CORPO CASES 4
Subsequently, the Supreme Court dismissed the petition in GR
1. Lopez Dee vs. Security and Exchange Commission
[GR 60502, 16 July 1991]
FACTS: Naga Telephone Company, Inc. (Natelco) was organized in 1954, the authorized capital was
P100,000.00. In 1974 Natelco decided to increase its authorized capital to P3,000,000.00. As required
by the Public Service Act, Natelco filed an application for the approval of the increased authorized
capital with the then Board of Communications under BOC Case 74-84. On 8 January 1975, a decision
was rendered in said case, approving the said application subject to certain conditions, among which
was "That the issuance of the shares of stocks will be for a period of one year from the date hereof,
'after which no further issues will be made without previous authority from this Board." Pursuant to
the approval given by the then Board of Communications, Natelco filed its Amended Articles of
Incorporation with the Securities and Exchange Commission (SEC). When the amended articles were
filed with the SEC, the original authorized capital of P100,000.00 was already paid. Of the increased
capital of P2,900,000.00 the subscribers subscribed to P580,000.00 of which P145,000 was fully paid.
The capital stock of Natelco was divided into 213,000 common shares and 87,000 preferred shares,
both at a par value of P10.00 per shares. On 12 April 1977, Natelco entered into a contract with
Communication Services, Inc. (CSI) for the "manufacture, supply, delivery and installation" of
telephone equipment. In accordance with this contract, Natelco issued 24,000 shares of common
stocks to CSI on the same date as part of the downpayment. On 5 May 1979, another 12,000 shares
of common stocks were issued to CSI. In both instances, no prior authorization from the Board of
Communications, now the National Telecommunications Commission, was secured pursuant to the
conditions imposed by the decision in BOC Case 74-84. On 19 May 1979, the stockholders of the
Natelco held their annual stockholders' meeting to elect their seven directors to their Board of
Directors, for the year 1979-1980. In this election Pedro Lopez Dee was unseated as Chairman of the
Board and President of the Corporation, but was elected as one of the directors, together with his
wife, Amelia Lopez Dee. In the election CSI was able to gain control of Natelco when the latter's legal
counsel, Atty. Luciano Maggay won a seat in the Board with the help of CSI. In the reorganization Atty.
Maggay became president. Dee having been unseated in the election, filed a petition in the SEC (SEC
Case 1748), questioning the validity of the elections of 19 May 1979 upon the main ground that there
was no valid list of stockholders through which the right to vote could be determined.
As prayed for in the petition, a restraining order was issued by the SEC placing Dee and the other
officers of the 1978-1979 Natelco Board in hold-over capacity. The SEC restraining order was elevated
to the Supreme Court in GR 50885 where the enforcement of the SEC restraining order was
restrained. Maggay, et. al. replaced the hold-over officers. During the tenure of the Maggay Board,
from 22 June 1979 to 10 March 1980, it did not reform the contract of 12 April 1977, and entered into
another contract with CSI for the supply and installation of additional equipment but also issued to
CSI 113,800 shares of common stock.
50885 upon the ground that the same was premature and the Commission should be allowed to
conduct its hearing on the controversy. The dismissal of the petition resulted in the unseating of the
Maggay group from the board of directors of Natelco in a "hold-over" capacity. In the course of the
proceedings in SEC Case 1748, SEC Hearing officer Emmanuel Sison issued an order on 23 June 1981,
declaring: (1) that CSI is a stockholder of Natelco and, therefore, entitled to vote; (2) that unexplained
16,858 shares of Natelco appear to have been issued in excess to CSI which should not be allowed to
vote; (3) that 82 shareholders with their corresponding number of shares shall be allowed to vote;
and (4) consequently, ordering the holding of special stockholder' meeting to elect the new members
of the Board of Directors for Natelco based on the findings made in the order as to who are entitled
to vote. From the foregoing order dated 23 June 1981, Dee filed a petition for certiorari/appeal with
the SEC en banc (SEC-AC 036). Thereafter, the Commission en banc rendered a decision on 5 April
1982, sustaining the order of the Hearing Officer; dismissing the petition/appeal for lack of merit; and
ordering new elections as the Hearing Officer shall set after consultations with Natelco officers,
among others. On 21 April 1982, Dee and Natelco filed their respective motions for reconsideration.
Pending resolution of the motions for reconsideration, on 4 May 1982, the hearing officer without
waiting for the decision of the commission en banc, to become final and executory rendered an order
stating that the election for directors would be held on 22 May 1982. On 20 May 1982, the SEC en
banc denied the motions for reconsideration.
Meanwhile on 20 May 1982 (GR 63922), Antonio Villasenor filed Civil Case 1507 with the Court of
First Instance of Camarines Sur, Naga City, against Luciano Maggay, Nildo I. Ramos, Desirerio
Saavedra, Augusto Federis, Ernesto Miguel, Justino de Jesus St., Vicente Tordilla, Pedro Lopez Dee
and Julio Lopez Dee, which was raffled to Branch I, presided over by Judge Delfin Vir. Sunga.
Villasenor claimed that he was an assignee of an option to repurchase 36,000 shares of common
stocks of Natelco under a Deed of Assignment executed in his favor. The Maggay group allegedly
refused to allow the repurchase of said stocks when Villasenor offered to CSI the repurchase of said
stocks by tendering payment of its price. The complaint therefore, prayed for the allowance to
repurchase the aforesaid stocks and that the holding of the 22 May 1982 election of directors and
officers of Natelco be enjoined. A restraining order dated 21 May 1982 was issued by the lower court
commanding desistance from the scheduled election until further orders. Nevertheless, on 22 May
1982, as scheduled, the controlling majority of the stockholders of the Natelco defied the restraining
order, and proceeded with the elections, under the supervision of the SEC representatives. On 25
May 1982, the SEC recognized the fact that elections were duly held, and proclaimed that the
following are the "duly elected directors" of the Natelco for the term 1982-1983: Felipa T. Javalera,
Nilda I. Ramos, Luciano Maggay, Augusto Federis, Daniel J. Ilano, Nelin J. Ilano, Sr., and Ernesto A.
Miguel. The following are the recognized officers to wit: Luciano Maggay (President), Nilda I. Ramos
(Vice-President), Desiderio Saavedra (Secretary), Felipa Javalera (Treasurer), and Daniel Ilano
(Auditor). Despite service of the order of 25 May 1982, the Lopez Dee group headed by Messrs.
Justino De Jesus and Julio Lopez Dee kept insisting no elections were held and refused to vacate their
position. On 28 May 1982, the SEC issued another order directing the hold-over directors and officers
to turn over their respective posts to the newly elected directors and officers and directing the Sheriff
of Naga City, with the assistance of PC and INP of Naga City, and other law enforcement agencies of
the City or of the Province of Camarines Sur, to enforce the aforesaid order. On 29 May 1982, the
Sheriff of Naga City, assisted by law enforcement agencies, installed the newly elected directors and
officers of the Natelco, and the hold-over officers peacefully vacated their respective offices and
turned-over their functions to the new officers. On 2 June 1982, a charge for contempt was filed by
Villasenor alleging that Maggay, et. al. have been claiming in press conferences and over the radio
airlanes that they actually held and conducted elections on 22 May 1982 in the City of Naga and that
they have a new set of officers, and that such acts of Maggay, et. al. constitute contempt of court. On
7 September 1982, the lower court rendered judgment on the contempt charge, declaring CSI, Nilda
Ramos, Luciano Maggay, Desiderio Saavedra, Augusto Federis and Ernesto Miguel, guilty of contempt
of court, and accordingly punished with imprisonment of 6 months and to pay fine of P1,000.00 each:
and ordering rNilda Ramos, Luciano Maggay, Desiderio Saavedra, Augusto Federis and Ernesto
Miguel, and those now occupying the positions of directors and officers of NATELCO to vacate their
respective positions therein, and ordering them to reinstate the hold-over directors and officers of
NATELCO, such as Pedro Lopez Dee as President, Justino de Jesus, Sr., as Vice President, Julio Lopez
Dee as Treasurer and Vicente Tordilla, Jr. as Secretary, and others referred to as hold-over directors
and officers of NATELCO in the order dated 28 May 1982 of SEC Hearing Officer Emmanuel Sison, in
SEC Case 1748, by way of RESTITUTION, and consequently, ordering said respondents to turn over all
records, property and assets of NATELCO to said hold-over directors and officers.
The trial judge issued an order dated 10 September 1982 directing the respondents in the contempt
charge to "comply strictly, under pain of being subjected to imprisonment until they do so." Maggay,
et. al. filed on 17 September 1982, a petition for certiorari and prohibition with preliminary injunction
or restraining order against the CFI Judge of Camarines Sur, Naga City and de Jesus, Sr., et.a al., with
the then Intermediate Appellate Court which issued a resolution ordering de Jesus, Sr., et. al. to
comment on the petition, which was complied with, and at the same time temporarily refrained from
implementing and or enforcing the questioned judgment and order of the lower court. On 14 April
1983, the then Intermediate Appellate Court, rendered a decision, annuling the judgment dated 7
September 1982 rendered by the trial judge on the contempt charge, and his order dated 10
September 1982, implementing said judgment; ordering the 'hold-over' directors and officers of
NATELCO to vacate their respective offices; directing respondents to restore or re-establish Maggay,
et. al. who were ejected on 22 May 1982 to their respective offices in the NATELCO; and prohibiting
whoever may be the successor of the Judge from interfering with the proceedings of the Securities
and Exchange Commission in SEC-AC 036. The order of re-implementation was issued, and, finally, the
Maggay group has been restored as the officers of the Natelco.
Lopez Dee, et. al. filed the petitions for certiorari with preliminary injunction and/or restraining order.
In the resolution of the Court En Banc dated 23 August 1983, GR 63922 was consolidated with GR
60502.
ISSUE:
Whether the issuance of 113,800 shares of Natelco to CSI, made during the pendency of SEC Case
1748 in the Securities and Exchange Commission was valid.
Whether Natelco stockholders have a right of preemption to the 113,800 shares in question; else,
whether the Maggay Board, in issuing said shares without notifying Natelco stockholders, violated
their right of pre-emption to the unissued shares .
HELD:
1. The issuance of 113,800 shares of Natelco stock to CSI made during the pendency of SEC Case 1748
in the Securities and Exchange Commission was valid. The findings of the SEC En Banc as to the
issuance of the 113,800 shares of stock was stated as follows: "But the issuance of 113,800 shares
was pursuant to a Board Resolution and stockholders' approval prior to 19 May 1979 when CSI was
not yet in control of the Board or of the voting shares. There is distinction between an order to issue
shares on or before 19 May 1979 and actual issuance of the shares after 19 May 1979. The actual
issuance, it is true, came during the period when CSI was in control of voting shares and the Board (if
they were in fact in control) - but only pursuant to the original Board and stockholders' orders, not on
the initiative to the new Board, elected 19 May 1979, which petitioners are questioning. The
Commission en banc finds it difficult to see how the one who gave the orders can turn around and
impugn the implementation of the orders he had previously given. The reformation of the contract is
understandable for Natelco lacked the corporate funds to purchase the CSI equipment.... Appellant
had raise the issue whether the issuance of 113,800 shares of stock during the incumbency of the
Maggay Board which was allegedly CSI controlled, and while the case was sub judice, amounted to
unfair and undue advantage. This does not merit consideration in the absence of additional evidence
to support the proposition." In effect, therefore, the stockholders of Natelco approved the issuance
of stock to CSI.
2. The issuance of the 113,800 stocks is not invalid even assuming that it was made without notice to
the stockholders as claimed by Dee, et. al.. The power to issue shares of stocks in a corporation is
lodged in the board of directors and no stockholders meeting is required to consider it because
additional issuance of shares of stocks does not need approval of the stockholders. Consequently, no
pre-emptive right of Natelco stockholders was violated by the issuance of the 113,800 shares to CSI.
2. McLeod vs National Labor Relations Commission
G.R. No. 146667 January 23, 2007
Facts: On February 2, 1995, John F. McLeod filed a complaint for retirement benefits, vacation and
sick leave benefits, nonpayment of unused airline tickets, holiday pay, underpayment of salary and
13th month pay, moral and exemplary damages, attorney’s fees plus interest against Filipinas
Synthetic Corporation (Filsyn), Far Eastern Textile Mills, Inc., Sta. Rosa Textiles, Inc., Patricio Lim and
Eric Hu. In his Position Paper, complainant alleged that he is an expert in textile manufacturing
process; that as early as 1956 he was hired as the Assistant Spinning Manager of Universal Textiles,
Inc. (UTEX); that he was promoted to Senior Manager and worked for UTEX till 1980 under its
President, respondent Patricio Lim; that in 1978 Patricio Lim formed Peggy Mills, Inc. with respondent
Filsyn having controlling interest; that complainant was absorbed by Peggy Mills as its Vice President
and Plant Manager of the plant at Sta. Rosa, Laguna; that at the time of his retirement complainant
was receiving P 60,000.00 monthly with vacation and sick leave benefits; 13th month pay, holiday pay
and two round trip business class tickets on a Manila-London-Manila itinerary every three years
which is convertible to cas[h] if unused; that in January 1986, respondents failed to pay vacation and
leave credits and requested complainant to wait as it was short of funds but the same remain unpaid
at present; that complainant is entitled to such benefit as per CBA provision (Annex “A”); that
respondents likewise failed to pay complainant’s holiday pay up to the present; that complainant is
entitled to such benefits as per CBA provision (Annex “B”); that in 1989 the plant union staged a strike
and in 1993 was found guilty of staging an illegal strike; that from 1989 to 1992 complainant was
entitled to 4 round trip business class plane tickets on a Manila-London-Manila itinerary but this
benefit not (sic) its monetary equivalent was not given; that on August 1990 the respondents reduced
complainant’s monthly salary of P 60,000.00 by P9,900.00 till November 1993 or a period of 39
months; that in 1991 Filsyn sold Peggy Mills, Inc. to Far Eastern Textile Mills, Inc. as per agreement
(Annex “D”) and this was renamed as Sta. Rosa Textile with Patricio Lim as Chairman and President;
that complainant worked for Sta. Rosa until November 30 that from time to time the owners of Far
Eastern consulted with complainant on technical aspects of reoperation of the plant as per
correspondence (Annexes “D-1” and “D-2”); that when complainant reached and applied retirement
age at the end of 1993, he was only given a reduced 13th month pay of P 44,183.63, leaving a balance
of P 15,816.87; that thereafter the owners of Far Eastern Textiles decided for cessation of operations
of Sta. Rosa Textiles; that on two occasions, complainant wrote letters (Annexes “E-1” to “E-2”) to
Patricio Lim requesting for his retirement and other benefits; that in the last quarter of 1994
respondents offered complainant compromise settlement of only P 300,000.00 which complainant
rejected; that again complainant wrote a letter (Annex “F”) reiterating his demand for full payment of
all benefits and to no avail, hence this complaint; and that he is entitled to all his money claims
pursuant to law. On the other hand, respondents in their Position Paper alleged that complainant was
the former Vice-President and Plant Manager of Peggy Mills, Inc.; that he was hired in June 1980 and
Peggy Mills closed operations due to irreversible losses at the end of July 1992 but the corporation
still exists at present; that its assets were acquired by Sta. Rosa Textile Corporation which was
established in April 1992 but still remains non-operational at present; that complainant was hired as
consultant by Sta. Rosa Textile in November 1992 but he resigned on November 30, 1993; that Filsyn
and Far Eastern Textiles are separate legal entities and have no employer relationship with
complainant; that respondent Patricio Lim is the President and Board Chairman of Sta. Rosa Textile
Corporation; that respondent Eric Hu is a Taiwanese and is Director of Sta. Rosa Textiles, Inc.; that
complainant has no cause of action against Filsyn, Far Eastern Textile Ltd., Sta. Rosa Textile
Corporation and Eric Hu; that Sta. Rosa only acquired the assets and not the liabilities of Peggy Mills,
Inc.; that Patricio Lim was only impleaded as Board Chairman of Sta. Rosa Textile and not as private
individual; that while complainant was Vice President and Plant Manager of Peggy Mills, the union
staged a strike up to July 1992 resulting in closure of operations due to irreversible losses as per
Notice (Annex “1”); that complainant was relied upon to settle the labor problem but due to his lack
of attention and absence the strike continued resulting in closure of the company; and losses to Sta.
