of merit. Costs against petitioner.
SO ORDERED.
G.R. No. L-15092 May 18, 1962
ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,
vs.
BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.
Tañada, Teehankee and Carreon for plaintiffs-appellants.
Hilado and Hilado for defendant-appellee.
REYES, J.B.L., J.:
Appeal on points of law from a judgment of the Court of First Instance of Occidental Negros,
in its Civil Case No. 2603, dismissing plaintiff's complaint that sought to compel the
defendant Milling Company to increase plaintiff's share in the sugar produced from their
cane, from 60% to 62.33%, starting from the 1951-1952 crop year. 1äwphï1.ñët
It is undisputed that plaintiffs-appellants, Alfredo Montelibano, Alejandro Montelibano, and
the Limited co-partnership Gonzaga and Company, had been and are sugar planters
adhered to the defendant-appellee's sugar central mill under identical milling contracts.
Originally executed in 1919, said contracts were stipulated to be in force for 30 years
starting with the 1920-21 crop, and provided that the resulting product should be divided in
the ratio of 45% for the mill and 55% for the planters. Sometime in 1936, it was proposed to
execute amended milling contracts, increasing the planters' share to 60% of the
manufactured sugar and resulting molasses, besides other concessions, but extending the
operation of the milling contract from the original 30 years to 45 years. To this effect, a
printed Amended Milling Contract form was drawn up. On August 20, 1936, the Board of
Directors of the appellee Bacolod-Murcia Milling Co., Inc., adopted a resolution (Acts No. 11,
Acuerdo No. 1) granting further concessions to the planters over and above those contained
in the printed Amended Milling Contract. The bone of contention is paragraph 9 of this
resolution, that reads as follows:
ACTA No. 11
SESSION DE LA JUNTA DIRECTIVA
AGOSTO 20, 1936
xxx xxx xxx
Acuerdo No. 1. — Previa mocion debidamente secundada, la Junta en
consideracion a una peticion de los plantadores hecha por un comite
nombrado por los mismos, acuerda enmendar el contrato de molienda
enmendado medientelas siguentes:
xxx xxx xxx
9.a Que si durante la vigencia de este contrato de Molienda Enmendado,
lascentrales azucareras, de Negros Occidental, cuya produccion anual de
azucar centrifugado sea mas de una tercera parte de la produccion total de
todas lascentrales azucareras de Negros Occidental, concedieren a sus
plantadores mejores condiciones que la estipuladas en el presente contrato,
entonces esas mejores condiciones se concederan y por el presente se
entenderan concedidas a los platadores que hayan otorgado este Contrato
de Molienda Enmendado.
Appellants signed and executed the printed Amended Milling Contract on September 10,
1936, but a copy of the resolution of August 10, 1936, signed by the Central's General
Manager, was not attached to the printed contract until April 17, 1937; with the notation —
Las enmiendas arriba transcritas forman parte del contrato de molienda enmendado,
otorgado por — y la Bacolod-Murcia Milling Co., Inc.
In 1953, the appellants initiated the present action, contending that three Negros sugar
centrals (La Carlota, Binalbagan-Isabela and San Carlos), with a total annual production
exceeding one-third of the production of all the sugar central mills in the province, had
already granted increased participation (of 62.5%) to their planters, and that under
paragraph 9 of the resolution of August 20, 1936, heretofore quoted, the appellee had
become obligated to grant similar concessions to the plaintiffs (appellants herein). The
appellee Bacolod-Murcia Milling Co., inc., resisted the claim, and defended by urging that
the stipulations contained in the resolution were made without consideration; that the
resolution in question was, therefore, null and void ab initio, being in effect a donation that
was ultra viresand beyond the powers of the corporate directors to adopt.
After trial, the court below rendered judgment upholding the stand of the defendant Milling
company, and dismissed the complaint. Thereupon, plaintiffs duly appealed to this Court.
We agree with appellants that the appealed decisions can not stand. It must be remembered
that the controverted resolution was adopted by appellee corporation as a supplement to, or
further amendment of, the proposed milling contract, and that it was approved on August 20,
1936, twenty-one days prior to the signing by appellants on September 10, of the Amended
Milling Contract itself; so that when the Milling Contract was executed, the concessions
granted by the disputed resolution had been already incorporated into its terms. No reason
appears of record why, in the face of such concessions, the appellants should reject them or
consider them as separate and apart from the main amended milling contract, specially
taking into account that appellant Alfredo Montelibano was, at the time, the President of the
Planters Association (Exhibit 4, p. 11) that had agitated for the concessions embodied in the
resolution of August 20, 1936. That the resolution formed an integral part of the amended
milling contract, signed on September 10, and not a separate bargain, is further shown by
the fact that a copy of the resolution was simply attached to the printed contract without
special negotiations or agreement between the parties.
It follows from the foregoing that the terms embodied in the resolution of August 20, 1936
were supported by the same causa or consideration underlying the main amended milling
contract; i.e., the promises and obligations undertaken thereunder by the planters, and,
particularly, the extension of its operative period for an additional 15 years over and beyond
the 30 years stipulated in the original contract. Hence, the conclusion of the court below that
the resolution constituted gratuitous concessions not supported by any consideration is
legally untenable.
All disquisition concerning donations and the lack of power of the directors of the respondent
sugar milling company to make a gift to the planters would be relevant if the resolution in
question had embodied a separate agreement after the appellants had already bound
themselves to the terms of the printed milling contract. But this was not the case. When the
resolution was adopted and the additional concessions were made by the company, the
appellants were not yet obligated by the terms of the printed contract, since they admittedly
did not sign it until twenty-one days later, on September 10, 1936. Before that date, the
printed form was no more than a proposal that either party could modify at its pleasure, and
the appellee actually modified it by adopting the resolution in question. So that by
September 10, 1936 defendant corporation already understood that the printed terms were
not controlling, save as modified by its resolution of August 20, 1936; and we are satisfied
that such was also the understanding of appellants herein, and that the minds of the parties
met upon that basis. Otherwise there would have been no consent or "meeting of the
minds", and no binding contract at all. But the conduct of the parties indicates that they
assumed, and they do not now deny, that the signing of the contract on September 10,
1936, did give rise to a binding agreement. That agreement had to exist on the basis of the
printed terms as modified by the resolution of August 20, 1936, or not at all. Since there is
no rational explanation for the company's assenting to the further concessions asked by the
planters before the contracts were signed, except as further inducement for the planters to
agree to the extension of the contract period, to allow the company now to retract such
concessions would be to sanction a fraud upon the planters who relied on such additional
stipulations.
The same considerations apply to the "void innovation" theory of appellees. There can be no
novation unless two distinct and successive binding contracts take place, with the later
designed to replace the preceding convention. Modifications introduced before a bargain
becomes obligatory can in no sense constitute novation in law.
Stress is placed on the fact that the text of the Resolution of August 20, 1936 was not
attached to the printed contract until April 17, 1937. But, except in the case of statutory
forms or solemn agreements (and it is not claimed that this is one), it is the assent and
concurrence (the "meeting of the minds") of the parties, and not the setting down of its
terms, that constitutes a binding contract. And the fact that the addendum is only signed by
the General Manager of the milling company emphasizes that the addition was made solely
in order that the memorial of the terms of the agreement should be full and complete.
Much is made of the circumstance that the report submitted by the Board of Directors of the
appellee company in November 19, 1936 (Exhibit 4) only made mention of 90%, the
planters having agreed to the 60-40 sharing of the sugar set forth in the printed "amended
milling contracts", and did not make any reference at all to the terms of the resolution of
August 20, 1936. But a reading of this report shows that it was not intended to inventory all
the details of the amended contract; numerous provisions of the printed terms are alao
glossed over. The Directors of the appellee Milling Company had no reason at the time to
call attention to the provisions of the resolution in question, since it contained mostly
modifications in detail of the printed terms, and the only major change was paragraph 9
heretofore quoted; but when the report was made, that paragraph was not yet in effect,
since it was conditioned on other centrals granting better concessions to their planters, and
that did not happen until after 1950. There was no reason in 1936 to emphasize a
concession that was not yet, and might never be, in effective operation.
There can be no doubt that the directors of the appellee company had authority to modify
the proposed terms of the Amended Milling Contract for the purpose of making its terms
more acceptable to the other contracting parties. The rule is that —
It is a question, therefore, in each case of the logical relation of the act to the
corporate purpose expressed in the charter. If that act is one which is lawful in itself,
and not otherwise prohibited, is done for the purpose of serving corporate ends, and
is reasonably tributary to the promotion of those ends, in a substantial, and not in a
remote and fanciful sense, it may fairly be considered within charter powers. The test
to be applied is whether the act in question is in direct and immediate furtherance of
the corporation's business, fairly incident to the express powers and reasonably
necessary to their exercise. If so, the corporation has the power to do it; otherwise,
not. (Fletcher Cyc. Corp., Vol. 6, Rev. Ed. 1950, pp. 266-268)
As the resolution in question was passed in good faith by the board of directors, it is valid
and binding, and whether or not it will cause losses or decrease the profits of the central, the
court has no authority to review them.
They hold such office charged with the duty to act for the corporation according to
their best judgment, and in so doing they cannot be controlled in the reasonable
exercise and performance of such duty. Whether the business of a corporation
should be operated at a loss during depression, or close down at a smaller loss, is a
purely business and economic problem to be determined by the directors of the
corporation and not by the court. It is a well-known rule of law that questions of policy
or of management are left solely to the honest decision of officers and directors of a
corporation, and the court is without authority to substitute its judgment of the board
of directors; the board is the business manager of the corporation, and so long as it
acts in good faith its orders are not reviewable by the courts. (Fletcher on
Corporations, Vol. 2, p. 390).
And it appearing undisputed in this appeal that sugar centrals of La Carlota, Hawaiian
Philippines, San Carlos and Binalbagan (which produce over one-third of the entire annual
sugar production in Occidental Negros) have granted progressively increasing participations
to their adhered planter at an average rate of
 62.333% for the 1951-52 crop year; AGAPITO FUELLAS, petitioner,
vs.
64.2% for 1952-53; ELPIDIO CADANO, ET AL., respondents.

64.3% for 1953-54; Ambrosio Padilla, Feliciano C. Tumale and Roberto R. Reverente for petitioner.
Valerio V. Rovira for respondents.
64.5% for 1954-55; and
63.5% for 1955-56, PAREDES, J.:

the appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution of August
20, 1936, duty bound to grant similar increases to plaintiffs-appellants herein.
WHEREFORE, the decision under appeal is reversed and set aside; and judgment is
decreed sentencing the defendant-appellee to pay plaintiffs-appellants the differential or
increase of participation in the milled sugar in accordance with paragraph 9 of the appellee
Resolution of August 20, 1936, over and in addition to the 60% expressed in the printed
Amended Milling Contract, or the value thereof when due, as follows:
0,333% to appellants Montelibano for the 1951-1952 crop year, said appellants
having received an additional 2% corresponding to said year in October, 1953;
2.333% to appellant Gonzaga & Co., for the 1951-1952 crop year; and to all
appellants thereafter —
4.2% for the 1952-1953 crop year;
4.3% for the 1953-1954 crop year;
4.5% for the 1954-1955 crop year;
3.5% for the 1955-1956 crop year;
with interest at the legal rate on the value of such differential during the time they were
withheld; and the right is reserved to plaintiffs-appellants to sue for such additional increases
as they may be entitled to for the crop years subsequent to those herein adjudged.
Costs against appellee, Bacolod-Murcia Milling Co.
G.R. No. L-14409 October 31, 1961
For serious physical injuries sustained by Pepito Cadano, son of plaintiff-appellee Elpidio
Cadano, two separate actions were instituted, Civil Case No. 583, filed on October 1, 1954,
for damages against Agapito Fuellas, father of the minor Rico Fuellas, who caused the
injuries, and Criminal Case No. 1765, against Rico Fuellas, filed on November 11, 1954, for
serious physical injuries. They were tried jointly. On May 18, 1956, a judgment of conviction
in the criminal case was rendered, finding Rico Fuellas guilty of the offense charged. No
pronouncement as to his civil liability was made, the trial judge having ruled that the same
"shall be determined in Civil Case No. 583 of this Court." On May 25, 1956, the same court,
rendered judgment in the civil case making defendant therein, now appellant Agapito
Fuellas, liable under Art. 2180 of the new Civil Code for the following damages: —
For medicine, etc. P1,000.00
For moral damages 6,000.00
As exemplary damages 2,000.00
As attorney's fees 600.00
Total P9,600.00
with 6% annual interest thereon until paid. The Court of Appeals modified the judgment by
reducing the moral damages to P3,000.00. An appeal was taken to this tribunal solely on
questions of law.
Pepito Cadano and Rico Fuellas, son of defendant-appellant Agapito Fuellas, were both 13
years old, on September 16, 1954. They were classmates at St. Mary's High School,
Dansalan City. In the afternoon of September 16, 1954, while Pepito was studying his
lessons in the classroom, Rico took the pencil of one Ernesto Cabanok and surreptitiously
placed it inside the pocket of Pepito. When Ernesto asked Rico to return the pencil, it was
Pepito who returned the same, an act which angered Rico, who held the neck of Pepito and
pushed him to the floor. Villamira, a teacher, separated Rico and Pepito and told them to go
home. Rico went ahead, with Pepito following. When Pepito had just gone down of the
schoolhouse, he was met by Rico, still in an angry mood. Angelito Aba, a classmate, told the
two to shake hands. Pepito extended his hand to Rico. Instead of accepting the proffer to
shake hands, Rico held Pepito by the neck and with his leg, placed Pepito out of balance
and pushed him to the ground. Pepito fell on his right side with his right arm under his body,
whereupon, Rico rode on his left side. While Rico was in such position, Pepito suddenly
cried out "My arm is broken." Rico then got up and went away. Pepito was helped by others
to go home. That same evening Pepito was brought to the Lanao General Hospital for
treatment (Exh. 4). An X-Ray taken showed that there was a complete fracture of the radius
and ulna of the right forearm which necessitated plaster casting (Exhs. A, B and D). On
November 20, 1954, more than a month after Pepito's release from the hospital, the plaster
cast was removed. And up to the last day of hearing of the case, the right forearm of Pepito
was seen to be shorter than the left forearm, still in bandage and could not be fully used.
It is contended that in the decision of the Court of Appeals, the petitioner-appellant was
ordered to pay damages for the deliberate injury caused by his son; that the said court held
the petitioner liable pursuant to par. 2 of Art. 2180 of the Civil Code, in connection with Art.
2176 of the same Code; that according to the last article, the act of the minor must be one
wherein "fault or negligence" is present; and that there being no fault or negligence on the
part of petitioner-appellant's minor son, but deliberate intent, the above mentioned articles
are not applicable, for the existence of deliberate intent in the commission of an act
negatives the presence of fault or negligence in its commission. Appellant, therefore,
submits that the appellate Court erred in holding him liable for damages for the deliberate
criminal act of his minor son.
The above-mentioned provisions of the Civil Code states: —
Whoever by act or omission causes damage to another, there being fault or
negligence is obliged to pay for the damage done. Such fault or negligence, if there
is no pre-existing contractual relation between the parties is called a quasi-delict and
is governed by the provisions of this chapter. (Article 2176)
The obligations imposed by article 2176 is demandable not only for one's own acts
or omissions, but also for those of persons for whom one is responsible.
The father and, in case of his death or incapacity, the mother, are responsible for the
damages caused by the minor children who live in their company.
xxx xxx xxx (Article 2180).
In the case of Araneta vs. Arreglado, G.R. No. L-11394, prom. September 9, 1958,
Benjamin Araneta was talking with other students of the Ateneo de Manila, seated atop a
low ruined wall. Dario Arreglado, a former student of the Ateneo, chanced to pass by. The
boys twitted him on his leaving the Ateneo and enrolling in the De la Salle College.
Arreglado, resenting the banter, pulled a Japanese luger pistol (licensed in the name of his
father Juan Arreglado), fired the same at Araneta, hitting him in the lower jaw. Dario was
indicted for frustrated homicide and pleaded guilty. But in view of his youth, he being only 14
years of age, the Court suspended the proceedings (Art. 80 of the Revised Penal Code).
Thereafter, action was instituted by Araneta and his father against Juan Arreglado, his wife
and their son Dario to recover material, moral and exemplary damages. The Court of First
Instance sentenced the Arreglados to pay P3,943.00 as damages and attorney's fees. The
Aranetas appealed in view of the meager amount of indemnity awarded. This tribunal
affirmed the decision but increased the indemnity to P18,000.00. This decision was
predicated upon the fact that Arreglado's father had acted negligently in allowing his son to
have access to the pistol used to injure Benjamin. And this was the logical consequence of
the case, considering the fact that the civil law liability under Article 2180 is not respondeat
superior but the relationship of pater familias which bases the liability of the father ultimately
on his own negligence and not on that of his minor son (Cuison vs. Norton & Harrison, 55
Phil. 23), and that if an injury is caused by the fault or negligence of his minor son, the law
presumes that there was negligence on the part of his father (Bahia vs. Litonjua y Leynes,
30 Phil., 625).
In an earlier case (Exconde vs. Capuno, et al., G.R. No. L-10132, prom. June 29, 1957),
holding the defendants jointly and severally liable with his minor son Dante for damages,
arising from the criminal act committed by the latter, this tribunal gave the following reasons
for the rule: —
The civil liability which the law imposes upon the father and, in case of his death or
incapacity, the mother, for any damages that may be caused by the minor children
who live with them, is obvious. This is a necessary consequence of the parental
authority they exercise over them which imposes upon the parents the "duty of
supporting them, keeping them in their company, educating them in proportion to
their means", while on the other hand, gives them the "right to correct and punish
them in moderation" (Arts. 134 and 135, Spanish Civil Code). The only way by which
they can relieve themselves of this liability is if they prove that they exercised all the
diligence of a good father of a family to prevent the damage (Art. 1903, last
paragraph, Spanish Civil Code). This, defendants failed to prove.
And a noted Spanish commentator said: —
Since children and wards do not yet have the capacity to govern themselves, the law
imposes upon the parents and guardians the duty of exercising special vigilance over
 the acts of their children and wards in order that damages to third persons due to the
ignorance, lack of foresight or discernment of such children and wards may be
avoided. If the parents and guardians fail to comply with this duty, they should suffer
the consequences of their abandonment or negligence by repairing the damage
caused" (12 Manresa, 649-650). (See also Arts. 311 and 316, Civil Code).
It is further argued that the only way by which a father can be made responsible for the
criminal act of his son committed with deliberate intent and with discernment, is an action
based on the provisions of the Revised Penal Code on subsidiary liability of the parents; that
the minor Fuellas having been convicted of serious physical injuries at the age of 13, the
provisions of par. 3 of Art. 12, Revised Penal Code, could have been applied, but having
acted with discernment, Art. 101 of the same Code can not include him. And as par. 2, of
Art. 101, states that "the exemption from criminal liability established in subdivisions 1, 2, 3,
5 and 6 of Article 12 and in subdivision 4 of Art. 11 of this Code does not include exemption
from civil liability, which shall be enforced subject to the following rules: First, in cases of
subdivisions 1, 2 and 3 of Article 12, the civil liability for acts committed by an imbecile or
insane person and by a person under nine years of age or by one over nine but under fifteen
years of age, who has acted without discernment, shall devolve upon those having such
person under their legal authority or control, unless it appears that there was no fault or
negligence on their part," the appellant concluded that this provision covers only a situation
where a minor under 15 but over 9 years old commits a criminal act "without discernment."
In the recent case of Salen and Salbanera vs. Jose Balce, G.R. No. L-14414, April 27, 1960;
57 Off. Gaz. No. 37, p. 6603, September 11, 1961, the defendant Balce was the father of a
minor Gumersindo Balce, below 18 years of age who was living with him. Gumersindo was
found guilty of homicide for having killed Carlos Salen, minor son of plaintiffs. The trial court
rendered judgment dismissing the case, stating that the civil liability of the minor son of
defendant arising from his criminal liability must be determined under the provisions of the
Revised Penal Code and not under Art. 2180 of the new Civil Code. In reversing the
decision, this tribunal held: —
It is true that under Art. 101 of the Revised Penal Code, a father is made civilly liable
for the acts committed by his son only if the latter is an imbecile, an insane, under 9
years of age, or over 9 but under 15 years of age, who acts without discernment,
unless it appears that there is no fault or negligence on his part. This is because a
son who commits the act under any of those conditions is by law exempt from
criminal liability (Article 12, subdivisions 1, 2 and 3, Revised Penal Code). The idea
is not to leave the act entirely unpunished but to attach certain civil liability to the
person who has the delinquent minor under his legal authority or control. But a minor
over 15 who acts with discernment is not exempt from criminal liability, for which
reason the Code is silent as to the subsidiary liability of his parents should he stand
convicted. In that case, resort should be had to the general law which is our Civil
Code.
The particular law that governs this case is Article 2180, the pertinent portion of
which provides: "The father and, in case of his death or incapacity, the mother, are
responsible for damages caused by the minor children who live in their company." To
hold that this provision does not apply to the instant case because it only covers
obligations which arise from quasi-delicts and not obligations which arise from
criminal offenses, would result in the absurdity that while for an act where mere
negligence intervenes the father or mother may stand subsidiarily liable for the
damage caused by his or her son, no liability would attach if the damage is caused
with criminal intent. Verily, the void apparently exists in the Revised Penal Code is
subserved by this particular provision of our Civil Code, as may be gleaned from
some recent decisions of this Court which cover equal or identical cases.
Moreover, the case at bar was decided by the Court of Appeals on the basis of the evidence
submitted therein by both parties, independently of the criminal case. And responsibility for
fault or negligence under Article 2176 upon which the action in the present case was
instituted, is entirely separate and distinct from the civil liability arising from fault of
negligence under the Penal Code (Art. 2177), and having in mind the reasons behind the
law as heretofore stated, any discussion as to the minor's criminal responsibility is of no
moment.
IN VIEW HEREOF, the petition is dismissed, the decision appealed from is affirmed, with
costs against the petitioner.
G.R. No. 75875 December 15, 1989
WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM and CHARLES
CHAMSAY, petitioners,
vs.
SANITARY WARES MANUFACTURING CORPORATOIN, ERNESTO V. LAGDAMEO,
ERNESTO R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A.
BONCAN, BALDWIN YOUNG and AVELINO V. CRUZ, respondents.
G.R. No. 75951 December 15, 1989
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R. LAGDAMEO,
ENRIQUE B. LAGDAMEO, GEORGE FL .EE RAUL A. BONCAN, BALDWIN YOUNG and
AVELINO V. CRUX, petitioners,
vs.
THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN GRIFFIN, DAVID P.
WHITTINGHAM, CHARLES CHAMSAY and LUCIANO SALAZAR, respondents.
G.R. Nos. 75975-76 December 15, 1989
LUCIANO E. SALAZAR, petitioner,
vs.
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO V. LAGDAMEO,
ERNESTO R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A.
BONCAN, BALDWIN YOUNG, AVELINO V. CRUZ and the COURT OF
APPEALS, respondents.
Belo, Abiera & Associates for petitioners in 75875.
Sycip, Salazar, Hernandez & Gatmaitan for Luciano E. Salazar.
GUTIERREZ, JR., J.:
These consolidated petitions seek the review of the amended decision of the Court of
Appeals in CA-G.R. SP Nos. 05604 and 05617 which set aside the earlier decision dated
June 5, 1986, of the then Intermediate Appellate Court and directed that in all subsequent
elections for directors of Sanitary Wares Manufacturing Corporation (Saniwares), American
Standard Inc. (ASI) cannot nominate more than three (3) directors; that the Filipino
stockholders shall not interfere in ASI's choice of its three (3) nominees; that, on the other
hand, the Filipino stockholders can nominate only six (6) candidates and in the event they
cannot agree on the six (6) nominees, they shall vote only among themselves to determine
who the six (6) nominees will be, with cumulative voting to be allowed but without
interference from ASI.
The antecedent facts can be summarized as follows:
In 1961, Saniwares, a domestic corporation was incorporated for the primary purpose of
manufacturing and marketing sanitary wares. One of the incorporators, Mr. Baldwin Young
went abroad to look for foreign partners, European or American who could help in its
expansion plans. On August 15, 1962, ASI, a foreign corporation domiciled in Delaware,
United States entered into an Agreement with Saniwares and some Filipino investors
whereby ASI and the Filipino investors agreed to participate in the ownership of an
enterprise which would engage primarily in the business of manufacturing in the Philippines
and selling here and abroad vitreous china and sanitary wares. The parties agreed that the
business operations in the Philippines shall be carried on by an incorporated enterprise and
that the name of the corporation shall initially be "Sanitary Wares Manufacturing
Corporation."
The Agreement has the following provisions relevant to the issues in these cases on the
nomination and election of the directors of the corporation:
3. Articles of Incorporation
(a) The Articles of Incorporation of the Corporation shall be substantially in
the form annexed hereto as Exhibit A and, insofar as permitted under
Philippine law, shall specifically provide for
(1) Cumulative voting for directors:
xxx xxx xxx
5. Management
(a) The management of the Corporation shall be vested in a Board of
Directors, which shall consist of nine individuals. As long as American-
Standard shall own at least 30% of the outstanding stock of the Corporation,
three of the nine directors shall be designated by American-Standard, and the
other six shall be designated by the other stockholders of the Corporation.
(pp. 51 & 53, Rollo of 75875)
At the request of ASI, the agreement contained provisions designed to protect it as a
minority group, including the grant of veto powers over a number of corporate acts and the
right to designate certain officers, such as a member of the Executive Committee whose
vote was required for important corporate transactions.
Later, the 30% capital stock of ASI was increased to 40%. The corporation was also
registered with the Board of Investments for availment of incentives with the condition that at
least 60% of the capital stock of the corporation shall be owned by Philippine nationals.
The joint enterprise thus entered into by the Filipino investors and the American corporation
prospered. Unfortunately, with the business successes, there came a deterioration of the
initially harmonious relations between the two groups. According to the Filipino group, a
basic disagreement was due to their desire to expand the export operations of the company
to which ASI objected as it apparently had other subsidiaries of joint joint venture groups in
the countries where Philippine exports were contemplated. On March 8, 1983, the annual
stockholders' meeting was held. The meeting was presided by Baldwin Young. The minutes
were taken by the Secretary, Avelino Cruz. After disposing of the preliminary items in the
agenda, the stockholders then proceeded to the election of the members of the board of
directors. The ASI group nominated three persons namely; Wolfgang Aurbach, John Griffin
and David P. Whittingham. The Philippine investors nominated six, namely; Ernesto
Lagdameo, Sr., Raul A. Boncan, Ernesto R. Lagdameo, Jr., George F. Lee, and Baldwin
Young. Mr. Eduardo R, Ceniza then nominated Mr. Luciano E. Salazar, who in turn
nominated Mr. Charles Chamsay. The chairman, Baldwin Young ruled the last two
nominations out of order on the basis of section 5 (a) of the Agreement, the consistent
practice of the parties during the past annual stockholders' meetings to nominate only nine
persons as nominees for the nine-member board of directors, and the legal advice of
Saniwares' legal counsel. The following events then, transpired:
... There were protests against the action of the Chairman and heated
arguments ensued. An appeal was made by the ASI representative to the
body of stockholders present that a vote be taken on the ruling of the
Chairman. The Chairman, Baldwin Young, declared the appeal out of order
and no vote on the ruling was taken. The Chairman then instructed the
Corporate Secretary to cast all the votes present and represented by proxy
equally for the 6 nominees of the Philippine Investors and the 3 nominees of
ASI, thus effectively excluding the 2 additional persons nominated, namely,
Luciano E. Salazar and Charles Chamsay. The ASI representative, Mr. Jaqua
protested the decision of the Chairman and announced that all votes accruing
to ASI shares, a total of 1,329,695 (p. 27, Rollo, AC-G.R. SP No. 05617)
were being cumulatively voted for the three ASI nominees and Charles
Chamsay, and instructed the Secretary to so vote. Luciano E. Salazar and
other proxy holders announced that all the votes owned by and or
represented by them 467,197 shares (p. 27, Rollo, AC-G.R. SP No. 05617)
were being voted cumulatively in favor of Luciano E. Salazar. The Chairman,
Baldwin Young, nevertheless instructed the Secretary to cast all votes equally
in favor of the three ASI nominees, namely, Wolfgang Aurbach, John Griffin
and David Whittingham and the six originally nominated by Rogelio Vinluan,
namely, Ernesto Lagdameo, Sr., Raul Boncan, Ernesto Lagdameo, Jr.,
Enrique Lagdameo, George F. Lee, and Baldwin Young. The Secretary then
certified for the election of the following Wolfgang Aurbach, John Griffin,
David Whittingham Ernesto Lagdameo, Sr., Ernesto Lagdameo, Jr., Enrique
Lagdameo, George F. Lee, Raul A. Boncan, Baldwin Young. The
representative of ASI then moved to recess the meeting which was duly
seconded. There was also a motion to adjourn (p. 28, Rollo, AC-G.R. SP No.
05617). This motion to adjourn was accepted by the Chairman, Baldwin
Young, who announced that the motion was carried and declared the meeting
adjourned. Protests against the adjournment were registered and having
been ignored, Mr. Jaqua the ASI representative, stated that the meeting was
not adjourned but only recessed and that the meeting would be reconvened
in the next room. The Chairman then threatened to have the stockholders
who did not agree to the decision of the Chairman on the casting of votes
bodily thrown out. The ASI Group, Luciano E. Salazar and other
stockholders, allegedly representing 53 or 54% of the shares of Saniwares,
decided to continue the meeting at the elevator lobby of the American
Standard Building. The continued meeting was presided by Luciano E.
Salazar, while Andres Gatmaitan acted as Secretary. On the basis of the
cumulative votes cast earlier in the meeting, the ASI Group nominated its four
nominees; Wolfgang Aurbach, John Griffin, David Whittingham and Charles
Chamsay. Luciano E. Salazar voted for himself, thus the said five directors
were certified as elected directors by the Acting Secretary, Andres
Gatmaitan, with the explanation that there was a tie among the other six (6)
nominees for the four (4) remaining positions of directors and that the body
decided not to break the tie. (pp. 37-39, Rollo of 75975-76)
These incidents triggered off the filing of separate petitions by the parties with the Securities
and Exchange Commission (SEC). The first petition filed was for preliminary injunction by
Saniwares, Emesto V. Lagdameo, Baldwin Young, Raul A. Bonean Ernesto R. Lagdameo,
Jr., Enrique Lagdameo and George F. Lee against Luciano Salazar and Charles Chamsay.
