1. G.R. No.

224307, August 06, 2018 - THE MISSIONARY SISTERS OF OUR LADY

OF FATIMA (PEACH SISTERS OF LAGUNA), REPRESENTED BY REV. MOTHER MA.
CONCEPCION R. REALON, ET AL., Petitioners, v. AMANDO V. ALZONA, ET AL.,
Respondents.

Ruling of the Court

The petition is meritorious.

The petitioner argues that it has the requisite legal personality to accept the donation
as a religious institution organized under the Roman Catholic Bishop of San Pablo, a
corporation sole.30

Regardless, the petitioner contends that it is a de facto corporation and therefore

possessed of the requisite personality to enter into a contract of donation.

Rather, a review of the attendant circumstances reveals that it calls for the application
of the doctrine of corporation by estoppel as provided for under Section 21 of the
Corporation Code, viz.:

Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising as a result thereof: Provided,
however, That when any such ostensible corporation is sued on any transaction entered
by it as a corporation or on any tort committed by it as such, it shall not be allowed to
use as a defense its lack of corporate personality.

One who assumes an obligation to an ostensible corporation as such, cannot

resist performance thereof on the ground that there was in fact no
corporation. (Emphasis Ours)

The doctrine of corporation by estoppel is founded on principles of equity

and is designed to prevent injustice and unfairness. It applies when a non-
existent corporation enters into contracts or dealings with third persons. 41 In
which case, the person who has contracted or otherwise dealt with the non-
existent corporation is estopped to deny the latter's legal existence in any
action leading out of or involving such contract or dealing. While the doctrine
is generally applied to protect the sanctity of dealings with the
public,42 nothing prevents its application in the reverse, in fact the very
wording of the law which sets forth the doctrine of corporation by estoppel
permits such interpretation. Such that a person who has assumed an
obligation in favor of a non-existent corporation, having transacted with the
latter as if it was duly incorporated, is prevented from denying the existence
of the latter to avoid the enforcement of the contract.
Jurisprudence dictates that the doctrine of corporation by estoppel applies for as long
as there is no fraud and when the existence of the association is attacked for causes
attendant at the time the contract or dealing sought to be enforced was entered into,
and not thereafter.43

[ G.R. No. 205466, January 11, 2021 ]

BASES CONVERSION AND DEVELOPMENT AUTHORITY, PETITIONER, VS. COMMISSIONER

OF INTERNAL REVENUE, RESPONDENT.

DECISION

HERNANDO, J.:

Antecedents:

This case involves the question of whether the BCDA is exempt from payment of docket fees before
the CTA. The BCDA claims exemption for being a government instrumentality pursuant to Section
22, Rule 141 of the Rules of Court, as amended.7 The CIR, on the other hand, disputes BCDA's
status as a government instrumentality, and therefore posits that it is not exempt from payment.

Issues

The Petition raises the following issues:

A. THE CTA EN BANC ERRED IN AFFIRMING THE CTA'S SECOND DIVISION'S

RESOLUTION DENYING DUE COURSE AND DISMISSING BCDA'S PETITION FOR
REVIEW FOR NON PAYMENT OF THE PRESCRIBED DOCKET FEES WITHIN THE
REGLEMENTARY PERIOD.

B. THE CTA EN BANC ERRED IN RULING THAT BCDA IS NOT EXEMPT FROM
PAYMENT OF LEGAL FEES.45

Our Ruling

The Petition is meritorious.

The BCDA is a government instrumentality and therefore exempt from payment of docket fees.

The resolution of this case hinges on whether the BCDA is a government instrumentality and
consequently exempt from payment of docket fees under Section 22, Rule 131 of the Rules of Court,
as amended:

Section. 22. Government exempt. The Republic of the Philippines, its agencies and instrumentalities
are exempt from paying the legal fees provided in the rule. Local governments and government-
owned or controlled corporations with or without independent charters are not exempt from paying
such fees. (Emphasis supplied)

Significantly, this issue has already been resolved in Bases Conversion and Development Authority
v. Commissioner of Internal Revenue,46 where this Court affirmed BCDA's status as a government
instrumentality:

BCDA is a government instrumentality vested with corporate powers. As such, it is exempt from the
payment of docket fees.

At the crux of the present petition is the issue of whether or not BCDA is a government
instrumentality or a government-owned and - controlled corporation (GOCC). If it is an
instrumentality, it is exempt from the payment of docket fees. If it is a GOCC, it is not exempt and as
such non-payment thereof would mean that the tax court did not acquire jurisdiction over the case
and properly dismissed it for BCDA's failure to settle the fees on time.

BCDA is a government instrumentality vested with corporate powers. As such, it is exempt from the
payment of docket fees required under Section 21, Rule 141 of the Rules of Court, to wit:

RULE 141
LEGAL FEES

SEC. 1. Payment of fees. — Upon the filing of the pleading or other application which initiates an
action or proceeding, the fees prescribed therefor shall be paid in full.

xxx xxx xxx

SEC. 21. Government exempt. — The Republic of the Philippines, its agencies and instrumentalities,
are exempt from paying the legal fees provided in this rule. Local governments and government-
owned or controlled corporations with or without independent charters are not exempt from paying
such fees. (Emphasis Ours)

Section 2 (10) and (13) of the Introductory Provisions of the Administrative Code of 1987 provides
for the definition of a government "instrumentality" and a "GOCC," to wit:

SEC. 2. General Terms Defined. — x x x

(10) Instrumentality refers to any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some if not
all corporate powers, administering special funds, and enjoying operational autonomy, usually
through a charter. x x x

xxx xxx xxx

(13) Government-owned or controlled corporation refers to any agency organized as a stock or non-
stock corporation, vested with functions relating to public needs whether governmental or proprietary
in nature, and owned by the Government directly or through its instrumentalities either wholly, or,
where applicable as in the case of stock corporations, to the extent of at least fifty-one (51) percent
of its capital stock: x x x. (Emphasis Ours)
The grant of these corporate powers is likewise stated in Section 3 of Republic Act (R.A.) No. 7227,
also known as The Bases Conversion and Development Act of 1992 which provides for BCDA's
manner of creation, to wit:

Sec. 3. Creation of the Bases Conversion and Development Authority. — There is hereby created a
body corporate to be known as the Bases Conversion and Development Authority, which shall have
the attribute of perpetual succession and shall be vested with the powers of a corporation.
(Emphasis Ours)

From the foregoing, it is clear that a government instrumentality may be endowed with corporate
powers and at the same time retain its classification as a government "instrumentality" for all other
purposes.

In the 2006 case of Manila International Airport Authority v. CA, the Court, speaking through
Associate Justice Antonio T. Carpio, explained in this wise:

Many government instrumentalities are vested with corporate powers but they do not become stock
or non-stock corporations, which is a necessary condition before an agency or instrumentality is
deemed a [GOCC]. Examples are the Mactan International Airport Authority, the Philippine Ports
Authority, the University of the Philippines and Bangko Sentral ng Pilipinas. All these government
instrumentalities exercise corporate powers but they are not organized as stock or non-stock
corporations as required by Section 2 (13) of the Introductory Provisions of the Administrative Code.
These government instrumentalities are sometimes loosely called government corporate entities.
However, they are not [GOCCs] in the strict sense as understood under the Administrative Code,
which is the governing law defining the legal relationship or status of government entities.

Moreover, in the 2007 case of Philippine Fisheries Development Authority v. CA, the Court reiterated
that a government instrumentality retains its classification as such albeit having been endowed with
some if not all corporate powers. The relevant portion of said decision reads as follows:

Indeed, the Authority is not a GOCC but an instrumentality of the government. The Authority has a
capital stock but it is not divided into shares of stocks. Also, it has no stockholders or voting shares.
Hence, it is not a stock corporation. Neither is it a non-stock corporation because it has no members.

The Authority is actually a national government instrumentality which is define[d] as an agency of the
national government, not integrated within the department framework, vested with special functions
or jurisdiction by law, endowed with some if not all corporate powers, administering special funds
and enjoying operational autonomy, usually through a charter. When the law vests in a government
instrumentality corporate powers, the instrumentality does not become a corporation. Unless the
government instrumentality is organized as a stock or non-stock corporation, it remains a
government instrumentality exercising not only governmental but also corporate powers.

As previously mentioned, in order to qualify as a GOCC, one must be organized either as a stock or
non-stock corporation. Section 3 of the Corporation Code defines a stock corporation as one whose
"capital stock is divided into shares and x x x authorized to distribute to the holders of such shares
dividends x x x."

From the foregoing, it is clear that BCDA is neither a stock nor a non-stock corporation. BCDA is a
government instrumentality vested with corporate powers. Under Section 21, Rule 141 of the Rules
of Court, agencies and instrumentalities of the Republic of the Philippines are exempt from paying
legal or docket fees. Hence, BCDA is exempt from the payment of docket fees.47 (Citations
omitted.)
As extensively discussed above, the BCDA is a government instrumentality because it falls under
the definition of an instrumentality under the Administrative Code of 1987, i.e., "any agency of the
National Government, not integrated within the department framework, vested with special functions
or jurisdiction by law, endowed with some if not all corporate powers, administering special funds,
and enjoying operational autonomy, usually through a charter."48 It is vested with corporate powers
under Section 3 of RA No. 7227.49 Despite having such powers, however, the BCDA is considered
neither a stock corporation because its capital is not divided into shares of stocks, nor a non-stock
corporation because it is not organized for any of the purposes mentioned under Section 88 of the
Corporation Code. Instead, the BCDA is a government instrumentality organized for the specific
purpose of owning, holding and/or administering the military reservations in the country and
implementing their conversion to other productive uses.50

Being a government instrumentality, the BCDA is exempt from payment of legal fees including
docket fees pursuant to Section 22, Rule 141 of the Rules of Court, as amended. Thus, it was
erroneous for the CTA En Banc to affirm the CTA Second Division's dismissal of the BCDA's Petition
for Review. That the BCDA belatedly filed the docket fees did not strip the CTA Second Division of
jurisdiction as it was exempt from payment in the first place.

All told, the BCDA is a government instrumentality vested with corporate powers. As such, it is
exempt from payment of docket fees pursuant to Section 22, Rule 141 of the Rules of Court, as
amended.

[ G.R. No. 211969. October 04, 2021 ]

THE LINDEN SUITES, INC. PETITIONER, VS. MERIDIEN FAR EAST
PROPERTIES, INC., RESPONDENT.

DECISION

The Antecedent Facts:

The Linden Suites Inc (petitioner) filed on November 18.

2005 a complaint[6] for damages against respondent
Meridien Far East Properties, Inc. (respondent) before the
RTC, Branch 70 of Pasig City,[7] which was docketed as
Civil Case No. 69023. Petitioner averred that while doing
excavation works for the construction of the Linden Suites
in Ortigas, Pasig City, it discovered that the concrete
retaining wall of the adjacent building, One Magnificent
Mile (OMM), owned by respondent, had encroached on its
property line.
Petitioner then informed respondent about the
encroachment which, in turn, immediately instructed its
workers to remove the same. However, respondent's
workers were unable to finish it and a substantial part still
needed to be removed. Petitioner was consequently
compelled to hire a contractor to complete the demolition.
It then demanded payment of the cost of the additional
works it conducted in the amount of P3,980,468.50, but
respondent refused, which led to the filing of the
complaint.