Rosa which acquired its assets as per their financial statements (Annexes “2” and “3”); that the
attendance records of complainant from April 1992 to November 1993 (Annexes “4” and “5”) show
that he was either absent or worked at most two hours a day; that Sta. Rosa and Peggy Mills are
interposing counterclaims for damages in the total amount of P 36,757.00 against complainant; that
complainant’s monthly salary at Peggy Mills was P P 50,495.00 and not 60,000.00; that Peggy Mills,
does not have a retirement program; that whatever amount complainant is entitled should be offset
with the counterclaims; that complainant worked only for 12 years from 1980 to 1992; that
complainant was only hired as a consultant and not an employee by Sta. Rosa Textile; that
complainant’s attendance record of absence and two hours daily work during the period of the strike
wipes out any vacation/sick leave he may have accumulated; that there is no basis for complainant’s
claim of two (2) business class airline tickets; that complainant’s pay already included the holiday pay;
that he is entitled to holiday pay as consultant by Sta. Rosa; that he has waived this benefit in his 12
years of work with Peggy Mills; that he is not entitled to 13th month pay as consultant; and that he is
not entitled to moral and exemplary damages and attorney’s fees.
Issues: Whether or not the doctrine of piercing the corporate veil should be applied to further entitle
petitioner for the claim sought in all the corporations allegedly his employer.
Whether or not the corporate directors can be held liable personally with petitioner.
Whether or not there is merger between PMI and SRTI.
Held: No. A corporation is an artificial being invested by law with a personality separate and distinct
from that of its stockholders and from that of other corporations to which it may be connected.
While a corporation may exist for any lawful purpose, the law will regard it as an association of
persons or, in case of two corporations, merge them into one, when its corporate legal entity is used
as a cloak for fraud or illegality. This is the doctrine of piercing the veil of corporate fiction. The
doctrine applies only when such corporate fiction is used to defeat public convenience, justify wrong,
protect fraud, or defend crime, or when it is made as a shield to confuse the legitimate issues, or
where a corporation is the mere alter ego or business conduit of a person, or where the corporation
is so organized and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation.
To disregard the separate juridical personality of a corporation, the wrongdoing must be established
clearly and convincingly. It cannot be presumed.
Here, we do not find any of the evils sought to be prevented by the doctrine of piercing the corporate
veil. Respondent corporations may be engaged in the same business as that of PMI, but this fact
alone is not enough reason to pierce the veil of corporate fiction.
At any rate, the existence of interlocking incorporators, directors, and officers is not enough
justification to pierce the veil of corporate fiction, in the absence of fraud or other public policy
considerations.
No. Personal liability of corporate directors, trustees or officers attaches only when (1) they assent to
a patently unlawful act of the corporation, or when they are guilty of bad faith or gross negligence in
directing its affairs, or when there is a conflict of interest resulting in damages to the corporation, its
stockholders or other persons; (2) they consent to the issuance of watered down stocks or when,
having knowledge of such issuance, do not forthwith file with the corporate secretary their written
objection; (3) they agree to hold themselves personally and solidarily liable with the corporation; or
(4) they are made by specific provision of law personally answerable for their corporate action.
No. As a rule, a corporation that purchases the assets of another will not be liable for the debts of the
selling corporation, provided the former acted in good faith and paid adequate consideration for such
assets, except when any of the following circumstances is present: (1) where the purchaser expressly
or impliedly agrees to assume the debts, (2) where the transaction amounts to a consolidation or
merger of the corporations, (3) where the purchasing corporation is merely a continuation of the
selling corporation, and (4) where the selling corporation fraudulently enters into the transaction to
escape liability for those debts.26 None of the foregoing exceptions is present in this case.
Here, PMI transferred its assets to SRTI to settle its obligation to SRTI in the sum of P 210,000,000. We
are not convinced that PMI fraudulently transferred these assets to escape its liability for any of its
debts. PMI had already paid its employees, except McLeod, their money claims. There was also no
merger or consolidation of PMI and SRTI.
Consolidation is the union of two or more existing corporations to form a new corporation called the
consolidated corporation. It is a combination by agreement between two or more corporations by
which their rights, franchises, and property are united and become those of a single, new
corporation, composed generally, although not necessarily, of the stockholders of the original
corporations. Merger, on the other hand, is a union whereby one corporation absorbs one or more
existing corporations, and the absorbing corporation survives and continues the combined business.
The parties to a merger or consolidation are called constituent corporations. In consolidation, all the
constituents are dissolved and absorbed by the new consolidated enterprise. In merger, all
constituents, except the surviving corporation, are dissolved. In both cases, however, there is no
liquidation of the assets of the dissolved corporations, and the surviving or consolidated corporation
acquires all their properties, rights and franchises and their stockholders usually become its
stockholders.
3. Islamic Directorate of the Philippines vs. Court of Appeals
[GR 117897, 14 May 1997]
Facts: Sometime in 1971, Islamic leaders of all Muslim major tribal groups in the Philippines headed
by Dean Cesar Adib Majul organized and incorporated the ISLAMIC DIRECTORATE OF THE PHILIPPINES
(IDP), the primary purpose of which is to establish an Islamic Center in Quezon City for, the
construction of a "Mosque (prayer place, Madrasah (Arabic School), and other religious
infrastructures" so as to facilitate the effective practice of Islamic faith in the area. Towards this end,
that is, in the same year, the Libyan government donated money to the IDP to purchase land at
Culiat, Tandang Sora, Quezon City, to be used as a Center for the Islamic populace. The land, with an
area of 49,652 square meters, we covered by two titles: TCTs RT-26520 (176616) and RT-26521
(170567), both registered in the name of IDP. In 1971, the Board of Trustees of the IDP was
composed of Senator Mamintal Tamano, Congressman Ali Dimaporo, Congressman Salipada
Pendatun, Dean Cesar Adib Majul, Sultan Harun Al-Rashid Lucman, Delegate Ahmad Alonto,
Commissioner Datu Mama Sinsuat and Mayor Aminkadra Abubakar. In 1972, after the purchase of
the land by the Libyan government in the name of IDP, Martial Law was declared by the late
President Ferdinand Marcos.
Most of the members of the 1971 Board of Trustees like Senators Mamintal Tamano, Salipada
Pendatun, Ahmad Alonto, and Congressman Al-Rashid Lucman flew to the Middle East to escape
political persecution. Thereafter, two Muslim groups sprung, the Carpizo Group, headed by Engineer
Farouk Carpizo, and the Abbas Group, led by Mrs. Zorayda Tamano and Atty. Firdaussi Abbas. Both
groups claimed to be the legitimate IDP. Significantly, on 3 October 1986, the SEC, in a suit between
these two contending groups, came out with a Decision in SEC Case 2687 declaring the election of
both the Carpizo Group and the Abbas Group as IDP board members to be null and void. Neither
group, however, took the necessary steps prescribed by the SEC in its 3 October 1986 Decision, and
no valid election of the members of the Board of Trustees of IDP was ever called. Although the
Carpizo Group attempted to submit a set of by-laws, the SEC found that, aside from that Engineer
Farouk Carpizo and Atty. Musib Buat, those who prepared and adopted the by-laws were not bona
fide members of the IDP, thus rendering the adoption of the by-laws likewise null and void. On 20
April 1989, without having been properly elected as new members of the Board of Trustees of IDP,
the Carpizo Group caused to be signed an alleged Board Resolution of the IDP, authorizing the sale of
the subject two parcels of land to the Iglesia ni Cristo (INC) for a consideration of P22,343,400.00,
which sale was evidenced by a Deed of Absolute Sale 12 dated 20 April 1989. On 30 May 1991, the
1971 IDP Board of Trustees headed by former Senator Mamintal Tamano, or the Tamano Group, filed
a petition before the SEC (SEC Case 4012) seeking to declare null and void the Deed of Absolute Sale
signed by the Carpizo Group and the INC since the group of Engineer Carpizo was not the legitimate
Board of Trustees of the IDP.
Meanwhile, INC, pursuant to the Deed of Absolute Sale executed in its favor, filed an action for
Specific Performance with Damages against the vendor, Carpizo Group, before Branch 81 of the
Regional Trial Court of Quezon City (Civil Case Q-90-6937) to compel said group to clear the property
of squatters and deliver complete and full physical possession thereof to INC. Likewise, INC filed a
motion in the same case to compel one Mrs. Leticia P. Ligon to produce and surrender to the Register
of Deeds of Quezon City the owner's duplicate copy of TCTs RT-26521 and RT-26520 covering the two
parcels of land, so that the sale in INC's favor may be registered and new titles issued in the name of
INC. Mrs. Ligon was alleged to be the mortgagee of the two parcels of land executed in her favor by
certain Abdulrahman R.T. Linzag and Rowaida Busran-Sampaco claimed to be in behalf of the Carpizo
Group. Judge Celia Lipana-Reyes of Branch 81, Regional Trial Court of Quezon City, denied IDP's
motion to intervene on the ground of lack of juridical personality of the IDP-Tamano Group and that
the issues being raised by way of intervention are intra-corporate in nature, jurisdiction thereto
properly pertaining to the SEC. Apprised of the pendency of SEC Case 4012 involving the controverted
status of the IDP-Carpizo Group but without waiting for the outcome of said case, Judge Reyes, on 12
September 1991, rendered Partial Judgment in Civil Case Q-90-6937 ordering the IDP-Carpizo Group
to comply with its obligation under the Deed of Sale of clearing the subject lots of squatters and of
delivering the actual possession thereof to INC. Thereupon Judge Reyes in another Order, dated 2
March 1992, pertaining also to Civil Case Q-90-6937, treated INC as the rightful owner of the real
properties and disposed. On 6 April 1992, the Order was amended by Judge Reyes directing Ligon "to
deliver the owner's duplicate copies of TCT Nos. RT-26521 (170567) and RT-26520 (176616) to the
Register of Deeds of Quezon City for the purposes stated in the Order of March 2, 1992." Mortgagee
Ligon went to the Court of Appeals, thru a petition for certiorari (CA-GR SP-27973), assailing the
Orders of Judge Reyes. The appellate court dismissed her petition on 28 October 1992. Undaunted,
Ligon filed a petition for review before the Supreme Court (GR 107751).
In the meantime, the SEC, on 5 July 1993, finally came out with a Decision in SEC Case 4012, Declaring
the by-laws submitted by the IDP-Caprizo group as unauthorized, and hence, null and void; declaring
the sale of the two (2) parcels of land in Quezon City covered by the Deed of Absolute Sale entered
into by Iglesia ni Kristo and the Islamic Directorate of the Philippines, Inc. null and void; declaring the
election of the Board of Directors 23 of the corporation from 1986 to 1991 as null and void; and
Declaring the acceptance of the respondents, except Farouk Carpizo and Musnib Buat, as members of
the IDP null and void. The INC filed a Motion for Intervention, dated 7 September 1993, in SEC Case
4012, but the same was denied on account of the fact that the decision of the case had become final
and executory, no appeal having been taken therefrom. INC elevated SEC Case 4012 to the Court of
Appeals by way of a special civil action for certiorari (CA-GR SP 33295). On 28 October 1994, the
appeallate court promulgated a Decision granting INC's petition. The portion of the SEC Decision in
SEC Case 4012 which declared the sale of the two (2) lots in question to INC as void was ordered set
aside by the Court of Appeals. Thus, the IDP-Tamano Group brought the petition for review, dated 21
December 1994, to the Supreme Court. While the petition was pending, however, the Supreme Court
rendered judgment in GR 107751 on the petition filed by Mrs. Leticia P. Ligon. The Decision, dated 1
June 1995, denied the Ligon petition and affirmed the 28 October 1992 Decision of the Court of
Appeals in CA-GR SP-27973 which sustained the Order of Judge Reyes compelling mortgagee Ligon to
surrender the owner's duplicate copies of TCTs RT-26521 (170567) and RT-26520 (176616) to the
Register of Deeds of Quezon City so that the Deed of Absolute Sale in INC's favor may be properly
registered.
