SECOND DIVISION
herein appellees and after the issues were joined, the reinstated
G.R. No. L-41182-3 April 16, 1988
DR. CARLOS L. SEVILLA and LINA O. SEVILLA vs. THE COURT OF APPEALS,
TOURIST WORLD SERVICE, INC., ELISEO S.CANILAO, and SEGUNDINA NOGUERA
SARMIENTO , J.:
The petitioners invoke the provisions on human relations of the Civil Code in this appeal by
certiorari. The facts are beyond dispute:
xxx xxx xxx
On the strength of a contract (Exhibit A for the appellant Exhibit 2 for the
appellees) entered into on Oct. 19, 1960 by and between Mrs. Segundina
Noguera, party of the first part; the Tourist World Service, Inc.,
represented by Mr. Eliseo Canilao as party of the second part, and
hereinafter referred to as appellants, the Tourist World Service, Inc.
leased the premises belonging to the party of the first part at Mabini St.,
Manila for the former-s use as a branch office. In the said contract the
party of the third part held herself solidarily liable with the party of the part
for the prompt payment of the monthly rental agreed on. When the branch
office was opened, the same was run by the herein appellant Una 0.
Sevilla payable to Tourist World Service Inc. by any airline for any fare
brought in on the efforts of Mrs. Lina Sevilla, 4% was to go to Lina Sevilla
and 3% was to be withheld by the Tourist World Service, Inc.
On or about November 24, 1961 (Exhibit 16) the Tourist World Service,
Inc. appears to have been informed that Lina Sevilla was connected with a
rival firm, the Philippine Travel Bureau, and, since the branch office was
anyhow losing, the Tourist World Service considered closing down its
office. This was firmed up by two resolutions of the board of directors of
Tourist World Service, Inc. dated Dec. 2, 1961 (Exhibits 12 and 13), the
first abolishing the office of the manager and vice-president of the Tourist
World Service, Inc., Ermita Branch, and the second,authorizing the
corporate secretary to receive the properties of the Tourist World Service
then located at the said branch office. It further appears that on Jan. 3,
1962, the contract with the appellees for the use of the Branch Office
premises was terminated and while the effectivity thereof was Jan. 31,
1962, the appellees no longer used it. As a matter of fact appellants used
it since Nov. 1961. Because of this, and to comply with the mandate of the
Tourist World Service, the corporate secretary Gabino Canilao went over
to the branch office, and, finding the premises locked, and, being unable
to contact Lina Sevilla, he padlocked the premises on June 4, 1962 to
protect the interests of the Tourist World Service. When neither the
appellant Lina Sevilla nor any of her employees could enter the locked
premises, a complaint wall filed by the herein appellants against the
appellees with a prayer for the issuance of mandatory preliminary
injunction. Both appellees answered with counterclaims. For apparent lack
of interest of the parties therein, the trial court ordered the dismissal of the
case without prejudice.
The appellee Segundina Noguera sought reconsideration of the order
dismissing her counterclaim which the court a quo, in an order dated June
8, 1963, granted permitting her to present evidence in support of her
counterclaim.
On June 17,1963, appellant Lina Sevilla refiled her case against the
counterclaim of Segundina Noguera and the new complaint of appellant
Lina Sevilla were jointly heard following which the court a quo ordered
both cases dismiss for lack of merit, on the basis of which was elevated
the instant appeal on the following assignment of errors:
I. THE LOWER COURT ERRED EVEN IN APPRECIATING THE
NATURE OF PLAINTIFF-APPELLANT MRS. LINA O. SEVILLA'S
COMPLAINT.
II. THE LOWER COURT ERRED IN HOLDING THAT APPELLANT MRS.
LINA 0. SEVILA'S ARRANGEMENT (WITH APPELLEE TOURIST
WORLD SERVICE, INC.) WAS ONE MERELY OF EMPLOYER-
EMPLOYEE RELATION AND IN FAILING TO HOLD THAT THE SAID
ARRANGEMENT WAS ONE OF JOINT BUSINESS VENTURE.
III. THE LOWER COURT ERRED IN RULING THAT PLAINTIFF-
APPELLANT MRS. LINA O. SEVILLA IS ESTOPPED FROM DENYING
THAT SHE WAS A MERE EMPLOYEE OF DEFENDANT-APPELLEE
TOURIST WORLD SERVICE, INC. EVEN AS AGAINST THE LATTER.
IV. THE LOWER COURT ERRED IN NOT HOLDING THAT APPELLEES
HAD NO RIGHT TO EVICT APPELLANT MRS. LINA O. SEVILLA FROM
THE A. MABINI OFFICE BY TAKING THE LAW INTO THEIR OWN
HANDS.
V. THE LOWER COURT ERRED IN NOT CONSIDERING AT .ALL
APPELLEE NOGUERA'S RESPONSIBILITY FOR APPELLANT LINA O.
SEVILLA'S FORCIBLE DISPOSSESSION OF THE A. MABINI
PREMISES.
VI. THE LOWER COURT ERRED IN FINDING THAT APPELLANT
APPELLANT MRS. LINA O. SEVILLA SIGNED MERELY AS
GUARANTOR FOR RENTALS.
On the foregoing facts and in the light of the errors asigned the issues to be resolved are:
1. Whether the appellee Tourist World Service unilaterally disco the
telephone line at the branch office on Ermita;
2. Whether or not the padlocking of the office by the Tourist World Service
was actionable or not; and
3. Whether or not the lessee to the office premises belonging to the
appellee Noguera was appellees TWS or TWS and the appellant.
In this appeal, appealant Lina Sevilla claims that a joint bussiness venture
was entered into by and between her and appellee TWS with offices at the
Ermita branch office and that she was not an employee of the TWS to the
end that her relationship with TWS was one of a joint business venture
appellant made declarations showing:
1. Appellant Mrs. Lina 0. Sevilla, a prominent figure and
wife of an eminent eye, ear and nose specialist as well
as a imediately columnist had been in the travel
business prior to the establishment of the joint business
venture with appellee Tourist World Service, Inc. and
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 appellee Eliseo Canilao, her compadre, she being the
godmother of one of his children, with her own clientele,
coming mostly from her own social circle (pp. 3-6 tsn.
February 16,1965).
2. Appellant Mrs. Sevilla was signatory to a lease
agreement dated 19 October 1960 (Exh. 'A') covering
the premises at A. Mabini St., she expressly warranting
and holding [sic] herself 'solidarily' liable with appellee
Tourist World Service, Inc. for the prompt payment of
the monthly rentals thereof to other appellee Mrs.
Noguera (pp. 14-15, tsn. Jan. 18,1964).
3. Appellant Mrs. Sevilla did not receive any salary from
appellee Tourist World Service, Inc., which had its own,
separate office located at the Trade & Commerce
Building; nor was she an employee thereof, having no
participation in nor connection with said business at the
Trade & Commerce Building (pp. 16-18 tsn Id.).
4. Appellant Mrs. Sevilla earned commissions for her
own passengers, her own bookings her own business
(and not for any of the business of appellee Tourist
World Service, Inc.) obtained from the airline
companies. She shared the 7% commissions given by
the airline companies giving appellee Tourist World
Service, Lic. 3% thereof aid retaining 4% for herself (pp.
18 tsn. Id.)
5. Appellant Mrs. Sevilla likewise shared in the
expenses of maintaining the A. Mabini St. office, paying
for the salary of an office secretary, Miss Obieta, and
other sundry expenses, aside from desicion the office
furniture and supplying some of fice furnishings (pp.
15,18 tsn. April 6,1965), appellee Tourist World Service,
Inc. shouldering the rental and other expenses in
consideration for the 3% split in the co procured by
appellant Mrs. Sevilla (p. 35 tsn Feb. 16,1965).
6. It was the understanding between them that appellant
Mrs. Sevilla would be given the title of branch manager
for appearance's sake only (p. 31 tsn. Id.), appellee
Eliseo Canilao admit that it was just a title for dignity (p.
36 tsn. June 18, 1965- testimony of appellee Eliseo
Canilao pp. 38-39 tsn April 61965-testimony of
corporate secretary Gabino Canilao (pp- 2-5, Appellants'
Reply Brief)
Upon the other hand, appellee TWS contend that the appellant was an
employee of the appellee Tourist World Service, Inc. and as such was
designated manager.1
xxx xxx xxx
The trial court2 held for the private respondent on the premise that the private respondent,
Tourist World Service, Inc., being the true lessee, it was within its prerogative to terminate
the lease and padlock the premises. 3 It likewise found the petitioner, Lina Sevilla, to be a
mere employee of said Tourist World Service, Inc. and as such, she was bound by the acts
of her employer. 4 The respondent Court of Appeal 5 rendered an affirmance.
The petitioners now claim that the respondent Court, in sustaining the lower court, erred.
Specifically, they state:
I
THE COURT OF APPEALS ERRED ON A QUESTION OF LAW AND GRAVELY ABUSED
ITS DISCRETION IN HOLDING THAT "THE PADLOCKING OF THE PREMISES BY
TOURIST WORLD SERVICE INC. WITHOUT THE KNOWLEDGE AND CONSENT OF THE
APPELLANT LINA SEVILLA ... WITHOUT NOTIFYING MRS. LINA O. SEVILLA OR ANY
OF HER EMPLOYEES AND WITHOUT INFORMING COUNSEL FOR THE APPELLANT
(SEVILIA), WHO IMMEDIATELY BEFORE THE PADLOCKING INCIDENT, WAS IN
CONFERENCE WITH THE CORPORATE SECRETARY OF TOURIST WORLD SERVICE
(ADMITTEDLY THE PERSON WHO PADLOCKED THE SAID OFFICE), IN THEIR ATTEMP
AMICABLY SETTLE THE CONTROVERSY BETWEEN THE APPELLANT (SEVILLA) AND
THE TOURIST WORLD SERVICE ... (DID NOT) ENTITLE THE LATTER TO THE RELIEF
OF DAMAGES" (ANNEX "A" PP. 7,8 AND ANNEX "B" P. 2) DECISION AGAINST DUE
PROCESS WHICH ADHERES TO THE RULE OF LAW.
II
THE COURT OF APPEALS ERRED ON A QUESTION OF LAW AND GRAVELY ABUSED
ITS DISCRETION IN DENYING APPELLANT SEVILLA RELIEF BECAUSE SHE HAD
"OFFERED TO WITHDRAW HER COMP PROVIDED THAT ALL CLAIMS AND
COUNTERCLAIMS LODGED BY BOTH APPELLEES WERE WITHDRAWN." (ANNEX "A"
P. 8)
III
THE COURT OF APPEALS ERRED ON A QUESTION OF LAW AND GRAVELY ABUSED
ITS DISCRETION IN DENYING-IN FACT NOT PASSING AND RESOLVING-APPELLANT
SEVILLAS CAUSE OF ACTION FOUNDED ON ARTICLES 19, 20 AND 21 OF THE CIVIL
CODE ON RELATIONS.
IV
THE COURT OF APPEALS ERRED ON A QUESTION OF LAW AND GRAVELY ABUSED
ITS DISCRETION IN DENYING APPEAL APPELLANT SEVILLA RELIEF YET NOT
RESOLVING HER CLAIM THAT SHE WAS IN JOINT VENTURE WITH TOURIST WORLD
SERVICE INC. OR AT LEAST ITS AGENT COUPLED WITH AN INTEREST WHICH
COULD NOT BE TERMINATED OR REVOKED UNILATERALLY BY TOURIST WORLD
SERVICE INC.6
As a preliminary inquiry, the Court is asked to declare the true nature of the relation between
Lina Sevilla and Tourist World Service, Inc. The respondent Court of see fit to rule on the
question, the crucial issue, in its opinion being "whether or not the padlocking of the
premises by the Tourist World Service, Inc. without the knowledge and consent of the
appellant Lina Sevilla entitled the latter to the relief of damages prayed for and whether or
not the evidence for the said appellant supports the contention that the appellee Tourist
World Service, Inc. unilaterally and without the consent of the appellant disconnected the
telephone lines of the Ermita branch office of the appellee Tourist World Service,
Inc.7 Tourist World Service, Inc., insists, on the other hand, that Lina SEVILLA was a mere
employee, being "branch manager" of its Ermita "branch" office and that inferentially, she
had no say on the lease executed with the private respondent, Segundina Noguera. The
petitioners contend, however, that relation between the between parties was one of joint
venture, but concede that "whatever might have been the true relationship between Sevilla
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and Tourist World Service," the Rule of Law enjoined Tourist World Service and Canilao
from taking the law into their own hands, 8 in reference to the padlocking now questioned.
The Court finds the resolution of the issue material, for if, as the private respondent, Tourist
World Service, Inc., maintains, that the relation between the parties was in the character of
employer and employee, the courts would have been without jurisdiction to try the case,
labor disputes being the exclusive domain of the Court of Industrial Relations, later, the
Bureau Of Labor Relations, pursuant to statutes then in force. 9
In this jurisdiction, there has been no uniform test to determine the evidence of an employer-
employee relation. In general, we have relied on the so-called right of control test, "where
the person for whom the services are performed reserves a right to control not only the
end to be achieved but also the means to be used in reaching such end." 10Subsequently,
however, we have considered, in addition to the standard of right-of control, the existing
economic conditions prevailing between the parties, like the inclusion of the employee in the
payrolls, in determining the existence of an employer-employee relationship.11
The records will show that the petitioner, Lina Sevilla, was not subject to control by the
private respondent Tourist World Service, Inc., either as to the result of the enterprise or as
to the means used in connection therewith. In the first place, under the contract of lease
covering the Tourist Worlds Ermita office, she had bound herself in solidum  as and for rental
payments, an arrangement that would be like claims of a master-servant relationship. True
the respondent Court would later minimize her participation in the lease as one of mere
guaranty, 12 that does not make her an employee of Tourist World, since in any case, a true
employee cannot be made to part with his own money in pursuance of his employer's
business, or otherwise, assume any liability thereof. In that event, the parties must be bound
by some other relation, but certainly not employment.
In the second place, and as found by the Appellate Court, '[w]hen the branch office was
opened, the same was run by the herein appellant Lina O. Sevilla payable to Tourist World
Service, Inc. by any airline for any fare brought in on the effort of Mrs. Lina Sevilla. 13 Under
these circumstances, it cannot be said that Sevilla was under the control of Tourist World
Service, Inc. "as to the means used." Sevilla in pursuing the business, obviously relied on
her own gifts and capabilities.
It is further admitted that Sevilla was not in the company's payroll. For her efforts, she
retained 4% in commissions from airline bookings, the remaining 3% going to Tourist World.
Unlike an employee then, who earns a fixed salary usually, she earned compensation in
fluctuating amounts depending on her booking successes.
The fact that Sevilla had been designated 'branch manager" does not make her, ergo,
Tourist World's employee. As we said, employment is determined by the right-of-control test
and certain economic parameters. But titles are weak indicators.
In rejecting Tourist World Service, Inc.'s arguments however, we are not, as a consequence,
accepting Lina Sevilla's own, that is, that the parties had embarked on a joint venture or
otherwise, a partnership. And apparently, Sevilla herself did not recognize the existence of
such a relation. In her letter of November 28, 1961, she expressly 'concedes your [Tourist
World Service, Inc.'s] right to stop the operation of your branch office 14 in effect, accepting
Tourist World Service, Inc.'s control over the manner in which the business was run. A joint
venture, including a partnership, presupposes generally a of standing between the joint co-
venturers or partners, in which each party has an equal proprietary interest in the capital or
property contributed 15 and where each party exercises equal rights in the conduct of the
business.16 furthermore, the parties did not hold themselves out as partners, and the building
itself was embellished with the electric sign "Tourist World Service, Inc. 17in lieu of a distinct
partnership name.
It is the Court's considered opinion, that when the petitioner, Lina Sevilla, agreed to (wo)man
the private respondent, Tourist World Service, Inc.'s Ermita office, she must have done so
pursuant to a contract of agency. It is the essence of this contract that the agent renders
services "in representation or on behalf of another. 18 In the case at bar, Sevilla solicited
airline fares, but she did so for and on behalf of her principal, Tourist World Service, Inc. As
compensation, she received 4% of the proceeds in the concept of commissions. And as we
said, Sevilla herself based on her letter of November 28, 1961, pre-assumed her principal's
authority as owner of the business undertaking. We are convinced, considering the
circumstances and from the respondent Court's recital of facts, that the ties had
contemplated a principal agent relationship, rather than a joint managament or a
partnership..
But unlike simple grants of a power of attorney, the agency that we hereby declare to be
compatible with the intent of the parties, cannot be revoked at will. The reason is that it is
one coupled with an interest, the agency having been created for mutual interest, of the
agent and the principal. 19 It appears that Lina Sevilla is a bona fide travel agent herself, and
as such, she had acquired an interest in the business entrusted to her. Moreover, she had
assumed a personal obligation for the operation thereof, holding herself solidarily liable for
the payment of rentals. She continued the business, using her own name, after Tourist
World had stopped further operations. Her interest, obviously, is not to the commissions she
earned as a result of her business transactions, but one that extends to the very subject
matter of the power of management delegated to her. It is an agency that, as we said,
cannot be revoked at the pleasure of the principal. Accordingly, the revocation complained of
should entitle the petitioner, Lina Sevilla, to damages.
As we have stated, the respondent Court avoided this issue, confining itself to the telephone
disconnection and padlocking incidents. Anent the disconnection issue, it is the holding of
the Court of Appeals that there is 'no evidence showing that the Tourist World Service, Inc.
disconnected the telephone lines at the branch office. 20 Yet, what cannot be denied is the
fact that Tourist World Service, Inc. did not take pains to have them reconnected. Assuming,
therefore, that it had no hand in the disconnection now complained of, it had clearly
condoned it, and as owner of the telephone lines, it must shoulder responsibility therefor.