The case was denominated as SEC Case No. 2417. The second petition was for quo
warranto and application for receivership by Wolfgang Aurbach, John Griffin, David
Whittingham, Luciano E. Salazar and Charles Chamsay against the group of Young and
Lagdameo (petitioners in SEC Case No. 2417) and Avelino F. Cruz. The case was docketed
as SEC Case No. 2718. Both sets of parties except for Avelino Cruz claimed to be the
legitimate directors of the corporation.
The two petitions were consolidated and tried jointly by a hearing officer who rendered a
decision upholding the election of the Lagdameo Group and dismissing the quo warranto
petition of Salazar and Chamsay. The ASI Group and Salazar appealed the decision to the
SEC en banc which affirmed the hearing officer's decision.
The SEC decision led to the filing of two separate appeals with the Intermediate Appellate
Court by Wolfgang Aurbach, John Griffin, David Whittingham and Charles Chamsay
(docketed as AC-G.R. SP No. 05604) and by Luciano E. Salazar (docketed as AC-G.R. SP
No. 05617). The petitions were consolidated and the appellate court in its decision ordered
the remand of the case to the Securities and Exchange Commission with the directive that a
new stockholders' meeting of Saniwares be ordered convoked as soon as possible, under
the supervision of the Commission.
Upon a motion for reconsideration filed by the appellees Lagdameo Group) the appellate
court (Court of Appeals) rendered the questioned amended decision. Petitioners Wolfgang
Aurbach, John Griffin, David P. Whittingham and Charles Chamsay in G.R. No. 75875
assign the following errors:
I. THE COURT OF APPEALS, IN EFFECT, UPHELD THE ALLEGED
ELECTION OF PRIVATE RESPONDENTS AS MEMBERS OF THE BOARD
OF DIRECTORS OF SANIWARES WHEN IN FACT THERE WAS NO
ELECTION AT ALL.
II. THE COURT OF APPEALS PROHIBITS THE STOCKHOLDERS FROM
EXERCISING THEIR FULL VOTING RIGHTS REPRESENTED BY THE
NUMBER OF SHARES IN SANIWARES, THUS DEPRIVING PETITIONERS
AND THE CORPORATION THEY REPRESENT OF THEIR PROPERTY
RIGHTS WITHOUT DUE PROCESS OF LAW.
III. THE COURT OF APPEALS IMPOSES CONDITIONS AND READS
PROVISIONS INTO THE AGREEMENT OF THE PARTIES WHICH WERE
NOT THERE, WHICH ACTION IT CANNOT LEGALLY DO. (p. 17, Rollo-
75875)
Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the amended decision on the
following grounds:
11.1. ThatAmendedDecisionwouldsanctiontheCA'sdisregard of binding
contractual agreements entered into by stockholders and the replacement of
the conditions of such agreements with terms never contemplated by the
stockholders but merely dictated by the CA .
11.2. The Amended decision would likewise sanction the deprivation of the
property rights of stockholders without due process of law in order that a
favored group of stockholders may be illegally benefitted and guaranteed a
continuing monopoly of the control of a corporation. (pp. 14-15, Rollo-75975-
76)
On the other hand, the petitioners in G.R. No. 75951 contend that:
I
THE AMENDED DECISION OF THE RESPONDENT COURT, WHILE
RECOGNIZING THAT THE STOCKHOLDERS OF SANIWARES ARE
DIVIDED INTO TWO BLOCKS, FAILS TO FULLY ENFORCE THE BASIC
INTENT OF THE AGREEMENT AND THE LAW.
II
THE AMENDED DECISION DOES NOT CATEGORICALLY RULE THAT
PRIVATE PETITIONERS HEREIN WERE THE DULY ELECTED
DIRECTORS DURING THE 8 MARCH 1983 ANNUAL STOCKHOLDERS
MEETING OF SANTWARES. (P. 24, Rollo-75951)
The issues raised in the petitions are interrelated, hence, they are discussed jointly.
The main issue hinges on who were the duly elected directors of Saniwares for the year
1983 during its annual stockholders' meeting held on March 8, 1983. To answer this
question the following factors should be determined: (1) the nature of the business
established by the parties whether it was a joint venture or a corporation and (2) whether or
not the ASI Group may vote their additional 10% equity during elections of Saniwares' board
of directors.
The rule is that whether the parties to a particular contract have thereby established among
themselves a joint venture or some other relation depends upon their actual intention which
is determined in accordance with the rules governing the interpretation and construction of
contracts. (Terminal Shares, Inc. v. Chicago, B. and Q.R. Co. (DC MO) 65 F Supp 678;
Universal Sales Corp. v. California Press Mfg. Co. 20 Cal. 2nd 751, 128 P 2nd 668)
The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the actual
intention of the parties should be viewed strictly on the "Agreement" dated August 15,1962
wherein it is clearly stated that the parties' intention was to form a corporation and not a joint
venture.
They specifically mention number 16 under Miscellaneous Provisions which states:
xxx xxx xxx
c) nothing herein contained shall be construed to constitute any of the parties
hereto partners or joint venturers in respect of any transaction hereunder. (At
P. 66, Rollo-GR No. 75875)
They object to the admission of other evidence which tends to show that the parties'
agreement was to establish a joint venture presented by the Lagdameo and Young Group
on the ground that it contravenes the parol evidence rule under section 7, Rule 130 of the
Revised Rules of Court. According to them, the Lagdameo and Young Group never pleaded
in their pleading that the "Agreement" failed to express the true intent of the parties.
The parol evidence Rule under Rule 130 provides:
Evidence of written agreements-When the terms of an agreement have been
reduced to writing, it is to be considered as containing all such terms, and
therefore, there can be, between the parties and their successors in interest,
no evidence of the terms of the agreement other than the contents of the
writing, except in the following cases:
(a) Where a mistake or imperfection of the writing, or its failure to express the
true intent and agreement of the parties or the validity of the agreement is put
in issue by the pleadings.
(b) When there is an intrinsic ambiguity in the writing.
Contrary to ASI Group's stand, the Lagdameo and Young Group pleaded in their Reply and
Answer to Counterclaim in SEC Case No. 2417 that the Agreement failed to express the
true intent of the parties, to wit:
xxx xxx xxx
4. While certain provisions of the Agreement would make it appear that the
parties thereto disclaim being partners or joint venturers such disclaimer is
directed at third parties and is not inconsistent with, and does not preclude,
the existence of two distinct groups of stockholders in Saniwares one of
which (the Philippine Investors) shall constitute the majority, and the other
ASI shall constitute the minority stockholder. In any event, the evident
intention of the Philippine Investors and ASI in entering into the Agreement is
to enter into ajoint venture enterprise, and if some words in the Agreement
appear to be contrary to the evident intention of the parties, the latter shall
prevail over the former (Art. 1370, New Civil Code). The various stipulations
of a contract shall be interpreted together attributing to the doubtful ones that
sense which may result from all of them taken jointly (Art. 1374, New Civil
Code). Moreover, in order to judge the intention of the contracting parties,
their contemporaneous and subsequent acts shall be principally considered.
(Art. 1371, New Civil Code). (Part I, Original Records, SEC Case No. 2417)
It has been ruled:
In an action at law, where there is evidence tending to prove that the parties
joined their efforts in furtherance of an enterprise for their joint profit, the
question whether they intended by their agreement to create a joint
adventure, or to assume some other relation is a question of fact for the jury.
(Binder v. Kessler v 200 App. Div. 40,192 N Y S 653; Pyroa v. Brownfield
(Tex. Civ. A.) 238 SW 725; Hoge v. George, 27 Wyo, 423, 200 P 96 33 C.J.
p. 871)
In the instant cases, our examination of important provisions of the Agreement as well as
the testimonial evidence presented by the Lagdameo and Young Group shows that the
parties agreed to establish a joint venture and not a corporation. The history of the
organization of Saniwares and the unusual arrangements which govern its policy making
body are all consistent with a joint venture and not with an ordinary corporation. As stated by
the SEC:
According to the unrebutted testimony of Mr. Baldwin Young, he negotiated
the Agreement with ASI in behalf of the Philippine nationals. He testified that
ASI agreed to accept the role of minority vis-a-vis the Philippine National
group of investors, on the condition that the Agreement should contain
provisions to protect ASI as the minority.
An examination of the Agreement shows that certain provisions were
included to protect the interests of ASI as the minority. For example, the vote
of 7 out of 9 directors is required in certain enumerated corporate acts [Sec. 3
(b) (ii) (a) of the Agreement]. ASI is contractually entitled to designate a
member of the Executive Committee and the vote of this member is required
for certain transactions [Sec. 3 (b) (i)].
The Agreement also requires a 75% super-majority vote for the amendment
of the articles and by-laws of Saniwares [Sec. 3 (a) (iv) and (b) (iii)]. ASI is
also given the right to designate the president and plant manager [Sec. 5 (6)].
The Agreement further provides that the sales policy of Saniwares shall be
that which is normally followed by ASI [Sec. 13 (a)] and that Saniwares
should not export "Standard" products otherwise than through ASI's Export
Marketing Services [Sec. 13 (6)]. Under the Agreement, ASI agreed to
provide technology and know-how to Saniwares and the latter paid royalties
for the same. (At p. 2).
xxx xxx xxx
 It is pertinent to note that the provisions of the Agreement requiring a 7 out of
9 votes of the board of directors for certain actions, in effect gave ASI (which
designates 3 directors under the Agreement) an effective veto power.
Furthermore, the grant to ASI of the right to designate certain officers of the
corporation; the super-majority voting requirements for amendments of the
articles and by-laws; and most significantly to the issues of tms case, the
provision that ASI shall designate 3 out of the 9 directors and the other
stockholders shall designate the other 6, clearly indicate that there are two
distinct groups in Saniwares, namely ASI, which owns 40% of the capital
stock and the Philippine National stockholders who own the balance of 60%,
and that 2) ASI is given certain protections as the minority stockholder.
Premises considered, we believe that under the Agreement there are two
groups of stockholders who established a corporation with provisions for a
special contractual relationship between the parties, i.e., ASI and the other
stockholders. (pp. 4-5)
Section 5 (a) of the agreement uses the word "designated" and not "nominated" or "elected"
in the selection of the nine directors on a six to three ratio. Each group is assured of a fixed
number of directors in the board.
Moreover, ASI in its communications referred to the enterprise as joint venture. Baldwin
Young also testified that Section 16(c) of the Agreement that "Nothing herein contained shall
be construed to constitute any of the parties hereto partners or joint venturers in respect of
any transaction hereunder" was merely to obviate the possibility of the enterprise being
treated as partnership for tax purposes and liabilities to third parties.
Quite often, Filipino entrepreneurs in their desire to develop the industrial and manufacturing
capacities of a local firm are constrained to seek the technology and marketing assistance of
huge multinational corporations of the developed world. Arrangements are formalized where
a foreign group becomes a minority owner of a firm in exchange for its manufacturing
expertise, use of its brand names, and other such assistance. However, there is always a
danger from such arrangements. The foreign group may, from the start, intend to establish
its own sole or monopolistic operations and merely uses the joint venture arrangement to
gain a foothold or test the Philippine waters, so to speak. Or the covetousness may come
later. As the Philippine firm enlarges its operations and becomes profitable, the foreign
group undermines the local majority ownership and actively tries to completely or
predominantly take over the entire company. This undermining of joint ventures is not
consistent with fair dealing to say the least. To the extent that such subversive actions can
be lawfully prevented, the courts should extend protection especially in industries where
constitutional and legal requirements reserve controlling ownership to Filipino citizens.
The Lagdameo Group stated in their appellees' brief in the Court of Appeal
In fact, the Philippine Corporation Code itself recognizes the right of
stockholders to enter into agreements regarding the exercise of their voting
rights.
Sec. 100. Agreements by stockholders.-
xxx xxx xxx
2. An agreement between two or more stockholders, if in writing and signed
by the parties thereto, may provide that in exercising any voting rights, the
shares held by them shall be voted as therein provided, or as they may
agree, or as determined in accordance with a procedure agreed upon by
them.
Appellants contend that the above provision is included in the Corporation
Code's chapter on close corporations and Saniwares cannot be a close
corporation because it has 95 stockholders. Firstly, although Saniwares had
95 stockholders at the time of the disputed stockholders meeting, these 95
stockholders are not separate from each other but are divisible into groups
representing a single Identifiable interest. For example, ASI, its nominees and
lawyers count for 13 of the 95 stockholders. The YoungYutivo family count for
another 13 stockholders, the Chamsay family for 8 stockholders, the Santos
family for 9 stockholders, the Dy family for 7 stockholders, etc. If the
members of one family and/or business or interest group are considered as
one (which, it is respectfully submitted, they should be for purposes of
determining how closely held Saniwares is there were as of 8 March 1983,
practically only 17 stockholders of Saniwares. (Please refer to discussion in
pp. 5 to 6 of appellees' Rejoinder Memorandum dated 11 December 1984
and Annex "A" thereof).
Secondly, even assuming that Saniwares is technically not a close
corporation because it has more than 20 stockholders, the undeniable fact is
that it is a close-held corporation. Surely, appellants cannot honestly claim
that Saniwares is a public issue or a widely held corporation.
In the United States, many courts have taken a realistic approach to joint
venture corporations and have not rigidly applied principles of corporation law
designed primarily for public issue corporations. These courts have indicated
that express arrangements between corporate joint ventures should be
construed with less emphasis on the ordinary rules of law usually applied to
corporate entities and with more consideration given to the nature of the
agreement between the joint venturers (Please see Wabash Ry v. American
Refrigerator Transit Co., 7 F 2d 335; Chicago, M & St. P. Ry v. Des Moines
Union Ry; 254 Ass'n. 247 US. 490'; Seaboard Airline Ry v. Atlantic Coast
Line Ry; 240 N.C. 495,.82 S.E. 2d 771; Deboy v. Harris, 207 Md., 212,113 A
2d 903; Hathway v. Porter Royalty Pool, Inc., 296 Mich. 90, 90, 295 N.W.
571; Beardsley v. Beardsley, 138 U.S. 262; "The Legal Status of Joint
Venture Corporations", 11 Vand Law Rev. p. 680,1958). These American
cases dealt with legal questions as to the extent to which the requirements
arising from the corporate form of joint venture corporations should control,
and the courts ruled that substantial justice lay with those litigants who relied
on the joint venture agreement rather than the litigants who relied on the
orthodox principles of corporation law.
As correctly held by the SEC Hearing Officer:
It is said that participants in a joint venture, in organizing the joint venture
deviate from the traditional pattern of corporation management. A noted
authority has pointed out that just as in close corporations, shareholders'
agreements in joint venture corporations often contain provisions which do
one or more of the following: (1) require greater than majority vote for
shareholder and director action; (2) give certain shareholders or groups of
shareholders power to select a specified number of directors; (3) give to the
shareholders control over the selection and retention of employees; and (4)
set up a procedure for the settlement of disputes by arbitration (See I O' Neal,
Close Corporations, 1971 ed., Section 1.06a, pp. 15-16) (Decision of SEC
Hearing Officer, P. 16)
Thirdly paragraph 2 of Sec. 100 of the Corporation Code does not necessarily
imply that agreements regarding the exercise of voting rights are allowed only
in close corporations. As Campos and Lopez-Campos explain:
Paragraph 2 refers to pooling and voting agreements in particular. Does this
provision necessarily imply that these agreements can be valid only in close
corporations as defined by the Code? Suppose that a corporation has twenty
five stockholders, and therefore cannot qualify as a close corporation under
section 96, can some of them enter into an agreement to vote as a unit in the
election of directors? It is submitted that there is no reason for denying
stockholders of corporations other than close ones the right to enter into not
voting or pooling agreements to protect their interests, as long as they do not
intend to commit any wrong, or fraud on the other stockholders not parties to
the agreement. Of course, voting or pooling agreements are perhaps more
useful and more often resorted to in close corporations. But they may also be
found necessary even in widely held corporations. Moreover, since the Code
limits the legal meaning of close corporations to those which comply with the
requisites laid down by section 96, it is entirely possible that a corporation
which is in fact a close corporation will not come within the definition. In such
case, its stockholders should not be precluded from entering into contracts
like voting agreements if these are otherwise valid. (Campos & Lopez-
Campos, op cit, p. 405)
In short, even assuming that sec. 5(a) of the Agreement relating to the
designation or nomination of directors restricts the right of the Agreement's
signatories to vote for directors, such contractual provision, as correctly held
by the SEC, is valid and binding upon the signatories thereto, which include
appellants. (Rollo No. 75951, pp. 90-94)
In regard to the question as to whether or not the ASI group may vote their additional equity
during elections of Saniwares' board of directors, the Court of Appeals correctly stated:
As in other joint venture companies, the extent of ASI's participation in the
management of the corporation is spelled out in the Agreement. Section 5(a)
hereof says that three of the nine directors shall be designated by ASI and
the remaining six by the other stockholders, i.e., the Filipino stockholders.
This allocation of board seats is obviously in consonance with the minority
position of ASI.
Having entered into a well-defined contractual relationship, it is imperative
that the parties should honor and adhere to their respective rights and
obligations thereunder. Appellants seem to contend that any allocation of
board seats, even in joint venture corporations, are null and void to the extent
that such may interfere with the stockholder's rights to cumulative voting as
provided in Section 24 of the Corporation Code. This Court should not be
prepared to hold that any agreement which curtails in any way cumulative
voting should be struck down, even if such agreement has been freely
entered into by experienced businessmen and do not prejudice those who
are not parties thereto. It may well be that it would be more cogent to hold, as
the Securities and Exchange Commission has held in the decision appealed
from, that cumulative voting rights may be voluntarily waived by stockholders
who enter into special relationships with each other to pursue and implement
specific purposes, as in joint venture relationships between foreign and local
stockholders, so long as such agreements do not adversely affect third
parties.
 In any event, it is believed that we are not here called upon to make a general
rule on this question. Rather, all that needs to be done is to give life and
effect to the particular contractual rights and obligations which the parties
have assumed for themselves.
On the one hand, the clearly established minority position of ASI and the
contractual allocation of board seats Cannot be disregarded. On the other
hand, the rights of the stockholders to cumulative voting should also be
protected.
In our decision sought to be reconsidered, we opted to uphold the second
over the first. Upon further reflection, we feel that the proper and just solution
to give due consideration to both factors suggests itself quite clearly. This
Court should recognize and uphold the division of the stockholders into two
groups, and at the same time uphold the right of the stockholders within each
group to cumulative voting in the process of determining who the group's
nominees would be. In practical terms, as suggested by appellant Luciano E.
Salazar himself, this means that if the Filipino stockholders cannot agree who
their six nominees will be, a vote would have to be taken among the Filipino
stockholders only. During this voting, each Filipino stockholder can cumulate
his votes. ASI, however, should not be allowed to interfere in the voting within
the Filipino group. Otherwise, ASI would be able to designate more than the
three directors it is allowed to designate under the Agreement, and may even
be able to get a majority of the board seats, a result which is clearly contrary
to the contractual intent of the parties.
Such a ruling will give effect to both the allocation of the board seats and the
stockholder's right to cumulative voting. Moreover, this ruling will also give
due consideration to the issue raised by the appellees on possible violation or
circumvention of the Anti-Dummy Law (Com. Act No. 108, as amended) and
the nationalization requirements of the Constitution and the laws if ASI is
allowed to nominate more than three directors. (Rollo-75875, pp. 38-39)
The ASI Group and petitioner Salazar, now reiterate their theory that the ASI Group has the
right to vote their additional equity pursuant to Section 24 of the Corporation Code which
gives the stockholders of a corporation the right to cumulate their votes in electing directors.
Petitioner Salazar adds that this right if granted to the ASI Group would not necessarily
mean a violation of the Anti-Dummy Act (Commonwealth Act 108, as amended). He cites
section 2-a thereof which provides:
And provided finally that the election of aliens as members of the board of
directors or governing body of corporations or associations engaging in
partially nationalized activities shall be allowed in proportion to their allowable
participation or share in the capital of such entities. (amendments introduced
by Presidential Decree 715, section 1, promulgated May 28, 1975)
The ASI Group's argument is correct within the context of Section 24 of the Corporation
Code. The point of query, however, is whether or not that provision is applicable to a joint
venture with clearly defined agreements:
The legal concept of ajoint venture is of common law origin. It has no precise
legal definition but it has been generally understood to mean an organization
formed for some temporary purpose. (Gates v. Megargel, 266 Fed. 811
[1920]) It is in fact hardly distinguishable from the partnership, since their
elements are similar community of interest in the business, sharing of profits
and losses, and a mutual right of control. Blackner v. Mc Dermott, 176 F. 2d.
498, [1949]; Carboneau v. Peterson, 95 P. 2d., 1043 [1939]; Buckley v.
Chadwick, 45 Cal. 2d. 183, 288 P. 2d. 12 289 P. 2d. 242 [1955]). The main
distinction cited by most opinions in common law jurisdictions is that the
partnership contemplates a general business with some degree of continuity,
while the joint venture is formed for the execution of a single transaction, and
is thus of a temporary nature. (Tufts v. Mann 116 Cal. App. 170, 2 P. 2d. 500
[1931]; Harmon v. Martin, 395 111. 595, 71 NE 2d. 74 [1947]; Gates v.
Megargel 266 Fed. 811 [1920]). This observation is not entirely accurate in
this jurisdiction, since under the Civil Code, a partnership may be particular or
universal, and a particular partnership may have for its object a specific
undertaking. (Art. 1783, Civil Code). It would seem therefore that under
Philippine law, a joint venture is a form of partnership and should thus be
governed by the law of partnerships. The Supreme Court has however
recognized a distinction between these two business forms, and has held that
although a corporation cannot enter into a partnership contract, it may
however engage in a joint venture with others. (At p. 12, Tuazon v. Bolanos,
95 Phil. 906 [1954]) (Campos and Lopez-Campos Comments, Notes and
Selected Cases, Corporation Code 1981)
Moreover, the usual rules as regards the construction and operations of contracts generally
apply to a contract of joint venture. (O' Hara v. Harman 14 App. Dev. (167) 43 NYS 556).
Bearing these principles in mind, the correct view would be that the resolution of the
question of whether or not the ASI Group may vote their additional equity lies in the
agreement of the parties.
Necessarily, the appellate court was correct in upholding the agreement of the parties as
regards the allocation of director seats under Section 5 (a) of the "Agreement," and the right
of each group of stockholders to cumulative voting in the process of determining who the
group's nominees would be under Section 3 (a) (1) of the "Agreement." As pointed out by
SEC, Section 5 (a) of the Agreement relates to the manner of nominating the members of
the board of directors while Section 3 (a) (1) relates to the manner of voting for these
nominees.
This is the proper interpretation of the Agreement of the parties as regards the election of
members of the board of directors.
To allow the ASI Group to vote their additional equity to help elect even a Filipino director
who would be beholden to them would obliterate their minority status as agreed upon by the
parties. As aptly stated by the appellate court:
... ASI, however, should not be allowed to interfere in the voting within the
Filipino group. Otherwise, ASI would be able to designate more than the
three directors it is allowed to designate under the Agreement, and may even
be able to get a majority of the board seats, a result which is clearly contrary
to the contractual intent of the parties.
Such a ruling will give effect to both the allocation of the board seats and the
stockholder's right to cumulative voting. Moreover, this ruling will also give
due consideration to the issue raised by the appellees on possible violation or
circumvention of the Anti-Dummy Law (Com. Act No. 108, as amended) and
the nationalization requirements of the Constitution and the laws if ASI is
allowed to nominate more than three directors. (At p. 39, Rollo, 75875)
Equally important as the consideration of the contractual intent of the parties is the
consideration as regards the possible domination by the foreign investors of the enterprise
in violation of the nationalization requirements enshrined in the Constitution and
circumvention of the Anti-Dummy Act. In this regard, petitioner Salazar's position is that the
Anti-Dummy Act allows the ASI group to elect board directors in proportion to their share in
the capital of the entity. It is to be noted, however, that the same law also limits the election
of aliens as members of the board of directors in proportion to their allowance
participation of said entity. In the instant case, the foreign Group ASI was limited to
designate three directors. This is the allowable participation of the ASI Group. Hence, in
future dealings, this limitation of six to three board seats should always be maintained as
long as the joint venture agreement exists considering that in limiting 3 board seats in the 9-
man board of directors there are provisions already agreed upon and embodied in the
parties' Agreement to protect the interests arising from the minority status of the foreign
investors.
With these findings, we the decisions of the SEC Hearing Officer and SEC which were
impliedly affirmed by the appellate court declaring Messrs. Wolfgang Aurbach, John Griffin,
David P Whittingham, Emesto V. Lagdameo, Baldwin young, Raul A. Boncan, Emesto V.
Lagdameo, Jr., Enrique Lagdameo, and George F. Lee as the duly elected directors of
Saniwares at the March 8,1983 annual stockholders' meeting.
On the other hand, the Lagdameo and Young Group (petitioners in G.R. No. 75951) object
to a cumulative voting during the election of the board of directors of the enterprise as ruled
by the appellate court and submits that the six (6) directors allotted the Filipino stockholders
should be selected by consensus pursuant to section 5 (a) of the Agreement which uses the
word "designate" meaning "nominate, delegate or appoint."
They also stress the possibility that the ASI Group might take control of the enterprise if the
Filipino stockholders are allowed to select their nominees separately and not as a common
slot determined by the majority of their group.
Section 5 (a) of the Agreement which uses the word designates in the allocation of board
directors should not be interpreted in isolation. This should be construed in relation to
section 3 (a) (1) of the Agreement. As we stated earlier, section 3(a) (1) relates to
the manner of voting for these nominees which is cumulative voting while section 5(a)
relates to the manner of nominating the members of the board of directors. The petitioners
in G.R. No. 75951 agreed to this procedure, hence, they cannot now impugn its legality.
The insinuation that the ASI Group may be able to control the enterprise under the
cumulative voting procedure cannot, however, be ignored. The validity of the cumulative
voting procedure is dependent on the directors thus elected being genuine members of the
Filipino group, not voters whose interest is to increase the ASI share in the management of
Saniwares. The joint venture character of the enterprise must always be taken into account,
so long as the company exists under its original agreement. Cumulative voting may not be
used as a device to enable ASI to achieve stealthily or indirectly what they cannot
accomplish openly. There are substantial safeguards in the Agreement which are intended
to preserve the majority status of the Filipino investors as well as to maintain the minority
status of the foreign investors group as earlier discussed. They should be maintained.
WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875 are DISMISSED
and the petition in G.R. No. 75951 is partly GRANTED. The amended decision of the Court
of Appeals is MODIFIED in that Messrs. Wolfgang Aurbach John Griffin, David Whittingham
Emesto V. Lagdameo, Baldwin Young, Raul A. Boncan, Ernesto R. Lagdameo, Jr., Enrique
Lagdameo, and George F. Lee are declared as the duly elected directors of Saniwares at
the March 8,1983 annual stockholders' meeting. In all other respects, the questioned
decision is AFFIRMED. Costs against the petitioners in G.R. Nos. 75975-76 and G.R. No.
75875.
SO ORDERED.
G.R. No. L-68555 March 19, 1993
PRIME WHITE CEMENT CORPORATION, petitioner,
vs.
HONORABLE INTERMEDIATE APPELLATE COURT and ALEJANDRO TE, respondents.
De Jesus & Associates for petitioner.
Padlan, Sutton, Mendoza & Associates for private respondent.
CAMPOS, JR., J.:
Before Us is a Petition for Review on Certiorari filed by petitioner Prime White Cement
Corporation seeking the reversal of the decision * of the then Intermediate Appellate Court,
the dispositive portion of which reads as follows:
WHEREFORE, in view of the foregoing, the judgment appealed from is
hereby affirmed in toto.1
The facts, as found by the trial court and as adopted by the respondent Court are hereby
quoted, to wit:
On or about the 16th day of July, 1969, plaintiff and defendant corporation
thru its President, Mr. Zosimo Falcon and Justo C. Trazo, as Chairman of the
Board, entered into a dealership agreement (Exhibit A) whereby said plaintiff
was obligated to act as the exclusive dealer and/or distributor of the said
defendant corporation of its cement products in the entire Mindanao area for
a term of five (5) years and proving (sic) among others that:
a. The corporation shall, commencing September, 1970, sell to
and supply the plaintiff, as dealer with 20,000 bags (94
lbs/bag) of white cement per month;
b. The plaintiff shall pay the defendant corporation P9.70,
Philippine Currency, per bag of white cement, FOB Davao and
Cagayan de Oro ports;
c. The plaintiff shall, every time the defendant corporation is
ready to deliver the good, open with any bank or banking
institution a confirmed, unconditional, and irrevocable letter of
credit in favor of the corporation and that upon certification by
the boat captain on the bill of lading that the goods have been
loaded on board the vessel bound for Davao the said bank or
banking institution shall release the corresponding amount as
payment of the goods so shipped.
Right after the plaintiff entered into the aforesaid dealership agreement, he
placed an advertisement in a national, circulating newspaper the fact of his
being the exclusive dealer of the defendant corporation's white cement
products in Mindanao area, more particularly, in the Manila Chronicle dated
August 16, 1969 (Exhibits R and R-1) and was even congratulated by his
business associates, so much so, he was asked by some of his businessmen
friends and close associates if they can be his
sub-dealer in the Mindanao area.
Relying heavily on the dealership agreement, plaintiff sometime in the months
of September, October, and December, 1969, entered into a written
agreement with several hardware stores dealing in buying and selling white
cement in the Cities of Davao and Cagayan de Oro which would thus enable
him to sell his allocation of 20,000 bags regular supply of the said commodity,
by September, 1970 (Exhibits O, O-1, O-2, P, P-1, P-2, Q, Q-1 and Q-2).
After the plaintiff was assured by his supposed buyer that his allocation of
20,000 bags of white cement can be disposed of, he informed the defendant
corporation in his letter dated August 18, 1970 that he is making the
necessary preparation for the opening of the requisite letter of credit to cover
the price of the due initial delivery for the month of September, 1970 (Exhibit
B), looking forward to the defendant corporation's duty to comply with the
dealership agreement. In reply to the aforesaid letter of the plaintiff, the
defendant corporation thru its corporate secretary, replied that the board of
directors of the said defendant decided to impose the following conditions:
a. Delivery of white cement shall commence at the end of
November, 1970;
 b. Only 8,000 bags of white cement per month for only a
period of three (3) months will be delivered;
c. The price of white cement was priced at P13.30 per bag;
d. The price of white cement is subject to readjustment
unilaterally on the part of the defendant;
e. The place of delivery of white cement shall be Austurias
(sic);
f. The letter of credit may be opened only with the Prudential
Bank, Makati Branch;
g. Payment of white cement shall be made in advance and
which payment shall be used by the defendant as guaranty in
the opening of a foreign letter of credit to cover costs and
expenses in the procurement of materials in the manufacture
of white cement. (Exhibit C).
xxx xxx xxx
Several demands to comply with the dealership agreement (Exhibits D, E, G,
I, R, L, and N) were made by the plaintiff to the defendant, however,
defendant refused to comply with the same, and plaintiff by force of
circumstances was constrained to cancel his agreement for the supply of
white cement with third parties, which were concluded in anticipation of, and
pursuant to the said dealership agreement.