Issue: Whether the Tandang Sora property was legitimately sold to the INC.
Held: As far back as 3 October 1986, the SEC, in Case 2687, in a suit between the Carpizo Group and
the Abbas Group, already declared the election of the Carpizo Group (as well as the Abbas Group) to
the IDP Board as null and void for being violative of the Articles of Incorporation. Nothing thus
becomes more settled than that the IDP-Carpizo Group with whom INC contracted is a fake Board.
Premises considered, all acts carried out by the Carpizo Board, particularly the sale of the Tandang
Sora property, allegedly in the name of the IDP, have to be struck down for having been done without
the consent of the IDP thru a legitimate Board of Trustees. Article 1318 of the New Civil Code lays
down the essential requisites of contracts, and where all these elements must be present to
constitute a valid contract. For, where even one is absent, the contract is void. Specifically, consent is
essential for the existence of a contract, and where it is wanting, the contract is non-existent. Herein,
the IDP, owner of the subject parcels of land, never gave its consent, thru a legitimate Board of
Trustees, to the disputed Deed of Absolute Sale executed in favor of INC. This is, therefore, a case not
only of vitiated consent, but one where consent on the part of one of the supposed contracting
parties is totally wanting. Ineluctably, the subject sale is void and produces no effect whatsoever. The
Carpizo Group-INC sale is further deemed null and void ab initio because of the Carpizo Group's
failure to comply with Section 40 of the Corporation Code pertaining to the disposition of all or
substantially all assets of the corporation. The Tandang Sora property, it appears from the records,
constitutes the only property of the IDP. Hence, its sale to a third-party is a sale or disposition of all
the corporate property and assets of IDP falling squarely within the contemplation of the foregoing
section. For the sale to be valid, the majority vote of the legitimate Board of Trustees, concurred in by
the vote of at least 2/3 of the bona fide members of the corporation should have been obtained.
These twin requirements were no met as the Carpizo Group which voted to sell the Tandang Sora
property was a fake Board of Trustees, and those whose names and signatures were affixed by the
Carpizo Group together with the sham Board Resolution authorizing the negotiation for the sale
were, from all indications, not bona fide members of the IDP as they were made to appear to be.
Apparently, there are only 15 official members of the IDP including the 8 members of the Board of
Trustees. All told, the disputed Deed of Absolute Sale executed by the fake Carpizo Board and INC
was intrinsically void ab initio.
4. Philippine National Bank vs. Andrada Electric & Engineering Co.
[GR 142936, 17 April 2002]

Facts: On 26 August 1975, the Philippine national Bank (PNB) acquired the assets of the Pampanga
Sugar Mills (PASUMIL) that were earlier foreclosed by the Development Bank of the Philippines (DBP)
under LOI 311. The PNB organized the ational Sugar Development Corporation (NASUDECO) in
September 1975, to take ownership and possession of the assets and ultimately to nationalize and
consolidate its interest in other PNB controlled sugar mills. Prior to 29 October 1971, PASUMIL
engaged the services of the Andrada Electric & Engineering Company (AEEC) for electrical rewinding
and repair, most of which were partially paid by PASUMIL, leaving several unpaid accounts with AEEC.
On 29 October 1971, AEEC and PASUMIL entered into a contract for AEEC to perform the (a)
Construction of a power house building; 3 reinforced concrete foundation for 3 units 350 KW diesel
engine generating sets, 3 reinforced concrete foundation for the 5,000 KW and 1,250 KW turbo
generator sets, among others. Aside from the work contract, PASUMIL required AEEC to perform
extra work, and provide electrical equipment and spare parts. Out of the total obligation of
P777,263.80, PASUMIL had paid only P250,000.00, leaving an unpaid balance, as of 27 June 1973,
amounting to P527,263.80. Out of said unpaid balance of P527,263.80, PASUMIL made a partial
payment to AEEC of P14,000.00, in broken amounts, covering the period from 5 January 1974 up to
23 May 1974, leaving an unpaid balance of P513,263.80. PASUMIL and PNB, and now NASUDECO,
allegedly failed and refused to pay AEEC their just, valid and demandable obligation (The President of
the NASUDECO is also the Vice-President of the PNB. AEEC besought said official to pay the
outstanding obligation of PASUMIL, inasmuch as PNB and NASUDECO now owned and possessed the
assets of PASUMIL, and these defendants all benefited from the works, and the electrical, as well as
the engineering and repairs, performed by AEEC).
Because of the failure and refusal of PNB, PASUMIL and/or NASUDECO to pay their obligations, AEEC
allegedly suffered actual damages in the total amount of P513,263.80; and that in order to recover
these sums, AEEC was compelled to engage the professional services of counsel, to whom AEEC
agreed to pay a sum equivalent to 25% of the amount of the obligation due by way of attorney's fees.
PNB and NASUDECO filed a joint motion to dismiss on the ground that the complaint failed to state
sufficient allegations to establish a cause of action against PNB and NASUDECO, inasmuch as there is
lack or want of privity of contract between the them and AEEC. Said motion was denied by the trial
court in its 27 November order, and ordered PNB nad NASUDECO to file their answers within 15 days.
After due proceedings, the Trial Court rendered judgment in favor of AEEC and against PNB,
NASUDECO and PASUMIL; the latter being ordered to pay jointly and severally the former (1) the sum
of P513,623.80 plus interest thereon at the rate of 14% per annum as claimed from 25 September
1980 until fully paid; (2) the sum of P102,724.76 as attorney's fees; and, (3) Costs. PNB and
NASUDECO appealed. The Court of Appeals affirmed the decision of the trial court in its decision of 17
April 2000 (CA-GR CV 57610. PNB and NASUDECO filed the petition for review.
Issue: Whether PNB and NASUDECO may be held liable for PASUMIL’s liability to AEEC.
Held: Basic is the rule that a corporation has a legal personality distinct and separate from the
persons and entities owning it. The corporate veil may be lifted only if it has been used to shield
fraud, defend crime, justify a wrong, defeat public convenience, insulate bad faith or perpetuate
injustice. Thus, the mere fact that the Philippine National Bank (PNB) acquired ownership or
management of some assets of the Pampanga Sugar Mill (PASUMIL), which had earlier been
foreclosed and purchased at the resulting public auction by the Development Bank of the Philippines
(DBP), will not make PNB liable for the PASUMIL's contractual debts to Andrada Electric & Engineering
Company (AEEC). Piercing the veil of corporate fiction may be allowed only if the following elements
concur: (1) control — not mere stock control, but complete domination — not only of finances, but of
policy and business practice in respect to the transaction attacked, must have been such that the
corporate entity as to this transaction had at the time no separate mind, will or existence of its own;
(2) such control must have been used by the defendant to commit a fraud or a wrong to perpetuate
the violation of a statutory or other positive legal duty, or a dishonest and an unjust act in
contravention of plaintiff's legal right; and (3) the said control and breach of duty must have
proximately caused the injury or unjust loss complained of. The absence of the foregoing elements in
the present case precludes the piercing of the corporate veil. First, other than the fact that PNB and
NASUDECO acquired the assets of PASUMIL, there is no showing that their control over it warrants
the disregard of corporate personalities. Second, there is no evidence that their juridical personality
was used to commit a fraud or to do a wrong; or that the separate corporate entity was farcically
used as a mere alter ego, business conduit or instrumentality of another entity or person. Third, AEEC
was not defrauded or injured when PNB and NASUDECO acquired the assets of PASUMIL. Hence,
although the assets of NASUDECO can be easily traced to PASUMIL, the transfer of the latter's assets
to PNB and NASUDECO was not fraudulently entered into in order to escape liability for its debt to
AEEC. Neither was there any merger or consolidation with respect to PASUMIL and PNB. The
procedure prescribed under Title IX of the Corporation Code 59 was not followed. In fact, PASUMIL's
corporate existence had not been legally extinguished or terminated. Further, prior to PNB's
acquisition of the foreclosed assets, PASUMIL had previously made partial payments to AEEC for the
former's obligation in the amount of P777,263.80. As of 27 June 1973, PASUMIL had paid P250,000 to
AEEC and, from 5 January 1974 to 23 May 1974, another P14,000. Neither did PNB expressly or
impliedly agree to assume the debt of PASUMIL to AEEC. LOI 11 explicitly provides that PNB shall
study and submit recommendations on the claims of PASUMIL's creditors. Clearly, the corporate
separateness between PASUMIL and PNB remains, despite AEEC's insistence to the contrary.
5. NIELSON & Co. vs. LEPANTO MINING CORP.
G.R. No. L-21601; December 28, 1968
Lepanto seeks the reconsideration of the decision rendered on December 17, 1966. The motion for
reconsideration is based on two sets of grounds — the first set consisting of four principal grounds,
and the second set consisting of five alternative grounds, as follows:chanrob1es virtual 1aw library
Principal Grounds:
1. The court erred in overlooking and failing to apply the proper law applicable to the agency or
management contract in question, namely, Article 1733 of the Old Civil Code (Article 1920 of the
new), by virtue of which said agency was effectively revoked and terminated in 1945 when, as stated
in paragraph 20 of the complaint, "defendant voluntarily . . . prevented plaintiff from resuming
management and operation of said mining properties."
2. The court erred in holding that paragraph II of the management contract (Exhibit C) suspended the
period of said contract.
3. The court erred in reversing the ruling of the trial judge, based on well-settled jurisprudence of this
Supreme Court, that the management agreement was only suspended but not extended on account
of the war.
4 The court erred in reversing the finding of the trial judge that Nielson’s action had prescribed, but
considering only the first claim and ignoring the prescriptibility of the other claims.
Alternative Grounds:
5. The court erred in holding that the period of suspension of the contract on account of the war
lasted from February 1942 to June 26, 1948.
6. Assuming arguendo that Nielson is entitled to any relief, the court erred in awarding as damages
(a) 10% of the cash dividends declared and paid in December, 1941; (b) the management fee of
P2,500.00 for the month of January, 1942; and (c) the full contract price for the extended period of
sixty months, since these damages were neither demanded nor proved and, in any case, not
allowable under the general law of damages.
7. Assuming arguendo that appellant is entitled to any relief, the court erred in ordering appellee to
issue and deliver to appellant shares of stock together with fruits thereof.
8. The court erred in awarding to appellant an undetermined amount of shares of stock and/or cash,
which award cannot be ascertained and executed without further litigation.
9. The court erred in rendering judgment for attorney’s fees.
We are going to dwell on these grounds in the order they are presented.
1. In its first principal ground Lepanto claims that its own counsel and this Court had overlooked the
real nature of the management contract entered into by and between Lepanto and Nielson, and the
law that is applicable on said contract. Lepanto now asserts for the first time - and this is done in a
motion for reconsideration — that the management contract in question is a contract of agency such
that it has the right to revoke and terminate the said contract, as it did terminate the same, under the
law of agency, and particularly pursuant to Article 1733 of the Old Civil Code (Article 1920 of the New
Civil Code)
We have taken note that Lepanto is advancing a new theory. We have carefully examined the
pleadings filed by Lepanto in the lower court, its memorandum and its brief on appeal, and never did
it assert the theory that it has the right to terminate the management contract because that contract
is one of agency which it could terminate at will. While it is true that in its ninth and tenth special
affirmative defenses, in its answer in the court below, Lepanto pleaded that it had the right to
terminate the management contract in question, that plea of its right to terminate was not based
upon the ground that the relation between Lepanto and Nielson was that of principal and agent but
upon the ground that Nielson had allegedly not complied with certain terms of the management
contract. If Lepanto had thought of considering the management contract as one of agency it could
have amended its answer by stating exactly its position. It could have asserted its theory of agency in
its memorandum for the lower court and in its brief on appeal. This, Lepanto did not do. It is the rule,
and the settled doctrine of this Court, that a party cannot change his theory on appeal — that is, that
a party cannot raise in the appellate court any question of law or of fact that was not raised in the
court below or which was not within the issue made by the parties in their pleadings (Section 19, Rule
49 of the old Rules of Court, and also Section 18 of the new Rules of Court; Hautea v. Magallon, L-
20345, November 28, 1964; Northern Motors, Inc. v. Prince Line, L-13884, February 29, 1960;
American Express Co. v. Natividad, 46 Phil. 207; Agoncillo v. Javier, 38 Phil. 424 and Molina v. Somes,
24 Phil. 49)
At any rate, even if we allow Lepanto to assert its new theory at this very late stage of the
proceedings, this Court cannot sustain the same.
Lepanto contends that the management contract in question (Exhibit C) is one of agency because: (1)
Nielson was to manage and operate the mining properties and mill on behalf, and for the account, of
Lepanto; and (2) Nielson was authorized to represent Lepanto in entering, on Lepanto’s behalf, into
contracts for the hiring of laborers, purchase of supplies, and the sale and marketing of the ores
mined. All these, Lepanto claims, show that Nielson was, by the terms of the contract, destined to
execute juridical acts not on its own behalf but on behalf of Lepanto under the control of the Board of
Directors of Lepanto "at all times." Hence Lepanto claims that the contract is one of agency. Lepanto
then maintains that an agency is revocable at the will of the principal (Article 1733 of the Old Civil
Code) regardless of any term or period stipulated in the contract, and it was in pursuance of that right
that Lepanto terminated the contract in 1945 when it took over and assumed exclusive management
of the work previously entrusted to Nielson under the contract. Lepanto finally maintains that Nielson
as an agent is not entitled to damages since the law gives to the principal the right to terminate the
agency at will.
Because of Lepanto’s new theory We consider it necessary to determine the nature of the
management contract — whether it is a contract of agency or a contract of lease of services.
Incidentally, we have noted that the lower court, in the decision appealed from, considered the
management contract as a contract of lease of services.
Article 1709 of the Old Civil Code, defining contract of agency, provides:
"By the contract of agency, one person binds himself to render some service or do something for the
account or at the request of another."
Article 1544, defining contract of lease of service, provides:
"In a lease of work or services, one of the parties binds himself to make or construct something or to
render a service to the other for a price certain."