The Court of Appeals must likewise be held to be in error with respect to the padlocking
incident. For the fact that Tourist World Service, Inc. was the lessee named in the lease con-
tract did not accord it any authority to terminate that contract without notice to its actual
occupant, and to padlock the premises in such fashion. As this Court has ruled, the
petitioner, Lina Sevilla, had acquired a personal stake in the business itself, and necessarily,
in the equipment pertaining thereto. Furthermore, Sevilla was not a stranger to that contract
having been explicitly named therein as a third party in charge of rental payments (solidarily
with Tourist World, Inc.). She could not be ousted from possession as summarily as one
would eject an interloper.
The Court is satisfied that from the chronicle of events, there was indeed some malevolent
design to put the petitioner, Lina Sevilla, in a bad light following disclosures that she had
worked for a rival firm. To be sure, the respondent court speaks of alleged business losses
to justify the closure '21 but there is no clear showing that Tourist World Ermita Branch had
in fact sustained such reverses, let alone, the fact that Sevilla had moonlit for another
company. What the evidence discloses, on the other hand, is that following such an
information (that Sevilla was working for another company), Tourist World's board of
directors adopted two resolutions abolishing the office of 'manager" and authorizing the
corporate secretary, the respondent Eliseo Canilao, to effect the takeover of its branch office
properties. On January 3, 1962, the private respondents ended the lease over the branch
office premises, incidentally, without notice to her.
It was only on June 4, 1962, and after office hours significantly, that the Ermita office was
padlocked, personally by the respondent Canilao, on the pretext that it was necessary to
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Protect the interests of the Tourist World Service. " 22It is strange indeed that Tourist World
Service, Inc. did not find such a need when it cancelled the lease five months earlier. While
Tourist World Service, Inc. would not pretend that it sought to locate Sevilla to inform her of
the closure, but surely, it was aware that after office hours, she could not have been
anywhere near the premises. Capping these series of "offensives," it cut the office's
telephone lines, paralyzing completely its business operations, and in the process, depriving
Sevilla articipation therein.
This conduct on the part of Tourist World Service, Inc. betrays a sinister effort to punish
Sevillsa it had perceived to be disloyalty on her part. It is offensive, in any event, to
elementary norms of justice and fair play.
We rule therefore, that for its unwarranted revocation of the contract of agency, the private
respondent, Tourist World Service, Inc., should be sentenced to pay damages. Under the
Civil Code, moral damages may be awarded for "breaches of contract where the defendant
acted ... in bad faith. 23
We likewise condemn Tourist World Service, Inc. to pay further damages for the moral injury
done to Lina Sevilla from its brazen conduct subsequent to the cancellation of the power of
attorney granted to her on the authority of Article 21 of the Civil Code, in relation to Article
2219 (10) thereof —
ART. 21. Any person who wilfully causes loss or injury to another in a
manner that is contrary to morals, good customs or public policy shall
compensate the latter for the damage.24
ART. 2219. Moral damages25 may be recovered in the following and
analogous cases:
xxx xxx xxx
(10) Acts and actions refered into article 21, 26, 27, 28, 29, 30, 32, 34, and
35.
The respondent, Eliseo Canilao, as a joint tortfeasor is likewise hereby ordered to respond
for the same damages in a solidary capacity.
Insofar, however, as the private respondent, Segundina Noguera is concerned, no evidence
has been shown that she had connived with Tourist World Service, Inc. in the disconnection
and padlocking incidents. She cannot therefore be held liable as a cotortfeasor.
The Court considers the sums of P25,000.00 as and for moral damages,24 P10,000.00 as
exemplary damages, 25and P5,000.00 as nominal 26 and/or temperate27 damages, to be just,
fair, and reasonable under the circumstances.
WHEREFORE, the Decision promulgated on January 23, 1975 as well as the Resolution
issued on July 31, 1975, by the respondent Court of Appeals is hereby REVERSED and
SET ASIDE. The private respondent, Tourist World Service, Inc., and Eliseo Canilao, are
ORDERED jointly and severally to indemnify the petitioner, Lina Sevilla, the sum of 25,00.00
as and for moral damages, the sum of P10,000.00, as and for exemplary damages, and the
sum of P5,000.00, as and for nominal and/or temperate damages.
Costs against said private respondents.
SO ORDERED.
EN BANC
G.R. No. L-8169             January 29, 1957
THE SHELL COMPANY OF THE PHILIPPINES, LTD. vs. FIREMEN'S INSURANCE
COMPANY OF NEWARK, NEW JERSEY COMMERCIAL CASUALTY INSURANCE CO.,
SALVADOR SISON, PORFIRIO DE LA FUENTE and THE COURT OF APPEALS (First
Division)
PADILLA, J.:
Appeal by certiorari under Rule 46 to review a judgment of the Court of Appeals which
reversed that of the Court of First Instance of Manila and sentenced ". . . the defendants-
appellees to pay, jointly and severally, the plaintiffs-appellants the sum of P1,651.38, with
legal interest from December 6, 1947 (Gutierrez vs. Gutierrez, 56 Phil., 177, 180), and the
costs in both instances."
The Court of Appeals found the following:
Inasmuch as both the Plaintiffs-Appellants and the Defendant-Appellee, the Shell
Company of the Philippine Islands, Ltd. accept the statement of facts made by the
trial court in its decision and appearing on pages 23 to 37 of the Record on Appeal,
we quote hereunder such statement:
This is an action for recovery of sum of money, based on alleged negligence of the
defendants.
It is a fact that a Plymounth car owned by Salvador R. Sison was brought, on
September 3, 1947 to the Shell Gasoline and Service Station, located at the corner
of Marques de Comillas and Isaac Peral Streets, Manila, for washing, greasing and
spraying. The operator of the station, having agreed to do service upon payment of
P8.00, the car was placed on a hydraulic lifter under the direction of the personnel
of the station.
What happened to the car is recounted by Perlito Sison, as follows:
Q. Will you please describe how they proceeded to do the work?
A. Yes, sir. The first thing that was done, as I saw, was to drive the car
over the lifter. Then by the aid of the two grease men they raised up my
car up to six feet high, and then washing was done. After washing, the
next step was greasing. Before greasing was finished, there is a part near
the shelf of the right fender, right front fender, of my car to be greased, but
the the grease men cannot reached that part, so the next thing to be done
was to loosen the lifter just a few feet lower. Then upon releasing the
valve to make the car lower, a little bit lower . . .
Q. Who released the valve?
A. The greasemen, for the escape of the air. As the escape of the air is
too strong for my ear I faced backward. I faced toward Isaac Peral Street,
and covered my ear. After the escaped of the air has been finished, the air
coming out from the valve, I turned to face the car and I saw the car
swaying at that time, and just for a few second the car fell., (t.s.n. pp. 22-
23.)
The case was immediately reported to the Manila Adjustor Company, the adjustor of the
firemen's Insurance Company and the Commercial Casualty Insurance Company, as the car
was insured with these insurance companies. After having been inspected by one Mr.
Baylon, representative of the Manila Adjustor Company, the damaged car was taken to the
shops of the Philippine Motors, Incorporated, for repair upon order of the Firemen's
Insurance Company and the Commercial Casualty Company, with the consent of Salvador
R. Sison. The car was restored to running condition after repairs amounting to P1,651.38,
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and was delivered to Salvador R. Sison, who, in turn made assignments of his rights to
recover damages in favor of the Firemen's Insurance Company and the Commercial
Casualty Insurance Company.
On the other hand, the fall of the car from the hydraulic lifter has been explained by
Alfonso M. Adriano, a greaseman in the Shell Gasoline and Service Station, as
follows:
Q. Were you able to lift the car on the hydraulic lifter on the occasion,
September 3, 1947?
A. Yes, sir.
Q. To what height did you raise more or less?
A. More or less five feet, sir.
Q. After lifting that car that height, what did you do with the car?
A. I also washed it, sir.
Q. And after washing?
A. I greased it.
Q. On that occasion, have you been able to finish greasing and washing
the car?
A. There is one point which I could not reach.
Q. And what did you do then?
A. I lowered the lifter in order to reach that point.
Q. After lowering it a little, what did you do then?
A. I pushed and pressed the valve in its gradual pressure.
Q. Were you able to reach the portion which you were not able to reach
while it was lower?
A. No more, sir.
Q. Why?
A. Because when I was lowering the lifter I saw that the car was swinging
and it fell.
THE COURT. Why did the car swing and fall?
WITNESS: 'That is what I do not know, sir'. (t.s.n., p.67.)
The position of Defendant Porfirio de la Fuente is stated in his counter-statement of facts
which is hereunder also reproduced:
In the afternoon of September 3, 1947, an automobile belonging to the plaintiff
Salvador Sison was brought by his son, Perlito Sison, to the gasoline and service
station at the corner of Marques de Comillas and Isaac Peral Streets, City of
Manila, Philippines, owned by the defendant The Shell Company of the Philippine
Islands, Limited, but operated by the defendant Porfirio de la Fuente, for the
purpose of having said car washed and greased for a consideration of P8.00 (t.s.n.,
pp. 19-20.) Said car was insured against loss or damage by Firemen's Insurance
Company of Newark, New Jersey, and Commercial Casualty Insurance Company
jointly for the sum of P10,000 (Exhibits "A', "B", and "D").
The job of washing and greasing was undertaken by defendant Porfirio de la
Fuente through his two employees, Alfonso M. Adriano, as greaseman and one
surnamed de los Reyes, a helper and washer (t.s.n., pp. 65-67). To perform the job
the car was carefully and centrally placed on the platform of the lifter in the gasoline
and service station aforementioned before raising up said platform to a height of
about 5 feet and then the servicing job was started. After more than one hour of
washing and greasing, the job was about to be completed except for an ungreased
portion underneath the vehicle which could not be reached by the greasemen. So,
the lifter was lowered a little by Alfonso M. Adriano and while doing so, the car for
unknown reason accidentally fell and suffered damage to the value of P1, 651.38
(t.s.n., pp. 65-67).
The insurance companies after paying the sum of P1,651.38 for the damage and
charging the balance of P100.00 to Salvador Sison in accordance with the terms of
the insurance contract, have filed this action together with said Salvador Sison for
the recovery of the total amount of the damage from the defendants on the ground
of negligence (Record on Appeal, pp. 1-6).
The defendant Porfirio de la Fuente denied negligence in the operation of the lifter
in his separate answer and contended further that the accidental fall of the car was
caused by unforseen event (Record on Appeal, pp. 17-19).
The owner of the car forthwith notified the insurers who ordered their adjustor, the Manila
Adjustor Company, to investigate the incident and after such investigation the damaged car,
upon order of the insures and with the consent of the owner, was brought to the shop of the
Philippine Motors, Inc. The car was restored to running condition after thereon which
amounted to P1,651.38 and returned to the owner who assigned his right to collect the
aforesaid amount to the Firemen's Insurance Company and the Commercial Casualty
Insurance Company.
On 6 December 1947 the insures and the owner of the car brought an action in the Court of
First Instance of Manila against the Shell Company of the Philippines, Ltd. and Porfirio de la
Fuente to recover from them, jointly and severally, the sum of P1,651.38, interest thereon at
the legal rate from the filing of the complaint until fully paid, the costs. After trial the Court
dismissed the complaint. The plaintiffs appealed. The Court of Appeals reversed the
judgment and sentenced the defendant to pay the amount sought to be recovered, legal
interest and costs, as stated at the beginning of this opinion.
In arriving at the conclusion that on 3 September 1947 when the car was brought to the
station for servicing Profirio de la Fuente, the operator of the gasoline and service station,
was an agent of the Shell Company of the Philippines, Ltd., the Court of Appeals found that
—
. . . De la Fuente owned his position to the Shell Company which could remove him
terminate his services at any time from the said Company, and he undertook to sell
the Shell Company's products exculusively at the said Station. For this purpose, De
la Fuente was placed in possession of the gasoline and service station under
consideration, and was provided with all the equipments needed to operate it, by
the said Company, such as the tools and articles listed on Exhibit 2 which the
hydraulic lifter (hoist) and accessories, from which Sison's automobile fell on the
date in question (Exhibit 1 and 2). These equipments were delivered to De la
Fuente on a so-called loan basis. The Shell Company took charge of its care and
maintenance and rendered to the public or its customers at that station for the
proper functioning of the equipment. Witness Antonio Tiongson, who was sales
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 superintendent of the Shell Company, and witness Augusto Sawyer, foreman of the
same Company, supervised the operators and conducted periodic inspection of the
Company's gasoline and service station, the service station in question inclusive.
Explaining his duties and responsibilities and the reason for the loan, Tiongson
said: "mainly of the supervision of sales or (of) our dealers and rountinary
inspection of the equipment loaned by the Company" (t.s.n., 107); "we merely
inquire about how the equipments are, whether they have complaints, and whether
if said equipments are in proper order . . .", (t.s.n., 110); station equipments are
"loaned for the exclusive use of the dealer on condition that all supplies to be sold
by said dealer should be exclusively Shell, so as a concession we loan equipments
for their use . . .," "for the proper functioning of the equipments, we answer and see
to it that the equipments are in good running order usable condition . . .," "with
respect to the public." (t.s.n., 111-112). De la Fuente, as operator, was given
special prices by the Company for the gasoline products sold therein. Exhibit 1 —
Shell, which was a receipt by Antonio Tiongson and signed by the De la Fuente,
acknowledging the delivery of equipments of the gasoline and service station in
question was subsequently replaced by Exhibit 2 — Shell, an official from of the
inventory of the equipment which De la Fuente signed above the words: "Agent's
signature" And the service station in question had been marked "SHELL", and all
advertisements therein bore the same sign. . . .
. . . De la Fuente was the operator of the station "by grace" of the Defendant
Company which could and did remove him as it pleased; that all the equipments
needed to operate the station was owned by the Defendant Company which took
charge of their proper care and maintenance, despite the fact that they were loaned
to him; that the Defendant company did not leave the fixing of price for gasoline to
De la Fuente; on the other hand, the Defendant company had complete control
thereof; and that Tiongson, the sales representative of the Defendant Company,
had supervision over De la Fuente in the operation of the station, and in the sale of
Defendant Company's products therein. . . .
Taking into consideration the fact that the operator owed his position to the company and the
latter could remove him or terminate his services at will; that the service station belonged to
the company and bore its tradename and the operator sold only the products of the
company; that the equipment used by the operator belonged to the company and were just
loaned to the operator and the company took charge of their repair and maintenance; that an
employee of the company supervised the operator and conducted periodic inspection of the
company's gasoline and service station; that the price of the products sold by the operator
was fixed by the company and not by the operator; and that the receipt signed by the
operator indicated that he was a mere agent, the finding of the Court of Appeals that the
operator was an agent of the company and not an independent contractor should not be
disturbed.
To determine the nature of a contract courts do not have or are not bound to rely upon the
name or title given it by the contracting parties, should there be a controversy as to what
they really had intended to enter into, but the way the contracting parties do or perform their
respective obligation stipulated or agreed upon may be shown and inquired into, and should
such performance conflict with the name or title given the contract by the parties, the former
must prevail over the latter.
It was admitted by the operator of the gasoline and service station that "the car was carefully
and centrally placed on the platform of the lifter . . ." and the Court of Appeals found that —
. . . the fall of Appellant Sison's car from the hydraulic lift and the damage caused
therefor, were the result of the jerking and swaying of the lift when the valve was
released, and that the jerking was due to some accident and unforeseen
shortcoming of the mechanism itself, which caused its faulty or defective operation
or functioning,
. . . the servicing job on Appellant Sison's automobile was accepted by De la
Fuente in the normal and ordinary conduct of his business as operator of his co-
appellee's service station, and that the jerking and swaying of the hydraulic lift
which caused the fall of the subject car were due to its defective condition, resulting
in its faulty operation. . . .
As the act of the agent or his employees acting within the scope of his authority is the act of
the principal, the breach of the undertaking by the agent is one for which the principal is
answerable. Moreover, the company undertook to "answer and see to it that the equipments
are in good running order and usable condition;" and the Court of Appeals found that the
Company's mechanic failed to make a thorough check up of the hydraulic lifter and the
check up made by its mechanic was "merely routine" by raising "the lifter once or twice and
after observing that the operator was satisfactory, he (the mechanic) left the place." The
latter was negligent and the company must answer for the negligent act of its mechanic
which was the cause of the fall of the car from the hydraulic lifter.
The judgment under review is affirmed, with costs against the petitioner.
EN BANC
G.R. No. L-10918            March 4, 1916
WILLIAM FRESSEL, ET AL. vs. MARIANO UY CHACO SONS & COMPANY
TRENT, J.:
This is an appeal from a judgment sustaining the demurrer on the ground that the complaint
does not state a cause of action, followed by an order dismissing the case after the plaintiffs
declined to amend.
The complaint, omitting the caption, etc., reads:
2. That during the latter part of the year 1913, the defendant entered into a contract
with one E. Merritt, whereby the said Merritt undertook and agreed with the
defendant to build for the defendant a costly edifice in the city of Manila at the
corner of Calle Rosario and Plaza del Padre Moraga. In the contract it was agreed
between the parties thereto, that the defendant at any time, upon certain
contingencies, before the completion of said edifice could take possession of said
edifice in the course of construction and of all the materials in and about said
premises acquired by Merritt for the construction of said edifice.
3. That during the month of August land past, the plaintiffs delivered to Merritt at the
said edifice in the course of construction certain materials of the value of
P1,381.21, as per detailed list hereto attached and marked Exhibit A, which price
Merritt had agreed to pay on the 1st day of September, 1914.
4. That on the 28th day of August, 1914, the defendant under and by virtue of its
contract with Merritt took possession of the incomplete edifice in course of
construction together with all the materials on said premises including the materials
delivered by plaintiffs and mentioned in Exhibit A aforesaid.
5. That neither Merritt nor the defendant has paid for the materials mentioned in
Exhibit A, although payment has been demanded, and that on the 2d day of
September, 1914, the plaintiffs demanded of the defendant the return or permission
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 to enter upon said premises and retake said materials at the time still unused which
was refused by defendant.