Notwithstanding that the dealership agreement between the plaintiff and
defendant was in force and subsisting, the defendant corporation, in violation
of, and with evident intention not to be bound by the terms and conditions
thereof, entered into an exclusive dealership agreement with a certain
Napoleon Co for the marketing of white cement in Mindanao (Exhibit T)
hence, this suit. (Plaintiff's Record on Appeal, pp. 86-90).2
After trial, the trial court adjudged the corporation liable to Alejandro Te in the amount of
P3,302,400.00 as actual damages, P100,000.00 as moral damages, and P10,000.00 as and
for attorney's fees and costs. The appellate court affirmed the said decision mainly on the
following basis, and We quote:
There is no dispute that when Zosimo R. Falcon and Justo B. Trazo signed
the dealership agreement Exhibit "A", they were the President and Chairman
of the Board, respectively, of defendant-appellant corporation. Neither is the
genuineness of the said agreement contested. As a matter of fact, it appears
on the face of the contract itself that both officers were duly authorized to
enter into the said agreement and signed the same for and in behalf of the
corporation. When they, therefore, entered into the said transaction they
created the impression that they were duly clothed with the authority to do so.
It cannot now be said that the disputed agreement which possesses all the
essential requisites of a valid contract was never intended to bind the
corporation as this avoidance is barred by the principle of estoppel.3
In this petition for review, petitioner Prime White Cement Corporation made the following
assignment of errors. 4
I
THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE
COURT ARE UNPRECEDENTED DEPARTURES FROM THE CODIFIED
PRINCIPLE THAT CORPORATE OFFICERS COULD ENTER INTO
CONTRACTS IN BEHALF OF THE CORPORATION ONLY WITH PRIOR
APPROVAL OF THE BOARD OF DIRECTORS.
II
THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE
COURT ARE CONTRARY TO THE ESTABLISHED JURISPRUDENCE,
PRINCIPLE AND RULE ON FIDUCIARY DUTY OF DIRECTORS AND
OFFICERS OF THE CORPORATION.
III
THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE
COURT DISREGARDED THE PRINCIPLE AND JURISPRUDENCE,
PRINCIPLE AND RULE ON UNENFORCEABLE CONTRACTS AS
PROVIDED IN ARTICLE 1317 OF THE NEW CIVIL CODE.
IV
 THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE
COURT DISREGARDED THE PRINCIPLE AND JURISPRUDENCE AS TO
WHEN AWARD OF ACTUAL AND MORAL DAMAGES IS PROPER.
V
IN NOT AWARDING PETITIONER'S CAUSE OF ACTION AS STATED IN
ITS ANSWER WITH SPECIAL AND AFFIRMATIVE DEFENSES WITH
COUNTERCLAIM THE INTERMEDIATE APPELLATE COURT HAS
CLEARLY DEPARTED FROM THE ACCEPTED USUAL, COURSE OF
JUDICIAL PROCEEDINGS.
There is only one legal issue to be resolved by this Court: whether or not the "dealership
agreement" referred by the President and Chairman of the Board of petitioner corporation is
a valid and enforceable contract. We do not agree with the conclusion of the respondent
Court that it is.
Under the Corporation Law, which was then in force at the time this case arose, as well as
5 voidable. If the contract is fair and reasonable under the circumstances, it may be ratified by
under the present Corporation Code, all corporate powers shall be exercised by the Board
of Directors, except as otherwise provided by law. 6 Although it cannot completely abdicate
its power and responsibility to act for the juridical entity, the Board may expressly delegate
specific powers to its President or any of its officers. In the absence of such express
delegation, a contract entered into by its President, on behalf of the corporation, may still
bind the corporation if the board should ratify the same expressly or impliedly. Implied
ratification may take various forms — like silence or acquiescence; by acts showing
approval or adoption of the contract; or by acceptance and retention of benefits flowing
therefrom.7 Furthermore, even in the absence of express or implied authority by ratification,
the President as such may, as a general rule, bind the corporation by a contract in the
ordinary course of business, provided the same is reasonable under the
circumstances.8 These rules are basic, but are all general and thus quite flexible. They apply
where the President or other officer, purportedly acting for the corporation, is dealing with
a third person, i. e., a person outside the corporation.
The situation is quite different where a director or officer is dealing with his own corporation.
In the instant case respondent Te was not an ordinary stockholder; he was a member of the
Board of Directors and Auditor of the corporation as well. He was what is often referred to as
a "self-dealing" director.
A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to
his corporation.9 In case his interests conflict with those of the corporation, he cannot
sacrifice the latter to his own advantage and benefit. As corporate managers, directors are
committed to seek the maximum amount of profits for the corporation. This trust relationship
"is not a matter of statutory or technical law. It springs from the fact that directors have the
control and guidance of corporate affairs and property and hence of the property interests of
the stockholders." 10 In the case of Gokongwei v. Securities and Exchange Commission, this
Court quoted with favor from Pepper v. Litton,11 thus:
. . . He cannot by the intervention of a corporate entity violate the ancient
precept against serving two masters. . . . He cannot utilize his inside
information and his strategic position for his own preferment. He cannot
violate rules of fair play by doing indirectly through the corporation what he
could not do directly. He cannot use his power for his personal advantage
and to the detriment of the stockholders and creditors no matter how absolute
in terms that power may be and no matter how meticulous he is to satisfy
technical requirements. For that power is at all times subject to the equitable
limitation that it may not be exercised for the aggrandizement, preference, or
advantage of the fiduciary to the exclusion or detriment of the cestuis. . . . .
On the other hand, a director's contract with his corporation is not in all instances void or
the stockholders provided a full disclosure of his adverse interest is made. Section 32 of the
Corporation Code provides, thus:
Sec. 32. Dealings of directors, trustees or officers with the corporation. — A
contract of the corporation with one or more of its directors or trustees or
officers is voidable, at the option of such corporation, unless all the following
conditions are present:
1. That the presence of such director or trustee in the board meeting in which
the contract was approved was not necessary to constitute a quorum for such
meeting;
2. That the vote of such director or trustee was not necessary for the approval
of the contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in the case of an officer, the contract with the officer has been
previously authorized by the Board of Directors.
Where any of the first two conditions set forth in the preceding paragraph is
absent, in the case of a contract with a director or trustee, such contract may
be ratified by the vote of the stockholders representing at least two-thirds
 (2/3) of the outstanding capital stock or of two-thirds (2/3) of the members in
a meeting called for the purpose: Provided, That full disclosure of the adverse
interest of the directors or trustees involved is made at such meeting:
Provided, however, That the contract is fair and reasonable under the
circumstances.
Although the old Corporation Law which governs the instant case did not contain a similar
provision, yet the cited provision substantially incorporates well-settled principles in
corporate law. 12
Granting arguendo that the "dealership agreement" involved here would be valid and
enforceable if entered into with a person other than a director or officer of the corporation,
the fact that the other party to the contract was a Director and Auditor of the petitioner
corporation changes the whole situation. First of all, We believe that the contract was neither
fair nor reasonable. The "dealership agreement" entered into in July, 1969, was to sell and
supply to respondent Te 20,000 bags of white cement per month, for five years starting
September, 1970, at the fixed price of P9.70 per bag. Respondent Te is a businessman
himself and must have known, or at least must be presumed to know, that at that time,
prices of commodities in general, and white cement in particular, were not stable and were
expected to rise. At the time of the contract, petitioner corporation had not even commenced
the manufacture of white cement, the reason why delivery was not to begin until 14 months
later. He must have known that within that period of six years, there would be a considerable
rise in the price of white cement. In fact, respondent Te's own Memorandum shows that in
September, 1970, the price per bag was P14.50, and by the middle of 1975, it was already
P37.50 per bag. Despite this, no provision was made in the "dealership agreement" to allow
for an increase in price mutually acceptable to the parties. Instead, the price was pegged at
P9.70 per bag for the whole five years of the contract. Fairness on his part as a director of
the corporation from whom he was to buy the cement, would require such a provision. In
fact, this unfairness in the contract is also a basis which renders a contract entered into by
the President, without authority from the Board of Directors, void or voidable, although it
may have been in the ordinary course of business. We believe that the fixed price of P9.70
per bag for a period of five years was not fair and reasonable. Respondent Te, himself,
when he subsequently entered into contracts to resell the cement to his "new dealers" Henry
Wee 13 and Gaudencio Galang 14 stipulated as follows:
The price of white cement shall be mutually determined by us but in no case
shall the same be less than P14.00 per bag (94 lbs).
The contract with Henry Wee was on September 15, 1969, and that with Gaudencio Galang,
on October 13, 1967. A similar contract with Prudencio Lim was made on December 29,
1969. 15 All of these contracts were entered into soon after his "dealership agreement" with
petitioner corporation, and in each one of them he protected himself from any increase in
the market price of white cement. Yet, except for the contract with Henry Wee, the contracts
were for only two years from October, 1970. Why did he not protect the corporation in the
same manner when he entered into the "dealership agreement"? For that matter, why did
the President and the Chairman of the Board not do so either? As director, specially since
he was the other party in interest, respondent Te's bounden duty was to act in such manner
as not to unduly prejudice the corporation. In the light of the circumstances of this case, it is
to Us quite clear that he was guilty of disloyalty to the corporation; he was attempting in
effect, to enrich himself at the expense of the corporation. There is no showing that the
stockholders ratified the "dealership agreement" or that they were fully aware of its
provisions. The contract was therefore not valid and this Court cannot allow him to reap the
fruits of his disloyalty.
As a result of this action which has been proven to be without legal basis, petitioner
corporation's reputation and goodwill have been prejudiced. However, there can be no
award for moral damages under Article 2217 and succeeding articles on Section 1 of
Chapter 3 of Title XVIII of the Civil Code in favor of a corporation.
In view of the foregoing, the Decision and Resolution of the Intermediate Appellate Court
dated March 30, 1984 and August 6, 1984, respectively, are hereby SET ASIDE. Private
respondent Alejandro Te is hereby ordered to pay petitioner corporation the sum of
P20,000.00 for attorney's fees, plus the cost of suit and expenses of litigation.
SO ORDERED.
G.R. No. 140667 August 12, 2004
WOODCHILD HOLDINGS, INC., petitioner,
vs.
ROXAS ELECTRIC AND CONSTRUCTION COMPANY, INC., respondent.
DECISION

CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision1 of the Court of Appeals in CA-G.R.
CV No. 56125 reversing the Decision2 of the Regional Trial Court of Makati, Branch 57,
which ruled in favor of the petitioner.
The Antecedents
The respondent Roxas Electric and Construction Company, Inc. (RECCI), formerly the
Roxas Electric and Construction Company, was the
owner of two parcels of land, identified as Lot No. 491-A-3-B-1 covered by Transfer
Certificate of Title (TCT) No. 78085 and Lot No. 491-A-3-B-2 covered by TCT No. 78086. A
portion of Lot No. 491-A-3-B-1 which abutted Lot No. 491-A-3-B-2 was a dirt road accessing
to the Sumulong Highway, Antipolo, Rizal.
At a special meeting on May 17, 1991, the respondent's Board of Directors approved a
resolution authorizing the corporation, through its president, Roberto B. Roxas, to sell Lot
No. 491-A-3-B-2 covered by TCT No. 78086, with an area of 7,213 square meters, at a price
and under such terms and conditions which he deemed most reasonable and advantageous
to the corporation; and to execute, sign and deliver the pertinent sales documents and
receive the proceeds of the sale for and on behalf of the company.3
Petitioner Woodchild Holdings, Inc. (WHI) wanted to buy Lot No. 491-A-3-B-2 covered by
TCT No. 78086 on which it planned to construct its warehouse building, and a portion of the
adjoining lot, Lot No. 491-A-3-B-1, so that its 45-foot container van would be able to readily
enter or leave the property. In a Letter to Roxas dated June 21, 1991, WHI President
Jonathan Y. Dy offered to buy Lot No. 491-A-3-B-2 under stated terms and conditions for
P1,000 per square meter or at the price of P7,213,000.4 One of the terms incorporated in
Dy's offer was the following provision:
5. This Offer to Purchase is made on the representation and warranty of the
OWNER/SELLER, that he holds a good and registrable title to the property, which
shall be conveyed CLEAR and FREE of all liens and encumbrances, and that the
area of 7,213 square meters of the subject property already includes the area on
which the right of way traverses from the main lot (area) towards the exit to the
Sumulong Highway as shown in the location plan furnished by the Owner/Seller to
the buyer. Furthermore, in the event that the right of way is insufficient for the buyer's
purposes (example: entry of a 45-foot container), the seller agrees to sell additional
square meter from his current adjacent property to allow the buyer to full access and
full use of the property.5
Roxas indicated his acceptance of the offer on page 2 of the deed. Less than a month later
or on July 1, 1991, Roxas, as President of RECCI, as vendor, and Dy, as President of WHI,
as vendee, executed a contract to sell in which RECCI bound and obliged itself to sell to Dy
Lot No. 491-A-3-B-2 covered by TCT No. 78086 for P7,213,000.6On September 5, 1991, a
Deed of Absolute Sale7 in favor of WHI was issued, under which Lot No. 491-A-3-B-2
covered by TCT No. 78086 was sold for P5,000,000, receipt of which was acknowledged by
Roxas under the following terms and conditions:
The Vendor agree (sic), as it hereby agrees and binds itself to give Vendee the
beneficial use of and a right of way from Sumulong Highway to the property herein
conveyed consists of 25 square meters wide to be used as the latter's egress from
and ingress to and an additional 25 square meters in the corner of Lot No. 491-A-3-
B-1, as turning and/or maneuvering area for Vendee's vehicles.
The Vendor agrees that in the event that the right of way is insufficient for the
Vendee's use (ex entry of a 45-foot container) the Vendor agrees to sell additional
square meters from its current adjacent property to allow the Vendee full access and
full use of the property.
…
The Vendor hereby undertakes and agrees, at its account, to defend the title of the
Vendee to the parcel of land and improvements herein conveyed, against all claims
of any and all persons or entities, and that the Vendor hereby warrants the right of
the Vendee to possess and own the said parcel of land and improvements thereon
and will defend the Vendee against all present and future claims and/or action in
relation thereto, judicial and/or administrative. In particular, the Vendor shall eject all
existing squatters and occupants of the premises within two (2) weeks from the
signing hereof. In case of failure on the part of the Vendor to eject all occupants and
squatters within the two-week period or breach of any of the stipulations, covenants
and terms and conditions herein provided and that of contract to sell dated 1 July
1991, the Vendee shall have the right to cancel the sale and demand reimbursement
for all payments made to the Vendor with interest thereon at 36% per annum.8
On September 10, 1991, the Wimbeco Builder's, Inc. (WBI) submitted its quotation for
P8,649,000 to WHI for the construction of the warehouse building on a portion of the
property with an area of 5,088 square meters.9 WBI proposed to start the project on October
1, 1991 and to turn over the building to WHI on February 29, 1992.10
In a Letter dated September 16, 1991, Ponderosa Leather Goods Company, Inc. confirmed
its lease agreement with WHI of a 5,000-square-meter portion of the warehouse yet to be
constructed at the rental rate of P65 per square meter. Ponderosa emphasized the need for
the warehouse to be ready for occupancy before April 1, 1992.11 WHI accepted the offer.
However, WBI failed to commence the construction of the warehouse in October 1, 1991 as
planned because of the presence of squatters in the property and suggested a renegotiation
of the contract after the squatters shall have been evicted.12 Subsequently, the squatters
were evicted from the property.
On March 31, 1992, WHI and WBI executed a Letter-Contract for the construction of the
warehouse building for P11,804,160.13 The contractor started construction in April 1992 even
before the building officials of Antipolo City issued a building permit on May 28, 1992. After
the warehouse was finished, WHI issued on March 21, 1993 a certificate of occupancy by
the building official. Earlier, or on March 18, 1993, WHI, as lessor, and Ponderosa, as
lessee, executed a contract of lease over a portion of the property for a monthly rental of
P300,000 for a period of three years from March 1, 1993 up to February 28, 1996.14
In the meantime, WHI complained to Roberto Roxas that the vehicles of RECCI were parked
on a portion of the property over which WHI had been granted a right of way. Roxas
promised to look into the matter. Dy and Roxas discussed the need of the WHI to buy a 500-
square-meter portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 as provided for in
the deed of absolute sale. However, Roxas died soon thereafter. On April 15, 1992, the WHI
wrote the RECCI, reiterating its verbal requests to purchase a portion of the said lot as
provided for in the deed of absolute sale, and complained about the latter's failure to eject
the squatters within the three-month period agreed upon in the said deed.
The WHI demanded that the RECCI sell a portion of Lot No. 491-A-3-B-1 covered by TCT
No. 78085 for its beneficial use within 72 hours from notice thereof, otherwise the
appropriate action would be filed against it. RECCI rejected the demand of WHI. WHI
reiterated its demand in a Letter dated May 29, 1992. There was no response from RECCI.
On June 17, 1992, the WHI filed a complaint against the RECCI with the Regional Trial
Court of Makati, for specific performance and damages, and alleged, inter alia, the following
in its complaint:
5. The "current adjacent property" referred to in the aforequoted paragraph of the
Deed of Absolute Sale pertains to the property covered by Transfer Certificate of
Title No. N-78085 of the Registry of Deeds of Antipolo, Rizal, registered in the name
of herein defendant Roxas Electric.
6. Defendant Roxas Electric in patent violation of the express and valid terms of the
Deed of Absolute Sale unjustifiably refused to deliver to Woodchild Holdings the
stipulated beneficial use and right of way consisting of 25 square meters and 55
square meters to the prejudice of the plaintiff.
7. Similarly, in as much as the 25 square meters and 55 square meters alloted to
Woodchild Holdings for its beneficial use is inadequate as turning and/or
maneuvering area of its 45-foot container van, Woodchild Holdings manifested its
intention pursuant to para. 5 of the Deed of Sale to purchase additional square
meters from Roxas Electric to allow it full access and use of the purchased property,
however, Roxas Electric refused and failed to merit Woodchild Holdings' request
contrary to defendant Roxas Electric's obligation under the Deed of Absolute Sale
(Annex "A").
8. Moreover, defendant, likewise, failed to eject all existing squatters and occupants
of the premises within the stipulated time frame and as a consequence thereof,
plaintiff's planned construction has been considerably delayed for seven (7) months
due to the squatters who continue to trespass and obstruct the subject property,
thereby Woodchild Holdings incurred substantial losses amounting to P3,560,000.00
occasioned by the increased cost of construction materials and labor.
9. Owing further to Roxas Electric's deliberate refusal to comply with its obligation
under Annex "A," Woodchild Holdings suffered unrealized income of P300,000.00 a
month or P2,100,000.00 supposed income from rentals of the subject property for
seven (7) months.
10. On April 15, 1992, Woodchild Holdings made a final demand to Roxas Electric to
comply with its obligations and warranties under the Deed of Absolute Sale but
notwithstanding such demand, defendant Roxas Electric refused and failed and
continue to refuse and fail to heed plaintiff's demand for compliance.
Copy of the demand letter dated April 15, 1992 is hereto attached as Annex "B" and
made an integral part hereof.
11. Finally, on 29 May 1991, Woodchild Holdings made a letter request addressed to
Roxas Electric to particularly annotate on Transfer Certificate of Title No. N-78085
the agreement under Annex "A" with respect to the beneficial use and right of way,
however, Roxas Electric unjustifiably ignored and disregarded the same.
Copy of the letter request dated 29 May 1992 is hereto attached as Annex "C" and
made an integral part hereof.
 12. By reason of Roxas Electric's continuous refusal and failure to comply with
Woodchild Holdings' valid demand for compliance under Annex "A," the latter was
constrained to litigate, thereby incurring damages as and by way of attorney's fees in
the amount of P100,000.00 plus costs of suit and expenses of litigation.15
The WHI prayed that, after due proceedings, judgment be rendered in its favor, thus:
WHEREFORE, it is respectfully prayed that judgment be rendered in favor of
Woodchild Holdings and ordering Roxas Electric the following:
a) to deliver to Woodchild Holdings the beneficial use of the stipulated 25 square
meters and 55 square meters;
b) to sell to Woodchild Holdings additional 25 and 100 square meters to allow it full
access and use of the purchased property pursuant to para. 5 of the Deed of
Absolute Sale;
c) to cause annotation on Transfer Certificate of Title No. N-78085 the beneficial use
and right of way granted to Woodchild Holdings under the Deed of Absolute Sale;
d) to pay Woodchild Holdings the amount of P5,660,000.00, representing actual
damages and unrealized income;
e) to pay attorney's fees in the amount of P100,000.00; and
f) to pay the costs of suit.
Other reliefs just and equitable are prayed for.16
In its answer to the complaint, the RECCI alleged that it never authorized its former
president, Roberto Roxas, to grant the beneficial use of any portion of Lot No. 491-A-3-B-1,
nor agreed to sell any portion thereof or create a lien or burden thereon. It alleged that,
under the Resolution approved on May 17, 1991, it merely authorized Roxas to sell Lot No.
491-A-3-B-2 covered by TCT No. 78086. As such, the grant of a right of way and the
agreement to sell a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 in the said
deed are ultra vires. The RECCI further alleged that the provision therein that it would sell a
portion of Lot No. 491-A-3-B-1 to the WHI lacked the essential elements of a binding
contract.17
In its amended answer to the complaint, the RECCI alleged that the delay in the
construction of its warehouse building was due to the failure of the WHI's contractor to
secure a building permit thereon.18
During the trial, Dy testified that he told Roxas that the petitioner was buying a portion of Lot
No. 491-A-3-B-1 consisting of an area of 500 square meters, for the price of P1,000 per
square meter.
On November 11, 1996, the trial court rendered judgment in favor of the WHI, the decretal
portion of which reads:
WHEREFORE, judgment is hereby rendered directing defendant:
(1) To allow plaintiff the beneficial use of the existing right of way plus the stipulated
25 sq. m. and 55 sq. m.;
(2) To sell to plaintiff an additional area of 500 sq. m. priced at P1,000 per sq. m. to
allow said plaintiff full access and use of the purchased property pursuant to Par. 5 of
their Deed of Absolute Sale;
(3) To cause annotation on TCT No. N-78085 the beneficial use and right of way
granted by their Deed of Absolute Sale;
(4) To pay plaintiff the amount of P5,568,000 representing actual damages and
plaintiff's unrealized income;
(5) To pay plaintiff P100,000 representing attorney's fees; and
To pay the costs of suit.
SO ORDERED.19
The trial court ruled that the RECCI was estopped from disowning the apparent authority of
Roxas under the May 17, 1991 Resolution of its Board of Directors. The court reasoned that
to do so would prejudice the WHI which transacted with Roxas in good faith, believing that
he had the authority to bind the WHI relating to the easement of right of way, as well as the
right to purchase a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085.
The RECCI appealed the decision to the CA, which rendered a decision on November 9,
1999 reversing that of the trial court, and ordering the dismissal of the complaint. The CA
ruled that, under the resolution of the Board of Directors of the RECCI, Roxas was merely
authorized to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086, but not to grant right of
way in favor of the WHI over a portion of Lot No. 491-A-3-B-1, or to grant an option to the
petitioner to buy a portion thereof. The appellate court also ruled that the grant of a right of
way and an option to the respondent were so lopsided in favor of the respondent because
the latter was authorized to fix the location as well as the price of the portion of its property
to be sold to the respondent. Hence, such provisions contained in the deed of absolute sale
were not binding on the RECCI. The appellate court ruled that the delay in the construction
of WHI's warehouse was due to its fault.
The Present Petition
The petitioner now comes to this Court asserting that:
I.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF
ABSOLUTE SALE (EXH. "C") IS ULTRA VIRES.
II.
THE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE RULING OF
THE COURT A QUO ALLOWING THE PLAINTIFF-APPELLEE THE BENEFICIAL
USE OF THE EXISTING RIGHT OF WAY PLUS THE STIPULATED 25 SQUARE
METERS AND 55 SQUARE METERS BECAUSE THESE ARE VALID
STIPULATIONS AGREED BY BOTH PARTIES TO THE DEED OF ABSOLUTE
SALE (EXH. "C").
III.
THERE IS NO FACTUAL PROOF OR EVIDENCE FOR THE COURT OF APPEALS
TO RULE THAT THE STIPULATIONS OF THE DEED OF ABSOLUTE SALE (EXH.
"C") WERE DISADVANTAGEOUS TO THE APPELLEE, NOR WAS APPELLEE
DEPRIVED OF ITS PROPERTY WITHOUT DUE PROCESS.
IV.
IN FACT, IT WAS WOODCHILD WHO WAS DEPRIVED OF PROPERTY WITHOUT
DUE PROCESS BY THE ASSAILED DECISION.
V.
THE DELAY IN THE CONSTRUCTION WAS DUE TO THE FAILURE OF THE
APPELLANT TO EVICT THE SQUATTERS ON THE LAND AS AGREED IN THE
DEED OF ABSOLUTE SALE (EXH. "C").
VI.
THE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE RULING OF
THE COURT A QUO DIRECTING THE DEFENDANT TO PAY THE PLAINTIFF THE
AMOUNT OF P5,568,000.00 REPRESENTING ACTUAL DAMAGES AND
PLAINTIFF'S UNREALIZED INCOME AS WELL AS ATTORNEY'S FEES.20
The threshold issues for resolution are the following: (a) whether the respondent is bound by
the provisions in the deed of absolute sale granting to the petitioner beneficial use and a
right of way over a portion of Lot
No. 491-A-3-B-1 accessing to the Sumulong Highway and granting the option to the
petitioner to buy a portion thereof, and, if so, whether such agreement is enforceable against
the respondent; (b) whether the respondent failed to eject the squatters on its property
within two weeks from the execution of the deed of absolute sale; and, (c) whether the
respondent is liable to the petitioner for damages.
On the first issue, the petitioner avers that, under its Resolution of May 17, 1991, the
respondent authorized Roxas, then its president, to grant a right of way over a portion of Lot
No. 491-A-3-B-1 in favor of the petitioner, and an option for the respondent to buy a portion
of the said property. The petitioner contends that when the respondent sold Lot No. 491-A-
3-B-2 covered by TCT No. 78086, it (respondent) was well aware of its obligation to provide
the petitioner with a means of ingress to or egress from the property to the Sumulong
Highway, since the latter had no adequate outlet to the public highway. The petitioner
asserts that it agreed to buy the property covered by TCT No. 78085 because of the grant
by the respondent of a right of way and an option in its favor to buy a portion of the property
covered by TCT No. 78085. It contends that the respondent never objected to Roxas'
acceptance of its offer to purchase the property and the terms and conditions therein; the
respondent even allowed Roxas to execute the deed of absolute sale in its behalf. The
petitioner asserts that the respondent even received the purchase price of the property
without any objection to the terms and conditions of the said deed of sale. The petitioner
claims that it acted in good faith, and contends that after having been benefited by the said
sale, the respondent is estopped from assailing its terms and conditions. The petitioner
notes that the respondent's Board of Directors never approved any resolution rejecting the
deed of absolute sale executed by Roxas for and in its behalf. As such, the respondent is
obliged to sell a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 with an area of
500 square meters at the price of P1,000 per square meter, based on its evidence and
Articles 649 and 651 of the New Civil Code.
For its part, the respondent posits that Roxas was not so authorized under the May 17, 1991
Resolution of its Board of Directors to impose a burden or to grant a right of way in favor of
the petitioner on Lot No. 491-A-3-B-1, much less convey a portion thereof to the petitioner.
Hence, the respondent was not bound by such provisions contained in the deed of absolute
sale. Besides, the respondent contends, the petitioner cannot enforce its right to buy a
portion of the said property since there was no agreement in the deed of absolute sale on
the price thereof as well as the specific portion and area to be purchased by the petitioner.
We agree with the respondent.
In San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals,21 we held that:
A corporation is a juridical person separate and distinct from its stockholders or
members. Accordingly, the property of the corporation is not the property of its
stockholders or members and may not be sold by the stockholders or members
without express authorization from the corporation's board of directors. Section 23 of
BP 68, otherwise known as the Corporation Code of the Philippines, provides:
"SEC. 23. The Board of Directors or Trustees. – Unless otherwise provided in
this Code, the corporate powers of all corporations formed under this Code
shall be exercised, all business conducted and all property of such
corporations controlled and held by the board of directors or trustees to be
elected from among the holders of stocks, or where there is no stock, from
among the members of the corporation, who shall hold office for one (1) year
and until their successors are elected and qualified."
Indubitably, a corporation may act only through its board of directors or, when
authorized either by its by-laws or by its board resolution, through its officers or
agents in the normal course of business. The general principles of agency govern
the relation between the corporation and its officers or agents, subject to the articles
of incorporation, by-laws, or relevant provisions of law. …22
Generally, the acts of the corporate officers within the scope of their authority are binding on
the corporation. However, under Article 1910 of the New Civil Code, acts done by such
officers beyond the scope of their authority cannot bind the corporation unless it has ratified
such acts expressly or tacitly, or is estopped from denying them:
Art. 1910. The principal must comply with all the obligations which the agent may
have contracted within the scope of his authority.
As for any obligation wherein the agent has exceeded his power, the principal is not
bound except when he ratifies it expressly or tacitly.
Thus, contracts entered into by corporate officers beyond the scope of authority are
unenforceable against the corporation unless ratified by the corporation.23
In BA Finance Corporation v. Court of Appeals,24 we also ruled that persons dealing with an
assumed agency, whether the assumed agency be a general or special one, are bound at
their peril, if they would hold the principal liable, to ascertain not only the fact of agency but
also the nature and extent of authority, and in case either is controverted, the burden of
proof is upon them to establish it.
In this case, the respondent denied authorizing its then president Roberto B. Roxas to sell a
portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085, and to create a lien or burden
thereon. The petitioner was thus burdened to prove that the respondent so authorized
Roxas to sell the same and to create a lien thereon.