In both agency and lease of services one of the parties binds himself to render some service to the
other party. Agency, however, is distinguished from lease of work or services in that the basis of
agency is representation, while in the lease of work or services the basis is employment. The lessor of
services does not represent his employer, while the agent represents his principal. Manresa, in his
"Commentarios al Codigo Civil Español" (1931, Tomo IX, pp. 372-373), points out that the element of
representation distinguishes agency from lease of services, as follows:
"Nuestro art. 1.709 como el art 1.984 del Codigo de Napoleon y cuantos textos legales citamos en las
concordancias, expresan claramente esta idea de la representación, ‘hacer alguna cosa por cuenta o
encargo de otra’ dice nuestro Codigo; ‘poder de hacer alguna cosa para el mandante o en su nombre’
dice el Codigo de Napoleon, y en tales palabras aparece vivo y luminoso el concepto y la teoria de la
representacion, tan fecunda en enseñanzas, que a su sola luz es como se explican las diferencias que
separan el mandato del arrendamiento de servicios, de los contratos inominados, del consejo y de la
gestion de negocios.
"En efecto, en el arrendamiento de servicios al obligarse para su ejecucion, se trabaja, en verdad,
para el dueño que remunera la labor, pero ni se le representa ni se obra en su nombre . . ."cralaw
virtua1aw library
On the basis of the interpretation of Article 1709 of the old Civil Code, Article 1868 of the new Civil
Code has defined the contract of agency in more explicit terms, as follows:
"By the contract of agency a person binds himself to render some service or to do something in
representation or on behalf of another, with the consent or authority of the latter."cralaw virtua1aw
library
There is another obvious distinction between agency and lease of services. Agency is a preparatory
contract, as agency "does not stop with the agency because the purpose is to enter into other
contracts." The most characteristic feature of an agency relationship is the agent’s power to bring
about business relations between his principal and third persons. "The agent is destined to execute
juridical acts (creation, modification or extinction of relations with third parties). Lease of services
contemplate only material (non-juridical) acts." (Reyes and Puno, "An Outline of Philippine Civil Law,"
Vol. V, p. 277)
In the light of the interpretations we have mentioned in the foregoing paragraphs, let us now
determine the nature of the management contract in question. Under the contract, Nielson had
agreed, for a period of five years, with the right to renew for a like period, to explore, develop and
operate the mining claims of Lepanto, and to mine, or mine and mill, such pay ore as may be found
therein and to market the metallic products recovered therefrom which may prove to be marketable,
as well as to render for Lepanto other services specified in the contract. We gather from the contract
that the work undertaken by Nielson was to take complete charge, subject at all times to the general
control of the Board of Directors of Lepanto, of the exploration and development of the mining
claims, of the hiring of a sufficient and competent staff and of sufficient and capable laborers, of the
prospecting and development of the mine, of the erection and operation of the mill, and of the
beneficiation and marketing of the minerals found on the mining properties; and in carrying out said
obligation Nielson should proceed diligently and in accordance with the best mining practice. In
connection with its work Nielson was to submit reports, maps, plans and recommendations with
respect to the operation and development of the mining properties, make recommendations and
plans on the erection or enlargement of any existing mill, dispatch mining engineers and technicians
to the mining properties as from time to time may reasonably be required to investigate and make
recommendations without cost or expense to Lepanto. Nielson was also to "act as purchasing agent
of supplies, equipment and other necessary purchases by Lepanto, provided, however, that no
purchase shall be made without the prior approval of Lepanto; and provided further, that no
commission shall be claimed or retained by Nielson on such purchase" ; and "to submit all requisition
for supplies, all contracts and arrangement with engineers, and staff and all matters requiring the
expenditures of money, present or future, for prior approval by Lepanto; and also to make contracts
subject to the prior approval of Lepanto for the sale and marketing of the minerals mined from said
properties, when said products are in a suitable condition for marketing." 1
It thus appears that the principal and paramount undertaking of Nielson under the management
contract was the operation and development of the mine and the operation of the mill. All the other
undertakings mentioned in the contract are necessary or incidental to the principal undertaking —
these other undertakings being dependent upon the work on the development of the mine and the
operation of the mill. In the performance of this principal undertaking Nielson was not in any way
executing juridical acts for Lepanto, destined to create, modify or extinguish business relations
between Lepanto and third persons. In other words, in performing its principal undertaking Nielson
was not acting as an agent of Lepanto, in the sense that the term agent is interpreted under the law
of agency, but as one who was performing material acts for an employer, for a compensation.
It is true that the management contract provides that Nielson would also act as purchasing agent of
supplies and enter into contracts regarding the sale of mineral, but the contract also provides that
Nielson could not make any purchase, or sell the minerals, without the prior approval of Lepanto. It is
clear, therefore, that even in these cases Nielson could not execute juridical acts which would bind
Lepanto without first securing the approval of Lepanto. Nielson, then, was to act only as an
intermediary, not as an agent.
Lepanto contends that the management contract in question being one of agency it had the right to
terminate the contract at will pursuant to the provision of Article 1733 of the old Civil Code. We find,
however, a provision in the management contract which militates against this stand of Lepanto.
Paragraph XI of the contract provides:
"Both parties to this agreement fully recognize that the terms of this Agreement are made possible
only because of the faith or confidence that the Officials of each company have in the other;
therefore, in order to assure that such confidence and faith shall abide and continue, NIELSON agrees
that LEPANTO may cancel this Agreement at any time upon ninety (90) days written notice, in the
event that NIELSON for any reason whatsoever, except acts of God, strike and other causes beyond
its control, shall cease to prosecute the operation and development of the properties herein
described, in good faith and in accordance with approved mining practice."
It is thus seen, from the above-quoted provision of paragraph XI of the management contract, that
Lepanto could not terminate the agreement at will. Lepanto could terminate or cancel the agreement
by giving notice of termination ninety days in advance only in the event that Nielson should prosecute
in bad faith and not in accordance with approved mining practice the operation and development of
the mining properties of Lepanto. Lepanto could not terminate the agreement if Nielson should cease
to prosecute the operation and development of the mining properties by reason of acts of God, strike
and other causes beyond the control of Nielson.
The phrase "Both parties to this agreement fully recognize that the terms of this agreement are made
possible only because of the faith and confidence of the officials of each company have in the other"
in paragraph XI of the management contract does not qualify the relation between Lepanto and
Nielson as that of principal and agent based on trust and confidence, such that the contractual
relation may be terminated by the principal at any time that the principal loses trust and confidence
in the agent. Rather, that phrase simply implies the circumstance that brought about the execution of
the management contract. Thus, in the annual report for 1936 2 , submitted by Mr. C. A. Dewit,
President of Lepanto, to its’ stockholders, under date of March 15, 1937, we read the
following:jgc:chanrobles.com.ph
"To the Stockholders:chanrob1es virtual 1aw library
x x x
"The incorporation of our Company was effected as a result of negotiations with Messrs. Nielson &
Co., Inc., and an offer by these gentlemen to Messrs. C. I. Cookes and V. L. Lednicky, dated August 11,
1936, reading as follows:chanrob1es virtual 1aw library
‘Messrs. Cookes and Lednicky,’
‘Present.
‘Re: Mankayan Copper Mines.
‘GENTLEMEN:
‘After an examination of your property by our engineers, we have decided to offer as we hereby offer
to underwrite the entire issue of stock of a corporation to be formed for the purpose of taking over
said properties, said corporation to have an authorized capital of P1,750,000.00, of which
P700,000.00 will be issued in escrow to the claimowners in exchange for their claims, and the balance
of P1,050,000.00 we will sell to the public at par or take ourselves.
‘The arrangement will be under the following conditions:chanrob1es virtual 1aw library
‘1. The subscriptions for cash shall be payable 50% at time of subscription and the balance subject to
the call of the Board of Directors of the proposed corporation.
‘2. We shall have an underwriting and brokerage commission of 10% of the P1,050,000.00 to be sold
for cash to the public, said commission to be payable from the first payment of 50% on each
subscription.
‘3. We will bear the cost of preparing and mailing any prospectus that may be required, but no such
prospectus will be sent out until the text thereof has been first approved by the Board of Directors of
the proposed corporation.
‘4. That after the organization of the corporation, all operating contract be entered into between
ourselves and said corporation, under the terms which the property will be developed and mined and
a mill erected, under our supervision, our compensation to be P2,000.00 per month until the property
is put on a profitable basis and P2,500.00 per month plus 10% of the net profits for a period of five
years thereafter.`
‘5. That we shall have the option to renew said operating contract for an additional period of five
years, on the same basis as the original contract, upon the expiration thereof.
‘It is understood that the development and mining operations on said property, and the erection of
the mill thereon, and the expenditures therefore, shall be subject to the general control of the Board
of Directors of the proposed corporation, and, in case you accept this proposition, that a detailed
operating contract will be entered into, covering the relationships between the parties.
Yours very truly,
(Sgd.) L. R. Nielson’"
"Pursuant to the provisions of paragraph 2 of this offer, Messrs. Nielson & Co., took subscriptions for
One Million Fifty Thousand Pesos (P1,050,000.00) in shares of our Company and their underwriting
and brokerage commission has been paid. More than fifty per cent of these subscriptions have been
paid to the Company in cash. The claimowners have transferred their claims to the Corporation, but
the P700,000.00 in stock which they are to receive therefor, is as yet held in escrow.
"Immediately upon the formation of the Corporation Messrs. Nielson & Co., assumed the
Management of the property under the control of the Board of Directors. A modification in the
Management Contract was made with the consent of all the then stockholders, in virtue of which the
compensation of Messrs. Nielson & Co., was increased to P2,500.00 per month when mill
construction began. The formal Management Contract was not entered into until January 30,
1937."cralaw virtua1aw library
x x x
"Manila, March 15, 1937
(Sgd.) "C.A. DeWitt
"President"
We can gather from the foregoing statements in the annual report for 1936, and from the provision
of paragraph XI of the Management contract, that the employment by Lepanto of Nielson to operate
and manage its mines was principally in consideration of the know-how and technical services that
Nielson offered Lepanto. The contract thus entered into pursuant to the offer made by Nielson and
accepted by Lepanto was a "detailed operating contract." It was not a contract of agency. Nowhere in
the record is it shown that Lepanto considered Nielson as its agent and that Lepanto terminated the
management contract because it had lost its trust and confidence in Nielson.
The contention of Lepanto that it had terminated the management contract in 1945, following the
liberation of the mines from Japanese control, because the relation between it and Nielson was one
of agency and as such it could terminate the agency at will, is, therefore, untenable. On the other
hand, it can be said that, in asserting that it had terminated or cancelled the management contract in
1945, Lepanto had thereby violated the express terms of the management contract. The
management contract was renewed to last until January 31, 1947, so that the contract had yet almost
two years to go — upon the liberation of the mines in 1945. There is no showing that Nielson had
ceased to prosecute the operation and development of the mines in good faith and in accordance
with approved mining practice which would warrant the termination of the contract upon ninety days
written notice. In fact there was no such written notice of termination. It is an admitted fact that
Nielson ceased to operate and develop the mines because of the war — a cause beyond the control
of Nielson.
Indeed, if the management contract in question was intended to create a relationship of principal and
agent between Lepanto and Nielson, paragraph XI of the contract should not have been inserted
because, as provided in Article 1733 of the old Civil Code, agency is essentially revocable at the will of
the principal - that means, with or without cause. But precisely said paragraph XI was inserted in the
management contract to provide for the cause for its revocation. The provision of paragraph XI must
be given effect.
In the construction of an instrument where there are several provisions or particulars, such a
construction is, if possible, to be adopted as will give effect to all, 3 and if some stipulation of any
contract should admit of several meanings, it shall be understood as bearing that import which is
most adequate to render it effectual. 4
It is Our considered view that by express stipulation of the parties, the management contract in
question is not revocable at the will of Lepanto. We rule that this management contract is not a
contract of agency as defined in Article 1709 of the old Civil Code, but a contract of lease of services
as defined in Article 1544 of the same Code. This contract can not be unilaterally revoked by Lepanto.
The first ground of the motion for reconsideration should, therefore, be brushed aside.
2. In the second, third and fifth grounds of its motion for reconsideration, Lepanto maintains that this
Court erred, in holding that paragraph II of the management contract suspended the period of said
contract, in holding that the agreement was not only suspended but was extended on account of the
war, and in holding that the period of suspension on account of the war lasted from February, 1942
to June 26, 1948. We are going to discuss these three grounds together because they are inter-
related.
In Our decision we have dwelt lengthily on the points that the management contract was suspended
because of the war, and that the period of the contract was extended for the period equivalent to the
time when Nielson was unable to perform the work of mining and milling because of the adverse
effects of the war on the work of mining and milling. It is the contention of Lepanto that the
happening of those events, and the effects of those events, simply suspended the performance of the
obligations by either party in the contract, but did not suspend the period of the contract, much less
extended the period of the contract.
We have conscientiously considered the arguments of Lepanto in support of these three grounds, but
We are not persuaded to reconsider the rulings that We made in Our decision.
We want to say a little more on these points, however. Paragraph II of the management contract
provides as follows:
"In the event of inundation, flooding of the mine, typhoon, earthquake or any other force majeure,
war, insurrection, civil commotion, organized strike, riot, fire, injury to the machinery or other event
or cause reasonably beyond the control of NIELSON and which adversely affects the work of mining
and milling; NIELSON shall report such fact to LEPANTO and without liability or breach of the terms of
this Agreement, the same shall remain in suspense, wholly or partially during the terms of such
inability." (Italics supplied)
A reading of the above-quoted paragraph II cannot but convey the idea that upon the happening of
any of the events enumerated therein, which adversely affects the work of mining and milling, the
agreement is deemed suspended for as long as Nielson is unable to perform its work of mining and
milling because of the adverse effects of the happening of the event on the work of mining and
milling. During the period when the adverse effects on the work of mining and milling exist, neither
party in the contract would be held liable for non- compliance of its obligation under the contract. In
other words, the operation of the contract is suspended for as long as the adverse effects of the
happening of any of those events had impeded or obstructed the work of mining and milling. An
analysis of the phraseology of the above-quoted paragraph II of the management contract readily
supports the conclusion that it is the agreement, or the contract, that is suspended. The phrase "the
same" can refer to no other than the term "Agreement" which immediately precedes it. The
"Agreement" may be wholly or partially suspended, and this situation will depend on whether the
event wholly or partially affected adversely the work of mining and milling. In the instant case, the
war had adversely affected — and wholly at that — the work of mining and milling. We have clearly
stated in Our decision the circumstances brought about by the war which caused the whole or total
suspension of the agreement or of the management contract.