6. That in pursuance of the contract between Merritt and the defendant, Merritt
acted as the agent for defendant in the acquisition of the materials from plaintiffs.
The appellants insist that the above quoted allegations show that Merritt acted as the agent
of the defendant in purchasing the materials in question and that the defendant, by taking
over and using such materials, accepted and ratified the purchase, thereby obligating itself
to pay for the same. Or, viewed in another light, if the defendant took over the unfinished
building and all the materials on the ground and then completed the structure according to
the plans, specifications, and building permit, it became in fact the successor or assignee of
the first builder, and as successor or assignee, it was as much bound legally to pay for the
materials used as was the original party. The vendor can enforce his contract against the
assignee as readily as against the assignor. While, on the other hand, the appellee contends
that Merritt, being "by the very terms of the contract" an independent contractor, is the only
person liable for the amount claimed.
It is urged that, as the demurrer admits the truth of all the allegations of fact set out in the
complaint, the allegation in paragraph 6 to the effect that Merritt "acted as the agent for
defendant in the acquisition of the materials from plaintiffs," must be, at this stage of the
proceedings, considered as true. The rule, as thus broadly stated, has many limitations and
restrictions.
A more accurate statement of the rule is that a demurrer admits the truth of all
material and relevant facts which are well pleaded. . . . .The admission of the truth
of material and relevant facts well pleaded does not extend to render a demurrer an
admission of inferences or conclusions drawn therefrom, even if alleged in the
pleading; nor mere inferences or conclusions from facts not stated; nor conclusions
of law. (Alzua and Arnalot vs. Johnson, 21 Phil. Rep., 308, 350.)
Upon the question of construction of pleadings, section 106 of the Code of Civil Procedure
provides that:
In the construction of a pleading, for the purpose of determining its effects, its
allegations shall be liberally construed, with a view of substantial justice between
the parties.
This section is essentially the same as section 452 of the California Code of Civil Procedure.
"Substantial justice," as used in the two sections, means substantial justice to be
ascertained and determined by fixed rules and positive statutes. (Stevens vs. Ross, 1 Cal.
94, 95.) "Where the language of a pleading is ambiguous, after giving to it a reasonable
intendment, it should be resolved against the pleader. This is especially true on appeal from
a judgment rendered after refusal to amend; where a general and special demurrer to a
complaint has been sustained, and the plaintiff had refused to amend, all ambiguities and
uncertainties must be construed against him." (Sutherland on Code Pleading, vol. 1, sec. 85,
and cases cited.)
The allegations in paragraphs 1 to 5, inclusive, above set forth, do not even intimate that the
relation existing between Merritt and the defendant was that of principal and agent, but, on
the contrary, they demonstrate that Merritt was an independent contractor and that the
materials were purchased by him as such contractor without the intervention of the
defendant. The fact that "the defendant entered into a contract with one E. Merritt, where by
the said Merritt undertook and agreed with the defendant to build for the defendant a costly
edifice" shows that Merritt was authorized to do the work according to his own method and
without being subject to the defendant's control, except as to the result of the work. He could
purchase his materials and supplies from whom he pleased and at such prices as he desired
to pay. Again, the allegations that the "plaintiffs delivered the Merritt . . . . certain materials
(the materials in question) of the value of P1,381.21, . . . . which price Merritt agreed to pay,"
show that there were no contractual relations whatever between the sellers and the
defendant. The mere fact that Merritt and the defendant had stipulated in their building
contract that the latter could, "upon certain contingencies," take possession of the
incompleted building and all materials on the ground, did not change Merritt from an
independent contractor to an agent. Suppose that, at the time the building was taken over
Merritt had actually used in the construction thus far P100,000 worth of materials and
supplies which he had purchased on a credit, could those creditors maintain an action
against the defendant for the value of such supplies? Certainly not. The fact that the
P100,000 worth of supplies had been actually used in the building would place those
creditors in no worse position to recover than that of the plaintiffs, although the materials
which the plaintiffs sold to Merritt had not actually gone into the construction. To hold that
either group of creditors can recover would have the effect of compelling the defendants to
pay, as we have indicated, just such prices for materials as Merritt and the sellers saw fit to
fix. In the absence of a statute creating what is known as mechanics' liens, the owner of a
building is not liable for the value of materials purchased by an independent contractor either
as such owner or as the assignee of the contractor.
The allegation in paragraph 6 that Merritt was the agent of the defendant contradicts all the
other allegations and is a mere conclusion drawn from them. Such conclusion is not
admitted, as we have said, by the demurrer.
The allegations in the complaint not being sufficient to constitute a cause of action against
the defendant, the judgment appealed from is affirmed, with costs against the appellants. So
ordered.
EN BANC
G.R. No. L-21601      December 28, 1968
NIELSON & COMPANY, INC. vs. LEPANTO CONSOLIDATED MINING COMPANY
RESOLUTION
ZALDIVAR, J.:
Lepanto seeks the reconsideration of the decision rendered on December 17, 1966. The
motion for reconsideration is based on two sets of grounds — the first set consisting of four
principal grounds, and the second set consisting of five alternative grounds, as follows:
Principal Grounds:
1. The court erred in overlooking and failing to apply the proper law applicable to
the agency or management contract in question, namely, Article 1733 of the Old
Civil Code (Article 1920 of the new), by virtue of which said agency was effectively
revoked and terminated in 1945 when, as stated in paragraph 20 of the complaint,
"defendant voluntarily ... prevented plaintiff from resuming management and
operation of said mining properties."
2. The court erred in holding that paragraph II of the management contract (Exhibit
C) suspended the period of said contract.
3. The court erred in reversing the ruling of the trial judge, based on well-settled
jurisprudence of this Supreme Court, that the management agreement was only
suspended but not extended on account of the war.
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 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 vs. Magallon, L-20345, November 28, 1964; Northern Motors, Inc. vs. Prince
Line, L-13884, February 29, 1960; American Express Co. vs. Natividad, 46 Phil. 207;
Agoncillo vs. Javier, 38 Phil. 424 and Molina vs. Somes, 24 Phil 49).
At any rate, even if we allow Lepanto to assert its new theory at this very late stage of the
proceedings, this Court cannot sustain the same.
Lepanto contends that the management contract in question (Exhibit C) is one of agency
because: (1) Nielson was to manage and operate the mining properties and mill on behalf,
and for the account, of Lepanto; and (2) Nielson was authorized to represent Lepanto in
entering, on Lepanto's behalf, into contracts for the hiring of laborers, purchase of supplies,
and the sale and marketing of the ores mined. All these, Lepanto claims, show that Nielson
was, by the terms of the contract, destined to execute juridical acts not on its own behalf but
on behalf of Lepanto under the control of the Board of Directors of Lepanto "at all times".
Hence Lepanto claims that the contract is one of agency. Lepanto then maintains that an
agency is revocable at the will of the principal (Article 1733 of the Old Civil Code), regardless
of any term or period stipulated in the contract, and it was in pursuance of that right that
Lepanto terminated the contract in 1945 when it took over and assumed exclusive
management of the work previously entrusted to Nielson under the contract. Lepanto finally
maintains 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
representacion, "hacer alguna cosa por cuenta o encargo de otra" dice nuestro
Codigo; "poder de hacer alguna cosa para el mandante o en su nombre" dice el
Codigo de Napoleon, y en tales palabras aparece vivo y luminoso el concepto y la
teoria de la representacion, tan fecunda en ensenanzas, que a su sola luz es como
se explican las diferencias que separan el mandato del arrendamiento de servicios,
de los contratos inominados, del consejo y de la gestion de negocios.
En efecto, en el arrendamiento de servicios al obligarse para su ejecucion, se
trabaja, en verdad, para el dueno que remunera la labor, pero ni se le representa ni
se obra en su nombre....
On the basis of the interpretation of Article 1709 of the old Civil Code, Article 1868 of the
new Civil Code has defined the contract of agency in more explicit terms, as follows:
By the contract of agency a person binds himself to render some service or to do
something in representation or on behalf of another, with the consent or authority of
the latter.
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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 benefication
and marketing of the minerals found on the mining properties; and in carrying out said
obligation Nielson should proceed diligently and in accordance with the best mining practice.
In connection with its work Nielson was to submit reports, maps, plans and
recommendations with respect to the operation and development of the mining properties,
make recommendations and plans on the erection or enlargement of any existing mill,
dispatch mining engineers and technicians to the mining properties as from time to time may
reasonably be required to investigate and make recommendations without cost or expense
to Lepanto. Nielson was also to "act as purchasing agent of supplies, equipment and other
necessary purchases by Lepanto, provided, however, that no purchase shall be made
without the prior approval of Lepanto; and provided further, that no commission shall be
claimed or retained by Nielson on such purchase"; and "to submit all requisition for supplies,
all constricts and arrangement with engineers, and staff and all matters requiring the
expenditures of money, present or future, for prior approval by Lepanto; and also to make
contracts subject to the prior approve of Lepanto for the sale and marketing of the minerals
mined from said properties, when said products are in a suitable condition for marketing."1
It thus appears that the principal and paramount undertaking of Nielson under the
management contract was the operation and development of the mine and the operation of
the mill. All the other undertakings mentioned in the contract are necessary or incidental to
the principal undertaking — these other undertakings being dependent upon the work on the
development of the mine and the operation of the mill. In the performance of this principal
undertaking Nielson was not in any way executing juridical acts for Lepanto, destined to
create, modify or extinguish business relations between Lepanto and third persons. In other
words, in performing its principal undertaking Nielson was not acting as an agent of Lepanto,
in the sense that the term agent is interpreted under the law of agency, but as one who was
performing material acts for an employer, for a compensation.
It is true that the management contract provides that Nielson would also act as purchasing
agent of supplies and enter into contracts regarding the sale of mineral, but the contract also
provides that Nielson could not make any purchase, or sell the minerals, without the prior
approval of Lepanto. It is clear, therefore, that even in these cases Nielson could not
execute juridical acts which would bind Lepanto without first securing the approval of
Lepanto. Nielson, then, was to act only as an intermediary, not as an agent.
Lepanto contends that the management contract in question being one of agency it had the
right to terminate the contract at will pursuant to the provision of Article 1733 of the old Civil
Code. We find, however, a proviso in the management contract which militates against this
stand of Lepanto. Paragraph XI of the contract provides:
Both parties to this agreement fully recognize that the terms of this Agreement are
made possible only because of the faith or confidence that the Officials of each
company have in the other; therefore, in order to assure that such confidence and
faith shall abide and continue, NIELSON agrees that LEPANTO may cancel this
Agreement at any time upon ninety (90) days written notice, in the event that
NIELSON for any reason whatsoever, except acts of God, strike and other causes
beyond its control, shall cease to prosecute the operation and development of the
properties herein described, in good faith and in accordance with approved mining
practice.
It is thus seen, from the above-quoted provision of paragraph XI of the management
contract, that Lepanto could not terminate the agreement at will. Lepanto could terminate or
cancel the agreement by giving notice of termination ninety days in advance only in the
event that Nielson should prosecute in bad faith and not in accordance with approved mining
practice the operation and development of the mining properties of Lepanto. Lepanto could
not terminate the agreement if Nielson should cease to prosecute the operation and
development of the mining properties by reason of acts of God, strike and other causes
beyond the control of Nielson.
The phrase "Both parties to this agreement fully recognize that the terms of this agreement
are made possible only because of the faith and confidence of the officials of each company
have in the other" in paragraph XI of the management contract does not qualify the relation
between Lepanto and Nielson as that of principal and agent based on trust and confidence,
such that the contractual relation may be terminated by the principal at any time that the
principal loses trust and confidence in the agent. Rather, that phrase simply implies the
circumstance that brought about the execution of the management contract. Thus, in the
annual report for 19362, submitted by Mr. C. A. Dewit, President of Lepanto, to its
stockholders, under date of March 15, 1937, we read the following:
To the stockholders
xxx      xxx      xxx
The incorporation of our Company was effected as a result of negotiations with
Messrs. Nielson & Co., Inc., and an offer by these gentlemen to Messrs. C. I.
Cookes and V. L. Lednicky, dated August 11, 1936, reading as follows:
Messrs. Cookes and Lednicky,
Present
Re: Mankayan Copper Mines
GENTLEMEN:
After an examination of your property by our engineers, we have decided
to offer as we hereby offer to underwrite the entire issue of stock of a
corporation to be formed for the purpose of taking over said properties,
said corporation to have an authorized capital of P1,750,000.00, of which
P700,000.00 will be issued in escrow to the claim-owners in exchange for
their claims, and the balance of P1,050,000.00 we will sell to the public at
par or take ourselves.
The arrangement will be under the following conditions:
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 1. The subscriptions for cash shall be payable 50% at time of subscription
and the balance subject to the call of the Board of Directors of the
proposed corporation.
2. We shall have an underwriting and brokerage commission of 10% of the
P1,050,000.00 to be sold for cash to the public, said commission to be
payable from the first payment of 50% on each subscription.
3. We will bear the cost of preparing and mailing any prospectus that may
be required, but no such prospectus will be sent out until the text thereof
has been first approved by the Board of Directors of the proposed
corporation.
4. That after the organization of the corporation, all operating contract be
entered into between ourselves and said corporation, under the terms
which the property will be developed and mined and a mill erected, under
our supervision, our compensation to be P2,000.00 per month until the
property is put on a profitable basis and P2,500.00 per month plus 10% of
the net profits for a period of five years thereafter.
5. That we shall have the option to renew said operating contract for an
additional period of five years, on the same basis as the original contract,
upon the expiration thereof.
It is understood that the development and mining operations on said
property, and the erection of the mill thereon, and the expenditures
therefor shall be subject to the general control of the Board of Directors of
the proposed corporation, and, in case you accept this proposition, that a
detailed operating contract will be entered into, covering the relationships
between the parties.
Yours very truly,  in question is not revocable at the will of Lepanto. We rule that this management contract is
(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 claim owners have transferred their claims to the Corporation, but the
P700,000.00 in stock which they are to receive therefor, is as yet held in escrow.
Immediately upon the formation of the Corporation Messrs. Nielson & Co.,
assumed the Management of the property under the control of the Board of
Directors. A modification in the Management Contract was made with the consent
of all the then stockholders, in virtue of which the compensation of Messrs. Nielson
& Co., was increased to P2,500.00 per month when mill construction began. The
formal Management Contract was not entered into until January 30, 1937.
xxx      xxx      xxx
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
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 11 of the management contract suspended
the period of said contract, in holding that the agreement was not only suspended but was
extended on account of the war, and in holding that the period of suspension on account of
the war lasted from February, 1942 to June 26, 1948. We are going to discuss these three
grounds together because they are interrelated.
In our decision we have dwelt lengthily on the points that the management contract was
suspended because of the war, and that the period of the contract was extended for a period
equivalent to the time when Nielson was unable to perform the work of mining and milling
because of the adverse effects of the war on the work of mining and milling.
It is the contention of Lepanto that the happening of those events, and the effects of those
events, simply suspended the performance of the obligations by either party in the contract,
but did not suspend the period of the contract, much less extended the period of the
contract.
We have conscientiously considered the arguments of Lepanto in support of these three
grounds, but We are not persuaded to reconsider the rulings that We made in Our decision.
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We want to say a little more on these points, however. Paragraph II of the management
contract provides as follows:
In the event of inundation, flooding of the mine, typhoon, earthquake or any other
force majeure, war, insurrection, civil commotion, organized strike, riot, fire, injury to
the machinery or other event or cause reasonably beyond the control of NIELSON
and which adversely affects the work of mining and milling; NIELSON shall report
such fact to LEPANTO and without liability or breach of the terms of this
Agreement,the same shall remain in suspense, wholly or partially during the terms
of such inability. (Emphasis supplied)
A reading of the above-quoted paragraph II cannot but convey the idea that upon the
happening of any of the events enumerated therein, which adversely affects the work of
mining and milling, the agreement is deemed suspended for as long as Nielson is unable to
perform its work of mining and milling because of the adverse effects of the happening of the
event on the work of mining and milling. During the period when the adverse effects on the
work of mining and milling exist, neither party in the contract would be held liable for 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
erect or reconstruct the mill in case of its destruction by force majeure.
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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
Agency, Trusts, and Partnership | UMak Law | Atty. Dujunco | MKM | Part 4&5 | 12
This Court has held that Republic Act No. 342 does not apply to debts contracted during the
war and did not lift the moratorium in relations thereto. 10 In the case of Abraham, et al. vs.
Intestate Estate of Juan C. Ysmael, et al., L-16741, Jan. 31, 1962, this Court said:
Respondents, however, contend that Republic Act No. 342, which took effect on
July 26, 1948, lifted the moratorium on debts contracted during the Japanese
occupation. The court has already held that Republic Act No. 342 did not lift the
moratorium on debts contracted during the war (Uy vs. Kalaw Katigbak, G.R. No. L-
1830, Dec. 31, 1949) but modified Executive Order No. 32 as to pre-war debts,
making the protection available only to debtors who had war damage claims (Sison
v. Mirasol, G.R. No. L-4711, Oct. 3, 1952).
We therefore reiterate the ruling in Our decision that the claim involved in the first item
awarded to Nielson had not prescribed.
What we have stated herein regarding the non-prescription of the cause of action of the
claim involved in the first item in the award also holds true with respect to the second item in
the award, which refers to Nielson's claim for management fee of P2,500.00 for January,
1942. Lepanto admits that this second item, like the first, is a monetary obligation. The right
of action of Nielson regarding this claim accrued on January 31, 1942.