Issue

May the RTC, as the court that rendered judgment on

petitioner's complaint, examine respondent's officers?
Our Ruling

The petition is impressed with merit.

The RTC's
error in
judgment is
tantamount
to grave
abuse of
discretion
amounting
to lack or
excess of
jurisdiction.
A writ of certiorari under Rule 65 is an extraordinary
remedy limited to correction of errors of jurisdiction or
grave abuse of discretion amounting to lack or excess of
jurisdiction.[26] It aims to keep the inferior court within the
bounds of its jurisdiction or to preclude it from committing
grave abuse of discretion amounting to lack or excess of
jurisdiction.[27] The burden lies on the petitioner who must
prove that that the lower court gravely abused its
discretion tantamount to lack or excess of jurisdiction.
[28]
Mere abuse of discretion is therefore not enough to
warrant a certiorari proceeding.[29]

Grave abuse of discretion is defined as a capricious or

whimsical exercise of judgment that is so patent and gross
as to amount to an evasion of positive duty or a virtual
refusal to perform a duty enjoined by law.[30]

In Yu v. Judge Reyes-Carpio,[31] the Court elucidated:

The term "grave abuse of discretion" has a specific
meaning. An act of a court or tribunal can only be
considered as with grave abuse of discretion when such
act is done in a "capricious or whimsical exercise of
judgment as is equivalent to lack of jurisdiction." The
abuse of discretion must be so patent and gross as to
amount to an "evasion of a positive duty or to a virtual
refusal to perform a duty enjoined by law, or to act at all in
contemplation of law, as where the power is exercised in
an arbitrary and despotic manner by reason of passion
and hostility." Furthermore, the use of a petition for
certiorari is restricted only to "truly extraordinary cases
wherein the act of the lower court or quasi-judicial body is
wholly void." From the foregoing definition, it is clear that
the special civil action of certiorari under Rule 65 can only
strike an act down for having been done with grave abuse
of discretion if the petitioner could manifestly show that
such act was patent and gross. x x x[32]
A judicious review of this case shows that the CA erred
when it held that there was no grave abuse of discretion
on the part of the RTC in denying petitioner's motion for
examination of respondent's officers.

The
doctrine of
separate
juridical
personality
is
inapplicable
in the case
at bench.

To recall, one of the grounds for the denial by the RTC of

petitioner's motion for examination is that the examination
of respondent's officers would constitute a violation of the
doctrine of separate juridical personality. The trial court
held that the doctrine applies even if the officers would be
examined for the sole purpose of ascertaining
respondent's properties and income.
The Court finds the trial court's pronouncement misplaced.

The doctrine of separate juridical personality provides that

a corporation has a legal personality separate and distinct
from those individuals acting for and in its behalf and, in
general, from those comprising it.[43] Any obligation
incurred by the corporation, acting through its directors,
officers and employees, is therefore its sole liability.[44] This
legal fiction may only be disregarded if it is used as a
means to perpetrate fraud or an illegal act, or as a vehicle
for the evasion of an existing obligation, the circumvention
of statutes, or to confuse legitimate issues.[45]

The well-settled doctrine is inapplicable in the case at

bench. Petitioner wanted the officers to be examined not
for the purpose of passing unto them the liability of
respondent as its judgment obligor. In fact, it never
averred in the motion any intention to make the officers
liable for respondent's obligation due to the latter's
purported attempts to evade the execution of the final
judgment. What is clear therein is that the sole objective of
the examination of the officers was to ascertain the
properties and income of respondent which can be
subjected for execution in order to satisfy the final
judgment and nothing else.

In sum, the Court finds that the CA committed reversible

error in finding that the RTC did not gravely abuse its
discretion when it denied petitioner's motion to examine
respondent's officers.
G.R. No. 202613. November 08, 2017 ]
SYMEX SECURITY SERVICES, INC. AND RAFAEL
Y. ARCEGA, PETITIONERS, V. MAGDALINO O.
RIVERA, JR. AND ROBERTO B. YAGO,
RESPONDENTS.

The instant case stemmed from a complaint[7] for

underpayment/nonpayment of wages, overtime pay,
holiday pay, premium for rest day, service incentive leave
pay, clothing allowance and 13th month pay as well as
illegal deduction of cash bond and firearm bond and repair
filed by respondents before the LA.
Respondents alleged that they had been employed as
security guards by petitioner Symex sometime in May
1999. Petitioner Symex is engaged in the business of
investigation and security services. Its President and
Chairman of the Board is petitioner Arcega.[8]
Respondents were both assigned at the offices and
premises of Guevent Industrial Development Corporation
(Guevent), a client of petitioner Symex. As security
guards, they were tasked to guard the entrance and the
exit of the building, and check the ingress and egress of
the visitors' vehicles going through the building. Their tour
of duty was from Monday to Saturday, from 6:00AM to
6:00PM, a twelve-hour duty, but they were not paid their
overtime pay. Respondents were likewise not given a rest
day, and not paid their five-day service incentive leave
pay, and 13th month pay.[9]
At the time of their employment, respondents were
receiving a salary of P198.00 a day from January 20 to
March 2001. From April 2001 to March 2003, they were
receiving P250.00 a day. They were required to report for
work during legal holidays, but they were not paid holiday
premium pay. [10]
On February 25, 2003, respondents filed a complaint for
nonpayment of holiday pay, premium for rest day, 13th
month pay, illegal deductions and damages.[11]
On March 13, 2003, Capt. Arcego Cura (Capt. Cura), the
Operations Manager of petitioner Symex, summoned
respondents to report to the head office the next day.[12]
The following day or on March 14, 2003, respondents
went to the head office where Capt. Cura told them that
they would be relieved from the post because Guevent
reduced the number of guards on duty. Capt. Cura told
them to go back on March 17, 2003 for their reassignment.
[13]

On March 17, 2003, Capt. Cura told respondents that they

would not be given a duty assignment unless they
withdrew the complaint they filed before the LA.
Respondents were made to choose between resignation
or forcible leave. Capt. Cura gave them a sample affidavit
of desistance for them to use as a guide. Respondents
both refused to obey Capt. Cura, who then told them that
they were dismissed.[14]
The next day or on March 18, 2003, respondents
amended their complaint[15] before the LA to include illegal
dismissal.[16]
The Issues Before the Court
The issues for the Court's resolution are whether or not:
(a) the CA correctly ruled that the NLRC did not gravely
abuse its discretion, and consequently, held that
respondents were illegally dismissed; (b) petitioners are
liable to respondents for backwages, service incentive
leave pay, 13th month pay, separation pay, moral
damages, exemplary damages and attorney's fees; and
(c) petitioner Arcega should be held solidarily liable with
petitioner Symex for respondents' monetary awards.
The Court's Ruling
The petition is without merit.
NLRC did not commit grave
abuse of discretion.
"To justify the grant of the extraordinary remedy
of certiorari, the petitioner must satisfactorily show that the
court or quasi-judicial authority gravely abused the
discretion conferred upon it. Grave abuse of discretion
connotes a capricious and whimsical exercise of
judgment, done in a despotic manner by reason of passion
or personal hostility, the character of which being so
patent and gross as to amount to an evasion of positive
duty or to a virtual refusal to perform the duty enjoined by
or to act at all in contemplation of law."[35]
"In labor disputes, grave abuse of discretion may be
ascribed to the NLRC when, inter alia, its findings and
conclusions are not supported by substantial evidence, or
that amount of relevant evidence which a reasonable mind
might accept as adequate to justify a conclusion."[36]
Guided by the foregoing considerations, the Court finds
that the CA correctly found no grave abuse of discretion
on the part of the NLRC in reversing the LA ruling, as the
LA's finding that respondents were not illegally dismissed
from employment is not supported by substantial
evidence.
A judicious review of the records of the case reveals that
respondents were dismissed by Capt. Cura, the
Operations Manager of petitioner Symex. Even as the
Court has acknowledged the management prerogative of
security agencies to transfer security guards when
necessary in conducting its business, it likewise has
repeatedly held that this should be done in good faith.[37]

It is well to remember that the private respondents in this

case initially filed a labor complaint for monetary claims
prior to their recall to the head office for possible
reassignment and new postings. To believe that the
private respondents refused to the new postings assigned
to them because it will inconvenience them is unlikely and
contrary to human experience.[48] (Emphasis supplied)
Petitioners, on the other hand, failed to discharge their
burden of proving that the termination of respondents was
for a valid or authorized cause. In fact, they simply
maintained that respondents were not illegally dismissed
because they refused their new assignments. Yet,
petitioners offered no evidence at all to prove respondents'
alleged new assignments or respondents' refusal to accept
the same. All that petitioners offer as proof that
respondents were not dismissed is the argument that
respondents remained in the roll of the security guards of
petitioner Symex. And yet, petitioners failed to even
present said roll of security guards to prove this assertion.
Respondents are not guilty of abandonment.
The Court further agrees with the findings of the CA that
respondents were not guilty of abandonment. Tan
Brothers Corporation of Basilan City v.
Escudero[49] extensively discussed abandonment in labor
cases:
As defined under established jurisprudence, abandonment
is the deliberate and unjustified refusal of an employee to
resume his employment. It constitutes neglect of duty and
is a just cause for termination of employment under
paragraph (b) of Article 282 [now Article 297] of the Labor
Code. To constitute abandonment, however, there
must be a clear and deliberate intent to discontinue
one's employment without any intention of returning.
In this regard, two elements must concur: (1) failure to
report for work or absence without valid or justifiable
reason, and (2) a clear intention to sever the
employer-employee relationship, with the second
element as the more determinative factor and being
manifested by some overt acts. Otherwise stated,
absence must be accompanied by overt acts unerringly
pointing to the fact that the employee simply does not
want to work anymore. It has been ruled that the employer
has the burden of proof to show a deliberate and
unjustified refusal of the employee to resume his
employment without any intention of returning.
[50]
(Emphasis supplied)
In this case, the respondents' act of filing a complaint for
illegal dismissal with prayer for reinstatement belies any
intention to abandon employment.[51] To be sure, the
immediate filing of a complaint for illegal dismissal, more
so when it includes a prayer for reinstatement, has been
held to be totally inconsistent with a charge of
abandonment.[52] To reiterate, abandonment is a matter of
intention and cannot be lightly inferred, much less legally
presumed, from certain equivocal acts.[53]
The rule is that factual findings of quasi-judicial agencies
such as the NLRC are generally accorded not only
respect, but at times, even finality because of the special
knowledge and expertise gained by these agencies from
handling matters falling under their specialized jurisdiction.
[54]
It is also settled that this Court is not a trier of facts and
does not normally embark in the evaluation of evidence
adduced during trial.[55]

Petitioner Arcega is not liable

for obligations of petitioner
Symex absent showing of gross
negligence or bad faith on his
part.
Finally, as to petitioner Arcega's liability for the obligations
of Symex to respondents, the Court notes that there was
no showing that Arcega, as President of Symex, willingly
and knowingly voted or assented to the unlawful acts of
the company.
In Guillermo v. Uson,[74] the Court resolved the twin
doctrines of piercing the veil of corporate fiction and
personal liability of company officers in labor cases.