LEPANTO itself admits that the management contract was suspended. We quote from the brief of
LEPANTO:
"Probably, what Nielson meant was, it was prevented by Lepanto to assume again the management
of the mine in 1945, at the precise time when defendant was at the feverish phase of rehabilitation
and although the contract had already been suspended." (Lepanto’s Brief, p. 9)
". . . it was impossible, as a result of the destruction of the mine, for the plaintiff to manage and
operate the same and because, as provided in the agreement, the contract was suspended by reason
of the war." (Lepanto’s Brief, pp. 9-10)
"Clause II, by its terms, is clear that the contract is suspended in case fortuitous event or force
majeure, such as war, adversely affects the work of mining and milling." (Lepanto’s Brief, p. 49)
Lepanto is correct when it said that the obligations under the contract were suspended upon the
happening of any of the events enumerated in paragraph II of the management contract. Indeed,
those obligations were suspended because the contract itself was suspended. When we talk of a
contract that has been suspended we certainly mean that the contract temporarily ceased to be
operative, and the contract becomes operative again upon the happening of a condition — or when a
situation obtains — which warrants the termination of the suspension of the contract.
In Our decision We pointed out that the agreement in the management contract would be suspended
when two conditions concur, namely: (1) the happening of the event constituting a force majeure
that was reasonably beyond the control of Nielson, and (2) that the event constituting the force
majeure adversely affected the work of mining and milling. The suspension, therefore, would last not
only while the event constituting the force majeure continued to occur but also for as long as the
adverse effects of the force majeure on the work of mining and milling had not been eliminated.
Under the management contract the happening alone of the event constituting the force majeure
which did not affect adversely the work of mining and milling would not suspend the period of the
contract. It is only when the two conditions concur that the period of the agreement is suspended.
It is not denied that because of the war, in February 1942, the mine, the original mill, the original
power plant, the supplies and equipment, and all installations at the Mankayan mines of Lepanto,
were destroyed upon order of the United States Army, to prevent their utilization by the enemy. It is
not denied that for the duration of the war Nielson could not undertake the work of mining and
milling. When the mines were liberated from the enemy in August, 1945, the condition of the mines,
the mill, the power plant and other installations, was not the same as in February 1942 when they
were ordered destroyed by the US army. Certainly, upon the liberation of the mines from the enemy,
the work of mining and milling could not be undertaken by Nielson under the same favorable
circumstances that obtained before February 1942. The work of mining and milling, as undertaken by
Nielson in January, 1942, could not be resumed by Nielson soon after liberation because of the
adverse effects of the war, and this situation continued until June of 1948. Hence, the suspension of
the management contract did not end upon the liberation of the mines in August, 1945. The mines
and the mill and the installations, laid waste by the ravages of war, had to be reconstructed and
rehabilitated, and it can be said that it was only on June 26, 1948 that the adverse effects of the war
on the work of mining and milling had ended, because it was on that date that the operation of the
mines and the mill was resumed. The period of suspension should, therefore, be reckoned from
February 1942 until June 26, 1948, because it was during this period that the war and the adverse
effects of the war on the work of mining and milling had lasted. The mines and the installations had
to be rehabilitated because of the adverse effects of the war. The work of rehabilitation started soon
after the liberation of the mines in August, 1945 and lasted until June 26, 1948 when, as stated in
Lepanto’s annual report to its stockholders for the year 1948, "June 28, 1948 marked the official
return to operation of this company at its properties at Mankayan, Mountain province, Philippines"
(Exh. F-1).
Lepanto would argue that if the management contract was suspended at all the suspension should
cease in August of 1945, contending that the effects of the war should cease upon the liberation of
the mines from the enemy. This contention cannot be sustained, because the period of rehabilitation
was still a period when the physical effects of the war — the destruction of the mines and of all the
mining installations — adversely affected, and made impossible, the work of mining and milling.
Hence, the period of the reconstruction and rehabilitation of the mines and the installations must be
counted as part of the period of suspension of the contract.
Lepanto claims that it would not be unfair to end the period of suspension upon the liberation of the
mines because soon after the liberation of the mines Nielson insisted to resume the management
work, and that Nielson was under obligation to reconstruct the mill in the same way that it was under
obligation to construct the mill in 1937. This contention is untenable. It is true that Nielson insisted to
resume its management work after liberation, but this was only for the purpose of restoring the
mines, the mill, and other installations to their operating and producing condition as of February 1942
when they were ordered destroyed. It is not shown by any evidence in the record, that Nielson had
agreed, or would have agreed, that the period of suspension of the contract would end upon the
liberation of the mines. This is so because, as found by this Court, the intention of the parties in the
management contract, and as understood by them, the management contract was suspended for as
long as the adverse effects of the force majeure on the work of mining and milling had not been
removed, and the contract would be extended for as long as it was suspended. Under the
management contract Nielson had the obligation to erect and operate the mill, but not to re-erect or
reconstruct the mill in case of its destruction by force majeure.
It is the considered view of this Court that it would not be fair to Nielson to consider the suspension
of the contract as terminated upon the liberation of the mines because then Nielson would be placed
in a situation whereby it would have to suffer the adverse effects of the war on the work of mining
and milling. The evidence shows that as of January 1942 the operation of the mines under the
management of Nielson was already under beneficial conditions, so much so that dividends were
already declared by Lepanto for the years 1939, 1940 and 1941. To make the management contract
immediately operative after the liberation of the mines from the Japanese, at the time when the
mines and all its installations were laid waste as a result of the war, would be to place Nielson in a
situation whereby it would lose all the benefits of what it had accomplished in placing the Lepanto
mines in profitable operation before the outbreak of the war in December, 1941. The record shows
that Nielson started its management operation way back in 1936, even before the management
contract was entered into. As early as August 1936 Nielson negotiated with Messrs. C.I. Cookes and
V.L. Lednicky for the operation of the Mankayan mines and it was the result of those negotiations
that Lepanto was incorporated; that it was Nielson that helped to capitalize Lepanto, and that after
the formation of the corporation (Lepanto) Nielson immediately assumed the management of the
mining properties of Lepanto. It was not until January 30, 1937 when the management contract in
question was entered into between Lepanto and Nielson (Exhibit A).
A contract for the management and operation of mines calls for a speculative and risky venture on
the part of the manager-operator. The manager-operator invests its technical know-how, undertakes
back-breaking efforts and tremendous spade-work, so to say, in the first years of its management and
operation of the mines, in the expectation that the investment and the efforts employed might be
rewarded later with success. This expected success may never come. This had happened in the very
case of the Mankayan mines where, as recounted by Mr. Lednicky of Lepanto, various persons and
entities of different nationalities, including Lednicky himself, invested all their money and failed. The
manager-operator may not strike sufficient ore in the first, second, third, or fourth year of the
management contract, or he may not strike ore even until the end of the fifth year. Unless the
manager-operator strikes sufficient quantity of ore he cannot expect profits or reward for his
investment and efforts. In the case of Nielson, its corps of competent engineers, geologists, and
technicians begun working on the Mankayan mines of Lepanto since the latter part of 1936, and
continued their work without success and profit through 1937, 1938, and the earlier part of 1939. It
was only in December of 1939 when the efforts of Nielson started to be rewarded when Lepanto
realized profits and the first dividends were declared. From that time on Nielson could expect profit
to come to it — as in fact Lepanto declared dividends for 1940 and 1941 — if the development and
operation of the mines and the mill would continue unhampered. The operation, and the expected
profits, however, would still be subject to hazards due to the occurrence of fortuitous events, fires,
earthquakes, strikes, war, etc., constituting force majeure, which would result in the destruction of
the mines and the mill. One of these diverse causes, or one after the other, may consume the whole
period of the contract, and if it should happen that way the manager- operator would reap no profit
to compensate for the first years of spade-work and investment of efforts and know-how. Hence, in
fairness to the manager-operator, so that he may not be deprived of the benefits of the work he had
accomplished, the force majeure clause is incorporated as a standard clause in contracts for the
management and operation of mines.
The nature of the contract for the management and operation of mines justifies the interpretation of
the force majeure clause, that a period equal to the period of suspension due to force majeure should
be added to the original term of the contract by way of an extension. We, therefore, reiterate the
ruling in Our decision that the management contract in the instant case was suspended from
February, 1942 to June 26, 1948, and that from the latter date the contract had yet five years to go.

3. In the fourth ground of its motion for reconsideration, Lepanto maintains that this Court erred in
reversing the finding of the trial court that Nielson’s action has prescribed, by considering only the
first claim and ignoring the prescriptibility of the other claims.
This ground of the motion for reconsideration has no merit.
In Our decision We stated that the claims of Nielson are based on a written document, and, as such,
the cause of action prescribes in ten years. 5 Inasmuch as there are different claims which accrued on
different dates the prescriptive periods for all the claims are not the same. The claims of Nielson that
have been awarded by this Court are itemized in the dispositive part of the decision.
The first item of the awards in Our decision refers to Nielson’s compensation in the sum of
P17,500.00, which is equivalent to 10% of the cash dividends declared by Lepanto in December, 1941.
As We have stated in Our decision, this claim accrued on December 31, 1941, and the right to
commence an action thereon started on January 1, 1942. We declared that the action on this claim
did not prescribe although the complaint was filed on February 6, 1958 — or after a lapse of 16 years,
1 month and 5 days — because of the operation of the moratorium law. We declared that under the
applicable decisions of this Court 6 the moratorium period of 8 years, 2 months and 8 days should be
deducted from the period that had elapsed since the accrual of the cause of action to the date of the
filing of the complaint, so that there is a period of less than 8 years to be reckoned for the purpose of
prescription.
This claim of Nielson is covered by Executive Order No. 32, issued on March 10, 1945, which provides
as follows:
"Enforcement of payments of all debts and other monetary obligations payable in the Philippines,
except debts and other monetary obligations entered into in any area after declaration by
Presidential Proclamation that such area has been freed from enemy occupation and control, is
temporarily suspended pending action by the Commonwealth Government." (41 O.G. 56-57;
Emphasis supplied)
Executive Order No. 32 covered all debts and monetary obligation contracted before the war (or
before December 8, 1941) and those contracted subsequent to December 8, 1941 and during the
Japanese occupation. Republic Act No. 342, approved on July 26, 1948, lifted the moratorium
provided for in Executive Order No. 32 on pre-war (or pre-December 8, 1941) debts of debtors who
had not filed war damage claims with the United States War Damage Commission. In other words,
after the effectivity of Republic Act No. 342, the debt moratorium was limited: (1) to debts and other
monetary obligations which were contracted after December 8, 1941 and during the Japanese
occupation, and (2) to those pre-war (or pre-December 8, 1941) debts and other monetary
obligations where the debtors filed war damage claims. That was the situation up to May 18, 1953
when this Court declared Republic Act No. 342 unconstitutional. 7 It has been held by this Court,
however, that from March 10, 1945 when Executive Order No. 32 was issued, to May 18, 1953 when
Republic Act No. 342 was declared unconstitutional — or a period of 8 years, 2 months and 8 days —
the debt moratorium was in force, and had the effect of suspending the period of prescription. 8
Lepanto is wrong when in its motion for reconsideration it claims that the moratorium provided for in
Executive Order No. 32 was continued by Republic Act No. 342 "only with respect to debtors of pre-
war obligations or those incurred prior to December 8, 1941," and that "the moratorium was lifted
and terminated with respect to obligations incurred after December 8, 1941." 9
This Court has held that Republic Act No. 342 does not apply to debts contracted during the war and
did not lift the moratorium in relation thereto. 10 In the case of Abraham, Et. Al. v. Intestate Estate of
Juan C. Ysmael, Et Al., L-16741, Jan. 31, 1962, this Court said:
"Respondents, however, contend that Republic Act No. 342, which took effect on July 26, 1948, lifted
the moratorium on debts contracted during the Japanese occupation. The court has already held that
Republic Act No. 342 did not lift the moratorium on debts contracted during the war (Uy v. Kalaw
Katigbak, G.R. No. L-1830, Dec. 31, 1949) but modified Executive Order No. 32 as to pre-war debts,
making the protection available only to debtors who had war damage claims (Sison v. Mirasol, G.R.
No. L-4711, Oct. 3, 1952)"
We therefore reiterate the ruling in Our decision that the claim involved in the first item awarded to
Nielson had not prescribed.
What we have stated herein regarding the non-prescription of the cause of action of the claim
involved in the first item in the award also holds true with respect to the second item in the award,
which refers to Nielson’s claim for management fee of P2,500.00 for January, 1942. Lepanto admits
that this second item, like the first, is a monetary obligation. The right of action of Nielson regarding
this claim accrued on January 31, 1942.
As regards items 3, 4, 5, 6 and 7 in the awards in the decision, the moratorium law is not applicable.
That is the reason why in Our decision We did not discuss the question of prescription regarding
these items. The claims of Nielson involved in these items are based on the management contract,
and Nielson’s cause of action regarding these claims prescribes in ten years. Corollary to Our ruling
that the management contract was suspended from February, 1942 until June 26, 1948, and that the
contract was extended for five years from June 26, 1948, the right of action of Nielson to claim for
what is due to it during that period of extension accrued during the period from June 26, 1948 till the
end of the five-year extension period — or until June 26, 1953. And so, even if We reckon June 26,
1948 as the starting date of the ten-year period in connection with the prescriptibility of the claims
involved in items 3, 4, 5, 6 and 7 of the awards in the decision, it is obvious that when the complaint
was filed on February 6, 1958 the ten-year prescriptive period had not yet lapsed.

In Our decision We have also ruled that the right of action of Nielson against Lepanto had not
prescribed because of the arbitration clause in the Management contract. We are satisfied that there
is evidence that Nielson had asked for arbitration, and an arbitration committee had been
constituted. The arbitration committee, however, failed to bring about any settlement of the
differences between Nielson and Lepanto. On June 25, 1957 counsel for Lepanto definitely advised
Nielson that they were not entertaining any claim of Nielson. The complaint in this case was filed on
February 6, 1958.