As regards items 3, 4, 5, 6 and 7 in the awards in the decision, the moratorium law is not
applicable. That is the reason why in Our decision We did not discuss the question of
prescription regarding these items. The claims of Nielson involved in these items are based
on the management contract, and Nielson's cause of action regarding these claims
prescribes in ten years. Corollary to Our ruling that the management contract was
suspended from February, 1942 until June 26, 1948, and that the contract was extended for
five years from June 26, 1948, the right of action of Nielson to claim for what is due to it
during that period of extension accrued during the period from June 26, 1948 till the end of
the five-year extension period or until June 26, 1953. And so, even if We reckon June 26,
1948 as the starting date of the ten-year period in connection with the prescriptibility of the
claims involved in items 3, 4, 5, 6 and 7 of the awards in the decision, it is obvious that when
the complaint was filed on 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
P3,000,000.00. We held in Our decision that Nielson is entitled to receive l0% of the stock
dividends declared, or shares of stock worth P300,000.00 at the par value of P0.10 per
Agency, Trusts, and Partnership | UMak Law | Atty. Dujunco | MKM | Part 4&5 | 13
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.
xxx      xxx      xxx
No corporation shall make or declare any dividend except from the surplus profits
arising from its business, or divide or distribute its capital stock or property other
than actual profits among its members or stockholders until after the payment of its
debts and the termination of its existence by limitation or lawful
dissolution: Provided, That banking, savings and loan, and trust corporations may
receive deposits and issue certificates of deposit, checks, drafts, and bills of
exchange, and the like in the transaction of the ordinary business of banking,
savings and loan, and trust corporations. (As amended by Act No. 2792, and Act
No. 3518; Emphasis supplied.)
From the above-quoted provision of Section 16 of the Corporation Law, the consideration for
which shares of stock may be issued are: (1) cash; (2) property; and (3) undistributed profits.
Shares of stock are given the special name "stock dividends" only if they are issued in lieu of
undistributed profits. If shares of stocks are issued in exchange of cash or property then
those shares do not fall under the category of "stock dividends". A corporation may legally
issue shares of stock in consideration of services rendered to it by a person not a
stockholder, or in payment of its indebtedness. A share of stock issued to pay for services
rendered is equivalent to a stock issued in exchange of property, because services is
equivalent to property.14 Likewise a share of stock issued in payment of indebtedness is
equivalent to issuing a stock in exchange for cash. But a share of stock thus issued should
be part of the original capital stock of the corporation upon its organization, or part of the
stocks issued when the increase of the capitalization of a corporation is properly authorized.
In other words, it is the shares of stock that are originally issued by the corporation and
forming part of the capital that can be exchanged for cash or services rendered, or property;
that is, if the corporation has original shares of stock unsold or unsubscribed, either coming
from the original capitalization or from the increased capitalization. Those shares of stock
may be issued to a person who is not a stockholder, or to a person already a stockholder in
exchange for services rendered or for cash or property. But a share of stock coming from
stock dividends declared cannot be issued to one who is not a stockholder of a corporation.
A "stock dividend" is any dividend payable in shares of stock of the corporation declaring or
authorizing such dividend. It is, what the term itself implies, a distribution of the shares of
stock of the corporation among the stockholders as dividends. A stock dividend of a
corporation is a dividend paid in shares of stock instead of cash, and is properly payable
only out of surplus profits.15 So, a stock dividend is actually two things: (1) a dividend, and
(2) the enforced use of the dividend money to purchase additional shares of stock at
par.16 When a corporation issues stock dividends, it shows that the corporation's
accumulated profits have been capitalized instead of distributed to the stockholders or
retained as surplus available for distribution, in money or kind, should opportunity offer. Far
from being a realization of profits for the stockholder, it tends rather to postpone said
realization, in that the fund represented by the new stock has been transferred from surplus
to assets and no longer available for actual distribution.17 Thus, it is apparent that stock
dividends are issued only to stockholders. This is so because only stockholders are entitled
to dividends. They are the only ones who have a right to a proportional share in that part of
the surplus which is declared as dividends. A stock dividend really adds nothing to the
interest of the stockholder; the proportional interest of each stockholder remains the
same.18If a stockholder is deprived of his stock dividends - and this happens if the shares of
stock forming part of the stock dividends are issued to a 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 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 —
Agency, Trusts, and Partnership | UMak Law | Atty. Dujunco | MKM | Part 4&5 | 14
 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:
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:
(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.
EN BANC
G.R. No. L-11491            August 23, 1918
ANDRES QUIROGA vs. PARSONS HARDWARE CO.
AVANCEÑA, J.:
Agency, Trusts, and Partnership | UMak Law | Atty. Dujunco | MKM | Part 4&5 | 15
On January 24, 1911, in this city of manila, a contract in the following tenor was entered into
by and between the plaintiff, as party of the first part, and J. Parsons (to whose rights and
obligations the present defendant later subrogated itself), as party of the second part:
CONTRACT EXECUTED BY AND BETWEEN ANDRES QUIROGA AND
J. PARSONS, BOTH MERCHANTS ESTABLISHED IN MANILA, FOR
THE EXCLUSIVE SALE OF "QUIROGA" BEDS IN THE VISAYAN
ISLANDS.
ARTICLE 1. Don Andres Quiroga grants the exclusive right to sell his beds in the
Visayan Islands to J. Parsons under the following conditions:
(A) Mr. Quiroga shall furnish beds of his manufacture to Mr. Parsons for the latter's
establishment in Iloilo, and shall invoice them at the same price he has fixed for
sales, in Manila, and, in the invoices, shall make and allowance of a discount of 25
per cent of the invoiced prices, as commission on the sale; and Mr. Parsons shall
order the beds by the dozen, whether of the same or of different styles.
(B) Mr. Parsons binds himself to pay Mr. Quiroga for the beds received, within a
period of sixty days from the date of their shipment.
(C) The expenses for transportation and shipment shall be borne by M. Quiroga,
and the freight, insurance, and cost of unloading from the vessel at the point where
the beds are received, shall be paid by Mr. Parsons.
(D) If, before an invoice falls due, Mr. Quiroga should request its payment, said
payment when made shall be considered as a prompt payment, and as such a
deduction of 2 per cent shall be made from the amount of the invoice.
The same discount shall be made on the amount of any invoice which Mr. Parsons
may deem convenient to pay in cash.
(E) Mr. Quiroga binds himself to give notice at least fifteen days before hand of any
alteration in price which he may plan to make in respect to his beds, and agrees
that if on the date when such alteration takes effect he should have any order
pending to be served to Mr. Parsons, such order shall enjoy the advantage of the
alteration if the price thereby be lowered, but shall not be affected by said alteration
if the price thereby be increased, for, in this latter case, Mr. Quiroga assumed the
obligation to invoice the beds at the price at which the order was given.
(F) Mr. Parsons binds himself not to sell any other kind except the "Quiroga" beds.
ART. 2. In compensation for the expenses of advertisement which, for the benefit of
both contracting parties, Mr. Parsons may find himself obliged to make, Mr.
Quiroga assumes the obligation to offer and give the preference to Mr. Parsons in
case anyone should apply for the exclusive agency for any island not comprised
with the Visayan group.
ART. 3. Mr. Parsons may sell, or establish branches of his agency for the sale of
"Quiroga" beds in all the towns of the Archipelago where there are no exclusive
agents, and shall immediately report such action to Mr. Quiroga for his approval.
ART. 4. This contract is made for an unlimited period, and may be terminated by
either of the contracting parties on a previous notice of ninety days to the other
party.
Of the three causes of action alleged by the plaintiff in his complaint, only two of them
constitute the subject matter of this appeal and both substantially amount to the averment
that the defendant violated the following obligations: not to sell the beds at higher prices than
those of the invoices; to have an open establishment in Iloilo; itself to conduct the agency; to
keep the beds on public exhibition, and to pay for the advertisement expenses for the same;
and to order the beds by the dozen and in no other manner. As may be seen, with the
exception of the obligation on the part of the defendant to order the beds by the dozen and
in no other manner, none of the obligations imputed to the defendant in the two causes of
action are expressly set forth in the contract. But the plaintiff alleged that the defendant was
his agent for the sale of his beds in Iloilo, and that said obligations are implied in a contract
of commercial agency. The whole question, therefore, reduced itself to a determination as to
whether the defendant, by reason of the contract hereinbefore transcribed, was a purchaser
or an agent of the plaintiff for the sale of his beds.
In order to classify a contract, due regard must be given to its essential clauses. In the
contract in question, what was essential, as constituting its cause and subject matter, is that
the plaintiff was to furnish the defendant with the beds which the latter might order, at the
price stipulated, and that the defendant was to pay the price in the manner stipulated. The
price agreed upon was the one determined by the plaintiff for the sale of these beds in
Manila, with a discount of from 20 to 25 per cent, according to their class. Payment was to
be made at the end of sixty days, or before, at the plaintiff's request, or in cash, if the
defendant so preferred, and in these last two cases an additional discount was to be allowed
for prompt payment. These are precisely the essential features of a contract of purchase and
sale. There was the obligation on the part of the plaintiff to supply the beds, and, on the part
of the defendant, to pay their price. These features exclude the legal conception of an
agency or order to sell whereby the mandatory or agent received the thing to sell it, and
does not pay its price, but delivers to the principal the price he obtains from the sale of the
thing to a third person, and if he does not succeed in selling it, he returns it. By virtue of the
contract between the plaintiff and the defendant, the latter, on receiving the beds, was
necessarily obliged to pay their price within the term fixed, without any other consideration
and regardless as to whether he had or had not sold the beds.
It would be enough to hold, as we do, that the contract by and between the defendant and
the plaintiff is one of purchase and sale, in order to show that it was not one made on the
basis of a commission on sales, as the plaintiff claims it was, for these contracts are
incompatible with each other. But, besides, examining the clauses of this contract, none of
them is found that substantially supports the plaintiff's contention. Not a single one of these
clauses necessarily conveys the idea of an agency. The words commission on sales used in
clause (A) of article 1 mean nothing else, as stated in the contract itself, than a mere
discount on the invoice price. The word agency, also used in articles 2 and 3, only
expresses that the defendant was the only one that could sell the plaintiff's beds in the
Visayan Islands. With regard to the remaining clauses, the least that can be said is that they
are not incompatible with the contract of purchase and sale.
The plaintiff calls attention to the testimony of Ernesto Vidal, a former vice-president of the
defendant corporation and who established and managed the latter's business in Iloilo. It
appears that this witness, prior to the time of his testimony, had serious trouble with the
defendant, had maintained a civil suit against it, and had even accused one of its partners,
Guillermo Parsons, of falsification. He testified that it was he who drafted the contract Exhibit
A, and, when questioned as to what was his purpose in contracting with the plaintiff, replied
that it was to be an agent for his beds and to collect a commission on sales. However,
according to the defendant's evidence, it was Mariano Lopez Santos, a director of the
corporation, who prepared Exhibit A. But, even supposing that Ernesto Vidal has stated the
truth, his statement as to what was his idea in contracting with the plaintiff is of no
importance, inasmuch as the agreements contained in Exhibit A which he claims to have
drafted, constitute, as we have said, a contract of purchase and sale, and not one of
commercial agency. This only means that Ernesto Vidal was mistaken in his classification of
the contract. But it must be understood that a contract is what the law defines it to be, and
not what it is called by the contracting parties.
Agency, Trusts, and Partnership | UMak Law | Atty. Dujunco | MKM | Part 4&5 | 16
The plaintiff also endeavored to prove that the defendant had returned beds that it could not
sell; that, without previous notice, it forwarded to the defendant the beds that it wanted; and
that the defendant received its commission for the beds sold by the plaintiff directly to
persons in Iloilo. But all this, at the most only shows that, on the part of both of them, there
was mutual tolerance in the performance of the contract in disregard of its terms; and it gives
no right to have the contract considered, not as the parties stipulated it, but as they
performed it. Only the acts of the contracting parties, subsequent to, and in connection with,
the execution of the contract, must be considered for the purpose of interpreting the
contract, when such interpretation is necessary, but not when, as in the instant case, its
essential agreements are clearly set forth and plainly show that the contract belongs to a
certain kind and not to another. Furthermore, the return made was of certain brass beds,
and was not effected in exchange for the price paid for them, but was for other beds of
another kind; and for the letter Exhibit L-1, requested the plaintiff's prior consent with respect
to said beds, which shows that it was not considered that the defendant had a right, by virtue
of the contract, to make this return. As regards the shipment of beds without previous notice,
it is insinuated in the record that these brass beds were precisely the ones so shipped, and
that, for this very reason, the plaintiff agreed to their return. And with respect to the so-called
commissions, we have said that they merely constituted a discount on the invoice price, and
the reason for applying this benefit to the beds sold directly by the plaintiff to persons in Iloilo
was because, as the defendant obligated itself in the contract to incur the expenses of
advertisement of the plaintiff's beds, such sales were to be considered as a result of that
advertisement.
In respect to the defendant's obligation to order by the dozen, the only one expressly
imposed by the contract, the effect of its breach would only entitle the plaintiff to disregard
the orders which the defendant might place under other conditions; but if the plaintiff
consents to fill them, he waives his right and cannot complain for having acted thus at his
own free will.
For the foregoing reasons, we are of opinion that the contract by and between the plaintiff
and the defendant was one of purchase and sale, and that the obligations the breach of
which is alleged as a cause of action are not imposed upon the defendant, either by
agreement or by law.
The judgment appealed from is affirmed, with costs against the appellant. So ordered.
EN BANC
G.R. No. L-47538             June 20, 1941
GONZALO PUYAT & SONS, INC. vs. ARCO AMUSEMENT COMPANY (formerly known
as Teatro Arco)
LAUREL, J.:
This is a petition for the issuance of a writ of certiorari to the Court of Appeals for the
purpose of reviewing its Amusement Company (formerly known as Teatro Arco), plaintiff-
appellant, vs. Gonzalo Puyat and Sons. Inc., defendant-appellee."
It appears that the respondent herein brought an action against the herein petitioner in the
Court of First Instance of Manila to secure a reimbursement of certain amounts allegedly
overpaid by it on account of the purchase price of sound reproducing equipment and
machinery ordered by the petitioner from the Starr Piano Company of Richmond, Indiana,
U.S.A. The facts of the case as found by the trial court and confirmed by the appellate court,
which are admitted by the respondent, are as follows:
In the year 1929, the "Teatro Arco", a corporation duly organized under the laws of
the Philippine Islands, with its office in Manila, was engaged in the business of
operating cinematographs. In 1930, its name was changed to Arco Amusement
Company. C. S. Salmon was the president, while A. B. Coulette was the business
manager. About the same time, Gonzalo Puyat & Sons, Inc., another corporation
doing business in the Philippine Islands, with office in Manila, in addition to its other
business, was acting as exclusive agents in the Philippines for the Starr Piano
Company of Richmond, Indiana, U.S. A. It would seem that this last company dealt
in cinematographer equipment and machinery, and the Arco Amusement Company
desiring to equipt its cinematograph with sound reproducing devices, approached
Gonzalo Puyat & Sons, Inc., thru its then president and acting manager, Gil Puyat,
and an employee named Santos. After some negotiations, it was agreed between
the parties, that is to say, Salmon and Coulette on one side, representing the
plaintiff, and Gil Puyat on the other, representing the defendant, that the latter
would, on behalf of the plaintiff, order sound reproducing equipment from the Starr
Piano Company and that the plaintiff would pay the defendant, in addition to the
price of the equipment, a 10 per cent commission, plus all expenses, such as,
freight, insurance, banking charges, cables, etc. At the expense of the plaintiff, the
defendant sent a cable, Exhibit "3", to the Starr Piano Company, inquiring about the
equipment desired and making the said company to quote its price without
discount. A reply was received by Gonzalo Puyat & Sons, Inc., with the price,
evidently the list price of $1,700 f.o.b. factory Richmond, Indiana. The defendant
did not show the plaintiff the cable of inquiry nor the reply but merely informed the
plaintiff of the price of $1,700. Being agreeable to this price, the plaintiff, by means
of Exhibit "1", which is a letter signed by C. S. Salmon dated November 19, 1929,
formally authorized the order. The equipment arrived about the end of the year
1929, and upon delivery of the same to the plaintiff and the presentation of
necessary papers, the price of $1.700, plus the 10 per cent commission agreed
upon and plus all the expenses and charges, was duly paid by the plaintiff to the
defendant.
Sometime the following year, and after some negotiations between the same
parties, plaintiff and defendants, another order for sound reproducing equipment
was placed by the plaintiff with the defendant, on the same terms as the first order.
This agreement or order was confirmed by the plaintiff by its letter Exhibit "2",
without date, that is to say, that the plaintiff would pay for the equipment the
amount of $1,600, which was supposed to be the price quoted by the Starr Piano
Company, plus 10 per cent commission, plus all expenses incurred. The equipment
under the second order arrived in due time, and the defendant was duly paid the
price of $1,600 with its 10 per cent commission, and $160, for all expenses and
charges. This amount of $160 does not represent actual out-of-pocket expenses
paid by the defendant, but a mere flat charge and rough estimate made by the
defendant equivalent to 10 per cent of the price of $1,600 of the equipment.
About three years later, in connection with a civil case in Vigan, filed by one Fidel
Reyes against the defendant herein Gonzalo Puyat & Sons, Inc., the officials of the
Arco Amusement Company discovered that the price quoted to them by the
defendant with regard to their two orders mentioned was not the net price but rather
the list price, and that the defendants had obtained a discount from the Starr Piano
Company. Moreover, by reading reviews and literature on prices of machinery and
cinematograph equipment, said officials of the plaintiff were convinced that the
prices charged them by the defendant were much too high including the charges for
out-of-pocket expense. For these reasons, they sought to obtain a reduction from
the defendant or rather a reimbursement, and failing in this they brought the
present action.
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The trial court held that the contract between the petitioner and the respondent was one of
outright purchase and sale, and absolved that petitioner from the complaint. The appellate
court, however, — by a division of four, with one justice dissenting — held that the relation
between petitioner and respondent was that of agent and principal, the petitioner acting as
agent of the respondent in the purchase of the equipment in question, and sentenced the
petitioner to pay the respondent alleged overpayments in the total sum of $1,335.52 or
P2,671.04, together with legal interest thereon from the date of the filing of the complaint
until said amount is fully paid, as well as to pay the costs of the suit in both instances. The
appellate court further argued that even if the contract between the petitioner and the
respondent was one of purchase and sale, the petitioner was guilty of fraud in concealing
the true price and hence would still be liable to reimburse the respondent for the
overpayments made by the latter.