According to the Court:

The common thread running among the aforementioned
cases, however, is that the veil of corporate fiction can be
pierced, and responsible corporate directors and
officers or even a separate but related corporation,
may be impleaded and held answerable solidarily in a
labor case, even after final judgment and on
execution, so long as it is established that such
persons have deliberately used the corporate vehicle
to unjustly evade the judgment obligation, or have
resorted to fraud, bad faith or malice in doing so.
When the shield of a separate corporate identity is used to
commit wrongdoing and opprobriously elude responsibility,
the courts and the legal authorities in a labor case have
not hesitated to step in and shatter the said shield and
deny the usual protections to the offending party, even
after final judgment. The key element is the presence of
fraud, malice or bad faith. Bad faith, in this instance, does
not connote bad judgment or negligence but imparts a
dishonest purpose or some moral obliquity and conscious
doing of wrong; it means breach of a known duty through
some motive or interest or ill will; it partakes of the nature
of fraud.
As the foregoing implies, there is no hard and fast rule on
when corporate fiction may be disregarded; instead, each
case must be evaluated according to its peculiar
circumstances. For the case at bar, applying the above
criteria, a finding of personal and solidary liability
against a corporate officer like Guillermo must be
rooted on a satisfactory showing of fraud, bad faith or
malice, or the presence of any of the justifications for
disregarding the corporate fiction.[75] (Emphasis
supplied)
A corporation is a juridical entity with a legal personality
separate and distinct from those acting for and in its behalf
and, in general, from the people comprising it.[76] Thus, as
a general rule, an officer may not be held liable for the
corporation's labor obligations unless he acted with
evident malice and/or bad faith in dismissing an employee.
[77]

Section 31[78] of the Corporation Code is the governing law

on personal liability of officers for the debts of the
corporation. To hold a director or officer personally liable
for corporate obligations, two requisites must concur: (1) it
must be alleged in the complaint that the director or officer
assented to patently unlawful acts of the corporation or
that the officer was guilty of gross negligence or bad faith;
and (2) there must be proof that the officer acted in bad
faith.[79]
Based on the records, respondents failed to specifically
allege either in their complaint or position paper that
Arcega, as an officer of Symex, willfully and knowingly
assented to the acts of Capt. Cura, or that Arcega had
been guilty of gross negligence or bad faith in directing the
affairs of the corporation. In fact, there was no evidence at
all to show Arcega's participation in the illegal dismissal of
respondents. Clearly, the twin requisites of allegation and
proof of bad faith, necessary to hold Arcega personally
liable for the monetary awards to the respondents, are
lacking.
Arcega is merely one of the officers of Symex and to
single him out and require him to personally answer for the
liabilities of Symex are without basis.
The Court has repeatedly emphasized that the piercing of
the veil of corporate fiction is frowned upon and can only
be done if it has been clearly established that the separate
and distinct personality of the corporation is used to justify
a wrong, protect fraud, or perpetrate a deception.[80] To
disregard the separate juridical personality of a
corporation, the wrongdoing must be established clearly
and convincingly. It cannot be presumed.
G.R. No. 221813

MARICALUM MINING CORPORATION, Petitioner

vs.
ELY G. FLORENTINO,

A subsidiary company's separate corporate personality may be

disregarded only when the evidence shows that such separate
personality was being used by its parent or holding corporation to
perpetrate a fraud or evade an existing obligation. Concomitantly,
employees of a corporation have no cause of action for labor-
related claims against another unaffiliated corporation, which
does not exercise control over them.

I
WHETHER THE COURT OF APPEALS ERRED IN REFUSING
TO RE-EVALUATE THE FACTS AND IN FINDING NO GRAVE
ABUSE OF DISCRETION ON THE PART OF THE NLRC;

II

WHETHER THE COURT OF APPEALS ERRED IN AFFIRMING

THE NLRC'S FINDING OF SUBSTANTIAL EVIDENCE IN
GRANTING THE COMPLAINANTS' MONETARY AWARD AS
WELL AS ITS REFUSAL TO REMAND THE CASE BACK TO
THE LABOR ARBITER FOR RE-COMPUTATION OF SUCH
AWARD;

III

WHETHER THE COURT OF APPEALS ERRED IN

DISREGARDING THAT THE NLRC ALLOWED MARICALUM
MINING TO INTERVENE IN THE CASE ONLY ON APPEAL;

IV

WHETHER THE COURT OF APPEALS ERRED IN AFFIRMING

THE NLRC'S RULING WHICH ALLOWED THE PIERCING OF
THE CORPORA TE VEIL AGAINST MARICALUM MINING BUT
NOT AGAINST SIPALAY HOSPITAL.

The Court's Ruling

It is basic that only pure questions of law should be raised in

petitions for review on certiorari under Rule 45 of the Rules of
Court.32 It will not entertain questions of fact as the factual findings
of appellate courts are final, binding or conclusive on the parties
and upon this court when supported by substantial evidence. 33 In
labor cases, however, the Court has to examine the CA' s
Decision from the prism of whether the latter had correctly
determined the presence or absence of grave abuse of discretion
in the NLRC's Decision.34
In this case, the principle that this Court is not a trier of facts
applies with greater force in labor cases. 35 Grave abuse must
have attended the evaluation of the facts and evidence presented
by the parties.36 This Court is keenly aware that the CA undertook
a Rule 65 review-not a review on appeal-of the NLRC decision
challenged before it. 37 It follows that this Court will not re-examine
conflicting evidence, reevaluate the credibility of witnesses, or
substitute the findings of fact of the NLRC, an administrative body
that has expertise in its specialized field. 38 It may only examine
the facts only for the purpose of resolving allegations and
determining the existence of grave abuse of
discretion. Accordingly, with these procedural guidelines, the
39

Court will now proceed to determine whether or not the CA had

committed any reversible error in affirming the NLRC's Decision.

The doctrine of piercing the corporate veil applies only in three (3)
basic areas, namely: (a) defeat of public convenience as when
the corporate fiction is used as a vehicle for the evasion of an
existing obligation; (b) fraud cases or when the corporate entity is
used to justify a wrong, protect fraud, or defend a crime; or (c)
alter ego cases, where a corporation is merely a farce since it is a
mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency,
conduit or adjunct of another corporation. 53 This principle is
basically applied only to determine established
liability. 54 However, piercing of the veil of corporate fiction is
frowned upon and must be done with caution. 55 This is because a
corporation is invested by law with a personality separate and
distinct from those of the persons composing it as well as from
that of any other legal entity to which it may be related. 56

A parent57 or holding company58 is a corporation which owns or is

organized to own a substantial portion of another company's
voting59 shares of stock enough to control60 or influence the
latter's management, policies or affairs thru election of the latter's
board of directors or otherwise. However, the term "holding
company" is customarily used interchangeably with the term
"investment company" which, in turn, is defined by Section 4 (a)
of Republic Act (R.A.) No. 262961 as "any issuer (corporation)
which is or holds itself out as being engaged primarily, or
proposes to engage primarily, in the business of investing,
reinvesting, or trading in securities."

In other words, a "holding company" is organized and is basically

conducting its business by investing substantially in the equity
securities62 of another company for the purposes of controlling
their policies (as opposed to directly engaging in operating
activities) and "holding" them in a conglomerate or umbrella
structure along with other subsidiaries. Significantly, the holding
company itself-being a separate entity-does not own the assets of
and does not answer for the liabilities of the subsidiary 63 or
affiliate. 64 The management of the subsidiary or affiliate still rests
in the hands of its own board of directors and corporate officers. It
is in keeping with the basic rule a corporation is a juridical entity
which is vested with a legal personality separate and distinct from
those acting for and in its behalf and, in general, from the people
comprising it.65 The corporate form was created to allow
shareholders to invest without incurring personal liability for the
acts of the corporation. 66

While the veil of corporate fiction may be pierced under certain

instances, mere ownership of a subsidiary does not justify the
imposition of liability on the parent company. 67 It must further
appear that to recognize a parent and a subsidiary as
separate entities would aid in the consummation of a
wrong.68 Thus, a holding corporation has a separate
corporate existence and is to be treated as a separate entity;
unless the facts show that such separate corporate existence
is a mere sham, or has been used as an instrument for
concealing the truth.69

In the case at bench, complainants mainly harp their cause on the

alter ego theory. Under this theory, piercing the veil of corporate
fiction may be allowed only if the following elements concur:

1) Control-not mere stock control, but complete domination-not

only of finances, but of policy and business practice in respect to
the transaction attacked, must have been such that the corporate
entity as to this transaction had at the time no separate mind, will
or existence of its own;

2) Such control must have been used by the defendant to commit

a fraud or a wrong, to perpetuate the violation of a statutory or
other positive legal duty, or a dishonest and an unjust act in
contravention of plaintiffs legal right; and

3) The said control and breach of duty must have proximately

caused the injury or unjust loss complained of.70

The elements of the alter ego theory were discussed in Philippine

National Bank v. Hydro Resources Contractors Corporation, 71 to
wit:

The first prong is the "instrumentality" or "control" test. This

test requires that the subsidiary be completely under the control
and domination of the parent. It examines the parent corporation's
relationship with the subsidiary. It inquires whether a subsidiary
corporation is so organized and controlled and its affairs are so
conducted as to make it a mere instrumentality or agent of the
parent corporation such that its separate existence as a distinct
corporate entity will be ignored. It seeks to establish whether the
subsidiary corporation has no autonomy and the parent
corporation, though acting through the subsidiary in form and
appearance, "is operating the business directly for itself."
The second prong is the "fraud" test. This test requires that the
parent corporation's conduct in using the subsidiary corporation
be unjust, fraudulent or wrongful. It examines the relationship of
the plaintiff to the corporation. It recognizes that piercing is
appropriate only if the parent corporation uses the subsidiary in a
way that harms the plaintiff creditor. As such, it requires a
showing of "an element of injustice or fundamental unfairness."

The third prong is the "harm" test. This test requires the plaintiff
to show that the defendant's control, exerted in a fraudulent,
illegal or otherwise unfair manner toward it, caused the harm
suffered. A causal connection between the fraudulent conduct
committed through the instrumentality of the subsidiary and the
injury suffered or the damage incurred by the plaintiff should be
established. The plaintiff must prove that, unless the corporate
veil is pierced, it will have been treated unjustly by the defendant's
exercise of control and improper use of the corporate form and,
thereby, suffer damages.

To summarize, piercing the corporate veil based on the alter

ego theory requires the concurrence of three elements: control
of the corporation by the stockholder or parent corporation, fraud
or fundamental unfairness imposed on the plaintiff, and harm or
damage caused to the plaintiff by the fraudulent or unfair act of
the corporation. The absence of any of these elements
prevents piercing the corporate veil. (emphases and
underscoring supplied)

Again, all these three elements must concur before the corporate
veil may be pierced under the alter ego theory. Keeping in mind
the parameters, guidelines and indicators for proper piercing of
the corporate veil, the Court now proceeds to determine whether
Maricalum Mining's corporate veil may be pierced in order to
allow complainants to enforce their monetary awards against G
Holdings.
I. Control or Instrumentality Test

In Concept Builders, Inc. v. National Labor Relations

Commission, et al., 72 the Court first laid down the first set of
probative factors of identity that will justify the application of the
doctrine of piercing the corporate veil, viz:

1) Stock ownership by one or common ownership of both

corporations.