Central to the issue at hand is the May 17, 1991 Resolution of the Board of Directors of the
respondent, which is worded as follows:
RESOLVED, as it is hereby resolved, that the corporation, thru the President, sell to
any interested buyer, its 7,213-sq.-meter property at the Sumulong Highway,
Antipolo, Rizal, covered by Transfer Certificate of Title No. N-78086, at a price and
on terms and conditions which he deems most reasonable and advantageous to the
corporation;
FURTHER RESOLVED, that Mr. ROBERTO B. ROXAS, President of the
corporation, be, as he is hereby authorized to execute, sign and deliver the pertinent
sales documents and receive the proceeds of sale for and on behalf of the
company.25
Evidently, Roxas was not specifically authorized under the said resolution to grant a right of
way in favor of the petitioner on a portion of Lot No. 491-A-3-B-1 or to agree to sell to the
petitioner a portion thereof. The authority of Roxas, under the resolution, to sell Lot No. 491-
A-3-B-2 covered by TCT No. 78086 did not include the authority to sell a portion of the
adjacent lot, Lot No. 491-A-3-B-1, or to create or convey real rights thereon. Neither may
such authority be implied from the authority granted to Roxas to sell Lot No. 491-A-3-B-2 to
the petitioner "on such terms and conditions which he deems most reasonable and
advantageous." Under paragraph 12, Article 1878 of the New Civil Code, a special power of
attorney is required to convey real rights over immovable property. 26 Article 1358 of the New
Civil Code requires that contracts which have for their object the creation of real rights over
immovable property must appear in a public document.27 The petitioner cannot feign
ignorance of the need for Roxas to have been specifically authorized in writing by the Board
of Directors to be able to validly grant a right of way and agree to sell a portion of Lot No.
491-A-3-B-1. The rule is that if the act of the agent is one which requires authority in writing,
those dealing with him are charged with notice of that fact.28
Powers of attorney are generally construed strictly and courts will not infer or presume broad
powers from deeds which do not sufficiently include property or subject under which the
agent is to deal.29 The general rule is that the power of attorney must be pursued within legal
strictures, and the agent can neither go beyond it; nor beside it. The act done must be
legally identical with that authorized to be done.30 In sum, then, the consent of the
respondent to the assailed provisions in the deed of absolute sale was not obtained; hence,
the assailed provisions are not binding on it.
We reject the petitioner's submission that, in allowing Roxas to execute the contract to sell
and the deed of absolute sale and failing to reject or disapprove the same, the respondent
thereby gave him apparent authority to grant a right of way over Lot No. 491-A-3-B-1 and to
grant an option for the respondent to sell a portion thereof to the petitioner. Absent estoppel
or ratification, apparent authority cannot remedy the lack of the written power required under
the statement of frauds.31 In addition, the petitioner's fallacy is its wrong assumption of the
unproved premise that the respondent had full knowledge of all the terms and conditions
contained in the deed of absolute sale when Roxas executed it.
It bears stressing that apparent authority is based on estoppel and can arise from two
instances: first, the principal may knowingly permit the agent to so hold himself out as
having such authority, and in this way, the principal becomes estopped to claim that the
agent does not have such authority; second, the principal may so clothe the agent with the
indicia of authority as to lead a reasonably prudent person to believe that he actually has
such authority.32 There can be no apparent authority of an agent without acts or conduct on
the part of the principal and such acts or conduct of the principal must have been known and
relied upon in good faith and as a result of the exercise of reasonable prudence by a third
person as claimant and such must have produced a change of position to its detriment. The
apparent power of an agent is to be determined by the acts of the principal and not by the
acts of the agent.33
For the principle of apparent authority to apply, the petitioner was burdened to prove the
following: (a) the acts of the respondent justifying belief in the agency by the petitioner; (b)
knowledge thereof by the respondent which is sought to be held; and, (c) reliance thereon
by the petitioner consistent with ordinary care and prudence.34 In this case, there is no
evidence on record of specific acts made by the respondent35 showing or indicating that it
had full knowledge of any representations made by Roxas to the petitioner that the
respondent had authorized him to grant to the respondent an option to buy a portion of Lot
No. 491-A-3-B-1 covered by TCT No. 78085, or to create a burden or lien thereon, or that
the respondent allowed him to do so.
The petitioner's contention that by receiving and retaining the P5,000,000 purchase price of
Lot No. 491-A-3-B-2, the respondent effectively and impliedly ratified the grant of a right of
way on the adjacent lot, Lot No. 491-A-3-B-1, and to grant to the petitioner an option to sell
a portion thereof, is barren of merit. It bears stressing that the respondent sold Lot No. 491-
A-3-B-2 to the petitioner, and the latter had taken possession of the property. As such, the
respondent had the right to retain the P5,000,000, the purchase price of the property it had
sold to the petitioner. For an act of the principal to be considered as an implied ratification of
an unauthorized act of an agent, such act must be inconsistent with any other hypothesis
than that he approved and intended to adopt what had been done in his name.36 Ratification
is based on waiver – the intentional relinquishment of a known right. Ratification cannot be
inferred from acts that a principal has a right to do independently of the unauthorized act of
the agent. Moreover, if a writing is required to grant an authority to do a particular act,
ratification of that act must also be in writing.37 Since the respondent had not ratified the
unauthorized acts of Roxas, the same are unenforceable.38 Hence, by the respondent's
retention of the amount, it cannot thereby be implied that it had ratified the unauthorized acts
of its agent, Roberto Roxas.
On the last issue, the petitioner contends that the CA erred in dismissing its complaint for
damages against the respondent on its finding that the delay in the construction of its
warehouse was due to its (petitioner's) fault. The petitioner asserts that the CA should have
affirmed the ruling of the trial court that the respondent failed to cause the eviction of the
squatters from the property on or before September 29, 1991; hence, was liable for
P5,660,000. The respondent, for its part, asserts that the delay in the construction of the
petitioner's warehouse was due to its late filing of an application for a building permit, only
on May 28, 1992.
The petitioner's contention is meritorious. The respondent does not deny that it failed to
cause the eviction of the squatters on or before September 29, 1991. Indeed, the
respondent does not deny the fact that when the petitioner wrote the respondent demanding
that the latter cause the eviction of the squatters on April 15, 1992, the latter were still in the
premises. It was only after receiving the said letter in April 1992 that the respondent caused
the eviction of the squatters, which thus cleared the way for the petitioner's contractor to
commence the construction of its warehouse and secure the appropriate building permit
therefor.
The petitioner could not be expected to file its application for a building permit before April
1992 because the squatters were still occupying the property. Because of the respondent's
failure to cause their eviction as agreed upon, the petitioner's contractor failed to commence
the construction of the warehouse in October 1991 for the agreed price of P8,649,000. In
the meantime, costs of construction materials spiraled. Under the construction contract
entered into between the petitioner and the contractor, the petitioner was obliged to pay
P11,804,160,39including the additional work costing P1,441,500, or a net increase of
P1,712,980.40 The respondent is liable for the difference between the original cost of
construction and the increase thereon, conformably to Article 1170 of the New Civil Code,
which reads:
Art. 1170. Those who in the performance of their obligations are guilty of fraud,
negligence, or delay and those who in any manner contravene the tenor thereof, are
liable for damages.
The petitioner, likewise, lost the amount of P3,900,000 by way of unearned income from the
lease of the property to the Ponderosa Leather Goods Company. The respondent is, thus,
liable to the petitioner for the said amount, under Articles 2200 and 2201 of the New Civil
Code:
Art. 2200. Indemnification for damages shall comprehend not only the value of the
loss suffered, but also that of the profits which the obligee failed to obtain.
Art. 2201. In contracts and quasi-contracts, the damages for which the obligor who
acted in good faith is liable shall be those that are the natural and probable
consequences of the breach of the obligation, and which the parties have foreseen
or could have reasonably foreseen at the time the obligation was constituted.
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible
for all damages which may be reasonably attributed to the non-performance of the
obligation.
In sum, we affirm the trial court's award of damages and attorney's fees to the petitioner.
IN LIGHT OF ALL THE FOREGOING, judgment is hereby rendered AFFIRMING the
assailed Decision of the Court of Appeals WITH MODIFICATION. The respondent is
ordered to pay to the petitioner the amount of P5,612,980 by way of actual damages and
P100,000 by way of attorney's fees. No costs.
SO ORDERED.
G.R. No. 11897 September 24, 1918
J. F. RAMIREZ, plaintiff-appellee,
vs.
THE ORIENTALIST CO., and RAMON J. FERNANDEZ, defendants-appellants.
Jose Moreno Lacalle for appellant Fernandez.
Sanz, Opisso & Luzuriaga for appellant "The Orientalist Co."
No appearance for appellee.
STREET, J.:
The Orientalist Company is a corporation, duly organized under the laws of the Philippine
Islands, and in 1913 and 1914, the time of the occurrences which gave rise to this lawsuit,
was engaged in the business of maintaining and conducting a theatre in the city of Manila
for the exhibition of cinematographic films. Under the articles of incorporation the company
is authorized to manufacture, buy, or otherwise obtain all accessories necessary for
conducting such a business. The plaintiff J. F. Ramirez was, at the same time, a resident of
the city of Paris, France, and was engaged in the business of marketing films for a
manufacturer or manufacturers, there engaged in the production or distribution of
cinematographic material. In this enterprise the plaintiff was represented in the city of Manila
by his son, Jose Ramirez.
In the month of July, 1913, certain of the directors of the Orientalist Company, in Manila,
became apprised of the fact that the plaintiff in Paris had control of the agencies for two
different marks of films, namely, the "Eclair Films" and the "Milano Films;" and negotiations
were begun with said officials of the Orientalist Company by Jose Ramirez, as agent of the
plaintiff, for the purpose of placing the exclusive agency of these films in the hands of the
Orientalist Company. The defendant Ramon J. Fernandez, one of the directors of the
Orientalist Company and also its treasure, was chiefly active in this matter, being moved by
the suggestions and representations of Vicente Ocampo, manage of the Oriental Theater, to
the effect that the securing of the said films was necessary to the success of the
corporation.
Near the end of July of the year aforesaid, Jose Ramirez, as representative of his father,
placed in the hands of Ramon J. Fernandez an offer, dated July 4, 1913, stating detail the
terms upon which the plaintiff would undertake to supply from Paris the aforesaid films. This
officer was declared to be good until the end of July; and as only about for the Orientalist
Company to act on the matter speedily, if it desired to take advantage of said offer.
Accordingly, Ramon J. Fernandez, on July 30, had an informal conference with all the
members of the company's board of directors except one, and with approval of those with
whom he had communicated, addressed a letter to Jose Ramirez, in Manila, accepting the
offer contained in the memorandum of July 4th for the exclusive agency of the Eclair films. A
few days later, on August 5, he addressed another letter couched in the same terms,
likewise accepting the office of the exclusive agency for the Milano Films.
The memorandum offer contained a statement of the price at which the films would be sold,
the quantity which the representative of each was required to take and information
concerning the manner and intervals of time for the respective shipments. The expenses of
packing, transportation and other incidentals were to be at the cost of the purchaser. There
was added a clause in which J. F. Ramirez described his function in such transactions as
that of a commission agent and stated that he would see to the prompt shipment of the
films, would pay the manufacturer, and take care that the films were insured — his
commission for such services being fixed at 5 per cent.
What we consider to be the most portion of the two letters of acceptance written by R. J.
Fernandez to Jose Ramirez is in the following terms:
We willingly accepted the officer under the terms communicated by your father in his
letter dated at Paris on July 4th of the present year.
These communications were signed in the following form, in which it will be noted the
separate signature of R. J. Fernandez, as an individual, is placed somewhat below and to
the left of the signature of the Orientalist Company as singed by R. J. Fernandez, in the
capacity of treasurer:
THE ORIENTALIST COMPANY,
By R. J. FERNANDEZ,
Treasurer,
R. J. FERNANDEZ.
Both of these letters also contained a request that Jose Ramirez should at once telegraph to
his father in Paris that his offer had been accepted by the Orientalist Company and instruct
him to make a contract with the film companies, according to the tenor of the offer, and in
the capacity of attorney-in-fact for the Orientalist Company. The idea behind the latter
suggestion apparently was that the contract for the films would have to be made directly
between the film-producing companies and the Orientalist Company; and it seemed
convenient, in order to save time, that the Orientalist Company should clothed J. F. Ramirez
with full authority as its attorney-in-fact. This idea was never given effect; and so far as the
record shows, J. F. Ramirez himself procured the films upon his own responsibility, as he
indicated in the officer of July 4 that he would do, with the result that the only contracting
parties in this case are J. F. Ramirez of the one part, and the Orientalist Company, with
Ramon J. Fernandez of the other.
In due time the films began to arrive in Manila, a draft for the cost and expenses incident to
each shipment being attached to the proper bill of lading. It appears that the Orientalist
Company was without funds to meet these obligations and the first few drafts were dealt
with in the following manner: The drafts, upon presented through the bank, were accepted in
the name of the Orientalist Company by its president B. Hernandez, and were taken up by
the latter with his own funds. As the drafts had thus been paid by B. Hernandez, the films
which had been procured by he payment of said drafts were treated by him as his own
property; and they in fact never came into the actual possession of the Orientalist Company
as owner at all, though it is true Hernandez rented the films to the Orientalist Company and
they were exhibited by it in the Oriental Theater under an arrangement which was made
between him and the theater's manager.
During the period between February 27, 1914, and April 30, 1914, there arrived in the city of
Manila several remittances of films from Paris, and it is these shipments which have given
occasion for the present action. All of the drafts accompanying these films were drawn, as
on former occasions, upon the Orientalist Company; and all were accepted in the name of
B. Hernandez, except the last, which was accepted by B. Hernandez individually. None of
the drafts thus accepted were taken up by the drawee or by B. Hernandez when they fell
due; and it was finally necessary for the plaintiff himself to take them up as dishonored by
non-payment.
Thereupon this action was instituted by the plaintiff on May 19, 1914, against the Orientalist
Company, and Ramon J. Fernandez. As the films which accompanied the dishonored were
liable to deteriorate, the court, upon application of the plaintiff, and apparently without
opposition on the part of the defendants, appointed a receiver who took charge of the films
and sold them. The amount realized from this sale was applied to the satisfaction of the
plaintiff's claim and was accordingly delivered to him in part payment thereof. At trial
judgment was given for the balance due to the plaintiff, namely P6,018.93, with interest from
May 19, 1914, the date of the institution of the action. In the judgment of the trial court the
Orientalist Company was declared to be a principal debtor and Ramon J. Fernandez was
declared to be liable subsidiarily as guarantor. From this judgment both of the parties
defendant appealed.
In this Court neither of the parties appellant make any question with respect to the right of
the plaintiff to recover from somebody the amount awarded by the lower court; but each of
the defendants insists the other is liable for the whole. It results that the real contention upon
this appeal is between the two defendants.
It is stated in the brief of the appellant Ramon J. Fernandez and the statement is not
challenged by the Orientalist Company that the judgment has already been executed as
against the company is exclusively and primarily liable the entire indebtedness, the question
as to the liability of Ramon J. Fernandez would be academic. But if the latter is liable as
principal obligor for the whole or any part of the debt, it will be necessary to modify the
judgment in order to adjust the rights of the defendants in accordance with such finding.
It will be noted that the action is primarily founded upon the liability created by the letters
dated July 30th and August 5, 1913, in connection with the plaintiff's offer of July 4, 1913;
and both of the letters mentioned are copied into the complaint as the foundation of the
action. The action is not based upon the dishonored drafts which were accepted by B.
Hernandez in the name of the Orientalist Company; and although these drafts, as well as
the last draft, which was accepted by B. Hernandez individually, have been introduced in
evidence, this was evidently done for the purpose of proving the amount of damages which
the plaintiff was entitled to recover.
In the discussion which is to follow we shall consider, first, the question of the liability of the
corporation upon the contracts contained in the letters of July 30 and August 5, 1913, and,
secondly the question of the liability of Ramon J. Fernandez, based upon his personal
signature to the same documents.
As to the liability of the corporation a preliminary point of importance arises upon the
pleadings. The action, as already stated, is based upon documents purporting to be signed
by the Orientalist Company, and copies of the documents are set out in the complaint. It was
therefore incumbent upon the corporation, if it desired to question the authority of Fernandez
to bind it, to deny the due execution of said contracts under oath, as prescribed in section
103 of the Code of Civil procedure. Said section, in the part pertinent to the situation now
under consideration, reads as follows:
When an action is brought upon a written instrument and the complaint contains or
has annexed or has annexed a copy of such instrument, the genuineness and due
execution of the instrument shall be deemed admitted, unless specifically denied
under oath in the answer.
No sworn answer denying the genuineness and due execution of the contracts in question
or questioning the authority of Ramon J. Fernandez to bind the Orientalist Company was
filed in this case; but evidence was admitted without objection from the plaintiff, tending to
show that Ramon J. Fernandez had no such authority. This evidence consisted of extracts
from the minutes of the proceedings of the company's board of directors and also of extracts
from the minutes of the proceedings of the company's stockholders, showing that the
making of this contract had been under consideration in both bodies and that the authority to
make the same had been withheld by the stockholders. It therefore becomes necessary for
us to consider whether the administration resulting from the failure of the defendant
company to deny the execution of the contracts under oath is binding upon it for all
purposes of this lawsuit, or whether such failure should be considered a mere irregularity of
procedure which was waived when the evidence referred to was admitted without objection
from the plaintiff. The proper solution of this problem makes it necessary to consider
carefully the principle underlying the provision above quoted.
That the situation was one in which an answer under oath denying the authority of the agent
should have been interposed, supposing that the company desired to contest this point, is
not open to question. In the case of Merchant vs. International Banking Corporation, (6 Phil.
Rep., 314), it appeared that one Brown has signed the name of the defendant bank as
guarantor of a promissory note. The bank was sued upon this guaranty and at the hearing
attempted to prove that Brown had no authority to bind the bank by such contract. It was
held that buy failing to deny the contract under oath, the bank had admitted the genuineness
and due execution thereof, and that this admission extended not only to the authenticity of
the signature of Brown but also to his authority. Said Justice Willard: "The failure of the
defendant to deny the genuineness and due execution of this guaranty under oath was an
admission not only of the signature of Brown, but also his authority to make the contract in
behalf of the defendant and of the power the contract in behalf of the defendant and of the
power of the defendant to enter into such a contract.
The rule thus stated is in entire accord with the doctrine prevailing in the United States, as
will be seen by reference to the following, among other authorities:
The case of Barrett Mining Co. vs. Tappan (2 Colo., 124) was an action against a mining
corporation upon an appeal bond. The name of the company had been affixed to the
obligation by an agent, and no sufficient affidavit was filed by the corporation questioning its
signature or the authority of the agent to bind the company. It was held that the plaintiff did
not have to prove the due execution of the bond and that the corporation as to be taken as
admitting the authority of the agent to make the signature. Among other things the court
said: "But it is said that the authority of Barrett to execute the bond is distinguishable from
the signing and, although the signature must be denied under oath, the authority of the
agent need not be. Upon this we observe that the statute manifestly refers to the legal effect
of the signature, rather than the manual act of singing. If the name of the obligor, in a bond,
is subscribed by one in his presence, and by his direction, the effect is the same as if his
name should be signed with his own hand, and under such circumstances we do not doubt
that the obligor must deny his signature under oath, in order to put the obligee to proof of the
fact. Quit facit per aliam facit per se, and when the name is signed by one thereunto
authorized, it is as much as the signature of the principal as if written with his own hand.
Therefore, if the principal would deny the authority of the agent, as the validity of the
signature is thereby directly attacked, the denial must be under oath.
In Union Dry Company vs. Reid (26 Ga., 107), an action was brought upon a promissory
note purporting to have been given by on A. B., as the treasurer of the defendant company.
Said the court: "Under the Judiciary Act of 1799, requiring the defendant to deny on oath an
instrument of writing, upon which he is sued, the plea in this case should have been verified.
If the person who signed this note for the company, and upon which they are sued, was not
authorized to make it, let them say so upon oath, and the onus is then on the plaintiff to
overcome the plea."
It should be noted that the provision contained in section 103 of our Code of Civil Procedure
is embodied in some form or other in the statutes of probably all of the American States, and
it is not by any means peculiar to the laws of California, though it appears to have been
taken immediately from the statutes of that State. (Secs. 447, 448, California Code of Civil
Procedure.)
There is really a broader question here involved than that which relates merely to the
formality of verifying the answer with an affidavit. This question arises from the circumstance
that the answer of the corporation does not in any was challenge the authority of Ramon J.
Fernandez to bind it by the contracts in question and does not set forth, as a special
defense, any such lack of authority in him. Upon well-established principles of pleading lack
of authority in an officer of a corporation to bind it by a contract executed by him in its name
is a defense which should be specially pleaded — and this quite apart from the requirement,
contained in section 103, that the answer setting up such defense should be verified by
oath. But is should not here escape observation that section 103 also requires — in denial
contemplated in that section shall be specific. An attack on the instrument in general terms
is insufficient, even though the answer is under oath. (Songco vs. Sellner, 37 Phil. Rep.,
254.)
In the first edition of a well-known treatise on the laws of corporations we find the following
proposition:
If an action is brought against a corporation upon a contract alleged to be its
contract, if it desires to set up the defense that the contract was executed by one not
authorized as its agent, it must plead non est factum. (Thompson on Corporations,
1st ed., vol. 6, sec. 7631.)
Again, says the same author:
A corporation can not avail itself of the defense that it had no power to enter into the
obligation to enforce which the suit is brought, unless it pleads that defense. This
principle applies equally where the defendant intends to challenge the power of its
officer or agent to execute in its behalf the contract upon which the action brought
and where it intends to defend on the ground of total want of power in the corporation
to make such a contract. (Opus citat. sec. 7619.)
In Simon vs. Calfee (80 Ark., 65), it was said:
Though the power of the officers of a business corporation to issue negotiable paper
in its name is not presumed, such corporation can not avail itself of a want of power
in its officers to bind it unless the defense was made on such ground.
The rule has been applied where the question was whether corporate officer, having
admitted power to make a contract, had in the particular instance exceeded that authority,
(Merill vs. Consumers' Coal Co., 114 N.Y., 216); and it has been held that where the answer
in a suit against a corporation on its note relies simply on the want of power of the
corporation to issue notes, the defendant can not afterwards object that the plaintiff has not
shown that the officer executing the note were empowered to do so. (Smith vs. Eureka Flour
Mills Co., 6 Cal., 1.)
The reason for the rule enunciated in the foregoing authorities will, we think, be readily
appreciated. In dealing with corporations the public at large is bound to rely to a large extent
upon outward appearances. If a man is found acting for a corporation with the external
indicia of authority, any person, not having notice of want of authority, may usually rely upon
those appearances; and if it be found that the directors had permitted the agent to exercise
that authority and thereby held him out as a person competent to bind the corporation, or
had acquiesced in a contract and retained the benefit supposed to have been conferred by
it, the corporation will be bound, notwithstanding the actual authority may never have been
granted. The public is not supposed nor required to know the transactions which happen
around the table where the corporate board of directors or the stockholders are from time to
time convoked. Whether a particular officer actually possesses the authority which he
assumes to exercise is frequently known to very few, and the proof of it usually is not readily
accessible to the stranger who deals with the corporation on the faith of the ostensible
authority exercised by some of the corporate officers. It is therefore reasonable, in a case
where an officer of a corporation has made a contract in its name, that the corporation
should be required, if it denies his authority, to state such defense in its answer. By this
means the plaintiff is apprised of the fact that the agent's authority is contested; and he is
given an opportunity to adduce evidence showing either that the authority existed or that the
contract was ratified and approved.
We are of the opinion that the failure of the defendant corporation to make any issue in its
answer with regard to the authority of Ramon J. Fernandez to bind it, and particularly its
failure to deny specifically under oath the genuineness and due execution of the contracts
sued upon, have the effect of elimination the question of his authority from the case,
considered as a matter of mere pleading. The statute (sec. 103) plainly says that if a written
instrument, the foundation of the suit, is not denied upon oath, it shall be deemed to be
admitted. It is familiar doctrine that an admission made in a pleading can not be
controverted by the party making such admission; and all proof submitted by him contrary
thereto or inconsistent therewith should simply be ignored by the court, whether objection is
interposed by the opposite party or not. We can see no reason why a constructive
admission, created by the express words of the statute, should be considered to have less
effect than any other admission.
The parties to an action are required to submit their respective contentions to the court in
their complaint and answer. These documents supply the materials which the court must
use in order to discover the points of contention between the parties; and where the statute
says that the due execution of a document which supplies the foundation of an action is to
be taken as admitted unless denied under oath, the failure of the defendant to make such
denial must be taken to operate as a conclusive admission, so long as the pleadings remain
that form.
It is true that it is declared in section 109 of the Code of Civil Procedure that immaterial
variances between the allegations of a pleading and the proof shall be disregarded and the
facts shall be found according to the evidence. The same section, however, recognizes the
necessity for an amendment of the pleadings. And judgment must be in conformity with the
case made in conformity with the case made in the pleadings and established by the proof,
and relief can not be granted that is substantially inconsistent with either. A party can no
more succeed upon a case proved but not alleged than upon a case alleged but nor proved.
This rule of course operates with like effect upon both parties, and applies equality to the
defendants special defense as to the plaintiffs cause of action.
Of course this Court, under section 109 of the Code of Civil Procedure, has authority even
now to permit the answer of the defendant to be amended; and if we believed that the
interests of justice so required, we would either exercise that authority or remand the cause
for a new trial in court below. As will appear further on in this opinion, however, we think that
the interests of justice will best be promoted by deciding the case, without more ado, upon
the issues presented in the record as it now stands.
That we may not appear to have overlooked the matter, we will observe that two cases are
cited from California in which the Supreme Court of the State has held that where a release
is pleaded by way of defense and evidence tending to destroy its effect is introduced without
objection, the circumstance that it was not denied under oath is immaterial. In the earlier of
these cases, Crowley, vs. Railroad Co. (60 Cal., 628), an action was brought against a
railroad company to recover damages for the death of the plaintiff's minor son, alleged to
have been killed by the negligence of the defendant. The defendant company pleaded by
way of defense a release purporting to be signed by the plaintiff, and in its answer inserted a
copy of the release. The execution of the release was not denied under oath; but at the trial
evidence was submitted on behalf of the plaintiff tending to show that at the time he signed
the release, he was incompetent by reason of drunkenness to bind himself thereby. It was
held that inasmuch as this evidence had been submitted by the plaintiff without objection, it
was proper for the court to consider it. We do not question the propriety of that decision,
especially as the issue had been passed upon by a jury; but we believe that the decision
would have been more soundly planted if it had been said that the incapacity of the plaintiff,
due to his drunken condition, was a matter which did not involve either the genuineness or
due execution of the release. Like the defenses of fraud, coercion, imbecility, and mistake, it
was a matter which could be proved under the general issue and did not have to be set up
in a sworn reply. (Cf. Moore vs. Copp, 119 Cal., 429, 432, 433.) A somewhat similar
explanation can, we think, be given of the case of Clark vs. Child in which the rule declared
in the earlier case was followed. With respect to both decisions which we merely observe
that upon point of procedure which they are supposed to maintain, the reasoning of the
court is in our opinion unconvincing.
We shall now consider the liability of the defendant company on the merits just as if that
liability had been properly put in issue by a specific answer under oath denying the authority
of Fernandez go to bind it. Upon this question it must at the outset be premised that Ramon
J. Fernandez, as treasurer, had no independent authority to bind the company by signing its
name to the letters in question. It is declared by signing its name to the letters in question. It
is declared in section 28 of the Corporation Law that corporate power shall be exercised,
and all corporate business conducted by the board of directors; and this principle is
recognized in the by-laws of the corporation in question which contain a provision declaring
that the power to make contracts shall be vested in the board of directors. It is true that it is
also declared in the same by-laws that the president shall have the power, and it shall be his
duty, to sign contract; but this has reference rather to the formality of reducing to proper
form the contract which are authorized by the board and is not intended to confer an
independent power to make contract binding on the corporation.
The fact that the power to make corporate contract is thus vested in the board of directors
does not signify that a formal vote of the board must always be taken before contractual
liability can be fixed upon a corporation; for the board can create liability, like an individual,
by other means than by a formal expression of its will. In this connection the case of Robert
Gair Co. vs. Columbia Rice Packing Co. (124 La., 194) is instructive. If there appeared that
the secretary of the defendant corporation had signed an obligation on its behalf binding it
as guarantor of the performance of an important contract upon which the name of another
corporation appeared as principal. The defendant company set up by way of defense that is
secretary had no authority to bind it by such an engagement. The court found that the
guaranty was given with the knowledge and consent of the president and directors, and that
this consent of the president and directors, and that this consent was given with as much
observance of formality as was customary in the transaction of the business of the
company. It was held that, so far as the authority of the secretary was concerned, the
contract was binding. In discussing this point, the court quoted with approval the following
language form one of its prior decisions:
The authority of the subordinate agent of a corporation often depends upon the
course of dealings which the company or its director have sanctioned. It may be
established sometimes without reference to official record of the proceedings of the
board, by proof of the usage which the company had permitted to grow up in
business, and of the acquiescence of the board charged with the duty of supervising
and controlling the company's business.
It appears in evidence, in the case now before us, that on July 30, the date upon which the
letter accepting the offer of the Eclair films was dispatched the board of directors of the
Orientalist Company convened in special session in the office of Ramon J. Fernandez at the
request of the latter. There were present the four members, including the president, who had
already signified their consent to the making of the contract. At this meeting, as appears
from the minutes, Fernandez informed the board of the offer which had been received from
the plaintiff with reference to the importation of films. The minutes add that terms of this offer
were approved; but at the suggestion of Fernandez it was decided to call a special meeting
of the stockholders to consider the matter and definite action was postponed.
The stockholders meeting was convoked upon September 18, 1913, upon which occasion
Fernandez informed those present of the offer in question and of the terms upon which the
films could be procured. He estimated that the company would have to make an outlay of
about P5,500 per month, if the offer for the two films should be accepted by it.
The following extracts from the minutes of this meeting are here pertinent:
Mr. Fernandez informed the stockholders that, in view of the urgency of the matter
and for the purpose of avoiding that other importers should get ahead of the
corporation in this regard, he and Messrs. B. Hernandez, Leon Monroy, and Dr.
Papa met for the purpose of considering the acceptance of the offer together with the
responsibilities attached thereto, made to the corporation by the film manufacturers
of Eclair and Milano of Paris and Italy respectively, inasmuch as the first shipment of
films was then expected to arrive.