The petitioner now claims that the following errors have been incurred by the appellate court:
I. El Tribunal de Apelaciones incurrio en error de derecho al declarar que, segun
hechos, entre la recurrente y la recurrida existia una relacion implicita de
mandataria a mandante en la transaccion de que se trata, en vez de la de
vendedora a compradora como ha declarado el Juzgado de Primera Instncia de
Manila, presidido entonces por el hoy Magistrado Honorable Marcelino
Montemayor.
II. El Tribunal de Apelaciones incurrio en error de derecho al declarar que,
suponiendo que dicha relacion fuerra de vendedora a compradora, la recurrente
obtuvo, mediante dolo, el consentimiento de la recurrida en cuanto al precio de
$1,700 y $1,600 de las maquinarias y equipos en cuestion, y condenar a la
recurrente ha obtenido de la Starr Piano Company of Richmond, Indiana.
We sustain the theory of the trial court that the contract between the petitioner and the
respondent was one of purchase and sale, and not one of agency, for the reasons now to be
stated.
In the first place, the contract is the law between the parties and should include all the things
they are supposed to have been agreed upon. What does not appear on the face of the
contract should be regarded merely as "dealer's" or "trader's talk", which can not bind either
party. (Nolbrook v. Conner, 56 So., 576, 11 Am. Rep., 212; Bank v. Brosscell, 120 III., 161;
Bank v. Palmer, 47 III., 92; Hosser v. Copper, 8 Allen, 334; Doles v. Merrill, 173 Mass., 411.)
The letters, Exhibits 1 and 2, by which the respondent accepted the prices of $1,700 and
$1,600, respectively, for the sound reproducing equipment subject of its contract with the
petitioner, are clear in their terms and admit no other interpretation that the respondent in
question at the prices indicated which are fixed and determinate. The respondent admitted in
its complaint filed with the Court of First Instance of Manila that the petitioner agreed to sellto
it the first sound reproducing equipment and machinery. The third paragraph of the
respondent's cause of action states:
3. That on or about November 19, 1929, the herein plaintiff (respondent) and
defendant (petitioner) entered into an agreement, under and by virtue of which the
herein defendant was to secure from the United States, and sell and deliver to the
herein plaintiff, certain sound reproducing equipment and machinery, for which the
said defendant, under and by virtue of said agreement, was to receive the actual
cost price plus ten per cent (10%), and was also to be reimbursed for all out of
pocket expenses in connection with the purchase and delivery of such equipment,
such as costs of telegrams, freight, and similar expenses. (Emphasis ours.)
We agree with the trial judge that "whatever unforseen events might have taken place
unfavorable to the defendant (petitioner), such as change in prices, mistake in their
quotation, loss of the goods not covered by insurance or failure of the Starr Piano Company
to properly fill the orders as per specifications, the plaintiff (respondent) might still legally
hold the defendant (petitioner) to the prices fixed of $1,700 and $1,600." This is incompatible
with the pretended relation of agency between the petitioner and the respondent, because in
agency, the agent is exempted from all liability in the discharge of his commission provided
he acts in accordance with the instructions received from his principal (section 254, Code of
Commerce), and the principal must indemnify the agent for all damages which the latter may
incur in carrying out the agency without fault or imprudence on his part (article 1729, Civil
Code).
While the latters, Exhibits 1 and 2, state that the petitioner was to receive ten per cent (10%)
commission, this does not necessarily make the petitioner an agent of the respondent, as
this provision is only an additional price which the respondent bound itself to pay, and which
stipulation is not incompatible with the contract of purchase and sale.
(See Quiroga vs. Parsons Hardware Co., 38 Phil., 501.)
In the second place, to hold the petitioner an agent of the respondent in the purchase of
equipment and machinery from the Starr Piano Company of Richmond, Indiana, is
incompatible with the admitted fact that the petitioner is the exclusive agent of the same
company in the Philippines. It is out of the ordinary for one to be the agent of both the
vendor and the purchaser. The facts and circumstances indicated do not point to anything
but plain ordinary transaction where the respondent enters into a contract of purchase and
sale with the petitioner, the latter as exclusive agent of the Starr Piano Company in the
United States.
It follows that the petitioner as vendor is not bound to reimburse the respondent as vendee
for any difference between the cost price and the sales price which represents the profit
realized by the vendor out of the transaction. This is the very essence of commerce without
which merchants or middleman would not exist.
The respondents contends that it merely agreed to pay the cost price as distinguished from
the list price, plus ten per cent (10%) commission and all out-of-pocket expenses incurred by
the petitioner. The distinction which the respondents seeks to draw between the cost price
and the list price we consider to be spacious. It is to be observed that the twenty-five per
cent (25%) discount granted by the Starr piano Company to the petitioner is available only to
the latter as the former's exclusive agent in the Philippines. The respondent could not have
secured this discount from the Starr Piano Company and neither was the petitioner willing to
waive that discount in favor of the respondent. As a matter of fact, no reason is advanced by
the respondent why the petitioner should waive the 25 per cent discount granted it by the
Starr Piano Company in exchange for the 10 percent commission offered by the respondent.
Moreover, the petitioner was not duty bound to reveal the private arrangement it had with the
Starr Piano Company relative to such discount to its prospective customers, and the
respondent was not even aware of such an arrangement. The respondent, therefore, could
not have offered to pay a 10 per cent commission to the petitioner provided it was given the
benefit of the 25 per cent discount enjoyed by the petitioner. It is well known that local
dealers acting as agents of foreign manufacturers, aside from obtaining a discount from the
home office, sometimes add to the list price when they resell to local purchasers. It was
apparently to guard against an exhorbitant additional price that the respondent sought to
limit it to 10 per cent, and the respondent is estopped from questioning that additional price.
If the respondent later on discovers itself at the short end of a bad bargain, it alone must
bear the blame, and it cannot rescind the contract, much less compel a reimbursement of
the excess price, on that ground alone. The respondent could not secure equipment and
machinery manufactured by the Starr Piano Company except from the petitioner alone; it
willingly paid the price quoted; it received the equipment and machinery as represented; and
that was the end of the matter as far as the respondent was concerned. The fact that the
petitioner obtained more or less profit than the respondent calculated before entering into
the contract or reducing the price agreed upon between the petitioner and the respondent.
Agency, Trusts, and Partnership | UMak Law | Atty. Dujunco | MKM | Part 4&5 | 18
Not every concealment is fraud; and short of fraud, it were better that, within certain limits,
business acumen permit of the loosening of the sleeves and of the sharpening of the
intellect of men and women in the business world.
The writ of certiorari should be, as it is hereby, granted. The decision of the appellate court is
accordingly reversed and the petitioner is absolved from the respondent's complaint in G. R.
No. 1023, entitled "Arco Amusement Company (formerly known as Teatro Arco), plaintiff-
appellant, vs. Gonzalo Puyat & Sons, Inc., defendants-appellee," without pronouncement
regarding costs. So ordered.
EN BANC  express or implied, in behalf of or in the name of the Company, or to bind the Company in
G.R. No. L-20871 April 30, 1971
KER & CO., LTD. vs. JOSE B. LINGAD, as Acting Commissioner of Internal Revenue
FERNANDO, J.:
Petitioner Ker & Co., Ltd. would have us reverse a decision of the Court of Tax Appeals,
holding it liable as a commercial broker under Section 194 (t) of the National Internal
Revenue Code. Its plea, notwithstanding the vigorous effort of its counsel, is not sufficiently
persuasive. An obstacle, well-nigh insuperable stands in the way. The decision under review
conforms to and is in accordance with the controlling doctrine announced in the recent case
of Commissioner of Internal Revenue v. Constantino.1 The decisive test, as therein set forth,
is the retention of the ownership of the goods delivered to the possession of the dealer, like
herein petitioner, for resale to customers, the price and terms remaining subject to the
control of the firm consigning such goods. The facts, as found by respondent Court, to which
we defer, unmistakably indicate that such a situation does exist. The juridical consequences
must inevitably follow. We affirm.
It was shown that petitioner was assessed by the then Commissioner of Internal Revenue
Melecio R. Domingo the sum of P20,272.33 as the commercial broker's percentage tax,
surcharge, and compromise penalty for the period from July 1, 1949 to December 31, 1953.
There was a request on the part of petitioner for the cancellation of such assessment, which
request was turned down. As a result, it filed a petition for review with the Court of Tax
Appeals. In its answer, the then Commissioner Domingo maintained his stand that petitioner
should be taxed in such amount as a commercial broker. In the decision now under review,
promulgated on October 19, 1962, the Court of Tax Appeals held petitioner taxable except
as to the compromise penalty of P500.00, the amount due from it being fixed at P19,772.33.
Such liability arose from a contract of petitioner with the United States Rubber International,
the former being referred to as the Distributor and the latter specifically designated as the
Company. The contract was to apply to transactions between the former and petitioner, as
Distributor, from July 1, 1948 to continue in force until terminated by either party giving to the
other sixty days' notice.2 The shipments would cover products "for consumption in Cebu,
Bohol, Leyte, Samar, Jolo, Negros Oriental, and Mindanao except [the] province of Davao",
petitioner, as Distributor, being precluded from disposing such products elsewhere than in
the above places unless written consent would first be obtained from the
Company.3 Petitioner, as Distributor, is required to exert every effort to have the shipment of
the products in the maximum quantity and to promote in every way the sale thereof. 4 The
prices, discounts, terms of payment, terms of delivery and other conditions of sale were
subject to change in the discretion of the Company.5
Then came this crucial stipulation: "The Company shall from time to time consign to the
Distributor and the Distributor will receive, accept and/or hold upon consignment the
products specified under the terms of this agreement in such quantities as in the judgment of
the Company may be necessary for the successful solicitation and maintenance of business
in the territory, and the Distributor agrees that responsibility for the final sole of all goods
delivered shall rest with him. All goods on consignment shall remain the property of the
Company until sold by the Distributor to the purchaser or purchasers, but all sales made by
the Distributor shall be in his name, in which the sale price of all goods sold less the discount
given to the Distributor by the Company in accordance with the provision of paragraph 13 of
this agreement, whether or not such sale price shall have been collected by the Distributor
from the purchaser or purchasers, shall immediately be paid and remitted by the Distributor
to the Company. It is further agreed that this agreement does not constitute Distributor the
agent or legal representative 4 of the Company for any purpose whatsoever. Distributor is
not granted any right or authority to assume or to create any obligation or responsibility,
any manner or thing whatsoever."6
All specifications for the goods ordered were subject to acceptance by the Company with
petitioner, as Distributor, required to accept such goods shipped as well as to clear the same
through customs and to arrange for delivery in its warehouse in Cebu City. Moreover, orders
are to be filled in whole or in part from the stocks carried by the Company's neighboring
branches, subsidiaries or other sources of Company's brands.7 Shipments were to be
invoiced at prices to be agreed upon, with the customs duties being paid by petitioner, as
Distributor, for account of the Company.8 Moreover, all resale prices, lists, discounts and
general terms and conditions of local resale were to be subject to the approval of the
Company and to change from time to time in its discretion. 9 The dealer, as Distributor, is
allowed a discount of ten percent on the net amount of sales of merchandise made under
such agreement. 10 On a date to be determined by the Company, the petitioner, as
Distributor, was required to report to it data showing in detail all sales during the month
immediately preceding, specifying therein the quantities, sizes and types together with such
information as may be required for accounting purposes, with the Company rendering an
invoice on sales as described to be dated as of the date of inventory and sales report. As
Distributor, petitioner had to make payment on such invoice or invoices on due date with the
Company being privileged at its option to terminate and cancel the agreement forthwith upon
the failure to comply with this obligation. 11 The Company, at its own expense, was to keep
the consigned stock fully insured against loss or damage by fire or as a result of fire, the
policy of such insurance to be payable to it in the event of loss. Petitioner, as Distributor,
assumed full responsibility with reference to the stock and its safety at all times; and upon
request of the Company at any time, it was to render inventory of the existing stock which
could be subject to change. 12 There was furthermore this equally tell-tale covenant: "Upon
the termination or any cancellation of this agreement all goods held on consignment shall be
held by the Distributor for the account of the Company, without expense to the Company,
until such time as provision can be made by the Company for disposition." 13
The issue with the Court of Tax Appeals, as with us now, is whether the relationship thus
created is one of vendor and vendee or of broker and principal. Not that there would have
been the slightest doubt were it not for the categorical denial in the contract that petitioner
was not constituted as "the agent or legal representative of the Company for any purpose
whatsoever." It would be, however, to impart to such an express disclaimer a meaning it
should not possess to ignore what is manifestly the role assigned to petitioner considering
the instrument as a whole. That would be to lose sight altogether of what has been agreed
upon. The Court of Tax Appeals was not misled in the language of the decision now on
appeal: "That the petitioner Ker & Co., Ltd. is, by contractual stipulation, an agent of U.S.
Rubber International is borne out by the facts that petitioner can dispose of the products of
the Company only to certain persons or entities and within stipulated limits, unless excepted
by the contract or by the Rubber Company (Par. 2); that it merely receives, accepts and/or
holds upon consignment the products, which remain properties of the latter company (Par.
8); that every effort shall be made by petitioner to promote in every way the sale of the
products (Par. 3); that sales made by petitioner are subject to approval by the company (Par.
Agency, Trusts, and Partnership | UMak Law | Atty. Dujunco | MKM | Part 4&5 | 19
12); that on dates determined by the rubber company, petitioner shall render a detailed
report showing sales during the month (Par. 14); that the rubber company shall invoice the
sales as of the dates of inventory and sales report (Par. 14); that the rubber company agrees
to keep the consigned goods fully insured under insurance policies payable to it in case of
loss (Par. 15); that upon request of the rubber company at any time, petitioner shall render
an inventory of the existing stock which may be checked by an authorized representative of
the former (Par. 15); and that upon termination or cancellation of the Agreement, all goods
held on consignment shall be held by petitioner for the account of the rubber company until
their disposition is provided for by the latter (Par. 19). All these circumstances are
irreconcilably antagonistic to the idea of an independent merchant." 14 Hence its conclusion:
"However, upon analysis of the contract, as a whole, together with the actual conduct of the
parties in respect thereto, we have arrived at the conclusion that the relationship between
them is one of brokerage or agency." 15 We find ourselves in agreement, notwithstanding the
able brief filed on behalf of petitioner by its counsel. As noted at the outset, we cannot heed
petitioner's plea for reversal.
1. According to the National Internal Revenue Code, a commercial broker "includes all
persons, other than importers, manufacturers, producers, or bona fide employees, who, for
compensation or profit, sell or bring about sales or purchases of merchandise for other
persons or bring proposed buyers and sellers together, or negotiate freights or other
business for owners of vessels or other means of transportation, or for the shippers, or
consignors or consignees of freight carried by vessels or other means of transportation. The
term includes commission merchants." 16 The controlling decision as to the test to be
followed as to who falls within the above definition of a commercial broker is that
of Commissioner of Internal Revenue v. Constantino. 17 In the language of Justice J. B. L.
Reyes, who penned the opinion: "Since the company retained ownership of the goods, even
as it delivered possession unto the dealer for resale to customers, the price and terms of
which were subject to the company's control, the relationship between the company and the
dealer is one of agency, ... ." 18 An excerpt from Salisbury v. Brooks 19 cited in support of
such a view follows: " 'The difficulty in distinguishing between contracts of sale and the
creation of an agency to sell has led to the establishment of rules by the application of which
this difficulty may be solved. The decisions say the transfer of title or agreement to transfer it
for a price paid or promised is the essence of sale. If such transfer puts the transferee in the
attitude or position of an owner and makes him liable to the transferor as a debtor for the
agreed price, and not merely as an agent who must account for the proceeds of a resale, the
transaction is a sale; while the essence of an agency to sell is the delivery to an agent, not
as his property, but as the property of the principal, who remains the owner and has the right
to control sales, fix the price, and terms, demand and receive the proceeds less the agent's
commission upon sales made.' " 20 The opinion relied on the work of Mechem on Sales as
well as Mechem on Agency. Williston and Tiedman both of whom wrote treatises on Sales,
were likewise referred to.
Equally relevant is this portion of the Salisbury opinion: "It is difficult to understand or
appreciate the necessity or presence of these mutual requirements and obligations on any
theory other than that of a contract of agency. Salisbury was to furnish the mill and put the
timber owned by him into a marketable condition in the form of lumber; Brooks was to
furnish the funds necessary for that purpose, sell the manufactured product, and account
therefor to Salisbury upon the specific terms of the agreement, less the compensation fixed
by the parties in lieu of interest on the money advanced and for services as agent. These
requirements and stipulations are in tent with any other conception of the contract. If it
constitutes an agreement to sell, they are meaningless. But they cannot be ignored. They
were placed there for some purpose, doubtless as the result of definite antecedent
negotiations therefore, consummated by the final written expression of the
agreement." 21 Hence the Constantino opinion could categorically affirm that the mere
disclaimer in a contract that an entity like petitioner is not "the agent or legal representative
for any purpose whatsoever" does not suffice to yield the conclusion that it is an
independent merchant if the control over the goods for resale of the goods consigned is
pervasive in character. The Court of Tax Appeals decision now under review pays fealty to
such an applicable doctrine.
2. No merit therefore attaches to the first error imputed by petitioner to the Court of Tax
Appeals. Neither did such Court fail to appreciate in its true significance the act and conduct
pursued in the implementation of the contract by both the United States Rubber International
and petitioner, as was contended in the second assignment of error. Petitioner ought to have
been aware that there was no need for such an inquiry. The terms of the contract, as noted,
speak quite clearly. There is lacking that degree of ambiguity sufficient to give rise to serious
doubt as to what was contemplated by the parties. A reading thereof discloses that the
relationship arising therefrom was not one of seller and purchaser. If it were thus intended,
then it would not have included covenants which in their totality would negate the concept of
a firm acquiring as vendee goods from another. Instead, the stipulations were so worded as
to lead to no other conclusion than that the control by the United States Rubber International
over the goods in question is, in the language of the Constantino opinion, "pervasive". The
insistence on a relationship opposed to that apparent from the language employed might
even yield the impression that such a mode of construction was resorted to in order that the
applicability of a taxing statute might be rendered nugatory. Certainly, such a result is to be
avoided.