2) Identity of directors and officers.

3) The manner of keeping corporate books and records.

4) Methods of conducting the business.

Later, in Philippine National Bank v. Ritratto Group Inc., et

al.,73 the Court expanded the aforementioned probative factors
and enumerated a combination of any of the following common
circumstances that may also render a subsidiary an
instrumentality, to wit:

1) The parent corporation owns all or most of the capital stock of

the subsidiary;

2) The parent and subsidiary corporations have common directors

or officers;

3) The parent corporation finances the subsidiary;

4) The parent corporation subscribes to all the capital stock of the

subsidiary or otherwise causes its incorporation;

5) The subsidiary has grossly inadequate capital;

6) The parent corporation pays the salaries and other

expenses or losses of the subsidiary;
7) The subsidiary has substantially no business except with the
parent corporation or no assets except those conveyed to or by
the parent corporation;

8) In the papers of the parent corporation or in the statements of

its officers, the subsidiary is described as a department or division
of the parent corporation, or its business or financial responsibility
is referred to as the parent corporation's own;

9) The parent corporation uses the property of the subsidiary as

its own;

10) The directors or executives of the subsidiary do not act

independently in the interest of the subsidiary but take their orders
from the parent corporation; and

11) The formal legal requirements of the subsidiary are not

observed.

In the instant case, there is no doubt that G Holdings-being the

majority and controlling stockholder-had been exercising
significant control over Maricalum Mining. This is because this
Court had already upheld the validity and enforceability of the
PSA between the APT and G Holdings.

Hence, the presence of both circumstances of dominant equity

ownership and provision for salary expenses may adequately
establish that Maricalum Mining is an instrumentality of G
Holdings.

However, mere presence of control and full ownership of a parent

over a subsidiary is not enough to pierce the veil of corporate
fiction. It has been reiterated by this Court time and again
that mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a
corporation is not of itself sufficient ground for disregarding
the separate corporate personality.74

II. Fraud Test

The corporate veil may be lifted only if it has been used to shield
fraud, defend crime, justify a wrong, defeat public convenience,
insulate bad faith or perpetuate injustice.75 To aid in the
determination of the presence or absence of fraud, the following
factors in the "Totality of Circumstances Test" 76 may be
considered, viz:

1) Commingling of funds and other assets of the corporation

with those of the individual shareholders;

2) Diversion of the corporation's funds or assets to non-corporate

uses (to the personal uses of the corporation's shareholders);

3) Failure to maintain the corporate formalities necessary for the

issuance of or subscription to the corporation's stock, such as
formal approval of the stock issue by the board of directors;

4) An individual shareholder representing to persons outside the

corporation that he or she is personally liable for the debts or
other obligations of the corporation;

5) Failure to maintain corporate minutes or adequate corporate

records;

6) Identical equitable ownership in two entities;

7) Identity of the directors and officers of two entities who are

responsible for supervision and management (a partnership or
sole proprietorship and a corporation owned and managed by the
same parties);
8) Failure to adequately capitalize a corporation for the
reasonable risks of the corporate undertaking;

9) Absence of separately held corporate assets;

10) Use of a corporation as a mere shell or conduit to operate a

single venture or some particular aspect of the business of an
individual or another corporation;

11) Sole ownership of all the stock by one individual or members

of a single family;

12) Use of the same office or business location by the

corporation and its individual shareholder(s);

13) Employment of the same employees or attorney by the

corporation and its shareholder(s);

14) Concealment or misrepresentation of the identity of the

ownership, management or financial interests in the corporation,
and concealment of personal business activities of the
shareholders (sole shareholders do not reveal the association
with a corporation, which makes loans to them without adequate
security);

15) Disregard of legal formalities and failure to maintain proper

arm's length relationships among related entities;

16) Use of a corporate entity as a conduit to procure labor,

services or merchandise for another person or entity;

17) Diversion of corporate assets from the corporation by or

to a stockholder or other person or entity to the detriment of
creditors, or the manipulation of assets and liabilities
between entities to concentrate the assets in one and the
liabilities in another;
18) Contracting by the corporation with another person with
the intent to avoid the risk of nonperformance by use of the
corporate entity; or the use of a corporation as a subterfuge
for illegal transactions; and

19) The formation and use of the corporation to assume the

existing liabilities of another person or entity.

Aside from the aforementioned circumstances, it must be

determined whether the transfer of assets from Maricalum Mining
to G Holdings is enough to invoke the equitable remedy of
piercing the corporate veil. The same issue was resolved in Y-1
Leisure Phils., Inc., et al. v. Yu77 where this Court applied the "Nell
Doctrine"78 regarding the transfer of all the assets of one
corporation to another. It was discussed in that case that as a
general rule that where one corporation sells or otherwise
transfers all of its assets to another corporation, the latter is not
liable for the debts and liabilities of the transferor, except:

1) Where the purchaser expressly or impliedly agrees to assume

such debts;

2) Where the transaction amounts to a consolidation or merger of

the corporations;

3) Where the purchasing corporation is merely a continuation of

the selling corporation; and

4) Where the transaction is entered into fraudulently in order

to escape liability for such debts.

If any of the above-cited exceptions are present, then the

transferee corporation shall assume the liabilities of the
transferor. 79
In this case, G Holdings cannot be held liable for the satisfaction
of labor-related claims against Maricalum Mining under the fraud
test for the following reasons:

First, the transfer of some Maricalum Mining's assets in favor G

Holdings was by virtue of the PSA as part of an official measure
to dispose of the government's non-performing assets-not to
evade its monetary obligations to the complainants.

Thus, G Holdings could not have devised a scheme to avoid a

non-existent obligation. No fraud could be attributed to G Holdings
because the transfer of assets was pursuant to a previously
perfected valid contract.

In other words, control or ownership of substantially all of a

subsidiary's assets is not by itself an indication of a holding
company's fraudulent intent to alienate these assets in evading
labor-related claims or liabilities.

Besides, it is evident that the alleged continuing depletion of

Maricalum Mining's assets is due to its disgruntled employees'
own acts of pilferage, which was beyond the control of G
Holdings.

Hence, no fraud can be imputed against G Holdings considering

that there is no evidence in the records that establishes it
systematically tried to alienate Maricalum Mining's assets to
escape the liabilities to complainants.

Second, it was not proven that all of Maricalum Mining's assets

were transferred to G Holdings or were totally depleted.

Third, G Holdings purchased Mari cal um Mining's shares from

the APT not for the purpose of continuing the latter's existence
and operations but for the purpose of investing in the mining
industry without having to directly engage in the management and
operation of mining.

As discussed earlier, a holding company's primary business is

merely to invest in the equity of another corporation for the
purpose of earning from the latter's endeavors. It generally does
not undertake to engage in the daily operating activities of its
subsidiaries that, in turn, have their own separate sets of directors
and officers. Thus, there should be proof that a holding company
had indeed fraudulently used the separate corporate personality
of its subsidiary to evade an obligation before it can be held liable.
Since G Holdings is a holding company, the corporate veil of its
subsidiaries may only be pierced based on fraud or gross
negligence amounting to bad faith.

Lastly, no clear and convincing evidence was presented by the

complainants to conclusively prove the presence of fraud on the
part of G Holdings. Although the quantum of evidence needed to
establish a claim for illegal dismissal in labor cases is substantial
evidence,86 the quantum need to establish the presence of fraud
is clear and convincing evidence.87 Thus, to disregard the
separate juridical personality of a corporation, the wrongdoing
must be established clearly and convincingly-it cannot be
presumed.88

Here, the complainants did not satisfy the requisite quantum of

evidence to prove fraud on the part of G Holdings. As emphasized
earlier, bare allegations do not prove anything. There must be
proof that fraud-not the inevitable effects of a previously executed
and valid contract such as the PSA-was the cause of the latter's
total asset depletion. To be clear, the presence of control per se is
not enough to justify the piercing of the corporate veil.

III. Harm or Casual Connection Test

The control must be shown to have been exercised at the time the
acts complained of took place. Moreover, the control and breach
of duty must proximately cause the injury or unjust loss for
which the complaint is made. (emphases and underscoring
supplied)

Proximate cause is defined as that cause, which, in natural and

continuous sequence, unbroken by any efficient intervening
cause, produces the injury, and without which the result would not
have occurred.90 More comprehensively, the proximate legal
cause is that "acting first and producing the injury, either
immediately or by setting other events in motion, all constituting a
natural and continuous chain of events, each having a close
causal connection with its immediate predecessor, the final event
in the chain immediately effecting the injury as a natural and
probable result of the cause which first acted, under such
circumstances that the person responsible for the first event
should, as an ordinary prudent and intelligent person, have
reasonable ground to expect at the moment of his act or default
that an injury to some person might probably result
therefrom."91 Hence, for an act or event to be considered as
proximate legal cause, it should be shown that such act or event
had indeed caused injury to another.

In the case at bench, complainants have not yet even suffered

any monetary injury. They have yet to enforce their claims
against Maricalum Mining.

Accordingly, complainants failed to satisfy the second and third

tests to justify the application of the alter ego theory. This
inevitably shows that the CA committed no reversible error in
upholding the NLRC's Decision declaring Maricalum Mining as
the proper party liable to pay the monetary awards in favor of
complainants.

G Holdings and Sipalay Hospital

Sipalay Hospital was incorporated by Romulo G. Zafra, Eleanore
B. Gutierrez, Helen Grace B. Fernandez, Evelyn B. Badajos and
Helen Grace L. Arbolario. 92 However, there is absence of
indication that G Holdings subsequently acquired the controlling
interests of Sipalay Hospital. There is also no evidence that G
Holdings entered into a contract with Sipalay Hospital to provide
medical services for its officers and employees. This lack of
stockholding or contractual connection signifies that Sipalay
Hospital is not affiliated93 with G Holdings. Thus, due to this
absence of affiliation, the Court must apply the tests used to
determine the existence of an employee-employer relationship;
rather than piercing the corporate veil.

Under the four-fold test, the employer-employee relationship is

determined if the following are present: a) the selection and
engagement of the employee; b) the payment of wages; c) the
power of dismissal; and d) the power to control the employee's
conduct, or the so-called "control test."94 Here, the "control test" is
the most important and crucial among the four tests. 95 However,
in cases where there is no written agreement to base the
relationship on and where the various tasks performed by the
worker bring complexity to the relationship with the employer, the
better approach would therefore be to adopt a two-tiered
test involving: a) the putative employer's power to control the
employee with respect to the means and methods by which the
work is to be accomplished; and b) the underlying economic
realities of the activity or relationship.96

In applying the second tier, the determination of the relationship

between employer and employee depends upon the
circumstances of the whole economic activity (economic reality
or multi-factor test), such as: a) the extent to which the services
performed are an integral part of the employer's business; b) the
extent of the worker's investment in equipment and facilities; c)
the nature and degree of control exercised by the employer; d)
the worker's opportunity for profit and loss; e) the amount of
initiative, skill, judgment or foresight required for the success of
the claimed independent enterprise; f) the permanency and
duration of the relationship between the worker and the employer;
and g) the degree of dependency of the worker upon the
employer for his continued employment in that line of
business. 97 Under all of these tests, the burden to prove by
substantial evidence all of the elements or factors is incumbent on
the employee for he or she is the one claiming the existence of an
employment relationship.98

In light of the present circumstances, the Court must apply the

four-fold test for lack of relevant data in the case records relating
to the underlying economic realities of the activity or relationship
of Sipalay Hospital's employees.