4. In the sixth ground of its motion for reconsideration, Lepanto maintains that this Court "erred in
awarding as damages (a) 10% of the cash dividends declared and paid in December, 1941; (b) the
management fee of P2,500.00 for the month of January 1942; and (c) the full contract price for the
extended period of 60 months, since the damages were never demanded nor proved and, in any
case, not allowable under the general law on damages."
We have stated in Our decision that the original agreement in the management contract regarding
the compensation of Nielson was modified, such that instead of receiving a monthly compensation of
P2,500.00 plus 10% of the net profits from the operation of the properties for the preceding month,
11 Nielson would receive a compensation of P2,500.00 a month, plus (1)10% of the dividends
declared and paid, when and as paid, during the period of the contract, and at the end of each year,
(2)10% of any depletion reserve that may be set up, and (3) 10% of any amount expended during the
year out of surplus earnings for capital account.
It is shown that in December, 1941, cash dividends amounting to P175,000.00 was declared by
Lepanto. 12 Nielson, therefore, should receive the equivalent of 10% of this amount, or the sum of
P17,500.00. We have found that this amount was not paid to Nielson.
In its motion for reconsideration, Lepanto inserted a photographic copy of page 127 of its cash
disbursement book, allegedly for 1941, in an effort to show that this amount of P17,500.00 had been
paid to Nielson. It appears, however, in this photographic copy of page 127 of the cash disbursement
book that the sum of P17,500.00 was entered on October 29 as "surplus a/c Nielson & Co. Inc." The
entry does not make any reference to dividends or participation of Nielson in the profits. On the
other hand, in the photographic copy of page 89 of the 1941 cash disbursement book, also attached
to the motion for reconsideration, there is an entry for P17,500.00 on April 23, 1941 which states
"Accts. Pay. Particip. Nielson & Co. Inc." This entry for April 23, 1941 may really be the participation of
Nielson in the profits based on dividends declared in April 1941 as shown in Exhibit L. But in the same
Exhibit L it is not stated that any dividend was declared in October 1941. On the contrary it is stated
in Exhibit L that dividends were declared in December 1941. We cannot entertain this piece of
evidence for several reasons: (1) because this evidence was not presented during the trial in the court
below; (2) there is no showing that this piece of evidence is newly discovered and that Lepanto was
not in possession of said evidence when this case was being tried in the court below; and (3)
according to Exhibit L cash dividends of P175,000.00 were declared in December, 1941, and so the
sum of P17,500.00 which appears to have been paid to Nielson in October 1941 could not be
payment of the equivalent of 10% of the cash dividends that were later declared in December, 1941.
As regards the management fee of Nielson corresponding to January, 1942, in the sum of P2,500.00,
We have also found that Nielson is entitled to be paid this amount, and that this amount was not paid
by Lepanto to Nielson. Whereas, Lepanto was able to prove that it had paid the management fees of
Nielson for November and December, 1941, 13 it was not able to present any evidence to show that
the management fee of P2,500.00 for January, 1942 had been paid.
It having been declared in Our decision, as well as in this resolution, that the management contract
had been extended for 5 years, or sixty months, from June 27, 1948 to June 26, 1953, and that the
cause of action of Nielson to claim for its compensation during that period of extension had not
prescribed, it follows that Nielson should be awarded the management fees during the whole period
of extension, plus the 10% of the value of the dividends declared during the said period of extension,
the 10% of the depletion reserve that was set up, and the 10% of any amount expended out of
surplus earnings for capital account.
5. In the seventh ground of its motion for reconsideration, Lepanto maintains that this Court erred in
ordering Lepanto to issue and deliver to Nielson shares of stock together with fruits thereof.
In Our decision, We declared that pursuant to the modified agreement regarding the compensation
of Nielson which provides, among others, that Nielson would receive 10% of any dividends declared
and paid, when and as paid, Nielson should be paid 10% of the stock dividends declared by Lepanto
during the period of extension of the contract.
It is not denied that on November 28, 1949, Lepanto declared stock dividends worth P1,000,000.00;
and on August 22, 1950, it declared stock dividends worth P2,000,000.00. In other words, during the
period of extension Lepanto had declared stock dividends worth 3,000,000.00. We held in Our
decision that Nielson is entitled to receive 10% of the stock dividends declared, or shares of stocks,
worth P300,000.00 at the par value of P0.10 per share. We ordered Lepanto to issue and deliver to
Nielson those shares of stocks as well as all the fruits or dividends that accrued to said shares.
In its motion for reconsideration, Lepanto contends that the payment to Nielson of stock dividends as
compensation for its services under the management contract is a violation of the Corporation Law,
and that it was not, and it could not be, the intention of Lepanto and Nielson — as contracting parties
— that the services of Nielson should be paid in shares of stock taken out of stock dividends declared
by Lepanto. We have assiduously considered the arguments adduced by Lepanto in support of its
contention, as well as the answer of Nielson in this connection, and We have arrived at the conclusion
that there is merit in the contention of Lepanto.
Section 16 of the Corporation Law, in part, provides as follows:

"No corporation organized under this Act shall create or issue bills, notes or other evidence of debt,
for circulation as money, and no corporation shall issue stock or bonds except in exchange for actual
cash paid to the corporation or for: (1) property actually received by it at a fair valuation equal to the
par or issued value of the stock or bonds so issued; and in case of disagreement as to their value, the
same shall be presumed to be the assessed value or the value appearing in invoices or other
commercial documents, as the case may be; and the burden or proof that the real present value of
the property is greater than the assessed value or value appearing in invoices or other commercial
documents, as the case may be, shall be upon the corporation, or for (2) profits earned by it but not
distributed among its stockholders or members; Provided, however, That no stock or bond dividend
shall be issued without the approval of stockholders representing not less than two-thirds of all stock
then outstanding and entitled to vote at a general meeting of the corporation or at a special meeting
duly called for the purpose.
x x x only to stockholders. This is so because only stockholders are entitled to dividends. They are the only
"No corporation shall make or declare any dividend except from the surplus profits arising from its
business, or divide or distribute its capital stock or property other than actual profits among its
members or stockholders until after the payment of its debts and the termination of its existence by
limitation or lawful dissolution: Provided, That banking, savings and loan, and trust corporations may
receive deposits and issue certificates of deposit, checks, drafts, and bills of exchange, and the like in
the transaction of the ordinary business of banking, savings and loan, and trust corporations." (As
amended by Act No. 2792, and Act No. 3518; Emphasis supplied.)
From the above-quoted provision of Section 16 of the Corporation Law, the consideration for which
shares of stock may be issued are: (1) cash; (2) property; and (3) undistributed profits. Shares of stock
are given the special name "stock dividends" only if they are issued in lieu of undistributed profits. If
shares of stocks are issued in exchange of cash or property then those shares do not fall under the
category of "stock dividends." A corporation may legally issue shares of stock in consideration of
services rendered to it by a person not a stockholder, or in payment of its indebtedness. A share of
stock issued to pay for services rendered is equivalent to a stock issued in exchange of property,
because services is equivalent to property. 14 Likewise a share of stock issued in payment of
indebtedness is equivalent to issuing a stock in exchange for cash. But a share of stock thus issued
should be part of the original capital stock of the corporation upon its organization, or part of the
stocks issued when the increase of the capitalization of a corporation is properly authorized. In other
words, it is the shares of stock that are originally issued by the corporation and forming part of the
capital that can be exchanged for cash or services rendered, or property; that is, if the corporation
has original shares of stock unsold or unsubscribed, either coming from the original capitalization or
from the increased capitalization. Those shares of stock may be issued to a person who is not a
stockholder, or to a person already a stockholder in exchange for services rendered or for cash or
property. But a share of stock coming from stock dividends declared cannot be issued to one who is
not a stockholder of a corporation.
A "stock dividend" is any dividend payable in shares of stock of the corporation declaring or
authorizing such dividend. It is, what the term itself implies, a distribution of the shares of stock of
the corporation among the stockholders as dividends. A stock dividend of a corporation is a dividend
paid in shares of stock instead of cash, and is properly payable only out of surplus profits. 15 So, a
stock dividend is actually two things: (1) a dividend, and (2) the enforced use of the dividend money
to purchase additional shares of stock at par. 16 When a corporation issues stock dividends, it shows
that the corporation’s accumulated profits have been capitalized instead of distributed to the
stockholders or retained as surplus available for distribution, in money or kind, should opportunity
offer. Far from being a realization of profits for the stockholder, it tends rather to postpone said
realization, in that the fund represented by the new stock has been transferred from surplus to assets
and no longer available for actual distribution. 17 Thus, it is apparent that stock dividends are issued
ones who have a right to a proportional share in that part of the surplus which is declared as
dividends. A stock dividend really adds nothing to the interest of the stockholder; the proportional
interest of each stockholder remains the same. 18 If a stockholder is deprived of his stock dividends
— and this happens if the shares of stock forming part of the stock dividends are issued to a non-
stockholder — then the proportion of the stockholder’s interest changes radically. Stock dividends
are civil fruits of the original investment, and to the owners of the shares belong the civil fruits. 19
The term "dividend" both in the technical sense and its ordinary acceptation, is that part or portion of
the profits of the enterprise which the corporation, by its governing agents, sets apart for ratable
division among the holders of the capital stock. It means the fund actually set aside, and declared by
the directors of the corporation as a dividends, and duly ordered by the director, or by the
stockholders at a corporate meeting, to be divided or distributed among the stockholders according
to their respective interests. 20
It is Our considered view, therefore, that under Section 16 of the Corporation Law stock dividends can
not be issued to a person who is not a stockholder in payment of services rendered. And so, in the
case at bar Nielson can not be paid in shares of stock which form part of the stock dividends of
Lepanto for services it rendered under the management contract. We sustain the contention of
Lepanto that the understanding between Lepanto and Nielson was simply to make the cash value of
the stock dividends declared as the basis for determining the amount of compensation that should be
paid to Nielson, in the proportion of 10% of the cash value of the stock dividends declared. And this
conclusion of Ours finds support in the record.
We had adverted to in Our decision that in 1940 there was some dispute between Lepanto and
Nielson regarding the application and interpretation of certain provisions of the original contract
particularly with regard to the 10% participation of Nielson in the net profits, so that some
adjustments had to be made. In the minutes of the meeting of the Board of Directors of Lepanto on
August 21, 1940, We read the following:
"The Chairman stated that he believed that it would be better to tie the computation of the 10%
participation of Nielson & Company, Inc. to the dividend, because Nielson will then be able to
definitely compute its net participation by the amount of the dividends declared. In addition to the
dividend, we have been setting up a depletion reserve and it does not seem fair to burden the 10%
participation of Nielson with the depletion reserve, as the depletion reserve should not be considered
as an operating expense. After a prolonged discussion, upon motion duly made and seconded, it was
—
"RESOLVED, That the President, be, and he hereby is, authorized to enter into an agreement with
Nielson & Company, Inc., modifying Paragraph V of management contract of January 30, 1937,
effective January 1, 1940, in such a way that Nielson & Company, Inc. shall receive 10% of any
dividends declared and paid, when and as paid during the period of the contract and at the end of
each year, 10% of any depletion reserve that may be set up and 10% of any amount expended during
the year out of surplus earnings for capital account." (Emphasis supplied.)
From the sentence, "The Chairman stated that he believed that it would be better to tie the
computation of the 10% participation of Nielson & Company, Inc. to the dividend, because Nielson
will then be able to definitely compute its net participation by the amount of the dividends declared"
the idea is conveyed that the intention of Lepanto, as expressed by its Chairman C. A. DeWitt, was to
make the value of the dividends declared — whether the dividends were in cash or in stock — as the
basis for determining the amount of compensation that should be paid to Nielson, in the proportion
of 10% of the cash value of the dividends so declared. It does not mean, however, that the
compensation of Nielson would be taken from the amount actually declared as cash dividend to be
distributed to the stockholder, nor from the shares of stocks to be issued to the stockholders as stock
dividends, but from the other assets or funds of the corporation which are not burdened by the
dividends thus declared. In other words, if, for example, cash dividends of P300,000.00 are declared.
Nielson would be entitled to a compensation of P30,000.00, but this P30,000.00 should not be taken
from the P300,000.00 to be distributed as cash dividends to the stockholders but from some other
funds or assets of the corporation which are not included in the amount to answer for the cash
dividends thus declared. This is so because if the P30,000.00 would be taken out from the
P300,000.00 declared as cash dividends, then the stockholders would not be getting P300,000.00 as
dividends but only P270,000.00. There would be a dilution of the dividend that corresponds to each
share of stock held by the stockholders. Similarly, if there were stock dividends worth one million
pesos that were declared, which means an issuance of ten million shares at the par value of ten
centavos per share, it does not mean that Nielson would be given 100,000 shares. It only means that
Nielson should be given the equivalent of 10% of the aggregate cash value of those shares issued as
stock dividends. That this was the understanding of Nielson itself is borne out by the fact that in its
appeal brief Nielson urged that it should be paid P300,000.00 being 10% of the P3,000,000.00 stock
dividends declared on November 28, 1949 and August 20, 1950 . . ." 21
We, therefore, reconsider that part of Our decision which declares that Nielson is entitled to shares
of stock worth P300,000.00 based on the stock dividends declared on November 28, 1949 and on
August 20, 1950, together with all the fruits accruing thereto. Instead, We declare that Nielson is
entitled to payment by Lepanto of P300,000.00 in cash, which is equivalent to 10% of the money
value of the stock dividends worth P3,000,000.00 which were declared on November 28, 1949 and on
August 20, 1950, with interest thereon at the rate of 6% from February 6, 1958.
6. In the eighth ground of its motion for reconsideration Lepanto maintains that this Court erred in
awarding to Nielson an undetermined amount of shares of stock and/or cash, which award can not
be ascertained and executed without further litigation.
In view of Our ruling in this resolution that Nielson is not entitled to receive shares of stock as stock
dividends in payment of its compensation under the management contract, We do not consider it
necessary to discuss this ground of the motion for reconsideration. The awards in the present case
are all reduced to specific sums of money.
7. In the ninth ground of its motion for reconsideration Lepanto maintains that this Court erred in
rendering judgment or attorney’s fees.