Nor is it to be lost sight of that on a matter left to the discretion of the Court of Tax Appeals
which has developed an expertise in view of its function being limited solely to the
interpretation of revenue laws, this Court is not prepared to substitute its own judgment
unless a grave abuse of discretion is manifest. It would be to frustrate the objective for which
administrative tribunals are created if the judiciary, absent such a showing, is to ignore their
appraisal on a matter that forms the staple of their specialized competence. While it is to be
admitted that counsel for petitioner did scrutinize with care the decision under review with a
view to exposing what was considered its flaws, it cannot be said that there was such a
failure to apply what the law commands as to call for its reversal. Instead, what cannot be
denied is that the Court of Tax Appeals reached a result to which the Court in the recent
Constantino decision gave the imprimatur of its approval.
WHEREFORE, the Court of Tax Appeals decision of October 19, 1962 is affirmed. With
costs against petitioner.
SECOND DIVISION
G.R. No. 113074 January 22, 1997
ALFRED HAHN, vs. COURT OF APPEALS and BAYERSCHE MOTOREN WERKE
AKTIENGSELLSCHAFT (BMW)
MENDOZA, J.:
This is a petition for review of the decision1 of the Court of Appeals dismissing a complaint
for specific performance which petitioner had filed against private respondent on the ground
that the Regional Trial Court of Quezon City did not acquire jurisdiction over private
respondent, a nonresident foreign corporation, and of the appellate court's order denying
petitioner's motion for reconsideration.
The following are the facts:
Petitioner Alfred Hahn is a Filipino citizen doing business under the name and style "Hahn-
Manila." On the other hand, private respondent Bayerische Motoren Werke
Aktiengesellschaft (BMW) is a nonresident foreign corporation existing under the laws of the
former Federal Republic of Germany, with principal office at Munich, Germany.
Agency, Trusts, and Partnership | UMak Law | Atty. Dujunco | MKM | Part 4&5 | 20
On March 7, 1967, petitioner executed in favor of private respondent a "Deed of Assignment
with Special Power of Attorney," which reads in full as follows:
WHEREAS, the ASSIGNOR is the present owner and holder of the BMW
trademark and device in the Philippines which ASSIGNOR uses and has been
using on the products manufactured by ASSIGNEE, and for which ASSIGNOR is
the authorized exclusive Dealer of the ASSIGNEE in the Philippines, the same
being evidenced by certificate of registration issued by the Director of Patents on
12 December 1963 and is referred to as Trademark No. 10625;
WHEREAS, the ASSIGNOR has agreed to transfer and consequently record said
transfer of the said BMW trademark and device in favor of the ASSIGNEE herein
with the Philippines Patent Office;
NOW THEREFORE, in view of the foregoing and in consideration of the
stipulations hereunder stated, the ASSIGNOR hereby affirms the said assignment
and transfer in favor of the ASSIGNEE under the following terms and conditions:
1. The ASSIGNEE shall take appropriate steps against any user other than
ASSIGNOR or infringer of the BMW trademark in the Philippines; for such purpose,
the ASSIGNOR shall inform the ASSIGNEE immediately of any such use or
infringement of the said trademark which comes to his knowledge and upon such
information the ASSIGNOR shall automatically act as Attorney-In-Fact of the
ASSIGNEE for such case, with full power, authority and responsibility to prosecute
unilaterally or in concert with ASSIGNEE, any such infringer of the subject mark
and for purposes hereof the ASSIGNOR is hereby named and constituted as
ASSIGNEE's Attorney-In-Fact, but any such suit without ASSIGNEE's consent will
exclusively be the responsibility and for the account of the ASSIGNOR,
2. That the ASSIGNOR and the ASSIGNEE shall continue business relations as
has been usual in the past without a formal contract, and for that purpose, the
dealership of ASSIGNOR shall cover the ASSIGNEE's complete production
program with the only limitation that, for the present, in view of ASSIGNEE's limited
production, the latter shall not be able to supply automobiles to ASSIGNOR.
Per the agreement, the parties "continue[d] business relations as has been usual in the past
without a formal contract." But on February 16, 1993, in a meeting with a BMW
representative and the president of Columbia Motors Corporation (CMC), Jose Alvarez,
petitioner was informed that BMW was arranging to grant the exclusive dealership of BMW
cars and products to CMC, which had expressed interest in acquiring the same. On
February 24, 1993, petitioner received confirmation of the information from BMW which, in a
letter, expressed dissatisfaction with various aspects of petitioner's business, mentioning
among other things, decline in sales, deteriorating services, and inadequate showroom and
warehouse facilities, and petitioner's alleged failure to comply with the standards for an
exclusive BMW dealer.2 Nonetheless, BMW expressed willingness to continue business
relations with the petitioner on the basis of a "standard BMW importer" contract, otherwise, it
said, if this was not acceptable to petitioner, BMW would have no alternative but to terminate
petitioner's exclusive dealership effective June 30, 1993.
Petitioner protested, claiming that the termination of his exclusive dealership would be a
breach of the Deed of Assignment.3 Hahn insisted that as long as the assignment of its
trademark and device subsisted, he remained BMW's exclusive dealer in the Philippines
because the assignment was made in consideration of the exclusive dealership. In the same
letter petitioner explained that the decline in sales was due to lower prices offered for BMW
cars in the United States and the fact that few customers returned for repairs and servicing
because of the durability of BMW parts and the efficiency of petitioner's service.
Because of Hahn's insistence on the former business relation, BMW withdrew on March 26,
1993 its offer of a "standard importer contract" and terminated the exclusive dealer
relationship effective June 30, 1993. 4 At a conference of BMW Regional Importers held on
April 26, 1993 in Singapore, Hahn was surprised to find Alvarez among those invited from
the Asian region. On April 29, 1993, BMW proposed that Hahn and CMC jointly import and
distribute BMW cars and parts.
Hahn found the proposal unacceptable. On May 14, 1993, he filed a complaint for specific
performance and damages against BMW to compel it to continue the exclusive dealership.
Later he filed an amended complaint to include an application for temporary restraining order
and for writs of preliminary, mandatory and prohibitory injunction to enjoin BMW from
terminating his exclusive dealership. Hahn's amended complaint alleged in pertinent parts:
2. Defendant [BMW] is a foreign corporation doing business in the Philippines with
principal offices at Munich, Germany. It may be served with summons and other
court processes through the Secretary of the Department of Trade and Industry of
the Philippines. . . .
xxx xxx xxx
5. On March 7, 1967, Plaintiff executed in favor of defendant BMW a Deed of
Assignment with Special Power of Attorney covering the trademark and in
consideration thereof, under its first whereas clause, Plaintiff was duly
acknowledged as the "exclusive Dealer of the Assignee in the Philippines. . . .
xxx xxx xxx
8. From the time the trademark "BMW & DEVICE" was first used by the Plaintiff in
the Philippines up to the present, Plaintiff, through its firm name "HAHN MANILA"
and without any monetary contribution from defendant BMW, established BMW's
goodwill and market presence in the Philippines. Pursuant thereto, Plaintiff has
invested a lot of money and resources in order to single-handedly compete against
other motorcycle and car companies. . . . Moreover, Plaintiff has built buildings and
other infrastructures such as service centers and showrooms to maintain and
promote the car and products of defendant BMW.
xxx xxx xxx
10. In a letter dated February 24, 1993, defendant BMW advised Plaintiff that it was
willing to maintain with Plaintiff a relationship but only "on the basis of a standard
BMW importer contract as adjusted to reflect the particular situation in the
Philippines" subject to certain conditions, otherwise, defendant BMW would
terminate Plaintiffs exclusive dealership and any relationship for cause effective
June 30, 1993. . . .
xxx xxx xxx
15. The actuations of defendant BMW are in breach of the assignment agreement
between itself and plaintiff since the consideration for the assignment of the BMW
trademark is the continuance of the exclusive dealership agreement. It thus, follows
that the exclusive dealership should continue for so long as defendant BMW enjoys
the use and ownership of the trademark assigned to it by Plaintiff.
The case was docketed as Civil Case No. Q-93-15933 and raffled to Branch 104 of the
Quezon City Regional Trial Court, which on June 14, 1993 issued a temporary restraining
order. Summons and copies of the complaint and amended complaint were thereafter
served on the private respondent through the Department of Trade and Industry, pursuant to
Rule 14, §14 of the Rules of Court. The order, summons and copies of the complaint and
Agency, Trusts, and Partnership | UMak Law | Atty. Dujunco | MKM | Part 4&5 | 21
amended complaint were later sent by the DTI to BMW via registered mail on June 15,
19935 and received by the latter on June 24, 1993.
On June 17, 1993, without proof of service on BMW, the hearing on the application for the
writ of preliminary injunction proceeded ex parte, with petitioner Hahn testifying. On June 30,
1993, the trial court issued an order granting the writ of preliminary injunction upon the filing
of a bond of P100,000.00. On July 13, 1993, following the posting of the required bond, a
writ of preliminary injunction was issued.
On July 1, 1993, BMW moved to dismiss the case, contending that the trial court did not
acquire jurisdiction over it through the service of summons on the Department of Trade and
Industry, because it (BMW) was a foreign corporation and it was not doing business in the
Philippines. It contended that the execution of the Deed of Assignment was an isolated
transaction; that Hahn was not its agent because the latter undertook to assemble and sell
BMW cars and products without the participation of BMW and sold other products; and that
Hahn was an indentor or middleman transacting business in his own name and for his own
account.
Petitioner Alfred Hahn opposed the motion. He argued that BMW was doing business in the
Philippines through him as its agent, as shown by the fact that BMW invoices and order
forms were used to document his transactions; that he gave warranties as exclusive BMW
dealer; that BMW officials periodically inspected standards of service rendered by him; and
that he was described in service booklets and international publications of BMW as a "BMW
Importer" or "BMW Trading Company" in the Philippines.
The trial court6 deferred resolution of the motion to dismiss until after trial on the merits for
the reason that the grounds advanced by BMW in its motion did not seem to be indubitable.
Without seeking reconsideration of the aforementioned order, BMW filed a petition
for certiorari with the Court of Appeals alleging that:
I. THE RESPONDENT JUDGE ACTED WITH UNDUE HASTE OR OTHERWISE
INJUDICIOUSLY IN PROCEEDINGS LEADING TOWARD THE ISSUANCE OF
THE WRIT OF PRELIMINARY INJUNCTION, AND IN PRESCRIBING THE
TERMS FOR THE ISSUANCE THEREOF.
II. THE RESPONDENT JUDGE PATENTLY ERRED IN DEFERRING
RESOLUTION OF THE MOTION TO DISMISS ON THE GROUND OF LACK OF
JURISDICTION, AND THEREBY FAILING TO IMMEDIATELY DISMISS THE
CASE A QUO.
BMW asked for the immediate issuance of a temporary restraining order and, after hearing,
for a writ of preliminary injunction, to enjoin the trial court from proceeding further in Civil
Case No. Q-93-15933. Private respondent pointed out that, unless the trial court's order was
set aside, it would be forced to submit to the jurisdiction of the court by filing its answer or to
accept judgment in default, when the very question was whether the court had jurisdiction
over it.
The Court of Appeals enjoined the trial court from hearing petitioner's complaint. On
December 20, 1993, it rendered judgment finding the trial court guilty of grave abuse of
discretion in deferring resolution of the motion to dismiss. It stated:
Going by the pleadings already filed with the respondent court before it came out
with its questioned order of July 26, 1993, we rule and so hold that petitioner's
(BMW) motion to dismiss could be resolved then and there, and that the
respondent judge's deferment of his action thereon until after trial on the merit
constitutes, to our mind, grave abuse of discretion.
xxx xxx xxx
. . . [T]here is not much appreciable disagreement as regards the factual matters
relating to the motion to dismiss. What truly divide (sic) the parties and to which
they greatly differ is the legal conclusions they respectively draw from such facts,
(sic) with Hahn maintaining that on the basis thereof, BMW is doing business in the
Philippines while the latter asserts that it is not.
Then, after stating that any ruling which the trial court might make on the motion to dismiss
would anyway be elevated to it on appeal, the Court of Appeals itself resolved the motion. It
ruled that BMW was not doing business in the country and, therefore, jurisdiction over it
could not be acquired through service of summons on the DTI pursuant to Rule 14, §14.
'The court upheld private respondent's contention that Hahn acted in his own name and for
his own account and independently of BMW, based on Alfred Hahn's allegations that he had
invested his own money and resources in establishing BMW's goodwill in the Philippines
and on BMW's claim that Hahn sold products other than those of BMW. It held that petitioner
was a mere indentor or broker and not an agent through whom private respondent BMW
transacted business in the Philippines. Consequently, the Court of Appeals dismissed
petitioner's complaint against BMW.
Hence, this appeal. Petitioner contends that the Court of Appeals erred (1) in finding that the
trial court gravely abused its discretion in deferring action on the motion to dismiss and (2) in
finding that private respondent BMW is not doing business in the Philippines and, for this
reason, dismissing petitioner's case.
Petitioner's appeal is well taken. Rule 14, §14 provides:
§14. Service upon private foreign corporations. — If the defendant is a foreign
corporation, or a nonresident joint stock company or association, doing business in
the Philippines, service may be made on its resident agent designated in
accordance with law for that purpose, or, if there be no such agent, on the
government official designated by law to that effect, or on any of its officers or
agents within the Philippines. (Emphasis added).
What acts are considered "doing business in the Philippines" are enumerated in §3(d) of the
Foreign Investments Act of 1991 (R.A. No. 7042) as follows:7
d) the phrase "doing business" shall include soliciting orders, service contracts,
opening offices, whether called "liaison" offices or branches; appointing
representatives or distributors domiciled in the Philippines  or who in any calendar
year stay in the country for a period or periods totalling one hundred eighty (180)
days or more; participating in the management, supervision or control of any
domestic business, firm, entity or corporation in the Philippines; and any other act
or acts that imply a continuity of commercial dealings or arrangements, and
contemplate to that extent the performance of acts or works, or the exercise of
some of the functions normally incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the business organization:
Provided, however, That the phrase "doing business" shall not be deemed to
include mere investment as a shareholder by a foreign entity in domestic
corporations duly registered to do business, and/or the exercise of rights as such
investor; nor having a nominee director or officer to represent its interests in such
corporation; nor appointing a representative or distributor domiciled in the
Philippines which transacts business in its own name and for its own account.
(Emphasis supplied)
Thus, the phrase includes "appointing representatives or distributors in the Philippines" but
not when the representative or distributor "transacts business in its name and for its own
account." In addition, §1(f)(1) of the Rules and Regulations implementing (IRR) the Omnibus
Investment Code of 1987 (E.O. No. 226) provided:
Agency, Trusts, and Partnership | UMak Law | Atty. Dujunco | MKM | Part 4&5 | 22
 (f) "Doing business" shall be any act or combination of acts, enumerated in Article
44 of the Code. In particular, "doing business" includes:
(1) . . . A foreign firm which does business through middlemen acting in their own
names, such as indentors, commercial brokers or commission merchants, shall not
be deemed doing business in the Philippines. But such indentors, commercial
brokers or commission merchants shall be the ones deemed to be doing business
in the Philippines.
The question is whether petitioner Alfred Hahn is the agent or distributor in the Philippines of
private respondent BMW. If he is, BMW may be considered doing business in the
Philippines and the trial court acquired jurisdiction over it (BMW) by virtue of the service of
summons on the Department of Trade and Industry. Otherwise, if Hahn is not the agent of
BMW but an independent dealer, albeit of BMW cars and products, BMW, a foreign
corporation, is not considered doing business in the Philippines within the meaning of the
Foreign Investments Act of 1991 and the IRR, and the trial court did not acquire jurisdiction
over it (BMW).
The Court of Appeals held that petitioner Alfred Hahn acted in his own name and for his own
account and not as agent or distributor in the Philippines of BMW on the ground that "he
alone had contacts with individuals or entities interested in acquiring BMW vehicles.
Independence characterizes Hahn's undertakings, for which reason he is to be considered,
under governing statutes, as doing business." (p. 13) In support of this conclusion, the
appellate court cited the following allegations in Hahn's amended complaint:
8. From the time the trademark "BMW & DEVICE" was first used by the Plaintiff in
the Philippines up to the present, Plaintiff, through its firm name "HAHN MANILA"
and without any monetary contributions from defendant BMW, established BMW's
goodwill and market presence in the Philippines. Pursuant thereto, Plaintiff invested
a lot of money and resources in order to single-handedly compete against other
motorcycle and car companies. . . . Moreover, Plaintiff has built buildings and other
infrastructures such as service centers and showrooms to maintain and promote
the car and products of defendant BMW.
As the above quoted allegations of the amended complaint show, however, there is nothing
to support the appellate court's finding that Hahn solicited orders alone and for his own
account and without "interference from, let alone direction of, BMW." (p. 13) To the contrary,
Hahn claimed he took orders for BMW cars and transmitted them to BMW. Upon receipt of
the orders, BMW fixed the downpayment and pricing charges, notified Hahn of the
scheduled production month for the orders, and reconfirmed the orders by signing and
returning to Hahn the acceptance sheets. Payment was made by the buyer directly to BMW.