A perusal of the aforementioned documents fails to show that the

services of complainants Dr. Welilmo T. Neri, Erlinda L.
Fernandez, Edgar M. Sobrino and Wilfredo C. Taganile, Sr. were
indeed selected and engaged by either Maricalum Mining or G
Holdings. This gap in evidence clearly shows that the first
factor of the four-fold test, or the selection and engagement
of the employee, was not satisfied and not supported by
substantial evidence.

However, the same cannot be said as to the second and third

factors of the four-fold test (the payment of wages and the power
of dismissal). Since substantial evidence is defined as that
amount of relevant evidence which a reasonable mind might
accept as adequate to justify a conclusion, 105 the cash vouchers,
social security payments and notices of termination are
reasonable enough to draw an inference that G Holdings and
Maricalum Mining may have had a hand in the complainants'
payment of salaries and dismissal.
Notwithstanding the absence of the first factor and the presence
of the second and third factors of the four-fold test, the Court still
deems it best to examine the fourth factor-the presence of control-
in order to determine the employment connection of complainants
Dr. Welilmo T. Neri, Erlinda L. Fernandez, Edgar M. Sobrino and
Wilfredo C. Taganile, Sr. with G Holdings.

Under the control test, an employer-employee relationship exists

where the person for whom the services are performed reserves
the right to control not only the end achieved, but also the manner
and means to be used in reaching that end. 106 As applied in the
healthcare industry, an employment relationship exists between a
physician and a hospital if the hospital controls both the means
and the details of the process by which the physician is to
accomplish his task. 107 But where a person who works for
another performs his job more or less at his own pleasure, in the
manner he sees fit, not subject to definite hours or conditions of
work, and is compensated according to the result of his efforts
and not the amount thereof, no employer-employee relationship
exists. 108

A corporation may only exercise its powers within the definitions

provided by law and its articles of incorporation. 109 Accordingly, in
order to determine the presence or absence of an employment
relationship between G Holdings and the employees of Sipalay
Hospital by using the control test, the Court deems it essential to
examine the salient portion of Sipalay Hospital's Articles of
Incorporation imparting its 'primary purpose,' 110 to wit:

To own, manage, lease or operate hospitals or clinics offering and

providing medical services and facilities to the general public,
provided that purely professional, medical or surgical services
shall be performed by duly qualified physicians or surgeons who
may or may not be connected with the corporation and who
shall be freely and individually contracted by patients. (emphasis
supplied)

It is immediately apparent that Sipalay Hospital, even if its

facilities are located inside the Sipalay Mining Complex, does not
limit its medical services only to the employees and officers of
Maricalum Mining and/or G Holdings. Its act of holding out
services to the public reinforces the fact of its independence from
either Maricalum Mining or G Holdings because it is free to deal
with any client without any legal or contractual restriction.
Moreover, G Holdings is a holding company primarily engaged in
investing substantially in the stocks of another company-not in
directing and managing the latter's daily business operations.
Because of this corporate attribute, the Court can reasonably
draw an inference that G Holdings does not have a
considerable ability to control means and methods of work of
Sipalay Hospital employees. Markedly, the records are simply
bereft of any evidence that G Holdings had, in fact, used its
ownership to control the daily operations of Sipalay Hospital as
well as the working methods of the latter's employees. There is no
evidence showing any subsequent transfer of shares from the
original incorporators of Sipalay Hospital to G Holdings. Worse, it
appears that complainants Dr. Welilmo T. Neri, Erlinda L.
Fernandez, Wilfredo C. Taganile, Sr. and Edgar M. Sobrino are
trying to derive their employment connection with G Holdings
merely on an assumed premise that the latter owns the controlling
stocks of Maricalum Mining.

On this score, the CA committed no reversible error in allowing

the NLRC to delete the monetary awards of Dr. Welilmo T. Neri,
Erlinda L. Fernandez, Wilfredo C. Taganile, Sr. and Edgar M.
Sobrino imposed by the Labor Arbiter against G Holdings.

Conclusion
A holding company may be held liable for the acts of its subsidiary
only when it is adequately proven that: a) there was control over
the subsidiary; (b) such control was used to protect a fraud (or
gross negligence amounting to bad faith) or evade an obligation;
and c) fraud was the proximate cause of another's existing injury.
Further, an employee is duly-burdened to prove the crucial test or
factor of control thru substantial evidence in order to establish the
existence of an employment relationship-especially as against an
unaffiliated corporation alleged to be exercising control.

In this case, complainants have not successfully proven that G

Holdings fraudulently exercised its control over Maricalum Mining
to fraudulently evade any obligation. They also fell short of
proving that G Holdings had exercised operational control over
the employees of Sipalay Hospital. Due to these findings, the
Court sees no reversible error on the part of the CA, which found
no grave abuse of discretion and affirmed in toto the factual
findings and legal conclusions of the NLRC.

[ G.R. No. 233857 (formerly UDK 16000), March 18, 2021 ]

AGAPITO A. SALIDO, JR., PETITIONER, VS. ARAMAYWAN

METALS DEVELOPMENT CORPORATION, CERLITO SAN
JUAN, CORAZON SAN JUAN, CRISTINA MARIE SAN JUAN,
RESPONDENTS.

DECISION

CAGUIOA, J.:

Before the Court is a Petition for Review on Certiorari (Petition)

under Rule 45 of the Rules of Court assailing the Amended
Decision1 of the Court of Appeals (CA) dated January 31, 2017
(Amended Decision) in CA-G.R. CV No. 98934, declaring as void
certain resolutions of the board of directors of Aramaywan Metals
Development Corporation (Aramaywan).
Facts

This case is an intra-corporate dispute involving two different

factions within Aramaywan, a corporation duly organized under
the laws of the Philippines. Sometime in April 2005, Cerlito San
Juan (San Juan), Ernesto Mangune (Mangune), and Agapito
Salido, Jr. (Salido), along with four other individuals (collectively,
Salido faction), agreed to form two mining corporations, namely
Aramaywan and Narra Mining Corporation (Narra Mining).2 San
Juan was tasked to finance the initial operations of the intended
corporation, Mangune was in charge of the technical aspect of the
operations, while Salido and the Salido faction were in charge of
the mining site and securing the necessary permits.3 They
entered into an Agreement to Incorporate (Agreement), wherein it
was stipulated that San Juan would advance the paid-up
subscription for Aramaywan amounting to P2,500,000.00 and
would assure the payment of the subscription of the capital stock
of Narra Mining.4 In exchange, San Juan would own 55% of the
stocks of Aramaywan and 35% of the stocks of Narra Mining.5 In
line with the said Agreement, San Juan then advanced the
P2,500,000.00 paid-up subscription of Aramaywan.7 This is
evidenced by a Standard Chartered Bank Certificate indicating
that the amount of P2,500,000.00 was deposited in San Juan's
name as treasurer, held by him in trust for the
corporation.8 Aramaywan was then subsequently incorporated
with nine named directors. Its Articles of Incorporation9 states that
out of its 100,000 shares, 25,000 are subscribed and paid as
follows:

The special board meeting was nevertheless conducted on

February 5, 2006, wherein resolutions were passed by the Salido
faction regarding the following matters:

a. Resolution No. 01-2006: "confirming"11 the reduction of

the shares of San Juan in Aramaywan from 55% to 15%.
 San Juan's shares were reduced to allegedly accurately
represent that amount of money he actually shelled out for
the corporation, which was allegedly only P932,209.16 and
not the total amount of P2,500,000.00;

b. Resolution No. 02-2006: change of corporate address

from Taguig to Palawan;

c. Resolution No. 03-2006: cancelling the shares of Corazon

and Cristina Marie by virtue of the reduction of shares of San
Juan;

d. Resolution No. 04-2006: That the registration of Narra

Mining Corporation shall no longer proceed on account of
San Juan's non-compliance with his obligation to advance
the necessary amount.

e. Resolution No. 05-2006: authorizing Salido, as President

and CEO of Aramaywan, to negotiate and transact with any
entity on behalf of Aramaywan, and to sign a memorandum
of agreement to speed up the mining operations for the
benefit of the corporation;

f. Resolution No. 06-2006: appointment of a new corporate

secretary in the person of Atty. Roland E. Pay per minutes of
a Special Meeting on November 25, 2005; and

g. Resolution No. 07-2006: appointment of a Teodora L.

Plata as the new Treasurer of Aramaywan.12

Several other meetings were called by the Salido faction through

Atty. Pay. The supposed approved acts of the corporation in
these meetings were similarly questioned by the San Juan
faction. The San Juan faction, on the other hand, in its belief that
it still had control over the corporation, called for stockholders'
and board meetings and approved supposed corporate acts. Both
contending parties then submitted to the Securities and Exchange
Commission (SEC) conflicting General Information Sheets.
Thereafter, the San Juan faction filed with the Regional Trial
Court of Pasig (RTC) a complaint which sought to invalidate the
acts of the Salido faction.

ISSUE

For resolution of the Court is the issue of whether the CA erred in

issuing the Amended Decision which held that San Juan's shares
were not validly reduced.

THE COURT'S RULING

Before delving into the main issue raised in this case, the Court
deems it proper to emphasize that under Rule 45 of the Rules of
Court, only questions of law may be raised.19 The reason behind
this is that this Court is not a trier of facts and will not re-examine
and re-evaluate the evidence on record.20

In the present case, Salido hinges his Petition on questions of

fact, more specifically, that San Juan agreed to the reduction of
his shares in one of the meetings. This cannot be done in a
petition for review under Rule 45.

While it is true that there are exceptions to this rule, such as is in

this case where the findings of fact of the CA differ from those of
the trial court, Salido did not attach any minutes of the relevant
meetings to aid the Court in understanding and verifying his
factual allegations. It was incumbent upon him as the petitioner to
attach "such material portions of the record as would Support the
petition."21 The only annexes to the petition, however, are the
Decisions of the RTC and the CA. Moreover, Salido did not file a
Reply despite the Court's Order22 for him to do so.
For these reasons alone, the Petition should be dismissed. In the
interest of substantial justice, however, the Court deems it proper
to discuss the substantive issue and explain the Petition's lack of
merit.

San Juan's shares were not validly converted into treasury shares
because Aramaywan did not have unrestricted retained earnings

The Petition asserts that, as held by the RTC, San Juan's shares
were validly reduced and in tum converted into treasury shares.

The Court disagrees.