At the same time he informed the said stockholders that he had already made
arrangements with respect to renting said films after they have been once exhibited
in the Cine Oriental, and that the corporation could very well meet the expenditure
involved and net a certain profit, but that, if we could enter into a contract with about
nine cinematographs, big gains would be obtained through such a step.
The possibility that the corporation might not see fit to authorize the contract, or might for
lack of funds be unable to make the necessary outlay, was foreseen; and in such
contingency the stockholders were informed, that the four gentlemen above mentioned
(Hernandez, Fernandez, Monroy, and Papa) "would continue importing said films at their
own account and risk, and shall be entitled only to a compensation of 10 per cent of their
outlay in importing the films, said payment to be made in shares of said corporation,
inasmuch as the corporation is lacking available funds for the purpose, and also because
there are 88 shares of stock remaining still unsold."
In view of this statement, the stockholders adopted a resolution to the effect that the
agencies of the Eclair and Milano films should be accepted, if the corporation could obtain
the money with which to meet the expenditure involved, and to this end appointed a
committee to apply to the bank for a credit. The evidence shows that an attempt was made,
on behalf of the corporation, to obtain a credit of P10,000 from the Bank of the Philippine
Islands for the purpose indicated, but the bank declined to grant his credit. Thereafter
another special meeting of the shareholders of the defendant corporation was called at
which the failure of their committee to obtain a credit from the bank was made known. A
resolution was thereupon passed to the effect that the company should pay to Hernandez,
Fernandez, Monroy, and Papa an amount equal to 10 per cent of their outlay in importing
the films, said payment to be made in shares of the company in accordance with the
suggestion made at the previous meeting. At the time this meeting was held three shipment
of the films had already been received in Manila.
We believe it is a fair inference from the recitals of the minutes of the stockholders meeting
of September 18, and especially from the first paragraph above quoted, that this body was
then cognizant that the officer had already been accepted in the name of the Orientalist
Company and that the films which were then expected to arrive were being imported by
virtue of such acceptance. Certainly four members of the board of directors there present
were aware of this fact, as the letter accepting the offer had been sent with their knowledge
and consent. In view of this circumstance, a certain doubt arises whether they meant to
utilize the financial assistance of the four so-called importers in order that the corporation
might bet the benefit of the contract for the films, just as it would have utilized the credit of
the bank if such credit had been extended. If such was the intention of the stockholders their
action amounted to a virtual, though indirect, approval of the contract. It is not however,
necessary to found the judgment on this interpretation of the stockholders proceedings,
inasmuch as we think for reasons presently to be stated, that the corporation is bound, and
we will here assume that in the end the contract were not approved by the stockholders.
It will be observed that Ramon J. Fernandez was the particular officer and member of the
board of directors who was most active in the effort to secure the films for the corporation.
The negotiations were conducted by him with the knowledge and consent of other members
of the board; and the contract was made with their prior approval. As appears from the
papers in this record, Fernandez was the person to who keeping was confided the printed
stationery bearing the official style of the corporation, as well as rubber stencil with which
the name of the corporation could be signed to documents bearing its name.
Ignoring now, for a moment, the transactions of the stockholders, and reverting to the
proceedings of the board of directors of the Orientalist Company, we find that upon October
27, 1913, after Fernandez had departed from the Philippine Islands, to be absent for many
months, said board adopted a resolution conferring the following among other powers on
Vicente Ocampo, the manager of the Oriental theater, namely:
(1) To rent a box for the films in the "Kneeler Building."
(4) To be in charge of the films and of the renting of the same.
(5) To advertise in the different newspapers that we are importing films to be
exhibited in the Cine Oriental.
(6) Not to deliver any film for rent without first receiving the rental therefor or the
guaranty for the payment thereof.
(7) To buy a book and cards for indexing the names of the films.
(10) Upon the motion of Mr. Ocampo, it was decided to give ample powers to the
Hon. R. Acuña to enter into agreements with cinematograph proprietors in the
provinces for the purpose of renting films from us.
It thus appears that the board of directors, before the financial inability of the corporation to
proceed with the project was revealed, had already recognized the contract as being in
existence and had proceeded to take the steps necessary to utilize the films. Particularly
suggestive is the direction given at this meeting for the publication of announcements in the
newspapers to the effect that the company was engaged in importing films. In the light of all
the circumstances of the case, we are of the opinion that the contracts in question were thus
inferentially approved by the company's board of directors and that the company is bound
unless the subsequent failure of the stockholders to approve said contracts had the effect of
abrogating the liability thus created.
Both upon principle and authority it is clear that the action of the stockholders, whatever its
character, must be ignored. The functions of the stockholders of a corporation are, it must
be remembered, of a limited nature. The theory of a corporation is that the stockholders may
have all the profits but shall turn over the complete management of the enterprise to their
representatives and agents, called directors. Accordingly, there is little for the stockholders
to do beyond electing directors, making by-laws, and exercising certain other special powers
defined by-law. In conformity with this idea it is settled that contract between a corporation
and third person must be made by the director and not by the stockholders. The corporation,
in such matters, is represented by the former and not by the latter. (Cook on Corporations,
sixth ed., secs. 708, 709.) This conclusion is entirely accordant with the provisions of section
28 of our Corporation Law already referred to. It results that where a meeting of the
stockholders is called for the purpose of passing on the propriety of making a corporate
contract, its resolutions are at most advisory and not in any wise binding on the board.
In passing upon the liability of a corporation in cases of this kind it is always well to keep in
mind the situation as it presents itself to the third party with whom the contract is made.
Naturally he can have little or no information as to what occurs in corporate meetings; and
he must necessarily rely upon the external manifestations of corporate consent. The
integrity of commercial transactions can only be maintained by holding the corporation
strictly to the liability fixed upon it by its agents in accordance with law, and we would be
sorry to announce a doctrine which would permit the property of a man in the city of Paris to
be whisked out of his hands and carried into a remote quarter of the earth without recourse
against the corporations whose name and authority had been used in the manner disclosed
in this case. As already observed, it is familiar doctrine that if a corporation knowingly
permits one of its officer, or any other agent, to do acts within the scope of an apparent
authority, and thus hold him out to the public as possessing power to do those acts, the
corporation will as against any one who has in good faith dealt with the corporation through
such agent, be estopped from denying his authority; and where it is said "if the corporation
permits" this means the same as "if the thing is permitted by the directing power of the
corporation."
It being determined that the corporation is bound by the contract in question, it remains to
consider the character of the liability assumed by R. J. Fernandez, in affixing his personal
signature to said contract. The question here is whether Fernandez is liable jointly with the
Orientalists Company as a principal obligor, or whether his liability is that of a guarantor
merely.
As appears upon the face of the contracts, the signature of Fernandez, in his individual
capacity, is not in line with the signature of the Orientalist Company, but is set off to the left
of the company's signature and somewhat who sign contracts in some capacity other than
that of principal obligor to place their signature alone would justify a court in holding that
Fernandez here took upon himself the responsibility of a guarantor rather than that of a
principal obligor. We do, however, think, that the form in which the contract is signed raises
a doubt as to what the real intention was; and we feel justified, in looking to the evidence to
discover that intention. In this connection it is entirely clear, from the testimony of both
Ramirez and Ramon J. Fernandez, that the responsibility of the latter was intended to be
that of guarantor. There is, to be sure, a certain difference between these witnesses as to
the nature of this guaranty, inasmuch as Fernandez would have us believe that his name
was signed as a guaranty that the contract would be approved by the corporation, while
Ramirez says that the name was put on the contract for the purpose of guaranteeing, not
the approval of the contract, but its performance. We are convinced that the latter was the
real intention of the contracting parties.
We are not unmindful of the force of that rule of law which declares that oral evidence is
admissible to show the character in which the signature was affixed. This conclusion is
perhaps supported by the language of the second paragraph of article 1281 of the Civil
Code, which declares that if the words of a contract should appear contrary to the evident
intention of the parties, the intention shall prevail. But the conclusion reached is, we think,
deducible from the general principle that in case of ambiguity parol evidence is admissible to
show the intention of the contracting parties.
It should be stated in conclusion that as the issues in this case have been framed, the only
question presented to this court is: To what extent are the signatory parties to the contract
liable to the plaintiff J. F. Ramirez? No contentious issue is raised directly between the
defendants, the Orientalist Company and Ramon H. Fernandez; nor does the present the
present action involve any question as to the undertaking of Fernandez and his three
associates to effect the importation of the films upon their own account and risk. Whether
they may be bound to hold the company harmless is a matter upon which we express no
opinion.
The judgment appealed from is affirmed, with costs equally against the two appellant. So
ordered.
Torres, Johnson, Malcolm, Avanceña and Fisher, JJ., concur.
G.R. No. L-53820 June 15, 1992
YAO KA SIN TRADING, owned and operated by YAO KA SIN, petitioner,
vs.
HONORABLE COURT OF APPEALS and PRIME WHITE CEMENT
CORPORATION, represented by its President-Chairman, CONSTANCIO B.
MALAGNA, respondents.
DAVIDE, JR., J.:
Assailed in this petition for review is the decision of the respondent Court of Appeals
in C.A.-G.R. No. 61072-R, 1 promulgated on 21 December 1979, reversing the
decision 2 of the then Court of First Instance (now Regional Trial Court) of Leyte
dated 20 November 1975 in Civil Case No. 5064 entitled "Yao Ka Sin Trading versus
Prime White Cement Corporation."
The root of this controversy is the undated letter-offer of Constancio B. Maglana,
President and Chairman of the Board of private respondent Prime White Cement
Corporation, hereinafter referred to as PWCC, to Yao Ka Sin Trading, hereinafter
referred to as YKS, which describes itself as "a business concern of single
proprietorship," 3 and is represented by its manager, Mr. Henry Yao; the letter reads
as follows:
PRIME WHITE CEMENT CORPORATION
602 Cardinal Life Building
Herran Street, Manila
Yao Ka Sin
Tacloban City
Gentlemen:
We have the pleasure to submit hereby our firm offer to you under the
following quotations, terms, and conditions, to wit:
1). Commodity — Prime White Cement
2). Price — At your option: a) P24.30 per 94 lbs. bag net,
FOB Cebu City; and b) P23.30 per 94 lbs. bag net, FOB
Asturias Cebu.
3). Quality — As fully specified in certificate No. 224-73
by Bureau of Public Works, Republic of the Philippines.
 4). Quantity — Forty-five Thousand (45,000) bags at 94 President &
lbs. net per bag withdrawable in guaranteed monthly Chairman
quantity of Fifteen Thousand (15,000) bags minimum
effective from June, 1973 to August 1973. CONFORME:

5). Delivery Schedule — Shipment be made within four YAO KA SIN TRADING
(4) days upon receipt of your shipping instruction. BY: (SGD) HENRY YAO

6). Bag/Container — a) All be made of Standard Kraft WITNESSES:

(water resistant paper, 4 ply, with bursting strength of 220
pounds, and b) Breakage allowance — additional four
percent (4%) over the quantity of each shipment.
7). Terms of Payment — Down payment of PESOS:
TWO HUNDRED FORTY THREE THOUSAND
(P243,000.00) payable on the signing of this contract and
the balance to be paid upon presentation of
corresponding shipping documents.
It is understood that in the event of a delay in our shipment, you hold
the option to discount any price differential resulting from a lower
market price vis-a-vis the contract price. In addition, grant (sic) you the
option to extend this contract until the complete delivery of Forty Five
Thousand (45,000) bags of 94 lbs. each is made by us. You are also
hereby granted the option to renew this contract under the same price,
terms and conditions.
Please countersign on the space provided for below as your
acknowledgement and confirmation of the above transaction. Thank
You.
Very truly yours,
PRIME WHITE
CEMENT
CORPORATION
BY: (SGD)
CONSTANCIO
B. MAGLANA
(SGD) T. CATINDIG (SGD) ERNESTO LIM
RECEIVED from Mr. Henry Yao of Yao Ka Sin Trading, in pursuance
of the above offer, the sum of Pesos: TWO HUNDRED FORTY
THREE THOUSAND ONLY (P243,000.00) in the form of Producers'
Bank of the Philippines Check No. C-153576 dated June 7, 1973.
PRIME WHITE
CEMENT
CORPORATION
BY:
(SGD)
CONSTANCIO
B. MAGLANA
President &
Chairman 4
This letter-offer, hereinafter referred to as Exhibit "A", was prepared, typed and
signed on 7 June 1973 in the office of Mr. Teodoro Catindig, Senior Vice-President
of the Consolidated Bank and Trust Corporation (Solid Bank). 5
The principal issue raised in this case is whether or not the aforesaid letter-offer, as
accepted by YKS, is a contract that binds the PWCC. The trial court rule in favor of
the petitioner, but the respondent Court held otherwise.
The records disclose the following material operative facts:
In its meeting in Cebu City on 30 June 1973, or twenty-three (23) days after the
signing of Exhibit "A", the Board of Directors of PWCC disapproved the same; the
rejection is evidenced by the following Minutes (Exhibit "10"):
the 10,000 bags of white cement sold to Yao Ka Sin Trading is sold not
because of the alledged letter-contract adhered to by them, but must
be understood as a new and separate contract, and has in no way to
do with the letter-offer which they (sic) as consummated is by this
resolution totally disapproved and is unacceptable to the corporation.
On 5 July 1973, PWCC wrote a letter (Exhibit "1") to YKS informing it of the
disapproval of Exhibit "A". Pursuant, however, to its decision with respect to the
10,000 bags of cement, it is issued the corresponding Delivery Order (Exhibit "4")
and Official Receipt No. 0394 (Exhibit "5") for the payment of the same in the
amount of P243,000.00 This is the same amount received and acknowledged by
Maglana in Exhibit "A".
YKS accepted without protest both the Delivery and Official Receipts.
While YKS denied having received a copy of Exhibit "1", it was established that the
original thereof was shown to Mr. Henry Yao; since no one would sign a receipt for
it, the original was left at the latter's office and this fact was duly noted in Exhibit "1"
(Exhibit "l-A").
On 4 August 1973, PWCC wrote a letter (Exhibit "2") to YKS in answer to the latter's
4 August 1973 letter stating that it is "withdrawing or taking delivery of not less than
10,000 bags of white cement on August 6-7, 1973 at Asturias, Cebu, thru M/V
Taurus." In said reply, PWCC reminded YKS of its (PWCC's) 5 July 1973 letter
(Exhibit "1") and told the latter that PWCC "only committed to you and which you
correspondingly paid 10,000 bags of white cement of which 4,150 bags were already
delivered to you as of August 11, 1973. 6 Unfortunately, no copy of the said 4
August 1973 letter of YKS was presented in evidence.
On 21 August 1973, PWCC wrote another letter (Exhibit "3") 7 to YKS in reply to the
latter's letter of 15 August 1973. Enclosed in the reply was a copy of Exhibit "2".
While the records reveal that YKS received this reply also on 21 August 1973
(Exhibit "3" "A"), 8 it still denied having received it. Likewise, no copy of the so-called
15 August 1973 letter was presented in evidence.
On 10 September 1973, YKS, through Henry Yao, wrote a letter 9 to PWCC as a
follow-up to the letter of 15 August 1973; YKS insisted on the delivery of 45,030
bags of white cement. 10
On 12 September 1973, Henry Yao sent a letter (Exhibit "G") to PWCC calling the
latter's attention to the statement of delivery dated 24 August 1973, particularly the
price change from P23.30 to P24.30 per 94 lbs. bag net FOB Asturias, Cebu. 11
On 2 November 1973, YKS sent a telegram (Exhibit "C") 12 to PWCC insisting on
the full compliance with the terms of Exhibit "A" and informing the latter that it is
exercising the option therein stipulated.
On 3 November 1973, YKS sent to PWCC a letter (Exhibit "D") as a follow-up to the
2 November 1973 telegram, but this was returned to sender as unclaimed. 13
As of 7 December 1973, PWCC had delivered only 9,775 bags of white cement.
On 9 February 1974, YKS wrote PWCC a letter (Exhibit "H") requesting, for the last
time, compliance by the latter with its obligation under
Exhibit "A". 14
On 27 February 1974, PWCC sent an answer (Exhibit "7") to the aforementioned
letter of 9 February 1974; PWCC reiterated the unenforceability of Exhibit "A". 15
On 4 March 1974, YKS filed with the then Court of First Instance of Leyte a
complaint for Specific Performance with Damages against PWCC. The
complaint 16 was based on Exhibit "A" and was docketed as Civil Case No. 5064.
In its Answer with Counterclaim 17 filed on 1 July 1974, PWCC denied under oath
the material averments in the complaint and alleged that: (a) YKS "has no legal
personality to sue having no legal personality even by fiction to represent itself;" (b)
Mr. Maglana, its President and Chairman, was lured into signing Exhibit "A"; (c) such
signing was subject to the condition that Exhibit "A" be approved by the Board of
Directors of PWCC, as corporate commitments are made through it; (d) the latter
disapproved it, hence Exhibit "A" was never consummated and is not enforceable
against PWCC; (e) it agreed to sell 10,000 bags of white cement, not under Exhibit
"A", but under a separate contract prepared by the Board; (f) the rejection by the
Board of Exhibit "A" was made known to YKS through various letters sent to it,
copies of which were attached to the Answer as Annexes 1, 2 and 3; 18(g) YKS
knew, per Delivery Order 19 and Official Receipt 20 issued by PWCC, that only
10;000 bags were sold to it without any terms or conditions, at P24.30 per bag FOB
Asturias, Cebu; (h) YKS is solely to blame for the failure to take complete delivery of
10,000 bags for it did not send its boat or truck to PWCC's plant; and (i) YKS has,
therefore, no cause of action.
In its Counterclaim, PWCC asks for moral damages in the amount of not less than
P10,000.00, exemplary damages in the sum of P500,000.00 and attorney's fees in
the sum of P10,000.00.
On 24 July 1974, YKS filed its Answer to the Counterclaim. 21
Issues having been joined, the trial court conducted a pre-trial. 22 On that occasion,
the parties admitted that according to the By-Laws of PWCC, the Chairman of the
Board, who is also the President of the corporation, "has the power to execute and
sign, for and in behalf of the corporation, all contracts or agreements which the
corporation enters into," subject to the qualification that "all the president's
actuations, prior to and after he had signed and executed said contracts, shall be
given to the board of directors of defendant Corporation." Furthermore, it was
likewise stated for the record "that the corporation is a semi-subsidiary of the
government because of the NIDC participation in the same, and that all contracts of
the corporation should meet the approval of the NIDC and/or the PNB Board
because of an exposure and financial involvement of around P10 million therein. 23
During the trial, PWCC presented evidence to prove that Exhibit "A" is not binding
upon it because Mr. Maglana was not authorized to make the offer and sign the
contract in behalf of the corporation. Per its By-Laws (Exhibit "8"), only the Board of
Directors has the power . . . (7) To enter into (sic) agreement or contract of any kind
with any person in the name and for and in behalf of the corporation through its
President, subject only to the declared objects and purpose of the corporation and
the existing provisions of law. 24 Among the powers of the President is "to operate
and conduct the business of the corporation according to his own judgment and
discretion, whenever the same is not expressly limited by such orders, directives or
resolutions." 25 Per standard practice of the corporation, contracts should first pass
through the marketing and intelligence unit before they are finalized. Because of its
interest in the PWCC, the NIDC, through its comptroller, goes over contracts
involving funds of and white cement produced by the PWCC. Finally, among the
duties of its legal counsel is to review proposed contracts before they are submitted
to the Board. While the president. may be tasked with the preparation of a contract,
it must first pass through the legal counsel and the comptroller of the corporation. 26
On 20 November 1975, after trial on the merits, the court handed down its decision
in favor of herein petitioner, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered:
(1) Ordering defendant: to complete the delivery of
45,000 bags of prime white cement at 94 lbs. net per bag
at the price agreed, with a breakage allowance of empty
bags at 4% over the quantity agreed;
(2) Ordering defendant to pay P50,000.00, as moral
damages; P5,000.00 as exemplary damages; P3,000.00
as attorney's fees; and the costs of these proceedings.
SO ORDERED. 27
In disregarding PWCC's theory, the trial court interpreted the provision of the By-
Laws — granting its Board of Directors the power to enter into an agreement or
contract of any kind with any person through the President, — to mean that the latter
may enter into such contract or agreement at any time and that the same is not
subject to the ratification of the board of directors but "subject only to the declared
objects and purpose of the corporation and existing laws." It then concluded:
It is obvious therefore, that it is not the whole membership of the board
of directors who actually enters into any contract with any person in the
name and for and in behalf of the corporation, but only its president. It
is likewise crystal clear that this automatic representation of the board
by the president is limited only by the "declared objects and purpose of
the corporation and existing provisions of law." 28
It likewise interpreted the provision on the power of the president to "operate and
conduct the business of the corporation according to the orders, directives or
resolutions of the board of directors and according to his own judgment and
discretion whenever the same is not expressly limited by such orders, directives and
resolutions," to mean that the president can operate and conduct the business of the
corporation according to his own judgment and discretion as long as it is not
expressly limited by the orders, directives or resolutions of the board of
directors. 29 The trial court found no evidence that the board had set a prior
limitation upon the exercise of such judgment and discretion; it further ruled that the
By-Laws, does not require that Exhibit "A" be approved by the Board of Directors.
Finally, in the light of the Chairman's power to "execute and sign for and in behalf of
the corporation all contracts or agreements which the corporation may enter into"
(Exhibit "I-1"), it concluded that Mr. Maglana merely followed the By-Laws
"presumably both as president and chairman of the board thereof." 30Hence, Exhibit
"A" was validly entered into by Maglana and thus binds the corporation.
The trial court, however, ruled that the option to sell is not valid because it is not
supported by any consideration distinct from the price; it was exercised before
compliance with the original contract by PWCC; and the repudiation of the original
contract by PWCC was deemed a withdrawal of the option before acceptance by the
petitioner.
Both parties appealed from the said decision to the respondent Court of Appeals
before which petitioner presented the following Assignment of Errors:
I III
THE TRIAL COURT ERRED IN HOLDING THAT THE OPTION TO
RENEW THE CONTRACT OF SALE IS NOT ENFORCEABLE
BECAUSE THE OPTION WAS MADE EVEN BEFORE THE
COMPLIANCE OF (sic) THE ORIGINAL CONTRACT BY
DEFENDANT AND THAT DEFENDANT'S PROMISE TO SELL IS
NOT SUPPORTED BY ANY CONSIDERATION DISTINCT FROM
THE PRICE.
II
THE TRIAL COURT ERRED IN NOT AWARDING TO THE PLAINTIFF
ACTUAL DAMAGES, SUFFICIENT EXEMPLARY DAMAGES AND
ATTORNEY'S FEES AS ALLEGED IN THE COMPLAINT AND
PROVEN DURING THE TRIAL." 31
while the private respondent cited the following errors:
I
THE TRIAL COURT ERRED IN HOLDING THAT EXHIBIT "A" IS A
VALID CONTRACT OR PLAINTIFF CAN CLAIM THAT THE
PROPOSED LETTER-CONTRACT, EXHIBIT "A" IS LEGALLY
ENFORCEABLE, AS THE SAME IS A MERE UNACCEPTED
PROPOSAL, NOT HAVING BEEN PREVIOUSLY AUTHORIZED TO
BE ENTERED INTO OR LATER ON RATIFIED BY THE
DEFENDANTS BOARD OF DIRECTORS; IN FACT EXHIBIT "A" WAS
TOTALLY REJECTED AND DISAPPROVED IN TOTO BY THE
DEFENDANT'S BOARD OF DIRECTORS IN CLEAR, PLAIN
LANGUAGE AND DULY INFORMED AND TRANSMITTED TO
PLAINTIFF.
II
THE TRIAL COURT ERRED IN HOLDING THAT PLAINTIFF CAN
LEGALLY UTILIZE THE COURTS AS THE FORUM TO GIVE LIFE
AND VALIDITY TO A TOTALLY UNENFORCEABLE OR NON-
EXISTING CONTRACT.
THE TRIAL COURT ERRED IN ALLOWING YAO KA SIN TO IMPUGN
AND CONTRADICT HIS VERY OWN ACTUATIONS AND
REPUDIATE HIS ACCEPTANCE AND RECEIPTS OF BENEFITS
FROM THE COUNTER-OFFER OF DEFENDANT FOR 10,000 BAGS
OF CEMENT ONLY, UNDER THE PRICE, TERMS AND
CONDITIONS TOTALLY FOREIGN TO AND WHOLLY DIFFERENT
FROM THOSE WHICH APPEAR IN EXHIBIT "A".
IV
THE TRIAL COURT ERRED IN DISMISSING DEFENDANT'S
COUNTER-CLAIMS AS THE SAME ARE DULY SUPPORTED BY
CLEAR AND INDUBITABLE EVIDENCE. 32
In its decision 33 promulgated on 21 December 1979, the respondent Court
reversed the decision of the trial court, thus:
 WHEREFORE, the judgment appealed from is REVERSED and set
aside, Plaintiff's complaint is dismissed with costs. Plaintiff is ordered
to pay defendant corporation P25,000.00 exemplary damages, and
P10,000.00 attorney's fees.
SO ORDERED.
Such conclusion is based on its findings, to wit:
Before resolving the issue, it is helpful to bring out some preliminary
facts. First, the defendant corporation is supervised and principally
financed by the National Investment and Development Corporation
(NIDC), a subsidiary investment of the Philippine National Bank (PNB),
with cash financial exposure of some P10,000,000.00. PNB is a
government financial institution whose Board is chairmaned (sic) by
the Minister of National Defense. This fact is very material to the issue
of whether defendant corporations president can bind the corporation
with his own act.
Second, for failure to deny under oath the following actionable
documents in support of defendant's counterclaim:
1. The resolution contained in defendant's letter to
plaintiff dated July 5, 1973, on the 10,000 bags of white
cement delivered to plaintiff was not by reason of the
letter contract, Exhibit "A", which was totally disapproved
by defendant corporation's board of directors, clearly
stating that "If within ten (10) days from date hereof, we
will not hear from you but you will withdraw cement at
P24.30 per bag from our plant, then we will deposit your
check of P243,000.00 dated June 7, 1973 issued by the
Producers Bank of the Philippines, per instruction of the
Board." (Annex "I" to defendant's Answer).
2. Letter of defendant to plaintiff dated August 4, 1973
that defendant "only committed to you and which you
accordingly paid 10,000 bags of white cement of which
4,150 bags were already delivered to you as of August 1,
1973" (Annex "2" of defendant's Answer).
3. Letter dated August 21, 1973 to plaintiff reiterating
defendant's letter of August 4, 1973 (Annex "3" to
defendant's Answer).
4. Letter to stores dated August 21, 1973,
5. Receipt from plaintiff (sic) P243,000.00 in payment of
10,000 bags of white cement at P24.30 per bag (Annex
"5", to defendant's Answer).
plaintiff is deemed to have admitted, not only the due execution and
genuiness (sic) of said documents, (Rule 8 Sec. 8, Rules of Court) but
also the allegations therein (Rule 9, Sec. 1, Rules of Court). All of the
foregoing documents tend to prove that the letter-offer, Exhibit "A", was
rejected by defendant corporation's Board of Directors and plaintiff was
duly notified thereof and that the P243,000.00 check was considered
by both parties as payment of the 10,000 bags of cement under a
separate transaction. As proof of which plaintiff did not complain nor
protest until February 9, 1974, when he threatened legal action.
Third, Maglana's signing the letter-offer prepared for him in the
Solidbank was made clearly upon the condition that it was subject to
the approval of the board of directors of defendant corporation. We find
consistency herein because according to the Corporation Law, and the
By-Laws of defendant corporation, all corporate commitments and
business are conducted by, and contracts entered into through, the
express authority of the Board of Directors (Sec. 28. Corp. Law, Exh "I"
or "8").
Fourth, What Henry Yao and Maglana agreed upon as embodied in
Exhibit "A", insofar as defendant corporation is concerned, was an
unauthorized contract (Arts. 1317 and 1403 (1), Civil Code). And
because Maglana was not authorized by the Board of Directors of
defendant corporation nor was his, actuation ratified by the Board, the
agreement is unenforceable (Art. 1403 (1), Civil Code; Raquiza et al.
vs. Lilles et al., 13 CA Rep. 343; Gana vs. Archbishop of Manila, 43 O-
G. 3224).
 While it may be true that Maglana is President of defendant
corporation nowhere in the Articles of Incorporation nor in the By-Laws
of said corporation was he empowered to enter into any contract all by
himself and bind the corporation without first securing the authority and
consent of the Board of Directors. Whatever authority Maglana may
have must be derived from the Board of Directors of defendant
corporation. A corporate officers power as an agent must be sought
from the law, the articles of incorporation and the By-Laws or from a
resolution of the Board (Vicente vs. Geraldez, 52 SCRA 227, Board of
Liquidators vs. Kalaw, 20 SCRA 987).
It clearly results from the foregoing that the judgment appealed from is
untenable. Having no cause of action against defendant corporation,
plaintiff is not entitled to any relief. We see no justification, therefore,
for the court a quo's awards in its favor. . . . 34
Its motion for reconsideration having been denied by the respondent Court in its
resolution 35 dated 15 April 1980, petitioner filed the instant petition based on the
following grounds:
1. That the contract (Exh. "A") entered into by the President and
Chairman of the Board of Directors Constancio B. Maglana in behalf of
the respondent corporation binds the said corporation.
2. That the contract (Exh. "A") was never novated nor superceded (sic)
by a subsequent contract.
3. That the option to renew the contract as contained in Exhibit "A" is
enforceable.
4. That Sec. 8, Rule 8 of the Rules of Court only applies when the
adverse party appear (sic) to be a party to the instrument but not to
one who is not a party to the instrument and Sec. 1, Rule 9 of the said
Rules with regards (sic) to denying under oath refers only to
allegations of
usury. 36
We gave due course 37 to the petition after private respondent filed its
Comment 38 and required the parties to submit simultaneously their Memoranda,
which the parties subsequently complied with. 39
Before going any further, this Court must first resolve an issue which, although
raised in the Answer of private respondent, was neither pursued in its appeal before
the respondent Court nor in its Comment and Memorandum in this case. It also
eluded the attention of the trial court and the respondent Court. The issue, which is
of paramount importance, concerns the lack of capacity of plaintiff/petitioner to sue.