The matter of the award of attorney’s fees is within the sound discretion of this Court. In Our decision
We have stated the reason why the award of P50,000.00 for attorney’s fees is considered by this
Court as reasonable.
Accordingly, We resolve to modify the decision that We rendered on December 17, 1966, in the sense
that instead of awarding Nielson shares of stock worth P300,000.00 at the par value of ten centavos
(P0.10) per share based on the stock dividends declared by Lepanto on November 28, 1949 and
August 20, 1950, together with their fruits, Nielson should be awarded the sum of P300,000.00 which
is an amount equivalent to 10% of the cash value of the stock dividends thus declared, as part of the
compensation due Nielson under the management contract. The dispositive portion of the decision
should, therefore, be amended, to read as follows:chanrob1es virtual 1aw library
IN VIEW OF THE FOREGOING CONSIDERATIONS, We hereby reverse the decision of the court a quo
and enter in lieu thereof another, ordering the appellee Lepanto to pay the appellant Nielson the
different amounts as specified hereinbelow:chanrob1es virtual 1aw library
(1) Seventeen thousand five hundred pesos (P17,500.00), equivalent to 10% of the cash dividends of
December, 1941, with legal interest thereon from the date of the filing of the complaint;
(2) Two thousand five hundred pesos (P2,500.00), as management fee for January, 1942, with legal
interest thereon from the date of the filing of the complaint;
(3) One hundred fifty thousand pesos (P150,000.00), representing management fees for the sixty-
month period of extension of the management contract, with legal interest thereon from the date of
the filing of the complaint;
(4) One million four hundred thousand pesos (P1,400,000.00), equivalent to 10% of the cash
dividends declared during the period of extension of the management contract, with legal interest
thereon from the date of the filing of the complaint;
(5) Three hundred thousand pesos (P300,000.00), equivalent to 10% of the cash value of the stock
dividends declared on November 28, 1949 and August 20, 1950, with legal interest thereon from the
date of the filing of the complaint;
(6) Fifty three thousand nine hundred twenty eight pesos and eighty eight centavos (P53,928.88),
equivalent to 10% of the depletion reserve set up during the period of extension, with legal interest
thereon from the date of the filing of the complaint;
(7) Six hundred ninety four thousand three hundred sixty four pesos and seventy six centavos
(P694,364.76), equivalent to 10% of the expenses for capital account during the period of extension,
with legal interest thereon from the date of the filing of the complaint;
(8) Fifty thousand pesos (P50,000.00) as attorney’s fees; and
(9) The costs.
It is so ordered..
6. Hydro Resources Contractors vs National Irrigation Administration
(GR No 160251, Nov 10, 2005, Santiago)
Facts: A contract was entered into between Hydro and NIA for the project of the latter. The contract
price is to be payable partly in Philippine peso and US dollars. Once the project was being executed,
there was depreciation in value of Peso resulting to price differential. In order to resolve the issue,
the administrator of NIA, Mr Tek, and Hydro made a joint computation of the amount corresponding
to the foreign currency differential. The computation showed that NIA owed Hydro for the
differential. When a demand was made by Hydro against NIA, NIA refused to pay contending that Mr
Tek has no authority to participate into a joint computation of the foreign currency differential and
that Mr Tek has no authority to bind NIA.
Issue: Whether or not Mr Tek has the authority to bind NIA in the joint computation of the foreign
currency differential.
Held: The SC found out that in the course of the project, Hydro has been dealing with NIA
represented by Mr. Tek. And applying the doctrine of apparent authority, if a corporation knowingly
permits one of its officers to act within the scope of an apparent authority, it holds him out to the
public possessing the power to do those acts; and thus, the corporation will, as against anyone who
has in good faith dealt with it through such agent, be stopped from denying the agent’s authority.
7. Loyola Grand Villas (South) Association Inc. v. CA
G.R. No. 117188 August 7, 1997
FACTS: Loyola Grand Villas Homeowners Association Inc. (LGVHAI) was organized on February 8,
1983, as the association of homeowners and residents of the Loyola Grand Villas. It was registered
with the Home Financing Corporation, the predecessor of herein respondent Home Insurance and
Guaranty Corporation (HIGC). For unknown reasons, however, LGVHAI did not file its corporate by-
laws. In July 1989, Soliven, the president of LGVHAI inquired about the status of the association. Atty.
Joaquin A. Bautista, the head of the legal department of the HIGC, informed him that LGVHAI had
been automatically dissolved for two reasons. First, it did not submit its by-laws within the period
required by the Corporation Code and, second, there was non-user of the corporate charter because
HIGC had not received any report on the association’s activities. These developments prompted the
officers of the LGVHAI to lodge a complaint with the HIGC. After some time, the HIGC ruled in favor of
LGVHAI revoking the Certificates of Registration of Loyola Grand Villas Homeowners (North)
Association, Inc. and Loyola Grand Villas Homeowners (South) Association, Inc. as hereby revoked or
cancelled and that the receivership terminated and that the receiver is ordered to render an
accounting and turn-over to LGVHAI all assets and records of the Association under his custody and
possession. Hence, petitioner now raises the issue of certiorari.
ISSUE: Whether or not the failure of a corporation to file its by-laws within one month from its
incorporation results in its automatic dissolution?
HELD: Under the Corporation Code, a private corporation commences to have corporate existence
and juridical personality from the date the Securities and Exchange Commission (SEC) issues a
certificate of incorporation under its official seal. There was no showing that the registration of
LGVHAI had been validly revoked, it continued to be the duly registered homeowners’ association in
the Loyola Grand Villas. It has been held that automatic corporate dissolution for failure to file the by-
laws on time was never the intention of the legislature. Taken as a whole and under the principle that
the best interpreter of a statute is the statute itself (optima statuli interpretatix est ipsum statutum),
Section 46 of the Corporate Code reveals the legislative intent to attach a directory, and not
mandatory, meaning for the word “must” in the first sentence thereof. Note should be taken of the
second paragraph of the law which allows the filing of the by-laws even prior to incorporation. This
provision in the same section of the Code rules out mandatory compliance with the requirement of
filing the by-laws “within one (1) month after receipt of official notice of the issuance of its certificate
of incorporation by the Securities and Exchange Commission.” It necessarily follows that failure to file
the by-laws within that period does not imply the “demise” of the corporation.
8. China Banking Corporation vs. Court of Appeals
[GR 117604, 26 March 1997]
Facts: On 21 August 1974, Galicano Calapatia, Jr., a stockholder of Valley Golf & Country Club, Inc.
(VGCCI), pledged his Stock Certificate 1219 to China Banking Corporation (CBC). On 16 September
1974, CBC wrote VGCCI requesting that the pledge agreement be recorded in its books. In a letter
dated 27 September 1974, VGCCI replied that the deed of pledge executed by Calapatia in CBC's favor
was duly noted in its corporate books. On 3 August 1983, Calapatia obtained a loan of P20,000.00
from CBC, payment of which was secured by the pledge agreement still existing between Calapatia
and CBC. Due to Calapatia's failure to pay his obligation, CBC, on 12 April 1985, filed a petition for
extrajudicial foreclosure before Notary Public Antonio T. de Vera of Manila, requesting the latter to
conduct a public auction sale of the pledged stock. On 14 May 1985, CBC informed VGCCI of the
foreclosure proceedings and requested that the pledged stock be transferred to its name and the
same be recorded in the corporate books. However, on 15 July 1985, VGCCI wrote CBC expressing its
inability to accede to CBC's request in view of Calapatia's unsettled accounts with the club. Despite
the foregoing, Notary Public de Vera held a public auction on 17 September 1985 and CBC emerged
as the highest bidder at P20,000.00 for the pledged stock. Consequently, CBC was issued the
corresponding certificate of sale.
On 21 November 1985, VGCCI sent Calapatia a notice demanding full payment of his overdue account
in the amount of P18,783.24. Said notice was followed by a demand letter dated 12 December 1985
for the same amount and another notice dated 22 November 1986 for P23,483.24. On 4 December
1986, VGCCI caused to be published in the newspaper Daily Express a notice of auction sale of a
number of its stock certificates, to be held on 10 December 1986 at 10:00 a.m. Included therein was
Calapatia's own share of stock (Stock Certificate 1219). Through a letter dated 15 December 1986,
VGCCI informed Calapatia of the termination of his membership due to the sale of his share of stock
in the 10 December 1986 auction. On 5 May 1989, CBC advised VGCCI that it is the new owner of
Calapatia's Stock Certificate 1219 by virtue of being the highest bidder in the 17 September 1985
auction and requested that a new certificate of stock be issued in its name. On 2 March 1990, VGCCI
replied that "for reason of delinquency" Calapatia's stock was sold at the public auction held on 10
December 1986 for P25,000.00. On 9 March 1990, CBC protested the sale by VGCCI of the subject
share of stock and thereafter filed a case with the Regional Trial Court of Makati for the nullification
of the 10 December 1986 auction and for the issuance of a new stock certificate in its name. On 18
June 1990, the Regional Trial Court of Makati dismissed the complaint for lack of jurisdiction over the
subject matter on the theory that it involves an intra-corporate dispute and on 27 August 1990
denied CBC's motion for reconsideration. On 20 September 1990, CBC filed a complaint with the
Securities and Exchange Commission (SEC) for the nullification of the sale of Calapatia's stock by
VGCCI; the cancellation of any new stock certificate issued pursuant thereto; for the issuance of a
new certificate in petitioner's name; and for damages, attorney's fees and costs of litigation.
On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision in favor of VGCCI, stating
in the main that considering that the said share is delinquent, VGCCI had valid reason not to transfer
the share in the name of CBC in the books of VGCCI until liquidation of delinquency. Consequently,
the case was dismissed. On 14 April 1992, Hearing Officer Perea denied CBC's motion for
reconsideration. CBC appealed to the SEC en banc and on 4 June 1993, the Commission issued an
order reversing the decision of its hearing officer; holding that CBC has a prior right over the pledged
share and because of pledgor's failure to pay the principal debt upon maturity, CBC can proceed with
the foreclosure of the pledged share; declaring that the auction sale conducted by VGCCI on 10
December 1986 is declared NULL and VOID; and ordering VGCCI to issue another membership
certificate in the name of CBC. VGCCI sought reconsideration of the order. However, the SEC denied
the same in its resolution dated 7 December 1993. The sudden turn of events sent VGCCI to seek
redress from the Court of Appeals. On 15 August 1994, the Court of Appeals rendered its decision
nullifying and setting aside the orders of the SEC and its hearing officer on ground of lack of
jurisdiction over the subject matter and, consequently, dismissed CBC's original complaint. The Court
of Appeals declared that the controversy between CBC and VGCCI is not intra-corporate; nullifying
the SEC orders and dismissing CBC’s complaint. CBC moved for reconsideration but the same was
denied by the Court of Appeals in its resolution dated 5 October 1994. CBC filed the petition for
review on certiorari.
Issue: Whether CBC is bound by VGCCI's by-laws.
Held: In order to be bound, the third party must have acquired knowledge of the pertinent by-laws at
the time the transaction or agreement between said third party and the shareholder was entered
into. Herein, at the time the pledge agreement was executed. VGCCI could have easily informed CBC
of its by-laws when it sent notice formally recognizing CBC as pledgee of one of its shares registered
in Calapatia's name. CBC's belated notice of said by-laws at the time of foreclosure will not suffice. By-
laws signifies the rules and regulations or private laws enacted by the corporation to regulate, govern
and control its own actions, affairs and concerns and its stockholders or members and directors and
officers with relation thereto and among themselves in their relation to it. In other words, by-laws are
the relatively permanent and continuing rules of action adopted by the corporation for its own
government and that of the individuals composing it and having the direction, management and
control of its affairs, in whole or in part, in the management and control of its affairs and activities.
The purpose of a by-law is to regulate the conduct and define the duties of the members towards the
corporation and among themselves. They are self-imposed and, although adopted pursuant to
statutory authority, have no status as public law. Therefore, it is the generally accepted rule that third
persons are not bound by by-laws, except when they have knowledge of the provisions either actually
or constructively. For the exception to the general accepted rule that third persons are not bound by
by-laws to be applicable and binding upon the pledgee, knowledge of the provisions of the VGCCI By-
laws must be acquired at the time the pledge agreement was contracted. Knowledge of said
provisions, either actual or constructive, at the time of foreclosure will not affect pledgee's right over
the pledged share. Article 2087 of the Civil Code provides that it is also of the essence of these
contracts that when the principal obligation becomes due, the things in which the pledge or
mortgage consists maybe alienated for the payment to the creditor. Further, VGCCI's contention that
CBC is duty-bound to know its by-laws because of Article 2099 of the Civil Code which stipulates that
the creditor must take care of the thing pledged with the diligence of a good father of a family, fails
to convince. CBC was never informed of Calapatia's unpaid accounts and the restrictive provisions in
VGCCI's by-laws. Furthermore, Section 63 of the Corporation Code which provides that "no shares of
stock against which the corporation holds any unpaid claim shall be transferable in the books of the
corporation" cannot be utilized by VGCCI. The term "unpaid claim" refers to "any unpaid claim arising
from unpaid subscription, and not to any indebtedness which a subscriber or stockholder may owe
the corporation arising from any other transaction." Herein, the subscription for the share in question
has been fully paid as evidenced by the issuance of Membership Certificate 1219. What Calapatia
owed the corporation were merely the monthly dues. Hence, Section 63 does not apply.
9. SALAFRANCA VS. PHILAMLIFE (PAMPLONA) VILLAGE HOMEOWNERS ASSOCIATION, INC. ET. AL.
300 SCRA 469
Petitioner Enrique Salafranca started working with the private respondent Philamlife Village
Homeowners Association on May 1, 1981 as administrative officer for a period of six months. From
this date until December 31, 1983, petitioner was reappointed to his position three more times. 1 As
administrative officer, petitioner was generally responsible for the management of the village's day to
day activities. 2 After petitioner's term of employment expired on December 31, 1983, he still
continued to work in the same capacity, albeit, without the benefit of a renewed contract.