Title to cars purchased passed directly to the buyer and Hahn never paid for the purchase
price of BMW cars sold in the Philippines. Hahn was credited with a commission equal to
14% of the purchase price upon the invoicing of a vehicle order by BMW. Upon confirmation
in writing that the vehicles had been registered in the Philippines and serviced by him, Hahn
received an additional 3% of the full purchase price. Hahn performed after-sale services,
including warranty services, for which he received reimbursement from BMW. All orders
were on invoices and forms of BMW.8
These allegations were substantially admitted by BMW which, in its petition
for certiorari before the Court of Appeals, stated:9
9.4. As soon as the vehicles are fully manufactured and full payment of the
purchase prices are made, the vehicles are shipped to the Philippines. (The
payments may be made by the purchasers or third-persons or even by Hahn.) The
bills of lading are made up in the name of the purchasers, but Hahn-Manila is
therein indicated as the person to be notified.
9.5. It is Hahn who picks up the vehicles from the Philippine ports, for purposes of
conducting pre-delivery inspections. Thereafter, he delivers the vehicles to the
purchasers.
9.6. As soon as BMW invoices the vehicle ordered, Hahn is credited with a
commission of fourteen percent (14%) of the full purchase price thereof, and as
soon as he confirms in writing that the vehicles have been registered in the
Philippines and have been serviced by him, he will receive an additional three
percent (3%) of the full purchase prices as commission.
Contrary to the appellate court's conclusion, this arrangement shows an agency. An agent
receives a commission upon the successful conclusion of a sale. On the other hand, a
broker earns his pay merely by bringing the buyer and the seller together, even if no sale is
eventually made.
As to the service centers and showrooms which he said he had put up at his own expense,
Hahn said that he had to follow BMW specifications as exclusive dealer of BMW in the
Philippines. According to Hahn, BMW periodically inspected the service centers to see to it
that BMW standards were maintained. Indeed, it would seem from BMW's letter to Hahn that
it was for Hahn's alleged failure to maintain BMW standards that BMW was terminating
Hahn's dealership.
The fact that Hahn invested his own money to put up these service centers and showrooms
does not necessarily prove that he is not an agent of BMW. For as already noted, there are
facts in the record which suggest that BMW exercised control over Hahn's activities as a
dealer and made regular inspections of Hahn's premises to enforce compliance with BMW
standards and specifications.10 For example, in its letter to Hahn dated February 23, 1996,
BMW stated:
In the last years we have pointed out to you in several discussions and letters that
we have to tackle the Philippine market more professionally and that we are
through your present activities not adequately prepared to cope with the
forthcoming challenges.11
In effect, BMW was holding Hahn accountable to it under the 1967 Agreement.
This case fits into the mould of Communications Materials, Inc.  v. Court of Appeals,12 in
which the foreign corporation entered into a "Representative Agreement" and a "Licensing
Agreement" with a domestic corporation, by virtue of which the latter was appointed
"exclusive representative" in the Philippines for a stipulated commission. Pursuant to these
contracts, the domestic corporation sold products exported by the foreign corporation and
put up a service center for the products sold locally. This Court held that these acts
constituted doing business in the Philippines. The arrangement showed that the foreign
corporation's purpose was to penetrate the Philippine market and establish its presence in
the Philippines.
In addition, BMW held out private respondent Hahn as its exclusive distributor in the
Philippines, even as it announced in the Asian region that Hahn was the "official BMW
agent" in the Philippines.13
The Court of Appeals also found that petitioner Alfred Hahn dealt in other products, and not
exclusively in BMW products, and, on this basis, ruled that Hahn was not an agent of BMW.
(p. 14) This finding is based entirely on allegations of BMW in its motion to dismiss filed in
the trial court and in its petition for certiorari before the Court of Appeals.14 But this allegation
was denied by Hahn15 and therefore the Court of Appeals should not have cited it as if it
were the fact.
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Indeed this is not the only factual issue raised, which should have indicated to the Court of
Appeals the necessity of affirming the trial court's order deferring resolution of BMW's motion
to dismiss. Petitioner alleged that whether or not he is considered an agent of BMW, the fact
is that BMW did business in the Philippines because it sold cars directly to Philippine
buyers. 16 This was denied by BMW, which claimed that Hahn was not its agent and that,
while it was true that it had sold cars to Philippine buyers, this was done without solicitation
on its part.17
It is not true then that the question whether BMW is doing business could have been
resolved simply by considering the parties' pleadings. There are genuine issues of facts
which can only be determined on the basis of evidence duly presented. BMW cannot short
circuit the process on the plea that to compel it to go to trial would be to deny its right not to
submit to the jurisdiction of the trial court which precisely it denies. Rule 16, §3 authorizes
courts to defer the resolution of a motion to dismiss until after the trial if the ground on which
the motion is based does not appear to be indubitable. Here the record of the case bristles
with factual issues and it is not at all clear whether some allegations correspond to the proof.
Anyway, private respondent need not apprehend that by responding to the summons it
would be waiving its objection to the trial court's jurisdiction. It is now settled that, for
purposes of having summons served on a foreign corporation in accordance with Rule 14,
§14, it is sufficient that it be alleged in the complaint that the foreign corporation is doing
business in the Philippines. The court need not go beyond the allegations of the complaint in
order to determine whether it has Jurisdiction. 18 A determination that the foreign corporation
is doing business is only tentative and is made only for the purpose of enabling the local
court to acquire jurisdiction over the foreign corporation through service of summons
pursuant to Rule 14, §14. Such determination does not foreclose a contrary finding should
evidence later show that it is not transacting business in the country. As this Court has
explained:
This is not to say, however, that the petitioner's right to question the jurisdiction of
the court over its person is now to be deemed a foreclosed matter. If it is true, as
Signetics claims, that its only involvement in the Philippines was through a passive
investment in Sigfil, which it even later disposed of, and that TEAM Pacific is not its
agent, then it cannot really be said to be doing business in the Philippines. It is a
defense, however, that requires the contravention of the allegations of the
complaint, as well as a full ventilation, in effect, of the main merits of the case,
which should not thus be within the province of a mere motion to dismiss. So, also,
the issue posed by the petitioner as to whether a foreign corporation which has
done business in the country, but which has ceased to do business at the time of
the filing of a complaint, can still be made to answer for a cause of action which
accrued while it was doing business, is another matter that would yet have to await
the reception and admission of evidence. Since these points have seasonably been
raised by the petitioner, there should be no real cause for what may understandably
be its apprehension, i.e., that by its participation during the trial on the merits, it
may, absent an invocation of separate or independent reliefs of its own, be
considered to have voluntarily submitted itself to the court's jurisdiction.19
Far from committing an abuse of discretion, the trial court properly deferred resolution of the
motion to dismiss and thus avoided prematurely deciding a question which requires a factual
basis, with the same result if it had denied the motion and conditionally assumed jurisdiction.
It is the Court of Appeals which, by ruling that BMW is not doing business on the basis
merely of uncertain allegations in the pleadings, disposed of the whole case with finality and
thereby deprived petitioner of his right to be heard on his cause of action. Nor was there
justification for nullifying the writ of preliminary injunction issued by the trial court. Although
the injunction was issued ex parte, the fact is that BMW was subsequently heard on its
defense by filing a motion to dismiss.
WHEREFORE, the decision of the Court of Appeals is REVERSED and the case is
REMANDED to the trial court for further proceedings.
SO ORDERED.
FIRST DIVISION
G.R. No. L-67889 October 10, 1985
PRIMITIVO SIASAT and MARCELINO SIASAT vs. INTERMEDIATE APPELLATE COURT
and TERESITA NACIANCENO
GUTIERREZ, JR., J.:
This is a petition for review of the decision of the Intermediate Appellate Court affirming in
toto the judgment of the Court of First Instance of Manila, Branch XXI, which ordered the
petitioner to pay respondent the thirty percent (30%) commission on 15,666 pieces of
Philippine flags worth P936,960.00, moral damages, attorney's fees and the costs of the
suit.
Sometime in 1974, respondent Teresita Nacianceno succeeded in convincing officials of the
then Department of Education and Culture, hereinafter called Department, to purchase
without public bidding, one million pesos worth of national flags for the use of public schools
throughout the country. The respondent was able to expedite the approval of the purchase
by hand-carrying the different indorsements from one office to another, so that by the first
week of September, 1974, all the legal requirements had been complied with, except the
release of the purchase orders. When Nacianceno was informed by the Chief of the Budget
Division of the Department that the purchase orders could not be released unless a formal
offer to deliver the flags in accordance with the required specifications was first submitted for
approval, she contacted the owners of the United Flag Industry on September 17, 1974. The
next day, after the transaction was discussed, the following document (Exhibit A) was drawn
up:
Mrs. Tessie Nacianceno,
This is to formalize our agreement for you to represent United Flag
Industry to deal with any entity or organization, private or government in
connection with the marketing of our products-flags and all its accessories.
For your service, you will be entitled to a commission of thirty
(30%) percent.
Signed
Mr. Primitive Siasat
Owner and Gen. Manager
On October 16, 1974, the first delivery of 7,933 flags was made by the United Flag Industry.
The next day, on October 17, 1974, the respondent's authority to represent the United Flag
Industry was revoked by petitioner Primitivo Siasat.
According to the findings of the courts below, Siasat, after receiving the payment of
P469,980.00 on October 23, 1974 for the first delivery, tendered the amount of P23,900.00
or five percent (5%) of the amount received, to the respondent as payment of her
commission. The latter allegedly protested. She refused to accept the said amount insisting
on the 30% commission agreed upon. The respondent was prevailed upon to accept the
same, however, because of the assurance of the petitioners that they would pay the
commission in full after they delivered the other half of the order. The respondent states that
Agency, Trusts, and Partnership | UMak Law | Atty. Dujunco | MKM | Part 4&5 | 24
she later on learned that petitioner Siasat had already received payment for the second
delivery of 7,833 flags. When she confronted the petitioners, they vehemently denied receipt
of the payment, at the same time claiming that the respondent had no participation
whatsoever with regard to the second delivery of flags and that the agency had already been
revoked.
The respondent originally filed a complaint with the Complaints and Investigation Office in
Malacañang but when nothing came of the complaint, she filed an action in the Court of First
Instance of Manila to recover the following commissions: 25%, as balance on the first
delivery and 30%, on the second delivery.
The trial court decided in favor of the respondent. The dispositive portion of the decision
reads as follows:
WHEREFORE, judgment is hereby rendered sentencing Primitivo Siasat
to pay to the plaintiff the sum of P281,988.00, minus the sum P23,900.00,
with legal interest from the date of this decision, and ordering the
defendants to pay jointly and solidarily the sum of P25,000.00 as moral
damages, and P25,000.00 as attorney's fees, also with legal interest from
the date of this decision, and the costs.
The decision was affirmed in toto by the Intermediate Appellate Court. After their motion for
reconsideration was denied, the petitioners went to this Court on a petition for review on
August 6, 1984.
In assailing the appellate court's decision, the petition tenders the following arguments: first,
the authorization making the respondent the petitioner's representative merely states that
she could deal with any entity in connection with the marketing of their products for a
commission of 30%. There was no specific authorization for the sale of 15,666 Philippine
flags to the Department; second, there were two transactions involved evidenced by the
separate purchase orders and separate delivery receipts, Exhibit 6-C for the purchase and
deliver on October 16, 1974, and Exhibits 7 to 7-C, for the purchase and delivery on
November 6, 1974. The revocation of agency effected by the parties with mutual consent on
October 17, 1974, therefore, forecloses the respondent's claim of 30% commission on the
second transaction; and last, there was no basis for the granting of attorney's fees and moral
damages because there was no showing of bad faith on the part of the petitioner. It was
respondent who showed bad faith in denying having received her commission on the first
delivery. The petitioner's counterclaim, therefore, should have been granted.
This petition was initially dismissed for lack of merit in a minute resolution.On a motion for
reconsideration, however,this Court give due course to the petition on November 14, 1984.
After a careful review of the records, we are constrained to sustain with some modifications
the decision of the appellate court.
We find respondent's argument regarding respondent's incapacity to represent them in the
transaction with the Department untenable. There are several kinds of agents. To quote a
commentator on the matter:
An agent may be (1) universal: (2) general, or (3) special. A universal;
agent is one authorized to do all acts for his principal which can lawfully be
delegated to an agent. So far as such a condition is possible, such an
agent may be said to have universal authority. (Mec. Sec. 58).
A general agent is one authorized to do all acts pertaining to a business of
a certain kind or at a particular place, or all acts pertaining to a business of
a particular class or series. He has usually authority either expressly
conferred in general terms or in effect made general by the usages,
customs or nature of the business which he is authorized to transact.
An agent, therefore, who is empowered to transact all the business of his
principal of a particular kind or in a particular place, would, for this reason,
be ordinarily deemed a general agent. (Mec Sec. ,30).
A special agent is one authorized to do some particular act or to act upon
some particular occasion. lie acts usually in accordance with specific
instructions or under limitations necessarily implied from the nature of the
act to be done. (Mec. Sec. 61) (Padilla, Civil Law The Civil Code
Annotated, Vol. VI, 1969 Edition, p. 204).
One does not have to undertake a close scrutiny of the document embodying the agreement
between the petitioners and the respondent to deduce that the 'latter was instituted as a
general agent. Indeed, it can easily be seen by the way general words were employed in the
agreement that no restrictions were intended as to the manner the agency was to be carried
out or in the place where it was to be executed. The power granted to the respondent was
so broad that it practically covers the negotiations leading to, and the execution of, a
contract of sale of petitioners' merchandise with any entity or organization.
There is no merit in petitioners' allegations that the contract of agency between the parties
was entered into under fraudulent representation because respondent "would not disclose
the agency with which she was supposed to transact and made the petitioner believe that
she would be dealing with The Visayas", and that "the petitioner had known of the
transactions and/or project for the said purchase of the Philippine flags by the Department of
Education and Culture and precisely it was the one being followed up also by the petitioner."
If the circumstances were as claimed by the petitioners, they would have exerted efforts to
protect their interests by limiting the respondent's authority. There was nothing to prevent
the petitioners from stating in the contract of agency that the respondent could represent
them only in the Visayas. Or to state that the Department of Education and Culture and the
Department of National Defense, which alone would need a million pesos worth of flags, are
outside the scope of the agency. As the trial court opined, it is incredible that they could be
so careless after being in the business for fifteen years.
A cardinal rule of evidence embodied in Section 7 Rule 130 of our Revised Rules of Court
states that "when the terms of an agreement have been reduced to writing, it is to be
considered as containing all such terms, and, therefore, there can be between the parties
and their successors-in-interest, no evidence of the terms of the agreement other than the
contents of the writing", except in cases specifically mentioned in the same rule. Petitioners
have failed to show that their agreement falls under any of these exceptions. The
respondent was given ample authority to transact with the Department in behalf of the
petitioners. Equally without merit is the petitioners' proposition that the transaction involved
two separate contracts because there were two purchase orders and two deliveries. The
petitioners' evidence is overcome by other pieces of evidence proving that there was only
one transaction.
The indorsement of then Assistant Executive Secretary Roberto Reyes to the Budget
Commission on September 3, 1974 (Exhibit "C") attests to the fact that out of the total
budget of the Department for the fiscal year 1975, "P1,000,000.00 is for the purchase of
national flags." This is also reflected in the Financial and Work Plan Request for Allotment
(Exhibit "F") submitted by Secretary Juan Manuel for fiscal year 1975 which however,
divided the allocation and release of the funds into three, corresponding to the second, third,
and fourth quarters of the said year. Later correspondence between the Department and the
Budget Commission (Exhibits "D" and "E") show that the first allotment of P500.000.00 was
released during the second quarter. However, due to the necessity of furnishing all of the
Agency, Trusts, and Partnership | UMak Law | Atty. Dujunco | MKM | Part 4&5 | 25
public schools in the country with the Philippine flag, Secretary Manuel requested for the
immediate release of the programmed allotments intended for the third and fourth quarters.
These circumstances explain why two purchase orders and two deliveries had to be made
on one transaction.
The petitioners' evidence does not necessarily prove that there were two separate
transactions. Exhibit "6" is a general indorsement made by Secretary Manuel for the
purchase of the national flags for public schools. It contains no reference to the number of
flags to be ordered or the amount of funds to be released. Exhibit "7" is a letter request for a
"similar authority" to purchase flags from the United Flag Industry. This was, however,
written by Dr. Narciso Albarracin who was appointed Acting Secretary of the Department
after Secretary Manuel's tenure, and who may not have known the real nature of the
transaction.
If the contracts were separate and distinct from one another, the whole or at least a
substantial part of the government's supply procurement process would have been
repeated. In this case, what were issued were mere indorsements for the release of funds
and authorization for the next purchase.
Since only one transaction was involved, we deny the petitioners' contention that respondent
Nacianceno is not entitled to the stipulated commission on the second delivery because of
the revocation of the agency effected after the first delivery. The revocation of agency could
not prevent the respondent from earning her commission because as the trial court opined, it
came too late, the contract of sale having been already perfected and partly executed.
In Macondray & Co. v. Sellner (33 Phil. 370, 377), a case analogous to this one in principle,
this Court held:
We do not mean to question the general doctrine as to the power of a
principal to revoke the authority of his agent at will, in the absence of a
contract fixing the duration of the agency (subject, however, to some well
defined exceptions). Our ruling is that at the time fixed by the manager of
the plaintiff company for the termination of the negotiations, the defendant
real estate agent had already earned the commissions agreed upon, and
could not be deprived thereof by the arbitrary action of the plaintiff
company in declining to execute the contract of sale for some reason
personal to itself.
The principal cannot deprive his agent of the commission agreed upon by cancelling the
agency and, thereafter, dealing directly with the buyer. (Infante v. Cunanan, 93 Phil. 691).
The appellate courts citation of its previous ruling in Heimbrod et al. v. Ledesma (C.A. 49
O.G. 1507) is correct:
The appellee is entitled to recovery. No citation is necessary to show that
the general law of contracts the equitable principle of estoppel. and the
expense of another, uphold payment of compensation for services
rendered.