Batas Pambansa Blg. 68, or the Corporation Code, the law

applicable at the time the events in this case occurred, clearly
sets out the parameters when a corporation may reacquire its
shares and convert them into treasury shares. According to
Section 9 of the Corporation Code, "[t]reasury shares are shares
of stock which have been issued and fully paid for, but
subsequently reacquired by the issuing corporation by purchase,
redemption, donation or through some other lawful
means."23 Apart from reacquiring the shares through some lawful
means, the Corporation Code is also explicit that while a
corporation has the power to purchase or acquire its own shares,
the corporation must have unrestricted retained earnings in its
books to cover the shares to be purchased or acquired.24 In
addition, in cases where the reason for reacquiring the shares is
because of the unpaid subscription, the Corporation Code is
likewise explicit that the corporation must purchase the same
during a delinquency sale.25

All the foregoing requirements were not met in the reduction of

San Juan's shares.

At the outset, the records are bereft of any showing that

Aramaywan had unrestricted retained earnings in its books at the
time the reduction of shares was made. During that time,
Aramaywan had just been existing for a few months, and had not
in fact been able to perform mining activities yet. It is thus both
highly doubtful and unsupported by the record that Aramaywan
had unrestricted retained earnings to be able to purchase its own
shares.

The Court has observed that: "The trust fund doctrine backstops
the requirement of unrestricted retained earnings to fund the
payment of the shares of stocks of the withdrawing
stockholders."26 Under the trust fund doctrine, "the capital stock,
property, and other assets of a corporation are regarded as equity
in trust for the payment of corporate creditors, who are preferred
in the distribution of corporate assets."27 Thus, "[t]he creditors of
a corporation have the right to assume that the board of directors
will not use the assets of the corporation to purchase its own
stock for as long as the corporation has outstanding debts and
liabilities. There can be no distribution of assets among the
stockholders without first paying corporate debts."28

In this case, there was no showing that, at the time the reduction
of San Juan's shares was made, Aramaywan had unrestricted
retained earnings in its books. Neither was it shown that it did not
have creditors or that they were already paid before the
agreement to release San Juan was made.

Moreover, it must be emphasized that San Juan's subscriptions

have already been fully paid by him, and as such, Aramaywan
cannot validly reduce his shares without giving a corresponding
return of his investment. As earlier stated, San Juan contributed
P2,500,000.00 evidenced by a Standard Chartered Bank
certificate in San Juan's name which indicates that he holds that
money in trust for Aramaywan.

The RTC itself, in narrating its factual findings, noted that "the
payment for the subscription of shares of all the subscribers were
paid by plaintiff Cerlito San Juan as his contribution in the
formation and running of the corporation. The payment for the
subscribed shares, however, was under the name of plaintiff
Cerlito San Juan in trust for plaintiff corporation."29

It is well established that when there is a trust relationship, there

is a separation of the legal title and equitable ownership of the
property.30 In a trust relation, legal title is vested in the fiduciary
or trustee, while equitable ownership is vested in the cestui
que trust or beneficiary.31 Here, it is clear that San Juan's name
was reflected in the bank certificate only because he is the trustee
in the trust relation, but Aramaywan is nevertheless the
beneficiary. This means that San Juan only had legal title over the
money, but the ownership of the same ultimately remained with
Aramaywan. As aptly found by the CA in its Amended Decision:

The allegation that only P932,000.00 was given in cash during the
incorporation process is baseless because the funds remained in
the name of Aramaywan and as such may be withdrawn anytime
upon approval of the board.

The fact that the deposit was initially made in the name of San
Juan as treasurer-in-trust for Aramaywan is also irrelevant. As
correctly argued by San Juan and as expressly stated in the bank
certificate: "x x x said deposit is clear and free from any lien,
restriction, condition or hold-out and may be withdrawn in behalf
of said company upon presentation of proof of due incorporation
thereof."32 (Emphasis supplied)

The following finding is bolstered by the fact that Aramaywan's

Articles of Incorporation33 states that P2,500,000.00 of its
authorized capital stock has already been paid. This is in
accordance with the parties' Agreement, which provides that
"Cerlito G. San Juan shall advance the paid-up subscription for
ARAMAYWAN METALS DEVELOPMENT CORPORATION in the
sum of P2,500,000.00."34 Notably, the SEC issued a certificate of
incorporation on September 9, 2005,35 which means that it found
the contents of the Articles of Incorporation and the Treasurer's
Affidavit — which also contains the information on how the shares
are subscribed and paid — to be correct.36

Considering that San Juan's subscriptions have been fully paid,

Aramaywan cannot thus reduce his shares without a
corresponding return of his investment. It is undisputed, however,
that San Juan received nothing for the reduction of his shares.

In any event, if it were true that San Juan had unpaid

subscriptions, the Corporation Code has provided a procedure for
the demand of such payment37 and the holding of a delinquency
sale in case of continued non-payment.38 Thus, even assuming it
was true that San Juan had unpaid subscriptions, simply agreeing
in a meeting for their reduction, thereby releasing the stockholder
from his obligation to pay the unpaid subscriptions, cannot be the
mode by which said unpaid subscriptions are settled. To allow
corporations to do such an act would violate the
aforementioned trust fund doctrine in corporation law. As the
Court explained in NTC v. CA:39

The term "capital" and other terms used to describe the capital
structure of a corporation are of universal acceptance, and their
usages have long been established in jurisprudence. Briefly,
capital refers to the value of the property or assets of a
corporation. The capital subscribed is the total amount of the
capital that persons (subscribers or shareholders) have agreed to
take and pay for, which need not necessarily be, and can be more
than, the par value of the shares. In fine, it is the amount that the
corporation receives, inclusive of the premiums if any, in
consideration of the original issuance of the shares. In the case of
stock dividends, it is the amount that the corporation transfers
from its surplus profit account to its capital account. It is the same
amount that can loosely be termed as the "trust fund" of the
corporation. The "Trust Fund" doctrine considers this subscribed
capital as a trust fund for the payment of the debts of the
corporation, to which the creditors may look for satisfaction. Until
the liquidation of the corporation, no part of the subscribed capital
may be returned or released to the stockholder (except in the
redemption of redeemable shares) without violating this principle.
Thus, dividends must never impair the subscribed
capital; subscription commitments cannot be condoned or
remitted; nor can the corporation buy its own shares using the
subscribed capital as the consideration therefor.40 (Emphasis
and underscoring supplied)

As early as 1923, in the case of Philippine Trust Co. v.

Rivera,41 the Court already prohibited corporations from
releasing its stockholders from the payment of unpaid
subscriptions without going through the formalities provided under
the corporation law in effect at the time. In the aforementioned
case, a board resolution was adopted to the effect that the
corporation's capital should be reduced by 50%, and the
subscribers released from the obligation to pay any unpaid
balance of their subscription in excess of 50% of the same. In
declaring the resolution ineffectual, the Court explained:

It is established doctrine that subscriptions to the capital of a

corporation constitute a fund to which creditors have a right to
look for satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock
subscription in order to realize assets for the payment of its debts.
(Velasco vs. Poizat, 37 Phil., 802.) A corporation has no power to
release an original subscriber to its capital stock from the
obligation of paying for his shares, without a valuable
consideration for such release; and as against creditors a
reduction of the capital stock can take place only in the manner
and under the conditions prescribed by the statute or the charter
or the articles of incorporation. Moreover, strict compliance with
the statutory regulations is necessary (14 C. J., 198, 620).

In the case before us the resolution releasing the shareholder

from their obligation to pay 50 per centum of their respective
subscriptions was an attempted withdrawal of so much capital
from the fund upon which the company's creditors were entitled
ultimately to rely and, having been effected without compliance
with the statutory requirements, was wholly
ineffectual.42 (Emphasis and underscoring supplied)

Verily, if it were true that San Juan had unpaid subscriptions, it

was invalid for the Board of Directors to waive such payment, for
it would amount to a decrease in the corporation's capital stock
which could not be accomplished without the formalities under
Section 38 of the Corporation Code (Section 37 under the
Revised Corporation Code) which includes, among others, the
prior approval of the SEC.

In light of the foregoing principles and findings, the Court holds

that the reduction of San Juan's shares was invalid. This remains
true even assuming that San Juan had consented to the said
reduction.

Even assuming San Juan agreed to the reduction of his shares,

such agreement is void for lack of consideration

The RTC, as affirmed initially by the CA, ruled that Aramaywan

validly acquired the shares of San Juan for a consideration. The
RTC explained:

On the other hand, as regards the issue of whether or not the

shares of plaintiff Cerlito San Juan was validly reduced from 55%
to 15%, the Court holds that the said contested reduction was
valid and lawful. As can be gleaned from the same minutes of the
meeting held on November 25-26, 2005 in Narra, Palawan,
plaintiff Cerlito San Juan voluntarily and expressly agreed to the
reduction of his shares from 55% to 15% in exchange, he will no
longer be required to contribute to the corporation the remaining
balance of the P2,500,000.00 of which he only gave P932,209.16
and to incorporate Narra Mining Corporation, he originally
promised to undertake. x x x

xxxx

The parties' agreement for the reduction of shares of Mr. San

Juan became effective and binding between and among them
immediately on [the] same date that the agreement was
made, i.e. November 25, 2005 although no written agreement
was entered into between the parties consistent with the
provisions of Article 1356 of the New Civil Code of the Philippines.
The agreement partakes the nature of conversion of 40% of
plaintiff Cerlito San Juan's shares into treasury shares in
exchange for the termination of his obligation to make additional
cash contribution to the corporation and to incorporate Narra
Mining Corporation. An agreement which was approved
unanimously by all the directors present during the meeting held
on November 25-26, 2005.

Consequently, from the time that Mr. San Juan agreed to reduce
his shares in favor of the corporation, said shares were
automatically converted into treasury shares, pursuant to Section
9 of B.P 68, otherwise known as the Corporation Code of the
Philippines. x x x

xxxx

The conversion of the 10,000 shares of plaintiff Cerlito San Juan

into treasury shares finds basis and justification in Alfonso S. Tan
vs[.] Securities and Exchange Commission, et al., G.R. No.
95696, March 3, 1992, where the Supreme Court upheld as valid
and lawful the conversion of 350 shares with a par value of only
P35,000.00 at P100.00 per share into treasury stocks after
petitioner therein exchanged them with P2,000,000.00 worth of
stocks-in-trade of the corporation, is valid and lawful. Here the
converted 10,000 shares of plaintiff Cerlito San Juan have a par
value of P1,000,000.00 only, which was exchanged for the
termination of his obligation to pay P1,567,790.1, the remaining
balance of the P2,500,000.00, of which [he] delivered to plaintiff
corporation the sum of P932,209.16 only.43

The foregoing ruling is incorrect.

The RTC's ruling is hinged on the premise that San Juan still had
the pending obligation (1) to release the rest of his P1,567,790.1
contribution to the corporation and (2) to incorporate Narra Mining
— and the extinguishment of these obligations constituted the
consideration for the reduction of his shares. The Court finds this
to be untenable.