In the caption of both the complaint and the instant petition, the plaintiff and the
petitioner, respectively, is:
YAO KA SIN TRADING,
owned and operated by
YAO KA SIN. 40
and is described in the body thereof as "a business concern of single proprietorship
owned and operated by Yao Ka Sin." 41 In the body of the petition, it is described as
"a single proprietorship business concern." 42 It also appears that, as gathered from
the decision of the trial court, no Yao Ka Sin testified. Instead, one Henry Yao took
the witness stand and testified that he is the "manager of Yao Ka Sin Trading" and "it
was in representation of the plaintiff" that he signed Exhibit "A" 43 Under Section 1,
Rule 3 of the Rules of Court, only natural or juridical persons or entities authorized
by law may be parties in a civil action. In Juasing Hardware vs. Mendoza, 44 this
Court held that a single proprietorship is neither a natural person nor a juridical
person under Article 44 of the Civil Code; it is not an entity authorized by law to bring
suit in court:
The law merely recognizes the existence of a sole proprietorship as a
form of business organization conducted for profit by a single
individual, and requires the proprietor or owner thereof to secure
licenses and permits, register the business name, and pair taxes to the
national government. It does not vest juridical or legal personality upon
the sole proprietorship nor empower it to file or defend an action in
court. 45
Accordingly, the proper party plaintiff/petitioner should be YAO KA SIN. 46
The complaint then should have been amended to implead Yao Ka Sin as plaintiff in
substitution of Yao Ka Sin Trading. However, it is now too late in the history of this
case to dismiss this petition and, in effect, nullify all proceedings had before the trial
court and the respondent Court on the sole ground of petitioner's lack of capacity to
sue. Considering that private respondent did not pursue this issue before the
respondent Court and this Court; that, as We held in Juasing, the defect is merely
formal and not substantial, and an amendment to cure such defect is expressly
authorized by Section 4, Rule 10 of the Rules of Court which provides that "[a] defect
in the designation of the parties may be summarily corrected at any stage of the
action provided no prejudice is caused thereby to the adverse party;" and that "[a]
sole proprietorship does not, of coarse, possess any juridical personality separate
and apart from the personality of the owner of the enterprise and the personality of
the persons acting in the name of such proprietorship," 47 We hold and declare that
Yao Ka Sin should be deemed as the plaintiff in Civil Case No. 5064 and the
petitioner in the instant case. As this Court stated nearly eighty (80) years ago
in Alonso vs. Villamor: 48
No one has been misled by the error in the name of the party plaintiff.
If we should by reason of this error send this case back for amendment
and new trial, there would be on the retrial the same complaint, the
same answer, the same defense, the same interests, the same
witnesses, and the same evidence. The name of the plaintiff would
constitute the only difference between the old trial and the new. In our
judgment there is not enough in a name to justify such action.
And now to the merits of the petition.
The respondent Court correctly ruled that Exhibit "A" is not binding upon the private
respondent. Mr. Maglana, its President and Chairman, was not empowered to
execute it. Petitioner, on the other hand, maintains that it is a valid contract because
the Maglana has the power to enter into contracts for the corporation as implied from
the following provisions of the By-Laws of private respondent:
a) The power of the Board of Directors to . . . enter into (sic) agreement
or contract of any kind with any person in the name and for and in
behalf of the corporation through its President, subject only to the
declared objects and purpose of the corporation and the existing
provisions of law. (Exhibit "8-A"); and
b) The power of the Chairman of the Board of Directors to "execute
and sign, for and in behalf of the corporation, all contracts or
agreements which the corporation may enter into" (Exhibit "I-1").
And even admitting, for the sake of argument, that Mr. Maglana was not so
authorized under the By-Laws, the private respondent, pursuant to the doctrine laid
down by this Court in Francisco vs. Government Service Insurance
System 49 and Board of Liquidators vs. Kalaw, 50 is still bound by his act for
clothing him with apparent authority.
We are not persuaded.
Since a corporation, such as the private respondent, can act only through its officers
and agents, "all acts within the powers of said corporation may be performed by
agents of its selection; and, except so far as limitations or restrictions may be
imposed by special charter, by-law, or statutory provisions, the same general
principles of law which govern the relation of agency for a natural person govern the
officer or agent of a corporation, of whatever status or rank, in respect to his power
to act for the corporation; and agents when once appointed, or members acting in
their stead, are subject to the same rules, liabilities and incapacities as are agents of
individuals and private persons." 51 Moreover, " . . . a corporate officer or agent may
represent and bind the corporation in transactions with third persons to the extent
that authority to do so has been conferred upon him, and this includes powers which
have been intentionally conferred, and also such powers as, in the usual course of
the particular business, are incidental to, or may be implied from, the powers
intentionally conferred, powers added by custom and usage, as usually pertaining to
the particular officer or agent, and such apparent powers as the corporation has
caused persons dealing with the officer or agent to believe that it has conferred. 52
While there can be no question that Mr. Maglana was an officer — the President and
Chairman — of private respondent corporation at the time he signed Exhibit "A", the
above provisions of said private respondent's By-Laws do not in any way confer
upon the President the authority to enter into contracts for the corporation
independently, of the Board of Directors. That power is exclusively lodged in the
latter. Nevertheless, to expedite or facilitate the execution of the contract, only the
President — and not all the members of the Board, or so much thereof as are
required for the act — shall sign it for the corporation. This is the import of the
words through the presidentin Exhibit "8-A" and the clear intent of the power of the
chairman "to execute and sign for and in behalf of the corporation all contracts and
agreements which the corporation may enter into" in Exhibit "I-1". Both powers
presuppose a prior act of the corporation exercised through the Board of Directors.
No greater power can be implied from such express, but limited, delegated authority.
Neither can it be logically claimed that any power greater than that expressly
conferred is inherent in Mr. Maglana's position as president and chairman of the
corporation.
Although there is authority "that if the president is given general control and
supervision over the affairs of the corporation, it will be presumed that he has
authority to make contract and do acts within the course of its ordinary
business," 53 We find such inapplicable in this case. We note that the private
corporation has a general manager who, under its By-Laws has, inter alia, the
following powers: "(a) to have the active and direct management of the business and
operation of the corporation, conducting the same accordingly to the order,
directives or resolutions of the Board of Directors or of the president." It goes without
saying then that Mr. Maglana did not have a direct and active and in the
management of the business and operations of the corporation. Besides, no
evidence was adduced to show that Mr. Maglana had, in the past, entered into
contracts similar to that of Exhibit "A" either with the petitioner or with other parties.
Petitioner's last refuge then is his alternative proposition, namely, that private
respondent had clothed Mr. Maglana with the apparent power to act for it and had
caused persons dealing with it to believe that he was conferred with such power.
The rule is of course settled that "[a]lthough an officer or agent acts without, or in
excess of, his actual authority if he acts within the scope of an apparent authority
with which the corporation has clothed him by holding him out or permitting him to
appear as having such authority, the corporation is bound thereby in favor of a
person who deals with him in good faith in reliance on such apparent authority, as
where an officer is allowed to exercise a particular authority with respect to the
business, or a particular branch of it, continuously and publicly, for a considerable
time." 54 Also, "if a private corporation intentionally or negligently clothes its officers
or agents with apparent power to perform acts for it, the corporation will be estopped
to deny that such apparent authority in real, as to innocent third persons dealing in
good faith with such officers or agents." 55 This "apparent authority may result from
(1) the general manner, by which the corporation holds out an officer or agent as
having power to act or, in other words, the apparent authority with which it clothes
him to act in general or (2) acquiescence in his acts of a particular nature, with
actual or constructive knowledge thereof, whether within or without the scope of his
ordinary powers. 56
It was incumbent upon the petitioner to prove that indeed the private respondent had
clothed Mr. Maglana with the apparent power to execute Exhibit "A" or any similar
contract. This could have been easily done by evidence of similar acts executed
either in its favor or in favor of other parties. Petitioner miserably failed to do that.
Upon the other hand, private respondent's evidence overwhelmingly shows that no
contract can be signed by the president without first being approved by the Board of
Directors; such approval may only be given after the contract passes through, at
least, the comptroller, who is the NIDC representative, and the legal counsel.
The cases then of Francisco vs. GSIS and Board of Liquidators vs. Kalaw are
hopelessly unavailing to the petitioner. In said cases, this Court found sufficient
evidence, based on the conduct and actuations of the corporations concerned, of
apparent authority conferred upon the officer involved which bound the corporations
on the basis of ratification. In the first case, it was established that the offer of
compromise made by plaintiff in the letter, Exhibit "A", was validly accepted by the
GSIS. The terms of the trial offer were clear, and over the signature of defendant's
general manager Rodolfo Andal, plaintiff was informed telegraphically that her
proposal had been accepted. It was sent by the GSIS Board Secretary and
defendant did not disown the same. Moreover, in a letter remitting the payment of
P30,000 advanced by her father, plaintiff quoted verbatim the telegram of
acceptance. This was in itself notice to the corporation of the terms of the allegedly
unauthorized telegram. Notwithstanding this notice, GSIS pocketed the amount and
kept silent about the telegram. This Court then ruled that:
This silence, taken together with the unconditional acceptance of three
other subsequent remittances from plaintiff, constitutes in itself a
binding ratification of the original agreement (Civil Code, Art. 1393).
Art. 1393. Ratification may be effected expressly or tactly
it is understood that there is a tacit ratification if, with
knowledge of the reason which renders the contract
voidable and such reason having ceased, the person
who has a right to invoke it should execute an act which
necessarily implies an intention to waive his right
In the second case, this Court found:
In the case at bar, the practice of the corporation has been to allow its
general manager to negotiate and execute contracts in its copra
 trading activities for and in NACOCO's behalf without prior board
approval. If the by-laws were to be literally followed, the board should
give its stamp of prior approval on all corporate contracts. But that
board itself, by its acts and through acquiescence, practically laid aside
the by-laws requirement of prior approval.
Under the given circumstances, the Kalaw contracts are valid
corporate acts.
The inevitable conclusion then is that Exhibit "A" is an unenforceable contract under
Article 1317 of the Civil Code which provides as follows:
Art. 1317. No one may contract in the name of another without being
authorized by the latter, or unless he has by law a right to represent
him.
A contract entered into in the name of another by one who has no
authority or legal representation, or who has acted beyond his powers,
shall be unenforceable, unless it is ratified, expressly or impliedly, by
the person on whose behalf it, has been execrated, before it is revoked
by the other contracting party.
The second ground is based on a wrong premise. It assumes, contrary to Our
conclusion above, that Exhibit "A" is a valid contract binding upon the private
respondent. It was effectively disapproved and rejected by the Board of Directors
which, at the same time, considered the amount of P243,000.00 received Mr.
Maglana as payment for 10,000 bags of white cement, treated as an entirely
different contract, and forthwith notified petitioner of its decision that "If within ten
(10) days from date hereof we will not hear from you but you will withdraw cement at
P24.30 per bag from our plant, then we will deposit your check of P243,000.00 dated
June 7, 1973 issued by the Producers Bank of the Philippines, per instruction of the
Board." 57 Petitioner received the copy of this notification and thereafter accepted
without any protest the Delivery Receipt covering the 10,000 bags and the Official
Receipt for the P243,000.00. The respondent Court thus correctly ruled that
petitioner had in fact agreed to a new transaction involving only 10,000 bags of white
cement.
The third ground must likewise fail. Exhibit "A" being unenforceable, the option to
renew it would have no leg to stand on. The river cannot rise higher than its source.
In any event, the option granted in. this case is without any consideration Article
1324 of the Civil Code expressly provides that:
When the offerer has allowed the offeree a certain period to accept,
the offer may be withdrawn at any time before acceptance by
communicating such withdrawal, except when the option is founded
upon a consideration, as something paid or promised.
while Article 1749 of the same Code provides:
A promise to buy and sell a determinate thing for a price certain is
reciprocally demandable.
An accepted unilateral promise to buy or to sell a determinate thing for
a price certain is binding upon the promissor if the promise is
supported by a consideration distinct from the price.
Accordingly, even if it were accepted, it can not validly bind the private
respondent. 58
The fourth ground is, however, meritorious.
Section 8, Rule 8 of the Rules of Court provides:
Sec. 8. How to contest genuineness of such documents — When an
action or defense is founded upon a written instrument, copied in or
attached in the corresponding pleading as provided in the preceding
section, the genuineness and due execution of the instrument shall be
deemed admitted unless the adverse party, under oath, specifically
denies them, and sets forth what he claims to be the facts; but this
provision does not apply when the adverse party does not appear, to
be a party to the instrument or when compliance with an order for an
inspection of the original instrument is refused.
It is clear that the petitioner is not a party to any of the documents attached to the
private respondent's Answer. Thus, the above quoted rule is not applicable. 59 While
the respondent Court, erred in holding otherwise, the challenged decision must,
nevertheless, stand in view of the above disquisitions on the first to the third grounds
of the petition.
WHEREFORE, judgment is hereby rendered AFFIRMING the decision of
respondent Court of Appeals in C.A. G.R. No. 61072-R promulgated on 21
December 1979.
Cost against the petitioner.
G.R. No. 153468 August 17, 2006
PAUL LEE TAN, ANDREW LIUSON, ESTHER WONG, STEPHEN CO, JAMES TAN,
JUDITH TAN, ERNESTO TANCHI JR., EDWIN NGO, VIRGINIA KHOO, SABINO
PADILLA JR., EDUARDO P. LIZARES and GRACE CHRISTIAN HIGH
SCHOOL, Petitioners,
vs.
PAUL SYCIP and MERRITTO LIM, Respondents.
DECISION
PANGANIBAN, CJ.:
For stock corporations, the "quorum" referred to in Section 52 of the Corporation Code is
based on the number of outstanding voting stocks. For nonstock corporations, only those
who are actual, living members with voting rights shall be counted in determining the
existence of a quorum during members’ meetings. Dead members shall not be counted.
The Case
The present Petition for Review on Certiorari [1] under Rule 45 of the Rules of Court seeks
the reversal of the January 23 2 and May 7, 2002, 3 Resolutions of the Court of Appeals (CA)
in CA-GR SP No. 68202. The first assailed Resolution dismissed the appeal filed by
petitioners with the CA. Allegedly, without the proper authorization of the other petitioners,
the Verification and Certification of Non-Forum Shopping were signed by only one of them --
Atty. Sabino Padilla Jr. The second Resolution denied reconsideration.
The Facts
Petitioner Grace Christian High School (GCHS) is a nonstock, non-profit educational
corporation with fifteen (15) regular members, who also constitute the board of
trustees. [4] During the annual members’ meeting held on April 6, 1998, there were only
eleven (11) [5] living member-trustees, as four (4) had already died. Out of the eleven, seven
(7) 6 attended the meeting through their respective proxies. The meeting was convened and
chaired by Atty. Sabino Padilla Jr. over the objection of Atty. Antonio C. Pacis, who argued
that there was no quorum. 7 In the meeting, Petitioners Ernesto Tanchi, Edwin Ngo, Virginia
Khoo, and Judith Tan were voted to replace the four deceased member-trustees.
When the controversy reached the Securities and Exchange Commission (SEC), petitioners
maintained that the deceased member-trustees should not be counted in the computation of
the quorum because, upon their death, members automatically lost all their rights (including
the right to vote) and interests in the corporation.
SEC Hearing Officer Malthie G. Militar declared the April 6, 1998 meeting null and void for
lack of quorum. She held that the basis for determining the quorum in a meeting of members
should be their number as specified in the articles of incorporation, not simply the number of
living members. 8 She explained that the qualifying phrase "entitled to vote" in Section
24 9 of the Corporation Code, which provided the basis for determining a quorum for the
election of directors or trustees, should be read together with Section 89. 10
The hearing officer also opined that Article III (2) 11 of the By-Laws of GCHS, insofar as it
prescribed the mode of filling vacancies in the board of trustees, must be interpreted in
conjunction with Section 29 12 of the Corporation Code. The SEC en banc denied the appeal
of petitioners and affirmed the Decision of the hearing officer in toto. 13 It found to be
untenable their contention that the word "members," as used in Section 52 14 of the
Corporation Code, referred only to the living members of a nonstock corporation. 15
As earlier stated, the CA dismissed the appeal of petitioners, because the Verification and
Certification of Non-Forum Shopping had been signed only by Atty. Sabino Padilla Jr. No
Special Power of Attorney had been attached to show his authority to sign for the rest of the
petitioners.
Hence, this Petition. 16
Issues
Petitioners state the issues as follows:
"Petitioners principally pray for the resolution of the legal question of whether or not in NON-
STOCK corporations, dead members should still be counted in determination of quorum for
purposed of conducting the Annual Members’ Meeting.
"Petitioners have maintained before the courts below that the DEAD members should no
longer be counted in computing quorum primarily on the ground that members’ rights are
‘personal and non-transferable’ as provided in Sections 90 and 91 of the Corporation Code
of the Philippines.
"The SEC ruled against the petitioners solely on the basis of a 1989 SEC Opinion that did
not even involve a non-stock corporation as petitioner GCHS.
"The Honorable Court of Appeals on the other hand simply refused to resolve this question
and instead dismissed the petition for review on a technicality – the failure to timely submit
an SPA from the petitioners authorizing their co-petitioner Padilla, their counsel and also a
petitioner before the Court of Appeals, to sign the petition on behalf of the rest of the
petitioners.
"Petitioners humbly submit that the action of both the SEC and the Court of Appeals are not
in accord with law particularly the pronouncements of this Honorable Court in Escorpizo v.
University of Baguio (306 SCRA 497), Robern Development Corporation v. Quitain (315
SCRA 150,) and MC Engineering, Inc. v. NLRC, (360 SCRA 183). Due course should have
been given the petition below and the merits of the case decided in petitioners’ favor." 17
In sum, the issues may be stated simply in this wise: 1) whether the CA erred in denying the
Petition below, on the basis of a defective Verification and Certification; and 2) whether dead
members should still be counted in the determination of the quorum, for purposes of
conducting the annual members’ meeting.
The Court’s Ruling
The present Petition is partly meritorious.
Procedural Issue:
Verification and Certification of Non-Forum Shopping
The Petition before the CA was initially flawed, because the Verification and Certification of
Non-Forum Shopping were signed by only one, not by all, of the petitioners; further, it failed
to show proof that the signatory was authorized to sign on behalf of all of them.
Subsequently, however, petitioners submitted a Special Power of Attorney, attesting that
Atty. Padilla was authorized to file the action on their behalf. 18
In the interest of substantial justice, this initial procedural lapse may be excused. 19 There
appears to be no intention to circumvent the need for proper verification and certification,
which are aimed at assuring the truthfulness and correctness of the allegations in the
Petition for Review and at discouraging forum shopping. 20 More important, the substantial
merits of petitioners’ case and the purely legal question involved in the Petition should be
considered special circumstances 21 or compelling reasons that justify an exception to the
strict requirements of the verification and the certification of non-forum shopping. 22
Main Issue:
Basis for Quorum
Generally, stockholders’ or members’ meetings are called for the purpose of electing
directors or trustees 23 and transacting some other business calling for or requiring the action
or consent of the shareholders or members, 24such as the amendment of the articles of
incorporation and bylaws, sale or disposition of all or substantially all corporate assets,
consolidation and merger and the like, or any other business that may properly come before
the meeting.
Under the Corporation Code, stockholders or members periodically elect the board of
directors or trustees, who are charged with the management of the corporation. 25 The
board, in turn, periodically elects officers to carry out management functions on a day-to-day
basis. As owners, though, the stockholders or members have residual powers over
fundamental and major corporate changes.
While stockholders and members (in some instances) are entitled to receive profits, the
management and direction of the corporation are lodged with their representatives and
agents -- the board of directors or trustees. 26 In other words, acts of management pertain to
the board; and those of ownership, to the stockholders or members. In the latter case, the
board cannot act alone, but must seek approval of the stockholders or members. 27
Conformably with the foregoing principles, one of the most important rights of a qualified
shareholder or member is the right
to vote -- either personally or by proxy -- for the directors or trustees who are to manage the
corporate affairs. 28The right to choose the persons who will direct, manage and operate the
corporation is significant, because it is the main way in which a stockholder can have a
voice in the management of corporate affairs, or in which a member in a nonstock
corporation can have a say on how the purposes and goals of the corporation may be
achieved. 29 Once the directors or trustees are elected, the stockholders or members
relinquish corporate powers to the board in accordance with law.
In the absence of an express charter or statutory provision to the contrary, the general rule
is that every member of a nonstock corporation, and every legal owner of shares in a stock
corporation, has a right to be present and to vote in all corporate meetings. Conversely,
those who are not stockholders or members have no right to vote. 30 Voting may be
expressed personally, or through proxies who vote in their representative
capacities. 31 Generally, the right to be present and to vote in a meeting is determined by the
time in which the meeting is held. 32
Section 52 of the Corporation Code states:
"Section 52. Quorum in Meetings. – Unless otherwise provided for in this Code or in the by-
laws, a quorum shall consist of the stockholders representing a majority of the outstanding
capital stock or a majority of the members in the case of non-stock corporations."
In stock corporations, the presence of a quorum is ascertained and counted on the basis of
the outstanding capital stock, as defined by the Code thus:
"SECTION 137. Outstanding capital stock defined. – The term ‘outstanding capital stock’ as
used in this Code, means the total shares of stock issued under binding subscription
agreements to subscribers or stockholders, whether or not fully or partially paid, except
treasury shares." (Underscoring supplied)
The Right to Vote in
Stock Corporations
The right to vote is inherent in and incidental to the ownership of corporate stocks. 33 It is
settled that unissued stocks may not be voted or considered in determining whether a
quorum is present in a stockholders’ meeting, or whether a requisite proportion of the stock
of the corporation is voted to adopt a certain measure or act. Only stock actually issued and
outstanding may be voted. 34 Under Section 6 of the Corporation Code, each share of stock
is entitled to vote, unless otherwise provided in the articles of incorporation or declared
delinquent 35 under Section 67 of the Code.
Neither the stockholders nor the corporation can vote or represent shares that have never
passed to the ownership of stockholders; or, having so passed, have again been purchased
by the corporation. 36 These shares are not to be taken into consideration in determining
majorities. When the law speaks of a
given proportion of the stock, it must be construed to mean the shares that have passed
from the corporation, and that may be voted. 37
Section 6 of the Corporation Code, in part, provides:
"Section 6. Classification of shares. – The shares of stock of stock corporations may be
divided into classes or series of shares, or both, any of which classes or series of shares
may have such rights, privileges or restrictions as may be stated in the articles of
incorporation: Provided, That no share may be deprived of voting rights except those
classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in
this Code: Provided, further, that there shall always be a class or series of shares which
have complete voting rights.
xxxxxxxxx
"Where the articles of incorporation provide for non-voting shares in the cases allowed by
this Code, the holders of such shares shall nevertheless be entitled to vote on the following
matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of
the corporation property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with this
Code; and
8. Dissolution of the corporation.
"Except as provided in the immediately preceding paragraph, the vote necessary to approve
a particular corporate act as provided in this Code shall be deemed to refer only to stocks
with voting rights."
Taken in conjunction with Section 137, the last paragraph of Section 6 shows that the
intention of the lawmakers was to base the quorum mentioned in Section 52 on the number
of outstanding voting stocks. 38
The Right to Vote in
Nonstock Corporations
In nonstock corporations, the voting rights attach to membership. 39 Members vote as
persons, in accordance with the law and the bylaws of the corporation. Each member shall
be entitled to one vote unless so limited, broadened, or denied in the articles of
incorporation or bylaws. 40 We hold that when the principle for determining the quorum for
stock corporations is applied by analogy to nonstock corporations, only those who are actual
members with voting rights should be counted.
Under Section 52 of the Corporation Code, the majority of the members representing the
actual number of voting rights, not
the number or numerical constant that may originally be specified in the articles of
incorporation, constitutes the quorum. 41
The March 3, 1986 SEC Opinion 42 cited by the hearing officer uses the phrase "majority
vote of the members"; likewise Section 48 of the Corporation Code refers to 50 percent of
94 (the number of registered members of the association mentioned therein) plus one. The
best evidence of who are the present members of the corporation is the "membership book";
in the case of stock corporations, it is the stock and transfer book. 43
Section 25 of the Code specifically provides that a majority of the directors or trustees, as
fixed in the articles of incorporation, shall constitute a quorum for the transaction of
corporate business (unless the articles of incorporation or the bylaws provide for a greater
majority). If the intention of the lawmakers was to base the quorum in the meetings of
stockholders or members on their absolute number as fixed in the articles of incorporation, it
would have expressly specified so. Otherwise, the only logical conclusion is that the
legislature did not have that intention.
Effect of the Death
of a Member or Shareholder
Having thus determined that the quorum in a members’ meeting is to be reckoned as the
actual number of members of the corporation, the next question to resolve is what happens
in the event of the death of one of them.
In stock corporations, shareholders may generally transfer their shares. Thus, on the death
of a shareholder, the executor or administrator duly appointed by the Court is vested with
the legal title to the stock and entitled to vote it. Until a settlement and division of the estate
is effected, the stocks of the decedent are held by the administrator or executor. 44
On the other hand, membership in and all rights arising from a nonstock corporation are
personal and non-transferable, unless the articles of incorporation or the bylaws of the
corporation provide otherwise. 45 In other words, the determination of whether or not "dead
members" are entitled to exercise their voting rights (through their executor or
administrator), depends on those articles of incorporation or bylaws.
Under the By-Laws of GCHS, membership in the corporation shall, among others, be
terminated by the death of the member. 46 Section 91 of the Corporation Code further
provides that termination extinguishes all the rights of a member of the corporation, unless
otherwise provided in the articles of incorporation or the bylaws.
Applying Section 91 to the present case, we hold that dead members who are dropped from
the membership roster in the manner and for the cause provided for in the By-Laws of
GCHS are not to be counted in determining the requisite vote in corporate matters or the
requisite quorum for the annual members’ meeting. With 11 remaining members, the
quorum in the present case should be 6. Therefore, there being a quorum, the annual
members’ meeting, conducted with six 47 members present, was valid.
Vacancy in the
Board of Trustees
As regards the filling of vacancies in the board of trustees, Section 29 of the Corporation
Code provides:
"SECTION 29. Vacancies in the office of director or trustee. -- Any vacancy occurring in the
board of directors or trustees other than by removal by the stockholders or members or by
expiration of term, may be filled by the vote of at least a majority of the remaining directors
or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the
stockholders in a regular or special meeting called for that purpose. A director or trustee so
elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in
office."
Undoubtedly, trustees may fill vacancies in the board, provided that those remaining still
constitute a quorum. The phrase "may be filled" in Section 29 shows that the filling of
vacancies in the board by the remaining directors or trustees constituting a quorum is merely
permissive, not mandatory. 48 Corporations, therefore, may choose how vacancies in their
respective boards may be filled up -- either by the remaining directors constituting a quorum,
or by the stockholders or members in a regular or special meeting called for the purpose. 49
The By-Laws of GCHS prescribed the specific mode of filling up existing vacancies in its
board of directors; that is, by a majority vote of the remaining members of the board. 50
While a majority of the remaining corporate members were present, however, the "election"
of the four trustees cannot be legally upheld for the obvious reason that it was held in an
annual meeting of the members, not of the board of trustees. We are not unmindful of the
fact that the members of GCHS themselves also constitute the trustees, but we cannot
ignore the GCHS bylaw provision, which specifically prescribes that vacancies in the board
must be filled up by the remaining trustees. In other words, these remaining member-
trustees must sit as a board in order to validly elect the new ones.
Indeed, there is a well-defined distinction between a corporate act to be done by the board
and that by the constituent members of the corporation. The board of trustees must act, not
individually or separately, but as a body in a lawful meeting. On the other hand, in their
annual meeting, the members may be represented by their respective proxies, as in the
contested annual members’ meeting of GCHS.
WHEREFORE, the Petition is partly GRANTED.The assailed Resolutions of the Court of
Appeals are hereby REVERSED AND SET ASIDE. The remaining members of the board of
trustees of Grace Christian High School (GCHS) may convene and fill up the vacancies in
the board, in accordance with this Decision. No pronouncement as to costs in this instance.
SO ORDERED.
G.R. No. 151969 September 4, 2009
VALLE VERDE COUNTRY CLUB, INC., ERNESTO VILLALUNA, RAY GAMBOA,
AMADO M. SANTIAGO, JR., FORTUNATO DEE, AUGUSTO SUNICO, VICTOR SALTA,
FRANCISCO ORTIGAS III, ERIC ROXAS, in their capacities as members of the Board
of Directors of Valle Verde Country Club, Inc., and JOSE RAMIREZ,Petitioners,
vs.
VICTOR AFRICA, Respondent.
DECISION
BRION, J.:
In this petition for review on certiorari,1 the parties raise a legal question on corporate
governance: Can the members of a corporation’s board of directors elect another director to
fill in a vacancy caused by the resignation of a hold-over director?
THE FACTUAL ANTECEDENTS
On February 27, 1996, during the Annual Stockholders’ Meeting of petitioner Valle Verde
Country Club, Inc. (VVCC), the following were elected as members of the VVCC Board of
Directors: Ernesto Villaluna, Jaime C. Dinglasan (Dinglasan), Eduardo Makalintal
(Makalintal), Francisco Ortigas III, Victor Salta, Amado M. Santiago, Jr., Fortunato Dee,
Augusto Sunico, and Ray Gamboa.2 In the years 1997, 1998, 1999, 2000, and 2001,
however, the requisite quorum for the holding of the stockholders’ meeting could not be
obtained. Consequently, the above-named directors continued to serve in the VVCC Board
in a hold-over capacity.
On September 1, 1998, Dinglasan resigned from his position as member of the VVCC
Board. In a meeting held on October 6, 1998, the remaining directors, still constituting a
quorum of VVCC’s nine-member board, elected Eric Roxas (Roxas) to fill in the vacancy
created by the resignation of Dinglasan.
A year later, or on November 10, 1998, Makalintal also resigned as member of the VVCC
Board. He was replaced by Jose Ramirez (Ramirez), who was elected by the remaining
members of the VVCC Board on March 6, 2001.
Respondent Africa (Africa), a member of VVCC, questioned the election of Roxas and
Ramirez as members of the VVCC Board with the Securities and Exchange Commission
(SEC) and the Regional Trial Court (RTC), respectively. The SEC case questioning the
validity of Roxas’ appointment was docketed as SEC Case No. 01-99-6177. The RTC case
questioning the validity of Ramirez’ appointment was docketed as Civil Case No. 68726.