Sometime in 1987, private respondent decided to amend its by-laws. Included therein was a provision
regarding officers, specifically, the position of administrative officer under which said officer shall hold
office at the pleasure of the Board of Directors. In view of this development, private respondent, on
July 3, 1987, informed the petitioner that his term of office shall be coterminus with the Board of
Directors which appointed him to his position. Furthermore, until he submits a medical certificate
showing his state of health, his employment shall be on a month-to-month basis. 3 Oddly,
notwithstanding the failure of herein petitioner to submit his medical certificate, he continued
working until his termination in December 1992. 4 Claiming that his services had been unlawfully and
unceremoniously dispensed with, petitioner filed a complaint for illegal dismissal with money claims
and for damages. 5
After the submission by the parties of their respective position papers and other pleadings, the Labor
Arbiter rendered a decision 6 ordering private respondent to pay the petitioner the amount of
P257,833.33 representing his backwages, separation pay and 13th month pay. In justifying the award,
the Labor Arbiter elucidated:
Respondents' contention that complainant's term of employment was co-terminus with the term of
Office of the Board of Directors, is wanting in merit. Records show that complainant had been hired in
1981 while the Amendment of the respondents' By-Laws making the position of an Administrative
Officer co-terminus with the term of the Board of Directors was made in 1987. Evidently, the said
Amendment would not be applicable to the case of complainant who had become a regular
employee long time before the Amendment took place. Moreover, the Amendment should be
applied prospectively and not retroactively.
On appeal by the private respondent, the NLRC reversed the decision of the Labor Arbiter and
rendered a new one 7 reducing petitioner's monetary award to only one-half (1/2) month pay for
every year of service representing his retirement pay. In other words, the NLRC viewed the dismissal
of the petitioner as a valid act by the private respondent.
The fact that he continued to perform the function of the office of administrative officer without
extension or re-appointment thereafter, to our mind, did not in any way make his employment
permanent as in fact, he was even reminded of the nature of his position by then president of the
association Jaime Y. Ladao in a letter of 3 July 1987. His reply to the aforesaid letter, claiming his
employment regular, and viz a viz, referring to submit his medical certificate, notwithstanding, to our
mind, merely underscored the need to define his position as, in fact, the Association's Rules and
Regulations were amended if but to put to rest the tenural (sic) limit of the office of the
Administrative Officer in accordance with its earlier intention, that it is co-terminus with that of the
members of the Board of Directors.
WHEREFORE, the decision appealed from is hereby set aside. Respondents are hereby ordered to pay
herein appellee one half (1/2) month pay for every year of service representing his retirement pay.
In view of the sudden turn of events, petitioner has elevated the case to this Court assigning the
following errors: 8
1. The NLRC gravely abused its discretion when it ruled that the employment of the Petitioner is not
purely based on considerations of Employer-Employee relationship.
2. Petitioner was illegally dismissed by private respondents.
As to the first assigned error by the petitioner, we need not dwell on this at length. We agree with the
Solicitor General's observation that an employer-employee relationship exists between the petitioner
and the private respondent. 9
xxx xxx xxx
The first element is present in this case. Petitioner was hired as Administrative Officer by
respondents. In fact, he was extended successive appointments by respondents.
The second element is also present since it is not denied that respondent PVHA paid petitioner a fixed
salary for his services.
As to the third element, it can be seen from the Records that respondents had the power of dismissal
over petitioner. In their letter dated December 7, 1992, respondents informed petitioner that they
had decided to discontinue his services. In their Position Paper submitted to the Labor Arbiter,
respondents stated that petitioner "was dismissed for cause." (p. 17, Record).
With respect to the fourth and most important element, respondents controlled the work of
petitioner not only with respect to the ends to be achieved but also the means used in reaching such
ends.
Relative to the second assigned error of the petitioner, both the Solicitor General and the private
respondent take the stance that petitioner was not illegally dismissed. 10 On this aspect, we disagree
with their contentions.
On the outset, there is no dispute that petitioner had already attained the status of a regular
employee, as evidenced by his eleven years of service with the private respondent. Accordingly,
petitioner enjoys the right to security of tenure 11 and his services may be terminated only for causes
provided by law. 12
Viewed in this light, while private respondent has the right to terminate the services of petitioner,
this is subject to both substantive and procedural grounds. 13 The substantive causes for dismissal
are those provided in Articles 282 and 283 of the, Labor Code, 14 while the procedural grounds refer
to the observance of the requirement of due process. 15 In all these instances, it is the private
respondent, being the employer, who must prove the validity of the dismissal. 16
Having reviewed the records of this case carefully, we conclude that private respondent utterly failed
to substantiate petitioner's dismissal, rendering the latter's termination illegal. At the risk of being
redundant, it must be stressed that these requirements are mandatory and non-compliance
therewith renders any judgment reached by the management void and inexistent. 17
While private respondent imputes "gross negligence," and "serious misconduct" as the causes of
petitioner's dismissal, 18 not a shred of evidence was offered in support thereof, other than bare and
uncorroborated allegations. The facts and circumstances regarding such alleged infractions were
never explained, While it is true that private respondent, through its president Bonifacio Dazo,
executed an affidavit narrating the alleged violations of the petitioner, 19 these were never
corroborated by concrete or competent evidence. It is settled that no undue importance should be
given to a sworn statement or affidavit as a piece of evidence because, being taken ex-parte, an
affidavit is almost always incomplete and inaccurate. 20 Furthermore, it must be noted that when
petitioner was terminated in 1992, these alleged infractions were never raised nor communicated to
him. In fact, these were only revealed after the complaint was filed by the petitioner in 1993. Why
there was a delay was never adequately explained by private respondent.
Likewise, we note that Dazo himself was not presented as a witness to give the petitioner an
opportunity to cross-examine him and propound clarificatory questions regarding matters averred in
his affidavit. All told, the foregoing lapses and the belated submission of the affidavit, cast doubt as to
the credibility of the allegations. In sum, the dismissal of the petitioner had no factual basis
whatsoever. The rule is that unsubstantiated accusations without more, are not tantamount to guilt.
21
As regards the issue of procedural due process, private respondent justifies its non-compliance
therewith in this wise:
The Association Officers, being his peers and friends had a problem however in terminating his
services. He had been found to have committed infractions as previously enumerated. PVHA could
have proceeded with a full-blown investigation to hear these charges, but the ordeal might break the
old man's heart as this will surely affect his standing in the community. So they decided to make their
move as discreetly (but legally) as possible to save the petitioner's reputation. Terminating him in
accordance with the provision of the by-laws of the Association without pointing out his numerous
faults and malfeasance in office and with one-half month pay for every year of service in accordance
with the Retirement Law was the best and only alternative.
We are not impressed. The reasoning advanced by the private respondent is as puerile as it is
preposterous.
The essence of due process is to afford the party an opportunity to be heard and defend himself, to
cleanse his name and reputation from any taint. It includes the twin requirements of notice and
hearing. 22 This concept evolved from the basic tenet that one's employment or profession is a
property right protected by the constitutional guaranty of due process of law. 23 Hence, an
individual's separation from work must be founded on clearly-established facts, not on mere
conjectures and suspicions. 24
In light of the foregoing, private respondent's arguments are clearly baseless and without merit. In
truth, instead of protecting petitioner's reputation, private respondent succeeded in doing exactly the
opposite - it condemned the petitioner without even hearing his side. It is stating the obvious that
dismissal, being the ultimate penalty that can be meted out to an employee, should be based on a
clear or convincing ground. 25 As such, a decision to terminate an employee without fully apprising
him of the facts, on the pretext that the twin requirements of notice and hearing are unnecessary or
useless, is an invalid and obnoxious exercise of management prerogative.
Furthermore, private respondent, in an effort to validate the dismissal of the petitioner, posits the
theory that the latter's position is coterminus with that of the Village's Board of Directors, as provided
for in its amended by-laws. 26
Admittedly, the right to amend the by-laws lies solely in the discretion of the employer, this being in
the exercise of management prerogative or business judgment. However this right, extensive as it
may be, cannot impair the obligation of existing contracts or rights.
Prescinding from these premises, private respondent's insistence that it can legally dismiss petitioner
on the ground that his tenure has expired is untenable. To reiterate, petitioner, being a regular
employee, is entitled to security of tenure, hence, his services may only be terminated for causes
provided by law. 27 A contrary interpretation would not find justification in the laws or the
Constitution. If we were to rule otherwise, it would enable an employer to remove any employee
from his employment by the simple expediency of amending its by-laws and providing that his/her
position shall cease to exist upon the occurrence of a specified event.
If private respondent wanted to make the petitioner's position co-terminus with that of the Board of
Directors, then the amendment must be effective after petitioner's stay with the private respondent,
not during his term. Obviously, the measure taken by the private respondent in amending its by-laws
is nothing but a devious, but crude, attempt to circumvent petitioner's right to security of tenure as a
regular employee guaranteed under the Labor Code. 28
Interestingly, the Solicitor General is of the view that what actually transpired was that petitioner was
retired from his employment, considering the fact that in 1992 he was already 70 years old and not
terminated. 29
While there seems to be a semblance of plausibility in this contention for the matter of extension of
service of such employee or official is addressed to the sound discretion of the employer, still we have
no doubt that this was just a mere after-thought - a dismissal disguised as retirement.
In the proceedings before the Labor Arbiter, it is noteworthy that private respondent never raised the
issue of compulsory retirement, 30 as a cause for terminating petitioner's service. In its appeal before
the NLRC, this ground was never discussed. In fact, private respondent, in justifying the termination
of the petitioner, still anchored its claim on the applicability of the amended by-laws. This omission is
fatal to private respondent's cause, for the rule is well-settled that matters, theories or arguments not
brought out in the proceedings below will ordinarily not be considered by a reviewing court, as they
cannot be raised for the first time on appeal. 31
Undaunted, private respondent now asserts that the instant petition was filed out of time, 32
considering that the assailed NLRC decision was received on June 28, 1995 while this petition was
filed on September 20, 1995. At this juncture, we take this opportunity to state that under the 1997
Rules of Civil Procedure, a petition for certiorari must now be instituted within sixty days of receipt of
the assailed judgment, order or resolution. 33 However, since this case arose in 1995 and the
aforementioned rule only took effect on July 1, 1997 then the old rule is applicable. Since prior to the
effectivity of the new rule, a special civil action of certiorari should be instituted within a period of
three months, 34 the instant petition which was filed on September 20, 1995 or two months and
twenty-two days thereafter, was still within the reglementary period.
With respect to the issue of the monetary award to be given to the petitioner, private respondent
argues that he deserves only retirement pay and nothing more. This position would have been
tenable had petitioner not been illegally dismissed. However, since we have already ruled petitioner's
dismissal as without just cause and lacking due process, the award of backwages and reinstatement is
proper. 35
In this particular case, reinstatement is no longer feasible since petitioner was already 70 years old at
the time he was removed from his employment. As a substitute thereof, separation pay is generally
awarded, 36 the amount of which must be equivalent to one-month salary for every year of service.
37
With respect to the amount of backwages which, incidentally is different from separation pay, 38 it
now settled that an illegally dismissed employee is entitled to its full payment as long as the cause of
action accrued after March 21, 1989. 39 Considering that petitioner was terminated from the service
on December 9, 1992, which is after March 21, 1989, he is entitled to full backwages from the time of
the illegal dismissal without any, qualification or deduction. 40
As regards the issue of retirement pay, private respondent asserts that the correct amount should be
one-half (1/2) month salary for every year of service. This time we agree with private respondent's
contention. The pertinent law is Article 287 of the Labor Code, as amended by Republic Act No. 7641,
which reads:
Art. 287. Retirement. - Any employee may be retired upon reaching the retirement age established in
the collective bargaining agreement or other applicable employment contract.
In case of retirement, the employee shall he entitled to receive such retirement benefits as he may
have earned under existing laws and any collective bargaining agreement and other agreements:
Provided, however, That an employee's retirement benefits under any collective bargaining and other
agreements shall not be less than those provided herein.
In the absence of a retirement plan or agreement providing for retirement benefits of employees in
the establishment, an employee upon reaching the age of sixty (60) years or more, but not beyond
sixty-five (65) years which is hereby declared the compulsory retirement age, who has served at least
five (5) years in the said establishment, may retire and shall be entitled to retirement pay equivalent
to at least one-half (1/2) month salary for every year of service, a fraction of al least six (6) months
being considered as one whole year.

xxx xxx xxx

With respect to the issue that petitioner, being a managerial employee, is not entitled to thirteenth
month pay, Memorandum Order No. 28, as implemented by the Revised Guidelines on the
Implementation of the 13th Month Pay Law dated November 16, 1987, provides:

Sec. 1 of Presidential Decree No. 851 is hereby modified to the extent that all employers are hereby
required to pay all their rank and file employees a 13th month pay not later than December 24 of
every year.

Clearly, therefore, the foregoing exempts managerial employees from this benefit. Of course, this
does not preclude an employer from granting other bonuses, in lieu of the 13th month pay, to
managerial employees in its discretion.

Finally, we cannot simply ignore private respondent's malicious scheme to remove petitioner from his
position which is contrary to good customs and effected in an oppressive manner, thus warranting an
award of moral and exemplary damages to the petitioner. 41 Moreover, since petitioner was forced
to litigate and incur expenses to protect his right and interests, he is entitled to attorney's fees. 42

WHEREFORE, in view of the foregoing, the instant petition is GRANTED. The NLRC decision dated June
15, 1995 is hereby REVERSED and SET ASIDE. Private respondent Philamlife Village Homeowners
Association is ORDERED: (1) to pay petitioner Enrique Salafranca separation pay equivalent to one
month salary for every year of service; (2) to pay his full backwages in accordance with our ruling in
Bustamante v. NLRC; 43 (3) to pay his retirement pay in accordance with Article 287 of the Labor
Code, as amended by Republic Act No. 7641, (4) to pay moral and exemplary damages in the amount
of twenty thousand (P20,000.00) pesos and ten thousand (P10,000.00) pesos, respectively; 44 and (5)
to pay ten (10%) percent of the total amount due to petitioner, as attorney's fees. Consequently, the
respondent NLRC is ORDERED to COMPUTE the total monetary benefits awarded in accordance with
this decision and to submit its compliance thereon within thirty (30) days from notice of this decision.