As earlier illustrated, San Juan did not have any unpaid obligation
as far as his subscriptions to Aramaywan's shares are
concerned.7!ᕼdMᗄ7

As regards the obligation to incorporate Narra Mining, while it is

undisputed that San Juan has yet to fulfill this obligation, the CA
notes that based on the minutes of the meeting held on
November 25-26, 2005, "there was yet no demand for him to
commence the incorporation of the other company, Narra
[Mining]."44 As well, based on the wording of the parties'
Agreement, San Juan's obligation as regards Narra Mining is only
to "assure the payment of the subscription of P2,500,000.00 of
the capital stock of NARRA MINING CORPORATION."45 Based
on the limited records that the Court has — again, because the
petitioner did not attach such relevant copies of documents as
would support his case — the Court cannot find a definitive
obligation on the part of San Juan to incorporate Narra Mining by
a certain date. Indeed, based on the foregoing wording of the
Agreement, San Juan's obligation is only to make sure that the
subscriptions of Narra Mining are paid, but the duty to incorporate
the said corporation is not explicitly imposed on him.

The Court notes as well Resolution No. 04-2006 that the

registration of Narra Mining would no longer be pursued due to
financial reverses and instead the operations of Aramaywan
would be improved.46

As San Juan did not have any unpaid obligations for the
subscription of shares in Aramaywan, and neither was he in
breach of his obligations for Narra Mining, then the Court
concludes that the agreement to reduce the shares did not have a
cause or consideration.

To reiterate, the Corporation Code allows corporations to

reacquire its shares through some lawful means, but under the
Civil Code, contracts without cause or consideration are void and
produce no effect whatsoever.47 Thus, the agreement between
the parties — assuming it exists — is void and cannot therefore
be a basis for the corporation to reacquire its shares.

CA was correct in its rulings regarding the validity of certain

Resolutions of the Board of Directors of Aramaywan

While the main issue in this intra-corporate dispute is the validity

of the reduction of San Juan's shares, the validity of certain
resolutions adopted by the Aramaywan's Board of Directors is
also at issue since a number of resolutions was adopted by the
said Board after the November 25-26, 2005 meeting where the
reduction was supposedly agreed upon. On the validity of these
resolutions, the Court quotes with approval the following ruling of
the CA:

Anent the other board resolutions issued during the special board
meeting on February 5, 2006: (1) Resolution 02-2006, transferring
the place of principal place of business of Aramaywan from
Taguig City to Palawan; (2) Resolution 04-2006, indicating that
the incorporation of Narra shall no longer be pursued due to
financial reverses and instead to improve and move forth with the
operation of Aramaywan; and (3) Resolution 06-2006, reiterating
the consensus made during the November 26, 2005 meeting for
Atty. Roland E. Pay to act and perform the duties of the corporate
secretary - we rule that except for the transfer of the principal
place of business, all other resolutions were validly adopted by
the board of directors of Aramaywan.

The business of the corporation is conducted by the board of

directors who were elected from among the holders of
stock.ℒαwρhi ৷ This means that with regard to the ordinary
business and affairs of the corporation, it is enough that there be
a resolution from the board of directors, in a meeting duly called
for that purpose. Contrary to plaintiffs-appellants' [San Juan's]
position, although the special board meeting held on February 5,
2006 was not convened by San Juan who was the Chairman of
the board, the resolutions may not be invalidated on this ground
alone because Section 4 of the corporation's by-laws allows such
meetings called upon the request of the majority of the directors.

It was also wrong for plaintiffs-appellants to insist that there was

no quorum during that special board meeting. We observe that
there may have been a confusion as to the quorum needed in a
stockholder's meeting vis-a-vis the quorum required in a board
meeting, which deals with ordinary business concerns of the
corporation.

Section 25 of the Corporation Code provides:

Section 25. Corporate officers, quorum. Immediately after their

election, the directors of a corporation must formally organize by
the election of a president, who shall be a director, a treasurer
who may or may not be a director, a secretary who shall be a
resident and citizen of the Philippines, and such other officers as
may be provided for in the by-laws. Any two (2) or more positions
may be held concurrently by the same person, except that no one
shall act as president and secretary or as president and treasurer
at the same time.

The directors or trustees and officers to be elected shall perform

the duties enjoined on them by law and the by-laws of the
corporation. Unless the articles of incorporation or the by-laws
provide for a greater majority, a majority of the number of
directors or trustees as fixed in the articles of incorporation shall
constitute a quorum for the transaction of corporate business, and
every decision of at least a majority of the directors or trustees
present at a meeting at which there is a quorum shall be valid as
a corporate act, except for the election of officers which shall
require the vote of a majority of all the members of the board.

Directors or trustees cannot attend or vote by proxy at board

meetings.

The Articles of Incorporation of Aramaywan named nine (9)

directors, which means that the presence of five (5) members is
sufficient to constitute a quorum to push through with the board
meeting and in that case, a vote of three (3) directors will be
enough to ratify or approve a corporate act.

In our case, the resolution of no longer proceeding with the

incorporation of Narra is an ordinary business affair and it was
unanimously approved by the five (5) directors present during the
February 5, 2006 special board meeting. This is also true as
regards the appointment of Atty. Pay as corporate secretary. We
see no reason to depart from the finding of the trial court on this
aspect especially since evidence shows that the appointment of
Atty. Pay as corporate secretary was previously agreed upon by
the board during the November 26, 2005 board meeting, where
San Juan was present. In fact, San Juan did not oppose Atty.
Pay's appointment as he only motioned that Ernesto Mangune be
made a director even if he is no longer the corporate secretary.

However, on the transfer of the corporate place of business, this

matter is not an ordinary business of the company for it would
necessarily involve an amendment of the articles of incorporation.
In order for the amendment to be valid, Section 16 of the
Corporation Code requires that there be (1) a majority vote of the
board of directors and (2) a written assent of the stockholders
representing at least 2/3 of the outstanding capital stock, (3) with
the corresponding approval by the Securities and Exchange
Corporation. Since we already ruled that the reduction of San
Juan's shares was invalid, he remains a majority stockholder and
his presence and written assent to the proposed transfer of
principal place of business is therefore indispensable for the
corporate act to be valid. Absent these requirements, we are
constrained to set aside the transfer of Aramaywan principal office
from Taguig City to Palawan.48

All in all, the Court finds the ruling of the CA in its Amended
Decision to be in order.

WHEREFORE, the petition is hereby DENIED. The Amended

Decision dated January 31, 2017 of the Court of Appeals in CA
G.R. CV No. 98934 is therefore AFFIRMED.

SO ORDERED.

Peralta, C.J., (Chairperson), Carandang, Zalameda,

and Rosario,* JJ., concur.
THIRD DIVISION

G.R. Nos. 201044 & 222691, May 05, 2021

JORGENETICS SWINE IMPROVEMENT CORPORATION, Petitioner, v.

THICK & THIN AGRI-PRODUCTS, INC., Respondent.
DECISION

HERNANDO, J.:

The Factual Antecedents:

On November 10, 2008, TTAI filed a complaint for replevin with

damages5 against Jorgenetics Swine Improvement Corporation (Jorgenetics),
seeking possession of 4,765 heads of hogs that were the subject of a chattel
mortgage between the parties. In its complaint, TTAI alleged that the parties
entered into an agreement where TTAI would supply, on credit, feeds and
other supplies necessary for Jorgenetics' hog raising business. As security for
payment of their obligation amounting to Php20,000,000.00, Jorgenetics
executed a chattel mortgage6 over its hog livestock inventories in favor of
TTAI. While TTAI delivered feeds and supplies pursuant to the agreement,
Jorgenetics failed to pay for the same despite demand.7

Thus, TTAI alleged in its complaint that as mortgagee it was entitled to take
immediate possession of the livestock subject of the mortgage which was
wrongfully withheld by Jorgenetics to avoid compliance of its obligation. 8 It
prayed for the immediate issuance of a writ of replevin commanding the
immediate seizure of the hogs, for judgment to be rendered adjudicating
rightful possession of the hogs subject of the mortgage to TTAI, or in the
event possession could not be secured, the payment of Php20,000,000.00
with interest, and for damages, attorney 's fees, and costs.9

The complaint was raffled to the Regional Trial Court (RTC) of Quezon City,
Branch 92. The next day, the trial court issued a writ of replevin and
required Jorgenetics to post a bond in the amount of Php40,000,000.00. 10

While the writ of replevin was served on May 29, 2009, the return thereon
indicated that the writ, together with a copy of TTAI's affidavit and bond, as
well as the summons and TTAI's complaint, were served on petitioner's farm
through its purchasing officer Rowena Almirol (Almirol), who refused
acknowledgment of the documents. The return likewise stated that the
4,765 heads of hog livestock subject of the writ were seized and delivered to
respondent.11

Jorgenetics moved to dismiss the complaint for replevin on the ground of

invalid service of summons since service was made on its farm in Rizal
instead of its place of business in Quezon City, and in view of the lack of
justification from the sheriff for availing of substituted service to the person
of Almirol. In its motion to dismiss, Jorgenetics likewise prayed for the
quashal of the writ of replevin and for the replevin bond to be made wholly
answerable for the damages it allegedly suffered. 12

The case was re-raffled to Branch 93 and subsequently to Branch

75.13 Thereafter, the trial court issued the February 4, 2010
Order,14 directing the dismissal of the complaint for replevin for failure to
acquire jurisdiction over the person of Jorgenetics by reason of the invalid
service of summons.

Meanwhile, then Presiding Judge Quijano-Padilla of Branch 226 was

appointed to the CA, which paved the way for Judge Cleto R. Villacorta's
(Judge Villacorta) designation as Presiding Judge of Branch 226. In an
October 18, 2012 Order39 , Judge Villacorta granted Jorgenetics' motion for
reconsideration, thus denying the motion to declare Jorgenetics in default.
Despite the March 29, 2011 Decision of the appellate court in CA G.R. SP.
No. 114682 nullifying the order of dismissal and reinstating TTAI's complaint
for replevin, Judge Villacorta opined that the February 4, 2010 Order
dismissing the complaint must be enforced since the same lapsed into
finality despite the filing of the petition for certiorari assailing the same,
because the CA did not issue any injunctive relief while the case was still
pending before the trial court. Thus, Judge Villacorta ordered the return of
the properties subject of

Our Ruling

The crux of the controversy in the case at bench is whether the trial court
has obtained jurisdiction over the person of petitioner or alternatively,
whether the February 4, 2010 order of the trial court dismissing the
complaint for lack of jurisdiction over petitioner had already become final
and executory and thus may no longer be disturbed. In connection thereto,
it must be stressed that any judgment rendered or any proceedings
conducted by a court which has no jurisdiction over the person of the
defendant is null and void.57

Thus, should the Court rule in favor of petitioner, the complaint for replevin
will be dismissed and all proceedings conducted, including the decision on
the merits invoked by respondent in its Manifestation and Motion, will be
considered null and void. "A void judgment is in effect no judgment at all,"
and "[a]ll acts performed under it and all claims flowing out of it are
void."58 "The judgment is vulnerable to attack even when no appeal h as
been taken," and "does not become final in the sense of depriving a party of
[their] right to question its validity."59
The chairperson and president of a corporation may
sign the verification and certification without need of
board resolution. Moreover, lack of authority of a
corporate officer to undertake an action on behalf of
the corporation may be cured by ratification through
the subsequent issuance of a board resolution.
In Cagayan Valley Drug Corp. v. Commissioner of Internal Revenue,60 this
Court ruled that certain officials or employees of a corporation can sign the
verification and certification on its behalf without need of a board resolution,
such as but not limited to the chairperson of the board of directors, the
president of a corporation, the general manager or acting general manager,
personnel officer, and an employment specialist in a labor case. Moreover,
the "lack of authority of a corporate officer to undertake an action on behalf
of the corporation may be cured by ratification through the subsequent
issuance of a board resolution, recognizing the validity of the action or the
authority of the concerned officer."61

Given the foregoing, Mr. Jorge, as the chairperson and president of

petitioner, is sufficiently authorized to sign the verification and certification
on behalf of Jorgenetics. Any doubt on his authority to sign the verification
and certification is likewise obviated by the secretary's certificate it
submitted upon the orders of this Court, which ratified Mr. Jorge's authority
to represent petitioner and file the Petition in G.R. No. 201044.