In his nullification complaint3 before the RTC, Africa alleged that the election of Roxas was
contrary to Section 29, in relation to Section 23, of the Corporation Code of the Philippines
(Corporation Code). These provisions read:
Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors
or trustees to be elected from among the holders of stocks, or where there is no stock, from
among the members of the corporation, who shall hold office for one (1) year until their
successors are elected and qualified.
xxxx
Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the
board of directors or trustees other than by removal by the stockholders or members or by
expiration of term, may be filled by the vote of at least a majority of the remaining directors
or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the
stockholders in a regular or special meeting called for that purpose. A director or trustee so
elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in
office. xxx. [Emphasis supplied.]
Africa claimed that a year after Makalintal’s election as member of the VVCC Board in 1996,
his [Makalintal’s] term – as well as those of the other members of the VVCC Board – should
be considered to have already expired. Thus, according to Africa, the resulting vacancy
should have been filled by the stockholders in a regular or special meeting called for that
purpose, and not by the remaining members of the VVCC Board, as was done in this case.
Africa additionally contends that for the members to exercise the authority to fill in vacancies
in the board of directors, Section 29 requires, among others, that there should be an
unexpired term during which the successor-member shall serve. Since Makalintal’s term had
already expired with the lapse of the one-year term provided in Section 23, there is no more
"unexpired term" during which Ramirez could serve.
Through a partial decision4 promulgated on January 23, 2002, the RTC ruled in favor of
Africa and declared the election of Ramirez, as Makalintal’s replacement, to the VVCC
Board as null and void.
Incidentally, the SEC issued a similar ruling on June 3, 2003, nullifying the election of Roxas
as member of the VVCC Board, vice hold-over director Dinglasan. While VVCC manifested
its intent to appeal from the SEC’s ruling, no petition was actually filed with the Court of
Appeals; thus, the appellate court considered the case closed and terminated and the SEC’s
ruling final and executory.5
THE PETITION
VVCC now appeals to the Court to assail the RTC’s January 23, 2002 partial decision for
being contrary to law and jurisprudence. VVCC made a direct resort to the Court via a
petition for review on certiorari, claiming that the sole issue in the present case involves a
purely legal question.
As framed by VVCC, the issue for resolution is whether the remaining directors of the
corporation’s Board, still constituting a quorum, can elect another director to fill in a vacancy
caused by the resignation of a hold-over director.
Citing law and jurisprudence, VVCC posits that the power to fill in a vacancy created by the
resignation of a hold-over director is expressly granted to the remaining members of the
corporation’s board of directors.
Under the above-quoted Section 29 of the Corporation Code, a vacancy occurring in the
board of directors caused by the expiration of a member’s term shall be filled by the
corporation’s stockholders. Correlating Section 29 with Section 23 of the same law, VVCC
alleges that a member’s term shall be for one year and until his successor is elected
and qualified; otherwise stated, a member’s term expires only when his successor to the
Board is elected and qualified. Thus, "until such time as [a successor is] elected or qualified
in an annual election where a quorum is present," VVCC contends that "the term of [a
member] of the board of directors has yet not expired."
As the vacancy in this case was caused by Makalintal’s resignation, not by the expiration of
his term, VVCC insists that the board rightfully appointed Ramirez to fill in the vacancy.
In support of its arguments, VVCC cites the Court’s ruling in the 1927 El Hogar6 case which
states:
Owing to the failure of a quorum at most of the general meetings since the respondent has
been in existence, it has been the practice of the directors to fill in vacancies in the
directorate by choosing suitable persons from among the stockholders. This custom finds its
sanction in Article 71 of the By-Laws, which reads as follows:
Art. 71. The directors shall elect from among the shareholders members to fill the vacancies
that may occur in the board of directors until the election at the general meeting.
xxxx
Upon failure of a quorum at any annual meeting the directorate naturally holds over and
continues to function until another directorate is chosen and qualified. Unless the law or the
charter of a corporation expressly provides that an office shall become vacant at the
expiration of the term of office for which the officer was elected, the general rule is to allow
the officer to hold over until his successor is duly qualified. Mere failure of a corporation to
elect officers does not terminate the terms of existing officers nor dissolve the corporation.
The doctrine above stated finds expression in article 66 of the by-laws of the respondent
which declares in so many words that directors shall hold office "for the term of one year or
until their successors shall have been elected and taken possession of their offices." xxx.
It results that the practice of the directorate of filling vacancies by the action of the
directors themselves is valid. Nor can any exception be taken to the personality of the
individuals chosen by the directors to fill vacancies in the body. [Emphasis supplied.]
Africa, in opposing VVCC’s contentions, raises the same arguments that he did before the
trial court.
THE COURT’S RULING
We are not persuaded by VVCC’s arguments and, thus, find its petition unmeritorious.
To repeat, the issue for the Court to resolve is whether the remaining directors of a
corporation’s Board, still constituting a quorum, can elect another director to fill in a vacancy
caused by the resignation of a hold-over director. The resolution of this legal issue is
significantly hinged on the determination of what constitutes a director’s term of office.
The holdover period is not part of the term of office of a member of the board of directors
The word "term" has acquired a definite meaning in jurisprudence. In several cases, we
have defined "term" as the time during which the officer may claim to hold the office as of
right, and fixes the interval after which the several incumbents shall succeed one
another.7 The term of office is not affected by the holdover.8 The term is fixed by statute and
it does not change simply because the office may have become vacant, nor because the
incumbent holds over in office beyond the end of the term due to the fact that a successor
has not been elected and has failed to qualify.
Term is distinguished from tenure in that an officer’s "tenure" represents the term during
which the incumbent actually holds office. The tenure may be shorter (or, in case of
holdover, longer) than the term for reasons within or beyond the power of the incumbent.
Based on the above discussion, when Section 239 of the Corporation Code declares that
"the board of directors…shall hold office for one (1) year until their successors are elected
and qualified," we construe the provision to mean that the term of the members of the board
of directors shall be only for one year; their term expires one year after election to the office.
The holdover period – that time from the lapse of one year from a member’s election to the
Board and until his successor’s election and qualification – is not part of the director’s
original term of office, nor is it a new term; the holdover period, however, constitutes part of
his tenure. Corollary, when an incumbent member of the board of directors continues to
serve in a holdover capacity, it implies that the office has a fixed term, which has expired,
and the incumbent is holding the succeeding term.10
After the lapse of one year from his election as member of the VVCC Board in 1996,
Makalintal’s term of office is deemed to have already expired. That he continued to serve in
the VVCC Board in a holdover capacity cannot be considered as extending his term. To be
precise, Makalintal’s term of office began in 1996 and expired in 1997, but, by virtue of the
holdover doctrine in Section 23 of the Corporation Code, he continued to hold office until his
resignation on November 10, 1998. This holdover period, however, is not to be considered
as part of his term, which, as declared, had already expired.
With the expiration of Makalintal’s term of office, a vacancy resulted which, by the terms of
Section 2911 of the Corporation Code, must be filled by the stockholders of VVCC in a
regular or special meeting called for the purpose. To assume – as VVCC does – that the
vacancy is caused by Makalintal’s resignation in 1998, not by the expiration of his term in
1997, is both illogical and unreasonable. His resignation as a holdover director did not
change the nature of the vacancy; the vacancy due to the expiration of Makalintal’s term had
been created long before his resignation.
The powers of the corporation’s board of directors emanate from its stockholders
VVCC’s construction of Section 29 of the Corporation Code on the authority to fill up
vacancies in the board of directors, in relation to Section 23 thereof, effectively weakens the
stockholders’ power to participate in the corporate governance by electing their
representatives to the board of directors. The board of directors is the directing and
controlling body of the corporation. It is a creation of the stockholders and derives its power
to control and direct the affairs of the corporation from them. The board of directors, in
drawing to themselves the powers of the corporation, occupies a position of trusteeship in
relation to the stockholders, in the sense that the board should exercise not only care and
diligence, but utmost good faith in the management of corporate affairs.12
The underlying policy of the Corporation Code is that the business and affairs of a
corporation must be governed by a board of directors whose members have stood for
election, and who have actually been elected by the stockholders, on an annual basis. Only
in that way can the directors' continued accountability to shareholders, and the legitimacy of
their decisions that bind the corporation's stockholders, be assured. The shareholder vote is
critical to the theory that legitimizes the exercise of power by the directors or officers over
properties that they do not own.13
This theory of delegated power of the board of directors similarly explains why, under
Section 29 of the Corporation Code, in cases where the vacancy in the corporation’s board
of directors is caused not by the expiration of a member’s term, the successor "so elected to
fill in a vacancy shall be elected only for the unexpired term of the his predecessor in office."
The law has authorized the remaining members of the board to fill in a vacancy only in
specified instances, so as not to retard or impair the corporation’s operations; yet, in
recognition of the stockholders’ right to elect the members of the board, it limited the period
during which the successor shall serve only to the "unexpired term of his predecessor in
office."
While the Court in El Hogar approved of the practice of the directors to fill vacancies in the
directorate, we point out that this ruling was made before the present Corporation Code was
enacted14 and before its Section 29 limited the instances when the remaining directors can
fill in vacancies in the board, i.e., when the remaining directors still constitute a quorum and
when the vacancy is caused for reasons other than by removal by the stockholders or by
expiration of the term.1avvphi1
It also bears noting that the vacancy referred to in Section 29 contemplates a vacancy
occurring within the director’s term of office. When a vacancy is created by the expiration of
a term, logically, there is no more unexpired term to speak of. Hence, Section 29 declares
that it shall be the corporation’s stockholders who shall possess the authority to fill in a
vacancy caused by the expiration of a member’s term.
As correctly pointed out by the RTC, when remaining members of the VVCC Board elected
Ramirez to replace Makalintal, there was no more unexpired term to speak of, as
Makalintal’s one-year term had already expired. Pursuant to law, the authority to fill in the
vacancy caused by Makalintal’s leaving lies with the VVCC’s stockholders, not the remaining
members of its board of directors.
WHEREFORE, we DENY the petitioners’ petition for review on certiorari, and AFFIRM the
partial decision of the Regional Trial Court, Branch 152, Manila, promulgated on January 23,
2002, in Civil Case No. 68726. Costs against the petitioners.
SO ORDERED.
G.R. No. 161886 March 16, 2007
FILIPINAS PORT SERVICES, INC., represented by stockholders, ELIODORO C. CRUZ
and MINDANAO TERMINAL AND BROKERAGE SERVICES, INC., Petitioners,
vs.
VICTORIANO S. GO, ARSENIO LOPEZ CHUA, EDGAR C. TRINIDAD, HERMENEGILDO
M. TRINIDAD, JESUS SYBICO, MARY JEAN D. CO, HENRY CHUA, JOSELITO S.
JAYME, ERNESTO S. JAYME, and ELIEZER B. DE JESUS, Respondents.
DECISION
GARCIA, J.:
Assailed and sought to be set aside in this petition for review on certiorari is the
Decision1 dated 19 January 2004 of the Court of Appeals (CA) in CA-G.R. CV No. 73827,
reversing an earlier decision of the Regional Trial Court (RTC) of Davao City and
accordingly dismissing the derivative suit instituted by petitioner Eliodoro C. Cruz for and in
behalf of the stockholders of co-petitioner Filipinas Port Services, Inc. (Filport, hereafter).
The case is actually an intra-corporate dispute involving Filport, a domestic corporation
engaged in stevedoring services with principal office in Davao City. It was initially instituted
with the Securities and Exchange Commission (SEC) where the case hibernated and
remained unresolved for several years until it was overtaken by the enactment into law, on
19 July 2000, of Republic Act (R.A.) No. 8799, otherwise known as the Securities
Regulation Code. From the SEC and consistent with R.A. No. 8799, the case was
transferred to the RTC of Manila, Branch 14, sitting as a corporate court. Subsequently,
upon respondents’ motion, the case eventually landed at the RTC of Davao City where it
was docketed as Civil Case No. 28,552-2001. RTC-Davao City, Branch 10, ruled in favor of
the petitioners prompting respondents to go to the CA in CA-G.R. CV No. 73827. This time,
the respondents prevailed, hence, this petition for review by the petitioners.
The relevant facts:
On 4 September 1992, petitioner Eliodoro C. Cruz, Filport’s president from 1968 until he lost
his bid for reelection as Filport’s president during the general stockholders’ meeting in 1991,
wrote a letter2 to the corporation’s Board of Directors questioning the board’s creation of the
following positions with a monthly remuneration of ₱13,050.00 each, and the election
thereto of certain members of the board, to wit:
Asst. Vice-President for Corporate Planning - Edgar C. Trinidad (Director)
Asst. Vice-President for Operations - Eliezer B. de Jesus (Director)
 Asst. Vice-President for Finance - Mary Jean D. Co (Director)
Asst. Vice-President for Administration - Henry Chua (Director)
Special Asst. to the Chairman - Arsenio Lopez Chua (Director)
Special Asst. to the President - Fortunato V. de Castro
In his aforesaid letter, Cruz requested the board to take necessary action/actions to recover
from those elected to the aforementioned positions the salaries they have received.
On 15 September 1992, the board met and took up Cruz’s letter. The records do not show
what specific action/actions the board had taken on the letter. Evidently, whatever
action/actions the board took did not sit well with Cruz.
On 14 June 1993, Cruz, purportedly in representation of Filport and its stockholders, among
which is herein co-petitioner Mindanao Terminal and Brokerage Services, Inc. (Minterbro),
filed with the SEC a petition3 which he describes as a derivative suit against the herein
respondents who were then the incumbent members of Filport’s Board of Directors, for
alleged acts of mismanagement detrimental to the interest of the corporation and its
shareholders at large, namely:
1. creation of an executive committee in 1991 composed of seven (7) members of
the board with compensation of ₱500.00 for each member per meeting, an office
which, to Cruz, is not provided for in the by-laws of the corporation and whose
function merely duplicates those of the President and General Manager;
2. increase in the emoluments of the Chairman, Vice-President, Treasurer and
Assistant General Manager which increases are greatly disproportionate to the
volume and character of the work of the directors holding said positions;
3. re-creation of the positions of Assistant Vice-Presidents (AVPs) for Corporate
Planning, Operations, Finance and Administration, and the election thereto of board
members Edgar C. Trinidad, Eliezer de Jesus, Mary Jean D. Co and Henry Chua,
respectively; and
4. creation of the additional positions of Special Assistants to the President and the
Board Chairman, with Fortunato V. de Castro and Arsenio Lopez Chua elected to the
same, the directors elected/appointed thereto not doing any work to deserve the
monthly remuneration of ₱13,050.00 each.
In the same petition, docketed as SEC Case No. 06-93-4491, Cruz alleged that despite
demands made upon the respondent members of the board of directors to desist from
creating the positions in question and to account for the amounts incurred in creating the
same, the demands were unheeded. Cruz thus prayed that the respondent members of the
board of directors be made to pay Filport, jointly and severally, the sums of money variedly
representing the damages incurred as a result of the creation of the offices/positions
complained of and the aggregate amount of the questioned increased salaries.
In their common Answer with Counterclaim,4 the respondents denied the allegations of
mismanagement and materially averred as follows:
1. the creation of the executive committee and the grant of per diems for the
attendance of each member are allowed under the by-laws of the corporation;
2. the increases in the salaries/emoluments of the Chairman, Vice-President,
Treasurer and Assistant General Manager were well within the financial capacity of
the corporation and well-deserved by the officers elected thereto; and
3. the positions of AVPs for Corporate Planning, Operations, Finance and
Administration were already in existence during the tenure of Cruz as president of
the corporation, and were merely recreated by the Board, adding that all those
appointed to said positions of Assistant Vice Presidents, as well as the additional
position of Special Assistants to the Chairman and the President, rendered services
to deserve their compensation.
In the same Answer, respondents further averred that Cruz and his co-petitioner Minterbro,
while admittedly stockholders of Filport, have no authority nor standing to bring the so-called
"derivative suit" for and in behalf of the corporation; that respondent Mary Jean D. Co has
already ceased to be a corporate director and so with Fortunato V. de Castro, one of those
holding an assailed position; and that no demand to cease and desist from further
committing the acts complained of was made upon the board. By way of affirmative
defenses, respondents asserted that (1) the petition is not duly verified by petitioner Filport
which is the real party-in-interest; (2) Filport, as represented by Cruz and Minterbro, failed to
exhaust remedies for redress within the corporation before bringing the suit; and (3) the
petition does not show that the stockholders bringing the suit are joined as nominal parties.
In support of their counterclaim, respondents averred that Cruz filed the alleged derivative
suit in bad faith and purely for harassment purposes on account of his non-reelection to the
board in the 1991 general stockholders’ meeting.
As earlier narrated, the derivative suit (SEC Case No. 06-93-4491) hibernated with the SEC
for a long period of time. With the enactment of R.A. No. 8799, the case was first turned
over to the RTC of Manila, Branch 14, sitting as a corporate court. Thereafter, on
respondents’ motion, it was eventually transferred to the RTC of Davao City whereat it was
docketed as Civil Case No. 28,552-2001 and raffled to Branch 10 thereof.
On 10 December 2001, RTC-Davao City rendered its decision5 in the case. Even as it found
that (1) Filport’s Board of Directors has the power to create positions not provided for in the
by-laws of the corporation since the board is the governing body; and (2) the increases in
the salaries of the board chairman, vice-president, treasurer and assistant general manager
are reasonable, the trial court nonetheless rendered judgment against the respondents by
ordering the directors holding the positions of Assistant Vice President for Corporate
Planning, Special Assistant to the President and Special Assistant to the Board Chairman to
refund to the corporation the salaries they have received as such officers "considering that
Filipinas Port Services is not a big corporation requiring multiple executive positions" and
that said positions "were just created for accommodation." We quote the fallo of the trial
court’s decision.
WHEREFORE, judgment is rendered ordering:
Edgar C. Trinidad under the third and fourth causes of action to restore to the corporation
the total amount of salaries he received as assistant vice president for corporate planning;
and likewise ordering Fortunato V. de Castro and Arsenio Lopez Chua under the fourth
cause of action to restore to the corporation the salaries they each received as special
assistants respectively to the president and board chairman. In case of insolvency of any or
all of them, the members of the board who created their positions are subsidiarily liable.
The counter claim is dismissed.
From the adverse decision of the trial court, herein respondents went on appeal to the CA in
CA-G.R. CV No. 73827.
In its decision6 of 19 January 2004, the CA, taking exceptions to the findings of the trial court
that the creation of the positions of Assistant Vice President for Corporate Planning, Special
Assistant to the President and Special Assistant to the Board Chairman was merely for
accommodation purposes, granted the respondents’ appeal, reversed and set aside the
appealed decision of the trial court and accordingly dismissed the so-called derivative suit
filed by Cruz, et al., thus:
IN VIEW OF ALL THE FOREGOING, the instant appeal is GRANTED, the challenged
decision is REVERSED and SET ASIDE, and a new one entered DISMISSING Civil Case
No. 28,552-2001 with no pronouncement as to costs.
SO ORDERED.
Intrigued, and quite understandably, by the fact that, in its decision, the CA, before
proceeding to address the merits of the appeal, prefaced its disposition with the statement
reading "[T]he appeal is bereft of merit,"7 thereby contradicting the very fallo of its own
decision and the discussions made in the body thereof, respondents filed with the appellate
court a Motion For Nunc Pro Tunc Order,8 thereunder praying that the phrase "[T]he appeal
is bereft of merit," be corrected to read "[T]he appeal is impressed with merit." In its
resolution9 of 23 April 2004, the CA granted the respondents’ motion and accordingly
effected the desired correction.
Hence, petitioners’ present recourse.
Petitioners assigned four (4) errors allegedly committed by the CA. For clarity, we shall
formulate the issues as follows:
1. Whether the CA erred in holding that Filport’s Board of Directors acted within its
powers in creating the executive committee and the positions of AVPs for Corporate
Planning, Operations, Finance and Administration, and those of the Special
Assistants to the President and the Board Chairman, each with corresponding
remuneration, and in increasing the salaries of the positions of Board Chairman,
Vice-President, Treasurer and Assistant General Manager; and
2. Whether the CA erred in finding that no evidence exists to prove that (a) the
positions of AVP for Corporate Planning, Special Assistant to the President and
Special Assistant to the Board Chairman were created merely for accommodation,
and (b) the salaries/emoluments corresponding to said positions were actually paid
to and received by the directors appointed thereto.
For their part, respondents, aside from questioning the propriety of the instant petition as the
same allegedly raises only questions of fact and not of law, also put in issue the purported
derivative nature of the main suit initiated by petitioner Eliodoro C. Cruz allegedly in
representation of and in behalf of Filport and its stockholders.
The petition is bereft of merit.
It is axiomatic that in petitions for review on certiorari under Rule 45 of the Rules of Court,
only questions of law may be raised and passed upon by the Court. Factual findings of the
CA are binding and conclusive and will not be reviewed or disturbed on appeal.10 Of course,
the rule is not cast in stone; it admits of certain exceptions, such as when the findings of fact
of the appellate court are at variance with those of the trial court,11 as here. For this reason,
and for a proper and complete resolution of the case, we shall delve into the records and
reexamine the same.
The governing body of a corporation is its board of directors. Section 23 of the Corporation
Code12 explicitly provides that unless otherwise provided therein, the corporate powers of all
corporations formed under the Code shall be exercised, all business conducted and all
property of the corporation shall be controlled and held by a board of directors. Thus, with
the exception only of some powers expressly granted by law to stockholders (or members,
in case of non-stock corporations), the board of directors (or trustees, in case of non-stock
corporations) has the sole authority to determine policies, enter into contracts, and conduct
the ordinary business of the corporation within the scope of its charter, i.e., its articles of
incorporation, by-laws and relevant provisions of law. Verily, the authority of the board of
directors is restricted to the management of the regular business affairs of the corporation,
unless more extensive power is expressly conferred.
The raison d’etre behind the conferment of corporate powers on the board of directors is not
lost on the Court. Indeed, the concentration in the board of the powers of control of
corporate business and of appointment of corporate officers and managers is necessary for
efficiency in any large organization. Stockholders are too numerous, scattered and
unfamiliar with the business of a corporation to conduct its business directly. And so the plan
of corporate organization is for the stockholders to choose the directors who shall control
and supervise the conduct of corporate business.13
In the present case, the board’s creation of the positions of Assistant Vice Presidents for
Corporate Planning, Operations, Finance and Administration, and those of the Special
Assistants to the President and the Board Chairman, was in accordance with the regular
business operations of Filport as it is authorized to do so by the corporation’s by-laws,
pursuant to the Corporation Code.
The election of officers of a corporation is provided for under Section 25 of the Code which
reads:
Sec. 25. Corporate officers, quorum. – Immediately after their election, the directors of a
corporation must formally organize by the election of a president, who shall be a director, a
treasurer who may or may not be a director, a secretary who shall be a resident and citizen
of the Philippines, and such other officers as may be provided for in the by-laws. (Emphasis
supplied.)
In turn, the amended Bylaws of Filport14 provides the following:
Officers of the corporation, as provided for by the by-laws, shall be elected by the board of
directors at their first meeting after the election of Directors. xxx
The officers of the corporation shall be a Chairman of the Board, President, a Vice-
President, a Secretary, a Treasurer, a General Manager and such other officers as the
Board of Directors may from time to time provide, and these officers shall be elected to hold
office until their successors are elected and qualified. (Emphasis supplied.)
Likewise, the fixing of the corresponding remuneration for the positions in question is
provided for in the same by-laws of the corporation, viz:
xxx The Board of Directors shall fix the compensation of the officers and agents of the
corporation. (Emphasis supplied.)
Unfortunately, the bylaws of the corporation are silent as to the creation by its board of
directors of an executive committee. Under Section 3515 of the Corporation Code, the
creation of an executive committee must be provided for in the bylaws of the corporation.
Notwithstanding the silence of Filport’s bylaws on the matter, we cannot rule that the
creation of the executive committee by the board of directors is illegal or unlawful. One
reason is the absence of a showing as to the true nature and functions of said executive
committee considering that the "executive committee," referred to in Section 35 of the
Corporation Code which is as powerful as the board of directors and in effect acting for the
board itself, should be distinguished from other committees which are within the competency
of the board to create at anytime and whose actions require ratification and confirmation by
the board.16 Another reason is that, ratiocinated by both the two (2) courts below, the Board
of Directors has the power to create positions not provided for in Filport’s bylaws since the
board is the corporation’s governing body, clearly upholding the power of its board to
exercise its prerogatives in managing the business affairs of the corporation.
As well, it may not be amiss to point out that, as testified to and admitted by petitioner Cruz
himself, it was during his incumbency as Filport president that the executive committee in
question was created, and that he was even the one who moved for the creation of the
positions of the AVPs for Operations, Finance and Administration. By his acquiescence
and/or ratification of the creation of the aforesaid offices, Cruz is virtually precluded from
suing to declare such acts of the board as invalid or illegal. And it makes no difference that
he sues in behalf of himself and of the other stockholders. Indeed, as his voice was not
heard in protest when he was still Filport’s president, raising a hue and cry only now leads to
the inevitable conclusion that he did so out of spite and resentment for his non-reelection as
president of the corporation.
With regard to the increased emoluments of the Board Chairman, Vice-President, Treasurer
and Assistant General Manager which are supposedly disproportionate to the volume and
nature of their work, the Court, after a judicious scrutiny of the increase vis-à-vis the value of
the services rendered to the corporation by the officers concerned, agrees with the findings
of both the trial and appellate courts as to the reasonableness and fairness thereof.
Continuing, petitioners contend that the CA did not appreciate their evidence as to the
alleged acts of mismanagement by the then incumbent board. A perusal of the records,
however, reveals that petitioners merely relied on the testimony of Cruz in support of their
bold claim of mismanagement. To the mind of the Court, Cruz’ testimony on the matter of
mismanagement is bereft of any foundation. As it were, his testimony consists merely of
insinuations of alleged wrongdoings on the part of the board. Without more, petitioners’
posture of mismanagement must fall and with it goes their prayer to hold the respondents
liable therefor.
But even assuming, in gratia argumenti, that there was mismanagement resulting to
corporate damages and/or business losses, still the respondents may not be held liable in
the absence, as here, of a showing of bad faith in doing the acts complained of.
If the cause of the losses is merely error in business judgment, not amounting to bad faith or
negligence, directors and/or officers are not liable.17 For them to be held accountable, the
mismanagement and the resulting losses on account thereof are not the only matters to be
proven; it is likewise necessary to show that the directors and/or officers acted in bad faith
and with malice in doing the assailed acts. Bad faith does not simply connote bad judgment
or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing
of a wrong, a breach of a known duty through some motive or interest or ill-will partaking of
the nature of fraud.18 We have searched the records and nowhere do we find a "dishonest
purpose" or "some moral obliquity," or "conscious doing of a wrong" on the part of the
respondents that "partakes of the nature of fraud."
We thus extend concurrence to the following findings of the CA, affirmatory of those of the
trial court:
xxx As a matter of fact, it was during the term of appellee Cruz, as president and director,
that the executive committee was created. What is more, it was appellee himself who moved
for the creation of the positions of assistant vice presidents for operations, for finance, and
for administration. He should not be heard to complain thereafter for similar corporate acts.
The increase in the salaries of the board chairman, president, treasurer, and assistant
general manager are indeed reasonable enough in view of the responsibilities assigned to
them, and the special knowledge required, to be able to effectively discharge their
respective functions and duties.
Surely, factual findings of trial courts, especially when affirmed by the CA, are binding and
conclusive on this Court.
There is, however, a factual matter over which the CA and the trial court parted ways. We
refer to the accommodation angle.
The trial court was with petitioner Cruz in saying that the creation of the positions of the
three (3) AVPs for Corporate Planning, Special Assistant to the President and Special
Assistant to the Board Chairman, each with a salary of ₱13,050.00 a month, was merely for
accommodation purposes considering that Filport is not a big corporation requiring multiple
executive positions. Hence, the trial court’s order for said officers to return the amounts they
received as compensation.
On the other hand, the CA took issue with the trial court and ruled that Cruz’s
accommodation theory is not based on facts and without any evidentiary substantiation.
We concur with the line of the appellate court. For truly, aside from Cruz’s bare and self-
serving testimony, no other evidence was presented to show the fact of "accommodation."
By itself, the testimony of Cruz is not enough to support his claim that accommodation was
the underlying factor behind the creation of the aforementioned three (3) positions.
It is elementary in procedural law that bare allegations do not constitute evidence adequate
to support a conclusion. It is basic in the rule of evidence that he who alleges a fact bears
the burden of proving it by the quantum of proof required. Bare allegations, unsubstantiated
by evidence, are not equivalent to proof under the Rules of Court.19 The party having the
burden of proof must establish his case by a preponderance of evidence.20
Besides, the determination of the necessity for additional offices and/or positions in a
corporation is a management prerogative which courts are not wont to review in the
absence of any proof that such prerogative was exercised in bad faith or with malice. 1awphi1.nét
Indeed, it would be an improper judicial intrusion into the internal affairs of Filport were the
Court to determine the propriety or impropriety of the creation of offices therein and the
grant of salary increases to officers thereof. Such are corporate and/or business decisions
which only the corporation’s Board of Directors can determine.
So it is that in Philippine Stock Exchange, Inc. v. CA,21 the Court unequivocally held:
Questions of policy or of management are left solely to the honest decision of the board as
the business manager of the corporation, and the court is without authority to substitute its
judgment for that of the board, and as long as it acts in good faith and in the exercise of
honest judgment in the interest of the corporation, its orders are not reviewable by the
courts.
In a last-ditch attempt to salvage their cause, petitioners assert that the CA went beyond the
issues raised in the court of origin when it ruled on the absence of receipt of actual payment
of the salaries/emoluments pertaining to the positions of Assistant Vice-President for
Corporate Planning, Special Assistant to the Board Chairman and Special Assistant to the
President. Petitioners insist that the issue of nonpayment was never raised by the
respondents before the trial court, as in fact, the latter allegedly admitted the same in their
Answer With Counterclaim.
We are not persuaded.
By claiming that Filport suffered damages because the directors appointed to the assailed
positions are not doing anything to deserve their compensation, petitioners are saddled with
the burden of proving that salaries were actually paid. Since the trial court, in effect, found
that the petitioners successfully proved payment of the salaries when it directed the
reimbursements of the same, respondents necessarily have to raise the issue on appeal.
And the CA rightly resolved the issue when it found that no evidence of actual payment of
the salaries in question was actually adduced. Respondents’ alleged admission of the fact of
payment cannot be inferred from a reading of the pertinent portions of the parties’ respective
initiatory pleadings. Respondents’ allegations in their Answer With Counterclaim that the
officers corresponding to the positions created "performed the work called for in their
positions" or "deserve their compensation," cannot be interpreted to mean that they were
"actually paid" such compensation. Directly put, the averment that "one deserves one’s
compensation" does not necessarily carry the implication that "such compensation was
actually remitted or received." And because payment was not duly proven, there is no
evidentiary or factual basis for the trial court to direct respondents to make reimbursements
thereof to the corporation.