There is merit, however, in the petitioners' contention that the agent's commission on the
first delivery was fully paid. The evidence does not sustain the respondent's claim that the
petitioners paid her only 5% and that their right to collect another 25% commission on the
first delivery must be upheld.
When respondent Nacianceno asked the Malacanang Complaints and Investigation Office to
help her collect her commission, her statement under oath referred exclusively to the 30%
commission on the second delivery. The statement was emphatic that "now" her demand
was for the 30% commission on the (second) release of P469,980.00. The demand letter of
the respondent's lawyer dated November 13, 1984 asked petitioner Siasat only for the 30%
commission due from the second delivery. The fact that the respondent demanded only the
commission on the second delivery without reference to the alleged unpaid balance which
was only slightly less than the amount claimed can only mean that the commission on the
first delivery was already fully paid, Considering the sizeable sum involved, such an
omission is too glaringly remiss to be regarded as an oversight.
Moreover, the respondent's authorization letter (Exhibit "5") bears her signature with the
handwritten words "Fully Paid", inscribed above it.
The respondent contested her signature as a forgery, Handwriting experts from two
government agencies testified on the matter. The reason given by the trial court in ruling for
the respondent is too flimsy to warrant a finding of forgery.
The court stated that in thirteen documents presented as exhibits, the private respondent
signed her name as "Tessie Nacianceno" while in this particular instance, she signed as "T.
Nacianceno."
The stated basis is inadequate to sustain the respondent's allegation of forgery. A variance
in the manner the respondent signed her name can not be considered as conclusive proof
that the questioned signature is a forgery. The mere fact that the respondent signed thirteen
documents using her full name does not rule out the possibility of her having signed the
notation "Fully Paid", with her initial for the given came and the surname written in full. What
she was signing was a mere acknowledgment.
This leaves the expert testimony as the sole basis for the verdict of forgery.
In support of their allegation of full payment as evidenced by the signed authorization letter
(Exhibit "5-A"), the petitioners presented as witness Mr. Francisco Cruz. Jr., a senior
document examiner of the Philippine Constabulary Crime laboratory. In rebuttal, the
respondent presented Mr. Arcadio Ramos, a junior document examiner of the National
Bureau of Investigation.
While the experts testified in a civil case, the principles in criminal cases involving forgery
are applicable. Forgery cannot be presumed. It must be proved.
In Borromeo v. Court of Appeals (131 SCRA 318, 326) we held that:
xxx xxx xxx
... Where the evidence, as here, gives rise to two probabilities, one
consistent with the defendant's innocence and another indicative of his
guilt, that which is favorable to the accused should be considered. The
constitutional presumption of innocence continues until overthrown by
proof of guilt beyond reasonable doubt, which requires moral certainty
which convinces and satisfies the reason and conscience of those who
are to act upon it. (People v. Clores, et al., 125 SCRA 67; People v.
Bautista, 81 Phil. 78).
We ruled in another case that where the supposed expert's testimony would constitute the
sole ground for conviction and there is equally convincing expert testimony to the contrary,
the constitutional presumption of innocence must prevail. (Lorenzo Ga. Cesar v. Hon.
Sandiganbayan and People of the Philippines, 134 SCRA 105). In the present case, the
circumstances earlier mentioned taken with the testimony of the PC senior document
examiner lead us to rule against forgery.
We also rule against the respondent's allegation that the petitioners acted in bad faith when
they revoked the agency given to the respondent.
Agency, Trusts, and Partnership | UMak Law | Atty. Dujunco | MKM | Part 4&5 | 26
Fraud and bad faith are matters not to be presumed but matters to be alleged with sufficient
facts. To support a judgment for damages, facts which justify the inference of a lack or
absence of good faith must be alleged and proven. (Bacolod-Murcia Milling Co., Inc. vs. First
Farmers Milling Co., Inc., Etc., 103 SCRA 436).
There is no evidence on record from which to conclude that the revocation of the agency
was deliberately effected by the petitioners to avoid payment of the respondent's
commission. What appears before us is only the petitioner's use in court of such a factual
allegation as a defense against the respondent's claim. This alone does not per se make the
petitioners guilty of bad faith for that defense should have been fully litigated.
Moral damages cannot be awarded in the absence of a wrongful act or omission or of fraud
or bad faith. (R & B Surety & Insurance Co., Inc. vs. Intermediate Appellate Court, 129
SCRA 736).
We therefore, rule that the award of P25,000.00 as moral damages is without basis.
The additional award of P25,000.00 damages by way of attorney's fees, was given by the
courts below on the basis of Article 2208, Paragraph 2, of the Civil Code, which provides:
"When the defendant's act or omission has compelled the plaintiff to litigate with third
persons or to incur expenses to protect his interests;" attorney's fees may be awarded as
damages. (Pirovano et al. v. De la Rama Steamship Co., 96 Phil. 335).
The underlying circumstances of this case lead us to rule out any award of attorney's fees.
For one thing, the respondent did not come to court with completely clean hands. For
another, the petitioners apparently believed they could legally revoke the agency in the
manner they did and deal directly with education officials handling the purchase of Philippine
flags. They had reason to sincerely believe they did not have to pay a commission for the
second delivery of flags.
We cannot close this case without commenting adversely on the inexplicably strange
procurement policies of the Department of Education and Culture in its purchase of
Philippine flags. There is no reason why a shocking 30% of the taxpayers' money should go
to an agent or facilitator who had no flags to sell and whose only work was to secure and
handcarry the indorsements of education and budget officials. There are only a few
manufacturers of flags in our country with the petitioners claiming to have supplied flags for
our public schools on earlier occasions. If public bidding was deemed unnecessary, the
Department should have negotiated directly with flag manufacturers. Considering the sad
plight of underpaid and overworked classroom teachers whose pitiful salaries and
allowances cannot sometimes be paid on time, a P300,000.00 fee for a P1,000,000.00
purchase of flags is not only clearly unnecessary but a scandalous waste of public funds as
well.
WHEREFORE, the decision of the respondent court is hereby MODIFIED. The petitioners
are ordered to pay the respondent the amount of ONE HUNDRED FOURTY THOUSAND
NINE HUNDRED AND NINETY FOUR PESOS (P140,994.00) as her commission on the
second delivery of flags with legal interest from the date of the trial court's decision. No
pronouncement as to costs.
SO ORDERED.
FIRST DIVISION
G.R. No. 129919               February 6, 2002
DOMINION INSURANCE CORPORATION vs. COURT OF APPEALS, RODOLFO S.
GUEVARRA, and FERNANDO AUSTRIA
DECISION
PARDO, J.:
The Case
This is an appeal via certiorari1 from the decision of the Court of Appeals 2 affirming the
decision3 of the Regional Trial Court, Branch 44, San Fernando, Pampanga, which ordered
petitioner Dominion Insurance Corporation (Dominion) to pay Rodolfo S. Guevarra
(Guevarra) the sum of P156,473.90  representing the total amount advanced by Guevarra in
the payment of the claims of Dominion’s clients.
The Facts
The facts, as found by the Court of Appeals, are as follows:
"On January 25,  1991, plaintiff Rodolfo S. Guevarra instituted Civil Case No. 8855 for sum
of money against defendant Dominion Insurance Corporation. Plaintiff sought to recover
thereunder the sum of P156,473.90 which he claimed to have advanced in his capacity as
manager of defendant to satisfy certain claims filed by defendant’s clients.
"In its traverse, defendant denied any liability to plaintiff and asserted a counterclaim for
P249,672.53, representing premiums that plaintiff allegedly failed to remit.
"On August 8, 1991, defendant filed a third-party complaint against Fernando Austria, who,
at the time relevant to the case, was its Regional Manager for Central Luzon area.
"In due time, third-party defendant Austria filed his answer.
"Thereafter the pre-trial conference was set on the following dates: October 18, 1991,
November 12, 1991, March 29, 1991, December 12, 1991, January 17, 1992, January 29,
1992, February 28, 1992, March 17, 1992 and April 6, 1992, in all of which dates no pre-trial
conference was held. The record shows that except for the settings on October 18, 1991,
January 17, 1992 and March 17, 1992 which were cancelled at the instance of defendant,
third-party defendant and plaintiff, respectively, the rest were postponed upon joint request
of the parties.
"On May 22, 1992 the case was again called for pre-trial conference. Only plaintiff and
counsel were present. Despite due notice, defendant and counsel did not appear, although a
messenger, Roy Gamboa, submitted to the trial court a handwritten note sent to him by
defendant’s counsel which instructed him to request for postponement. Plaintiff’s counsel
objected to the desired postponement and moved to have defendant declared as in default.
This was granted by the trial court in the following order:
"ORDER
"When this case was called for pre-trial this afternoon only plaintiff and his counsel Atty.
Romeo Maglalang appeared. When shown a note dated May 21, 1992 addressed to a
certain Roy who was requested to ask for postponement, Atty. Maglalang vigorously
objected to any postponement on the ground that the note is but a mere scrap of paper and
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moved that the defendant corporation be declared as in default for its failure to appear in
court despite due notice.
"Finding the verbal motion of plaintiff’s counsel to be meritorious and considering that the
pre-trial conference has been repeatedly postponed on motion of the defendant Corporation,
the defendant Dominion Insurance Corporation is hereby declared (as) in default and plaintiff
is allowed to present his evidence on June 16, 1992 at 9:00 o’clock in the morning.
"The plaintiff and his counsel are notified of this order in open court.
"SO ORDERED.
"Plaintiff presented his evidence on June 16, 1992. This was followed by a written offer of
documentary exhibits on July 8 and a supplemental offer of additional exhibits on July 13,
1992. The exhibits were admitted in evidence in an order dated July 17, 1992.
"On August 7, 1992 defendant corporation filed a ‘MOTION TO LIFT ORDER OF
DEFAULT.’ It alleged therein that the failure of counsel to attend the pre-trial conference was
‘due to an unavoidable circumstance’ and that counsel had sent his representative on that
date to inform the trial court of his inability to appear. The Motion was vehemently opposed
by plaintiff.
"On August 25, 1992 the trial court denied defendant’s motion for reasons, among others,
that it was neither verified nor supported by an affidavit of merit and that it further failed to
allege or specify the facts constituting his meritorious defense.
"On September 28, 1992 defendant moved for reconsideration of the aforesaid order. For
the first time counsel revealed to the trial court that the reason for his nonappearance at the
pre-trial conference was his illness. An Affidavit of Merit executed by its Executive Vice-
President purporting to explain its meritorious defense was attached to the said Motion. Just
the same, in an Order dated November 13, 1992, the trial court denied said Motion.
"On November 18, 1992, the court a quo rendered judgment as follows:
"WHEREFORE, premises considered, judgment is hereby rendered ordering:
"1. The defendant Dominion Insurance Corporation to pay plaintiff the sum of
P156,473.90 representing the total amount advanced by plaintiff in the payment of
the claims of defendant’s clients;
"2. The defendant to pay plaintiff P10,000.00 as and by way of attorney’s fees;
"3. The dismissal of the counter-claim of the defendant and the third-party
complaint;
"4. The defendant to pay the costs of suit."4
On December 14, 1992, Dominion appealed the decision to the Court of Appeals.5
On July 19, 1996, the Court of Appeals promulgated a decision affirming that of the trial
court.6 On September 3, 1996, Dominion filed with the Court of Appeals a motion for
reconsideration.7 On July 16, 1997, the Court of Appeals denied the motion.8
Hence, this appeal.9
The Issues
The issues raised are: (1) whether respondent Guevarra acted within his authority as agent
for petitioner, and (2) whether respondent Guevarra is entitled to reimbursement of amounts
he paid out of his personal money in settling the claims of several insured.
The Court's Ruling
The petition is without merit.
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. 10 The
basis for agency is representation.11 On the part of the principal, there must be an actual
intention to appoint12 or an intention naturally inferrable from his words or actions; 13 and on
the part of the agent, there must be an intention to accept the appointment and act on
it,14 and in the absence of such intent, there is generally no agency.15
A perusal of the Special Power of Attorney 16 would show that petitioner (represented by
third-party defendant Austria) and respondent Guevarra intended to enter into a principal-
agent relationship. Despite the word "special" in the title of the document, the contents
reveal that what was constituted was actually a general agency. The terms of the agreement
read:
"That we,  FIRST CONTINENTAL ASSURANCE COMPANY, INC., 17 a corporation duly
organized and existing under and by virtue of the laws of the Republic of the Philippines, xxx
represented by the undersigned as Regional Manager, xxx do hereby appoint RSG
Guevarra Insurance Services represented by Mr. Rodolfo Guevarra  xxx to be our Agency
Manager in San Fdo., for our place and stead, to do and perform the following acts and
things:
"1. To conduct, sign, manager (sic), carry on and transact Bonding and Insurance
business as usually pertain to a Agency Office, or FIRE, MARINE, MOTOR CAR,
PERSONAL ACCIDENT, and BONDING with the right, upon our prior written
consent, to appoint agents and sub-agents.
"2. To accept, underwrite and subscribed (sic) cover notes or Policies  of Insurance
and Bonds for and on our behalf.
"3. To demand, sue, for (sic) collect, deposit, enforce payment, deliver and transfer
for and receive and give effectual receipts and discharge for all money to which the
FIRST CONTINENTAL ASSURANCE COMPANY, INC.,18 may hereafter become
due, owing payable or transferable to said Corporation by reason of or in
connection with the above-mentioned appointment.
"4. To receive notices, summons, and legal processes for and in behalf of the
FIRST CONTINENTAL ASSURANCE COMPANY, INC., in connection with actions
and all legal proceedings against the said Corporation."19 [Emphasis supplied]
The agency comprises all the business of the principal, 20 but, couched in general terms, it is
limited only to acts of administration.21
A general power permits the agent to do all acts for which the law does not require a special
power.22 Thus, the acts enumerated in or similar to those enumerated in the Special Power
of Attorney do not require a special power of attorney.
Article 1878, Civil Code, enumerates the instances when a special power of attorney is
required. The pertinent portion that applies to this case provides that:
"Article 1878. Special powers of attorney are necessary in the following cases:
"(1) To make such payments as are not usually considered as acts of administration;
"x x x           x x x          x x x
"(15)  Any other act of strict dominion."
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The payment of claims is not an act of administration. The settlement of claims is not
included among the acts enumerated in the Special Power of Attorney, neither is it of a
character similar to the acts enumerated therein. A special power of attorney is required
before respondent Guevarra could settle the insurance claims of the insured.
Respondent Guevarra’s authority to settle claims is embodied in the Memorandum of
Management Agreement23dated February 18, 1987 which enumerates the scope of
respondent Guevarra’s duties and responsibilities as agency manager for San Fernando,
Pampanga, as follows:
"x x x           x x x          x x x
"1. You are hereby given authority to settle and dispose of all motor car claims in
the amount of P5,000.00 with prior approval of the Regional Office.
"2. Full authority is given you on TPPI claims settlement.
" x x x           x x x          x x x "24
In settling the claims mentioned above, respondent Guevarra’s authority is further limited by
the written standard authority to pay, 25 which states that the payment shall come from
respondent Guevarra’s revolving fund or collection. The authority to pay is worded as
follows:
"This is to authorize you to withdraw from your revolving fund/collection the amount of
PESOS __________________ (P ) representing the payment on the _________________
claim of assured _______________ under Policy No. ______ in that accident of
___________ at ____________.
"It is further expected, release papers will be signed and authorized by the concerned and
attached to the corresponding claim folder after effecting payment of the claim.
"(sgd.) FERNANDO C. AUSTRIA
Regional Manager"26
[Emphasis supplied]
The instruction of petitioner as the principal could not be any clearer.1âwphi1 Respondent
Guevarra was authorized to pay the claim of the insured, but the payment shall come from
the revolving fund or collection in his possession.
Having deviated from the instructions of the principal, the expenses that respondent
Guevarra incurred in the settlement of the claims of the insured may not be reimbursed from
petitioner Dominion. This conclusion is in accord with Article 1918, Civil Code, which states
that:
"The principal is not liable for the expenses incurred by the agent in the following cases:
"(1) If the agent acted in contravention of the principal’s instructions,  unless the
latter should wish to avail himself of the benefits derived from the contract;
" x x x           x x x          x x x "
However, while the law on agency prohibits respondent Guevarra from obtaining
reimbursement, his right to recover may still be justified under the general law on obligations
and contracts.
Article 1236, second paragraph, Civil Code, provides:
"Whoever pays for another may demand from the debtor what he has paid, except that if he
paid without the knowledge or against the will of the debtor, he can recover only insofar as
the payment has been beneficial to the debtor."
In this case, when the risk insured against occurred, petitioner’s liability as insurer
arose.1âwphi1 This obligation was extinguished when respondent Guevarra paid the claims
and obtained Release of Claim Loss and Subrogation Receipts from the insured who were
paid.
Thus, to the extent that the obligation of the petitioner has been extinguished, respondent
Guevarra may demand for reimbursement from his principal. To rule otherwise would result
in unjust enrichment of petitioner.
The extent to which petitioner was benefited by the settlement of the insurance claims could
best be proven by the Release of Claim Loss and Subrogation Receipts 27 which were
attached to the original complaint as Annexes C-2, D-1, E-1, F-1, G-1, H-1, I-1 and J-l, in the
total amount of P116,276.95.
However, the amount of the revolving fund/collection that was then in the possession of
respondent Guevarra as reflected in the statement of account dated July 11, 1990 would be
deducted from the above amount.
The outstanding balance and the production/remittance for the period corresponding to the
claims was P3,604.84. Deducting this from P116,276.95,  we get P112,672.11. This is the
amount that may be reimbursed to respondent Guevarra.
The Fallo
IN VIEW WHEREOF, we DENY the Petition. However, we MODIFY the decision of the
Court of Appeals28 and that of the Regional Trial Court, Branch 44, San Fernando,
Pampanga,29 in that petitioner is ordered to pay respondent Guevarra the amount of
P112,672.11 representing the total amount advanced by the latter in the payment of the
claims of petitioner’s clients.
No costs in this instance.
SO ORDERED.
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