This brings us to the respondents’ claim that the case filed by the petitioners before the
SEC, which eventually landed in RTC-Davao City as Civil Case No. 28,552-2001, is not a
derivative suit, as maintained by the petitioners.
We sustain the petitioners.
Under the Corporation Code, where a corporation is an injured party, its power to sue is
lodged with its board of directors or trustees. But an individual stockholder may be permitted
to institute a derivative suit in behalf of the corporation in order to protect or vindicate
corporate rights whenever the officials of the corporation refuse to sue, or when a demand
upon them to file the necessary action would be futile because they are the ones to be sued,
or because they hold control of the corporation.22 In such actions, the corporation is the real
party-in-interest while the suing stockholder, in behalf of the corporation, is only a nominal
party.23
Here, the action below is principally for damages resulting from alleged mismanagement of
the affairs of Filport by its directors/officers, it being alleged that the acts of mismanagement
are detrimental to the interests of Filport. Thus, the injury complained of primarily pertains to
the corporation so that the suit for relief should be by the corporation. However, since the
ones to be sued are the directors/officers of the corporation itself, a stockholder, like
petitioner Cruz, may validly institute a "derivative suit" to vindicate the alleged corporate
injury, in which case Cruz is only a nominal party while Filport is the real party-in-interest.
For sure, in the prayer portion of petitioners’ petition before the SEC, the reliefs prayed were
asked to be made in favor of Filport.
Besides, the requisites before a derivative suit can be filed by a stockholder are present in
this case, to wit:
a) the party bringing suit should be a shareholder as of the time of the act or
transaction complained of, the number of his shares not being material;
b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the
board of directors for the appropriate relief but the latter has failed or refused to heed
his plea; and
c) the cause of action actually devolves on the corporation, the wrongdoing or harm
having been, or being caused to the corporation and not to the particular stockholder
bringing the suit.24
Indisputably, petitioner Cruz (1) is a stockholder of Filport; (2) he sought without success to
have its board of directors remedy what he perceived as wrong when he wrote a letter
requesting the board to do the necessary action in his complaint; and (3) the alleged wrong
was in truth a wrong against the stockholders of the corporation generally, and not against
Cruz or Minterbro, in particular. In the end, it is Filport, not Cruz which directly stands to
benefit from the suit. And while it is true that the complaining stockholder must show to the
satisfaction of the court that he has exhausted all the means within his reach to attain within
the corporation itself the redress for his grievances, or actions in conformity to his wishes,
nonetheless, where the corporation is under the complete control of the principal
defendants, as here, there is no necessity of making a demand upon the directors. The
reason is obvious: a demand upon the board to institute an action and prosecute the same
effectively would have been useless and an exercise in futility. In fine, we rule and so hold
that the petition filed with the SEC at the instance of Cruz, which ultimately found its way to
the RTC of Davao City as Civil Case No. 28,552-2001, is a derivative suit of which Cruz has
the necessary legal standing to institute.
WHEREFORE, the petition is DENIED and the challenged decision of the CA is AFFIRMED
in all respects.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 125469 October 27, 1997
PHILIPPINE STOCK EXCHANGE, INC., petitioner,
vs.
THE HONORABLE COURT OF APPEALS, SECURITIES AND EXCHANGE
COMMISSION and PUERTO AZUL LAND, INC., respondents.
TORRES, JR., J.:
The Securities and Exchange Commission is the government agency, under the direct
general supervision of the Office of the President, 1 with the immense task of enforcing the
Revised Securities Act, and all other duties assigned to it by pertinent laws. Among its
inumerable functions, and one of the most important, is the supervision of all corporations,
partnerships or associations, who are grantees of primary franchise and/or a license or
permit issued by the government to operate in the Philippines. 2 Just how far this regulatory
authority extends, particularly, with regard to the Petitioner Philippine Stock Exchange, Inc.
is the issue in the case at bar.
In this Petition for Review on Certiorari, petitioner assails the resolution of the respondent
Court of Appeals, dated June 27, 1996, which affirmed the decision of the Securities and
Exchange Commission ordering the petitioner Philippine Stock Exchange, Inc. to allow the
private respondent Puerto Azul Land, Inc. to be listed in its stock market, thus paving the
way for the public offering of PALI's shares.
The facts of the case are undisputed, and are hereby restated in sum.
The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had sought to offer its
shares to the public in order to raise funds allegedly to develop its properties and pay its
loans with several banking institutions. In January, 1995, PALI was issued a Permit to Sell
its shares to the public by the Securities and Exchange Commission (SEC). To facilitate the
trading of its shares among investors, PALI sought to course the trading of its shares
through the Philippine Stock Exchange, Inc. (PSE), for which purpose it filed with the said
stock exchange an application to list its shares, with supporting documents attached.
On February 8, 1996, the Listing Committee of the PSE, upon a perusal of PALI's
application, recommended to the PSE's Board of Governors the approval of PALI's listing
application.
On February 14, 1996, before it could act upon PALI's application, the Board of Governors
of the PSE received a letter from the heirs of Ferdinand E. Marcos, claiming that the late
President Marcos was the legal and beneficial owner of certain properties forming part of the
Puerto Azul Beach Hotel and Resort Complex which PALI claims to be among its assets
and that the Ternate Development Corporation, which is among the stockholders of PALI,
likewise appears to have been held and continue to be held in trust by one Rebecco Panlilio
for then President Marcos and now, effectively for his estate, and requested PALI's
application to be deferred. PALI was requested to comment upon the said letter.
PALI's answer stated that the properties forming part of the Puerto Azul Beach Hotel and
Resort Complex were not claimed by PALI as its assets. On the contrary, the resort is
actually owned by Fantasia Filipina Resort, Inc. and the Puerto Azul Country Club, entities
distinct from PALI. Furthermore, the Ternate Development Corporation owns only 1.20% of
PALI. The Marcoses responded that their claim is not confined to the facilities forming part
of the Puerto Azul Hotel and Resort Complex, thereby implying that they are also asserting
legal and beneficial ownership of other properties titled under the name of PALI.
On February 20, 1996, the PSE wrote Chairman Magtanggol Gunigundo of the Presidential
Commission on Good Government (PCGG) requesting for comments on the letters of the
PALI and the Marcoses. On March 4, 1996, the PSE was informed that the Marcoses
received a Temporary Restraining Order on the same date, enjoining the Marcoses from,
among others, "further impeding, obstructing, delaying or interfering in any manner by or any
means with the consideration, processing and approval by the PSE of the initial public
offering of PALI." The TRO was issued by Judge Martin S. Villarama, Executive Judge of the
RTC of Pasig City in Civil Case No. 65561, pending in Branch 69 thereof.
In its regular meeting held on March 27, 1996, the Board of Governors of the PSE reached
its decision to reject PALI's application, citing the existence of serious claims, issues and
circumstances surrounding PALI's ownership over its assets that adversely affect the
suitability of listing PALI's shares in the stock exchange.
On April 11, 1996, PALI wrote a letter to the SEC addressed to the then Acting Chairman,
Perfecto R. Yasay, Jr., bringing to the SEC's attention the action taken by the PSE in the
application of PALI for the listing of its shares with the PSE, and requesting that the SEC, in
the exercise of its supervisory and regulatory powers over stock exchanges under Section
6(j) of P.D. No. 902-A, review the PSE's action on PALI's listing application and institute
such measures as are just and proper under the circumstances.
On the same date, or on April 11, 1996, the SEC wrote to the PSE, attaching thereto the
letter of PALI and directing the PSE to file its comments thereto within five days from its
receipt and for its authorized representative to appear for an "inquiry" on the matter. On April
22, 1996, the PSE submitted a letter to the SEC containing its comments to the April 11,
1996 letter of PALI.
On April 24, 1996, the SEC rendered its Order, reversing the PSE's decision. The
dispositive portion of the said order reads:
WHEREFORE, premises considered, and invoking the Commissioner's
authority and jurisdiction under Section 3 of the Revised Securities Act, in
conjunction with Section 3, 6(j) and 6(m) of Presidential Decree No. 902-A,
the decision of the Board of Governors of the Philippine Stock Exchange
denying the listing of shares of Puerto Azul Land, Inc., is hereby set aside,
and the PSE is hereby ordered to immediately cause the listing of the PALI
shares in the Exchange, without prejudice to its authority to require PALI to
disclose such other material information it deems necessary for the protection
of the investigating public.
This Order shall take effect immediately.
SO ORDERED.
PSE filed a motion for reconsideration of the said order on April 29, 1996, which was,
however denied by the Commission in its May 9, 1996 Order which states:
WHEREFORE, premises considered, the Commission finds no compelling
reason to reconsider its order dated April 24, 1996, and in the light of recent
developments on the adverse claim against the PALI properties, PSE should
require PALI to submit full disclosure of material facts and information to
protect the investing public. In this regard, PALI is hereby ordered to amend
its registration statements filed with the Commission to incorporate the full
disclosure of these material facts and information.
Dissatisfied with this ruling, the PSE filed with the Court of Appeals on May 17, 1996 a
Petition for Review (with Application for Writ of Preliminary Injunction and Temporary
Restraining Order), assailing the above mentioned orders of the SEC, submitting the
following as errors of the SEC:
I. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE
OF DISCRETION IN ISSUING THE ASSAILED ORDERS
WITHOUT POWER, JURISDICTION, OR AUTHORITY; SEC
HAS NO POWER TO ORDER THE LISTING AND SALE OF
SHARES OF PALI WHOSE ASSETS ARE SEQUESTERED
AND TO REVIEW AND SUBSTITUTE DECISIONS OF PSE
ON LISTING APPLICATIONS;
II. SEC COMMITTED SERIOUS ERROR AND GRAVE
ABUSE OF DISCRETION IN FINDING THAT PSE ACTED IN
AN ARBITRARY AND ABUSIVE MANNER IN
DISAPPROVING PALI'S LISTING APPLICATION;
III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL AND
VOID FOR ALLOWING FURTHER DISPOSITION OF
PROPERTIES IN CUSTODIA LEGIS AND WHICH FORM
PART OF NAVAL/MILITARY RESERVATION; AND
IV. THE FULL DISCLOSURE OF THE SEC WAS NOT
PROPERLY PROMULGATED AND ITS IMPLEMENTATION
AND APPLICATION IN THIS CASE VIOLATES THE DUE
PROCESS CLAUSE OF THE CONSTITUTION.
On June 4, 1996, PALI filed its Comment to the Petition for Review and subsequently, a
Comment and Motion to Dismiss. On June 10, 1996, PSE fled its Reply to Comment and
Opposition to Motion to Dismiss.
On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing the PSE's
Petition for Review. Hence, this Petition by the PSE.
The appellate court had ruled that the SEC had both jurisdiction and authority to look into
the decision of the petitioner PSE, pursuant to Section 3 3 of the Revised Securities Act in
relation to Section 6(j) and 6(m) 4 of P.D. No. 902-A, and Section 38(b)5 of the Revised
Securities Act, and for the purpose of ensuring fair administration of the exchange. Both as
a corporation and as a stock exchange, the petitioner is subject to public respondent's
jurisdiction, regulation and control. Accepting the argument that the public respondent has
the authority merely to supervise or regulate, would amount to serious consequences,
considering that the petitioner is a stock exchange whose business is impressed with public
interest. Abuse is not remote if the public respondent is left without any system of control. If
the securities act vested the public respondent with jurisdiction and control over all
corporations; the power to authorize the establishment of stock exchanges; the right to
supervise and regulate the same; and the power to alter and supplement rules of the
exchange in the listing or delisting of securities, then the law certainly granted to the public
respondent the plenary authority over the petitioner; and the power of review necessarily
comes within its authority.
All in all, the court held that PALI complied with all the requirements for public listing,
affirming the SEC's ruling to the effect that:
. . . the Philippine Stock Exchange has acted in an arbitrary and abusive
manner in disapproving the application of PALI for listing of its shares in the
face of the following considerations:
1. PALI has clearly and admittedly complied with the Listing Rules and full
disclosure requirements of the Exchange;
2. In applying its clear and reasonable standards on the suitability for listing of
shares, PSE has failed to justify why it acted differently on the application of
PALI, as compared to the IPOs of other companies similarly situated that
were allowed listing in the Exchange;
3. It appears that the claims and issues on the title to PALI's properties were
even less serious than the claims against the assets of the other companies
in that, the assertions of the Marcoses that they are owners of the disputed
properties were not substantiated enough to overcome the strength of a title
to properties issued under the Torrens System as evidence of ownership
thereof;
4. No action has been filed in any court of competent jurisdiction seeking to
nullify PALI's ownership over the disputed properties, neither has the
government instituted recovery proceedings against these properties. Yet the
import of PSE's decision in denying PALI's application is that it would be
PALI, not the Marcoses, that must go to court to prove the legality of its
ownership on these properties before its shares can be listed.
In addition, the argument that the PALI properties belong to the Military/Naval Reservation
does not inspire belief. The point is, the PALI properties are now titled. A property losses its
public character the moment it is covered by a title. As a matter of fact, the titles have long
been settled by a final judgment; and the final decree having been registered, they can no
longer be re-opened considering that the one year period has already passed. Lastly, the
determination of what standard to apply in allowing PALI's application for listing, whether the
discretion method or the system of public disclosure adhered to by the SEC, should be
addressed to the Securities Commission, it being the government agency that exercises
both supervisory and regulatory authority over all corporations.
On August 15, 19961 the PSE, after it was granted an extension, filed the instant Petition for
Review on Certiorari, taking exception to the rulings of the SEC and the Court of Appeals.
Respondent PALI filed its Comment to the petition on October 17, 1996. On the same date,
the PCGG filed a Motion for Leave to file a Petition for Intervention. This was followed up by
the PCGG's Petition for Intervention on October 21, 1996. A supplemental Comment was
filed by PALI on October 25, 1997. The Office of the Solicitor General, representing the SEC
and the Court of Appeals, likewise filed its Comment on December 26, 1996. In answer to
the PCGG's motion for leave to file petition for intervention, PALI filed its Comment thereto
on January 17, 1997, whereas the PSE filed its own Comment on January 20, 1997.
On February 25, 1996, the PSE filed its Consolidated Reply to the comments of respondent
PALI (October 17, 1996) and the Solicitor General (December 26, 1996). On May 16, 1997,
PALI filed its Rejoinder to the said consolidated reply of PSE.
PSE submits that the Court of Appeals erred in ruling that the SEC had authority to order the
PSE to list the shares of PALI in the stock exchange. Under presidential decree No. 902-A,
the powers of the SEC over stock exchanges are more limited as compared to its authority
over ordinary corporations. In connection with this, the powers of the SEC over stock
exchanges under the Revised Securities Act are specifically enumerated, and these do not
include the power to reverse the decisions of the stock exchange. Authorities are in
abundance even in the United States, from which the country's security policies are
patterned, to the effect of giving the Securities Commission less control over stock
exchanges, which in turn are given more lee-way in making the decision whether or not to
allow corporations to offer their stock to the public through the stock exchange. This is in
accord with the "business judgment rule" whereby the SEC and the courts are barred from
intruding into business judgments of corporations, when the same are made in good faith.
the said rule precludes the reversal of the decision of the PSE to deny PALI's listing
application, absent a showing of bad faith on the part of the PSE. Under the listing rules of
the PSE, to which PALI had previously agreed to comply, the PSE retains the discretion to
accept or reject applications for listing. Thus, even if an issuer has complied with the PSE
listing rules and requirements, PSE retains the discretion to accept or reject the issuer's
listing application if the PSE determines that the listing shall not serve the interests of the
investing public.
Moreover, PSE argues that the SEC has no jurisdiction over sequestered corporations, nor
with corporations whose properties are under sequestration. A reading of Republic of
the Philippines vs. Sadiganbayan, G.R. No. 105205, 240 SCRA 376, would reveal that the
properties of PALI, which were derived from the Ternate Development Corporation (TDC)
and the Monte del Sol Development Corporation (MSDC). are under sequestration by the
PCGG, and subject of forfeiture proceedings in the Sandiganbayan. This ruling of the Court
is the "law of the case" between the Republic and TDC and MSDC. It categorically declares
that the assets of these corporations were sequestered by the PCGG on March 10, 1986
and April 4, 1988.
It is, likewise, intimated that the Court of Appeals' sanction that PALI's ownership over its
properties can no longer be questioned, since certificates of title have been issued to PALI
and more than one year has since lapsed, is erroneous and ignores well settled
jurisprudence on land titles. That a certificate of title issued under the Torrens System is a
conclusive evidence of ownership is not an absolute rule and admits certain exceptions. It is
fundamental that forest lands or military reservations are non-alienable. Thus, when a title
covers a forest reserve or a government reservation, such title is void.
PSE, likewise, assails the SEC's and the Court of Appeals reliance on the alleged policy of
"full disclosure" to uphold the listing of PALI's shares with the PSE, in the absence of a clear
mandate for the effectivity of such policy. As it is, the case records reveal the truth that PALI
did not comply with the listing rules and disclosure requirements. In fact, PALI's documents
supporting its application contained misrepresentations and misleading statements, and
concealed material information. The matter of sequestration of PALI's properties and the fact
that the same form part of military/naval/forest reservations were not reflected in PALI's
application.
It is undeniable that the petitioner PSE is not an ordinary corporation, in that although it is
clothed with the markings of a corporate entity, it functions as the primary channel through
which the vessels of capital trade ply. The PSE's relevance to the continued operation and
filtration of the securities transactions in the country gives it a distinct color of importance
such that government intervention in its affairs becomes justified, if not necessarily. Indeed,
as the only operational stock exchange in the country today, the PSE enjoys a monopoly of
securities transactions, and as such, it yields an immense influence upon the country's
economy.
Due to this special nature of stock exchanges, the country's lawmakers has seen it wise to
give special treatment to the administration and regulation of stock exchanges. 6
These provisions, read together with the general grant of jurisdiction, and right of
supervision and control over all corporations under Sec. 3 of P.D. 902-A, give the SEC the
special mandate to be vigilant in the supervision of the affairs of stock exchanges so that the
interests of the investing public may be fully safeguard.
Section 3 of Presidential Decree 902-A, standing alone, is enough authority to uphold the
SEC's challenged control authority over the petitioner PSE even as it provides that "the
Commission shall have absolute jurisdiction, supervision, and control over all corporations,
partnerships or associations, who are the grantees of primary franchises and/or a license or
permit issued by the government to operate in the Philippines. . ." The SEC's regulatory
authority over private corporations encompasses a wide margin of areas, touching nearly all
of a corporation's concerns. This authority springs from the fact that a corporation owes its
existence to the concession of its corporate franchise from the state.
The SEC's power to look into the subject ruling of the PSE, therefore, may be implied from
or be considered as necessary or incidental to the carrying out of the SEC's express power
to insure fair dealing in securities traded upon a stock exchange or to ensure the fair
administration of such exchange. 7 It is, likewise, observed that the principal function of the
SEC is the supervision and control over corporations, partnerships and associations with the
end in view that investment in these entities may be encouraged and protected, and their
activities for the promotion of economic development. 8
Thus, it was in the alleged exercise of this authority that the SEC reversed the decision of
the PSE to deny the application for listing in the stock exchange of the private respondent
PALI. The SEC's action was affirmed by the Court of Appeals.
We affirm that the SEC is the entity with the primary say as to whether or not securities,
including shares of stock of a corporation, may be traded or not in the stock exchange. This
is in line with the SEC's mission to ensure proper compliance with the laws, such as the
Revised Securities Act and to regulate the sale and disposition of securities in the
country. 9 As the appellate court explains:
Paramount policy also supports the authority of the public respondent to
review petitioner's denial of the listing. Being a stock exchange, the petitioner
performs a function that is vital to the national economy, as the business is
affected with public interest. As a matter of fact, it has often been said that
the economy moves on the basis of the rise and fall of stocks being traded.
By its economic power, the petitioner certainly can dictate which and how
many users are allowed to sell securities thru the facilities of a stock
exchange, if allowed to interpret its own rules liberally as it may please.
Petitioner can either allow or deny the entry to the market of securities. To
repeat, the monopoly, unless accompanied by control, becomes subject to
abuse; hence, considering public interest, then it should be subject to
government regulation.
The role of the SEC in our national economy cannot be minimized. The legislature, through
the Revised Securities Act, Presidential Decree No. 902-A, and other pertinent laws, has
entrusted to it the serious responsibility of enforcing all laws affecting corporations and other
forms of associations not otherwise vested in some other government office. 10
This is not to say, however, that the PSE's management prerogatives are under the absolute
control of the SEC. The PSE is, alter all, a corporation authorized by its corporate franchise
to engage in its proposed and duly approved business. One of the PSE's main concerns, as
such, is still the generation of profit for its stockholders. Moreover, the PSE has all the rights
pertaining to corporations, including the right to sue and be sued, to hold property in its own
name, to enter (or not to enter) into contracts with third persons, and to perform all other
legal acts within its allocated express or implied powers.
A corporation is but an association of individuals, allowed to transact under an assumed
corporate name, and with a distinct legal personality. In organizing itself as a collective
body, it waives no constitutional immunities and perquisites appropriate to such a body. 11 As
to its corporate and management decisions, therefore, the state will generally not interfere
with the same. Questions of policy and of management are left to the honest decision of the
officers and directors of a corporation, and the courts are without authority to substitute their
judgment for the judgment of the board of directors. The board is the business manager of
the corporation, and so long as it acts in good faith, its orders are not reviewable by the
courts. 12
Thus, notwithstanding the regulatory power of the SEC over the PSE, and the resultant
authority to reverse the PSE's decision in matters of application for listing in the market, the
SEC may exercise such power only if the PSE's judgment is attended by bad faith. In Board
of Liquidators vs. Kalaw,13 it was held that bad faith does not simply connote bad judgment
or negligence. It imports a dishonest purpose or some moral obliquity and conscious doing
of wrong. It means a breach of a known duty through some motive or interest of ill will,
partaking of the nature of fraud.
In reaching its decision to deny the application for listing of PALI, the PSE considered
important facts, which, in the general scheme, brings to serious question the qualification of
PALI to sell its shares to the public through the stock exchange. During the time for
receiving objections to the application, the PSE heard from the representative of the late
President Ferdinand E. Marcos and his family who claim the properties of the private
respondent to be part of the Marcos estate. In time, the PCGG confirmed this claim. In fact,
an order of sequestration has been issued covering the properties of PALI, and suit for
reconveyance to the state has been filed in the Sandiganbayan Court. How the properties
were effectively transferred, despite the sequestration order, from the TDC and MSDC to
Rebecco Panlilio, and to the private respondent PALI, in only a short span of time, are not
yet explained to the Court, but it is clear that such circumstances give rise to serious doubt
as to the integrity of PALI as a stock issuer. The petitioner was in the right when it refused
application of PALI, for a contrary ruling was not to the best interest of the general public.
The purpose of the Revised Securities Act, after all, is to give adequate and effective
protection to the investing public against fraudulent representations, or false promises, and
the imposition of worthless ventures. 14
It is to be observed that the U.S. Securities Act emphasized its avowed protection to acts
detrimental to legitimate business, thus:
The Securities Act, often referred to as the "truth in securities" Act, was
designed not only to provide investors with adequate information upon which
to base their decisions to buy and sell securities, but also to protect legitimate
business seeking to obtain capital through honest presentation against
competition from crooked promoters and to prevent fraud in the sale of
securities. (Tenth Annual Report, U.S. Securities & Exchange Commission, p.
14).
As has been pointed out, the effects of such an act are chiefly (1) prevention
of excesses and fraudulent transactions, merely by requirement of that their
details be revealed; (2) placing the market during the early stages of the
offering of a security a body of information, which operating indirectly through
investment services and expert investors, will tend to produce a more
accurate appraisal of a security, . . . Thus, the Commission may refuse to
permit a registration statement to become effective if it appears on its face to
be incomplete or inaccurate in any material respect, and empower the
Commission to issue a stop order suspending the effectiveness of any
registration statement which is found to include any untrue statement of a
material fact or to omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading. (Idem).
Also, as the primary market for securities, the PSE has established its name and goodwill,
and it has the right to protect such goodwill by maintaining a reasonable standard of
propriety in the entities who choose to transact through its facilities. It was reasonable for
the PSE, therefore, to exercise its judgment in the manner it deems appropriate for its
business identity, as long as no rights are trampled upon, and public welfare is safeguarded.
In this connection, it is proper to observe that the concept of government absolutism is a
thing of the past, and should remain so.
The observation that the title of PALI over its properties is absolute and can no longer be
assailed is of no moment. At this juncture, there is the claim that the properties were owned
by TDC and MSDC and were transferred in violation of sequestration orders, to Rebecco
Panlilio and later on to PALI, besides the claim of the Marcoses that such properties belong
to the Marcos estate, and were held only in trust by Rebecco Panlilio. It is also alleged by
the petitioner that these properties belong to naval and forest reserves, and therefore
beyond private dominion. If any of these claims is established to be true, the certificates of
title over the subject properties now held by PALI map be disregarded, as it is an
established rule that a registration of a certificate of title does not confer ownership over the
properties described therein to the person named as owner. The inscription in the registry,
to be effective, must be made in good faith. The defense of indefeasibility of a Torrens Title
does not extend to a transferee who takes the certificate of title with notice of a flaw.
In any case, for the purpose of determining whether PSE acted correctly in refusing the
application of PALI, the true ownership of the properties of PALI need not be determined as
an absolute fact. What is material is that the uncertainty of the properties' ownership and
alienability exists, and this puts to question the qualification of PALI's public offering. In sum,
the Court finds that the SEC had acted arbitrarily in arrogating unto itself the discretion of
approving the application for listing in the PSE of the private respondent PALI, since this is a
matter addressed to the sound discretion of the PSE, a corporation entity, whose business
judgments are respected in the absence of bad faith.
The question as to what policy is, or should be relied upon in approving the registration and
sale of securities in the SEC is not for the Court to determine, but is left to the sound
discretion of the Securities and Exchange Commission. In mandating the SEC to administer
the Revised Securities Act, and in performing its other functions under pertinent laws, the
Revised Securities Act, under Section 3 thereof, gives the SEC the power to promulgate
such rules and regulations as it may consider appropriate in the public interest for the
enforcement of the said laws. The second paragraph of Section 4 of the said law, on the
other hand, provides that no security, unless exempt by law, shall be issued, endorsed, sold,
transferred or in any other manner conveyed to the public, unless registered in accordance
with the rules and regulations that shall be promulgated in the public interest and for the
protection of investors by the Commission. Presidential Decree No. 902-A, on the other
hand, provides that the SEC, as regulatory agency, has supervision and control over all
corporations and over the securities market as a whole, and as such, is given ample
authority in determining appropriate policies. Pursuant to this regulatory authority, the SEC
has manifested that it has adopted the policy of "full material disclosure" where all
companies, listed or applying for listing, are required to divulge truthfully and accurately, all
material information about themselves and the securities they sell, for the protection of the
investing public, and under pain of administrative, criminal and civil sanctions. In connection
with this, a fact is deemed material if it tends to induce or otherwise effect the sale or
purchase of its securities. 15 While the employment of this policy is recognized and
sanctioned by the laws, nonetheless, the Revised Securities Act sets substantial and
procedural standards which a proposed issuer of securities must satisfy. 16 Pertinently,
Section 9 of the Revised Securities Act sets forth the possible Grounds for the Rejection of
the registration of a security:
— The Commission may reject a registration statement and refuse to issue a
permit to sell the securities included in such registration statement if it finds
that —
(1) The registration statement is on its face incomplete or inaccurate in any
material respect or includes any untrue statement of a material fact or omits
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading; or
(2) The issuer or registrant —
(i) is not solvent or not in sound financial condition;
(ii) has violated or has not complied with the provisions of this
Act, or the rules promulgated pursuant thereto, or any order of
the Commission;
(iii) has failed to comply with any of the applicable
requirements and conditions that the Commission may, in the
public interest and for the protection of investors, impose
before the security can be registered;
(iv) has been engaged or is engaged or is about to engage in
fraudulent transaction;
(v) is in any way dishonest or is not of good repute; or
(vi) does not conduct its business in accordance with law or is
engaged in a business that is illegal or contrary to government
rules and regulations.
(3) The enterprise or the business of the issuer is not shown to be sound or to
be based on sound business principles;
(4) An officer, member of the board of directors, or principal stockholder of
the issuer is disqualified to be such officer, director or principal stockholder;
or
 (5) The issuer or registrant has not shown to the satisfaction of the
Commission that the sale of its security would not work to the prejudice of the
public interest or as a fraud upon the purchasers or investors. (Emphasis
Ours)

A reading of the foregoing grounds reveals the intention of the lawmakers to make the
registration and issuance of securities dependent, to a certain extent, on the merits of the
securities themselves, and of the issuer, to be determined by the Securities and Exchange
Commission. This measure was meant to protect the interests of the investing public against
fraudulent and worthless securities, and the SEC is mandated by law to safeguard these
interests, following the policies and rules therefore provided. The absolute reliance on the
full disclosure method in the registration of securities is, therefore, untenable. As it is, the
Court finds that the private respondent PALI, on at least two points (nos. 1 and 5) has failed
to support the propriety of the issue of its shares with unfailing clarity, thereby lending
support to the conclusion that the PSE acted correctly in refusing the listing of PALI in its
stock exchange. This does not discount the effectivity of whatever method the SEC, in the
exercise of its vested authority, chooses in setting the standard for public offerings of
corporations wishing to do so. However, the SEC must recognize and implement the
mandate of the law, particularly the Revised Securities Act, the provisions of which cannot
be amended or supplanted by mere administrative issuance.

In resume, the Court finds that the PSE has acted with justified circumspection, discounting,
therefore, any imputation of arbitrariness and whimsical animation on its part. Its action in
refusing to allow the listing of PALI in the stock exchange is justified by the law and by the
circumstances attendant to this case.

ACCORDINGLY, in view of the foregoing considerations, the Court hereby GRANTS the
Petition for Review on Certiorari. The Decisions of the Court of Appeals and the Securities
and Exchange Commission dated July 27, 1996 and April 24, 1996 respectively, are hereby
REVERSED and SET ASIDE, and a new Judgment is hereby ENTERED, affirming the
decision of the Philippine Stock Exchange to deny the application for listing of the private
respondent Puerto Azul Land, Inc.

SO ORDERED.