A variance in the date of the verification with the date of the Petition is not fatal to
petitioner's case.

The purpose of a verification in the petition is to secure an assurance that

the allegations of a pleading are true and correct, are not speculative or
merely imagined, and have been made in good faith. To achieve this
purpose, the verification of a pleading is made through an affidavit or sworn
statement, confirming that the affiant has read the pleading whose
allegations are true and correct of the affiant's personal knowledge or based
on authentic records.62

In connection thereto, a variance in the date of the verification with the date
of the petition is not necessarily fatal to Jorgenetics' case since the variance
does not necessarily lead to the conclusion that no verification was made, or
that the verification was false. It does not necessarily contradict the
categorical declaration made by Jorgenetics in its affidavit that its
representatives read and understood the contents of the pleading.

[W]hat the Rules require is for a party to read the contents of a pleading
without any specific requirement on the form or manner in which the reading
is to be done. [W]hat is important is that efforts were made to satisfy the
objective of the Rule, that is, to ensure good faith and veracity i n the
allegations of a pleading, thereby allowing the courts to act on the case with
reasonable certainty that the petitioners' real positions have been pleaded. 63

We find the verification and certification of non-forum shopping attached to

the Petition in G.R. No 222691 sufficiently compliant in achieving the said
objective.

An order dismissing an action for lack of jurisdiction over the parties to the case is
cognizable under a special civil action for certiorari.

We find no error in the ruling of the appellate court that a petition

for certiorari under Rule 65 of the Rules of Court is the proper remedy to
question the trial court's order dismissing the replevin case on the ground of
lack of jurisdiction. An order granting a motion to dismiss on the ground that
the court has no jurisdiction over the person of the defendant is without
prejudice to the refiling of the same action or claim. 64 In connection thereto,
Section 1, Rule 41 clearly provides that an order dismissing an action
without prejudice may not be appealed via a Rule 41 petition, and must
instead be assailed through a petition for certiorari under Rule 65:

SECTION 1. Subject of Appeal. � An appeal may be taken from a

judgment or final order that completely disposes of the case, or of a
particular matter therein when declared by these Rules to be appealable.

No appeal may be taken from:

xxxx

(h) An order dismissing an action without prejudice.

In all the above instances where the judgment or final order is not
appealable, the aggrieved party may file an appropriate special civil
action under Rule 65. (n) [Emphasis supplied]

Under the circumstances, the special civil action for certiorari under Rule 65
availed of by TTAI � and not an appeal via Rule 41 � was the correct
remedy to challenge the February 4, 2010 Order, which dismissed the
complaint for replevin for lack of jurisdiction.

Jorgenetics, in seeking to recover damages in the main action on the bond of the writ of
replevin, is deemed to have voluntarily submitted to the jurisdiction of the court.

Jurisdiction over the person of the defendant in civil cases is acquired by

service of summons. However, "even without valid service of summons, a
court may still acquire jurisdiction over the person of the defendant if the
latter voluntarily appears before it."65 "If the defendant knowingly does an
act inconsistent with the right to object to the lack of personal jurisdiction as
to [them], like voluntarily appearing in the action, [they are] deemed to
have submitted [themselves] to the jurisdiction of the court." 66

Thus, a defendant is deemed to have voluntarily submitted themselves to

the jurisdiction of the court if they seek affirmative relief from the court. This
includes the filing of motions to admit answer, for additional time to file
answer, for reconsideration of a default judgment, and to lift order of default
with motion for reconsideration.67

We have likewise held that a party is deemed to have submitted themselves

to the jurisdiction of the court when, after the opposing party sought the
execution of the decision, they file a motion asking for the resetting of the
hearing without reserving their continuing objection to the lower court's lack
of jurisdiction over their person.68 "[T]he active participation of a party in the
proceedings is tantamount to an invocation of the court's jurisdiction and a
willingness to abide by the resolution of the case, and will bar said party
from later on impugning the court or body's jurisdiction." 69

However, this rule is "tempered by the concept of conditional appearance,

such that a party who makes a special appearance to challenge, among
others, the court's jurisdiction over [their] person cannot be considered to
have submitted to its authority x x x A special appearance operates as an
exception to the general rule on voluntary appearance," but only when the
defendant explicitly and unequivocably poses objections to the jurisdiction of
the court over their person.70

Applying the foregoing principles to the instant case, the Court finds that
Jorgenetics voluntarily submitted itself to the jurisdiction of the trial court
when it filed a motion for the issuance of a writ of execution and an
application for damages against the replevin bond without objecting to the
jurisdiction of the trial court.
Under the said provision, an application for damages against the bond
presupposes that a trial on the merits in the main case was conducted and
the defendant obtained a favorable judgment from the court. 71 Moreover, the
damages to which the defendant would be entitled to, if any, would require
the conduct of a hearing. In other words, petitioner's act of filing an
application for damages against the replevin bond in the same action is
tantamount to requesting the trial court to conduct a trial on the merits of
the case and adjudicating rightful possession to Jorgenetics, and to
thereafter conduct a hearing on Jorgenetics' application for damages. This is
clearly an invocation of the court's jurisdiction and a willingness to abide by
the resolution of the case. Hence, Jorgenetics is deemed to have submitted
itself to the jurisdiction of the court.

Jorgenetics' assertion that it was merely invoking the residual authority of

the trial court when it requested the latter to rule on its application for
damages comes up empty. In Development Bank of the Philippines v.
Carpio,72 We clarified that a trial court acquires residual jurisdiction over a
case once a trial on the merits has been conducted, the court renders
judgment, and the aggrieved party appeals therefrom.

Hence, We ruled therein that the trial court may not be considered to have
acquired residual jurisdiction over a replevin case if the complaint is
dismissed without prejudice, and the trial court may not rule on the
application for

From the foregoing, it is clear that before the trial court can be said to
have residual jurisdiction over a case, a trial on the merits must
have been conducted; the court rendered judgment; and the
aggrieved party appealed therefrom.

xxxx

Here, the RTC dismissed the replevin case on the ground of improper venue.
Such dismissal is one without prejudice and does not bar the refiling of the
same action; hence, it is not appealable. Clearly, the RTC did not reach,
and could not have reached, the residual jurisdiction stage as the
case was dismissed due to improper venue, and such order of
dismissal could not be the subject of an appeal. Without the
perfection of an appeal, let alone the unavailability of the remedy of
appeal, the RTC did not acquire residual jurisdiction. Hence, it is
erroneous to conclude that the RTC may rule on DBP's application for
damages pursuant to its residual powers.73 [Emphasis supplied]
The issue on the validity and efficacy of the writ of replevin is mooted in view of the final
and executory decision on the merits in the main case.

Replevin is an action for the recovery of personal property. It is both a principal remedy
and a provisional relief. When utilized as a principal remedy, the objective is to recover
possession of personal property that may have been wrongfully detained by another.
When sought as a provisional relief, it allows a plaintiff to retain the contested
property during the pendency of the action.74

Being provisional and ancillary in character, the existence and efficacy of the writ of
repl evin depends on the outcome of the case.75 Ancillary writs are not causes of action
in themselves, but mere adjuncts to the main suit with the sole object of preserving the
status quo until the merits of the case can be heard. 76 An ancillary writ "cannot survive
the main case of which it is an incident because an ancillary writ loses its force and
effect after the decision in the main petition." 77

Considering that a decision has already been rendered in the main case, adjudicating
rightful possession of the livestock to TTAI, and which may be maintained in light of the
Court's foregoing ruling that the trial court validly acquired jurisdiction over Jorgenetics,
We find that any disposition by this Court on the validity and efficacy of the writ of
replevin, which was merely ancillary to the main action, serves no practical purpose.
Thus, a discussion on the said issue is moot and may be dispensed with.

G.R. No. 237553

BDO UNIBANK, INC., Petitioner

vs.
ANTONIO CHOA, Respondent

DECISION

LEONEN, J.:

When a demurrer is granted in a criminal case, the private complainant can

file a Rule 65 petition on the civil aspect of the case, as long as he or she
can show that the trial court committed grave abuse of discretion in
granting the demurrer.

This Court resolves a Petition for Review on Certiorari1 under Rule 45 of

the 1997 Rules of Civil Procedure, assailing the October 24, 2017
Decision2 and February 13, 2018 Resolution3 of the Court of Appeals in
CA-G.R. SP No. 140059.4 The Court of Appeals affirmed the November 26,
20145 and February 12, 20156 Orders of the Regional Trial Court, which
granted Antonio Choa (Choa)'s Demurrer to Evidence.
On February 28, 2008, an Information 7 was filed before the Regional Trial
Court of Pasig City against Choa, then president and general manager of
Camden Industries, Inc. (Camden). He was charged with violating
Presidential Decree No. 115, or the Trust Receipts Law, to the prejudice of
BDO Unibank, Inc. (BDO), the private complainant. The Information read:

That, on or about and during the period beginning March 12, 1999 until
May 20, 1999, in the then Municipality of San Juan, now City of San Juan,
a place within the jurisdiction of this Honorable Court, the above named
accused, being then the President and General Manager of Camden
Industries, Inc., execute several Trust Receipt Agreements with Nos. 0006,
0007, 0008, 0009, 0024, 0025, 0046 and 0047 in favor of Equitable PCI
Bank (now Banco De Oro-EPCI, Inc.), herein represented by its Senior
Manager Danilo M. De Dios, in consideration of the receipt by the said
accused of . . . for which there is now due the sum of Php 7,875,904.96
under the terms of which the accused agreed to sell the same with express
obligation to remit to the complainant bank proceeds of the sale and/or turn
over the same if not sold or disposed of in accordance with the said Trust
Receipt Agreements on demand, but the accused once in possession of
the said good, far from complying with his obligation and with unfaithfulness
and abuse of confidence, did then and there willfully, unlawfully and
feloniously, misappropriate, misapply and convert to his own personal use
and benefit the said goods and/or the proceeds of the sale thereof, and
despite repeated demands, failed and refused to account for and/or remit
the proceeds of the sale thereof, to the damage and prejudice of the said
complainant bank in the aforementioned amount of Php7,875,904.96.
The issues for this Court's resolution are:

First, whether or not petitioner BDO Unibank, Inc. has the legal personality to file a Petition
for Certiorari before the Court of Appeals; and

Second, whether or not the Court of Appeals erred in ruling that the trial court judge did not commit
grave abuse of discretion when he issued the Order granting respondent Antonio Choa's Demurrer
to Evidence.

The State has the "inherent prerogative in prosecuting criminal cases and in seeing to it that justice
is served." Subsumed under this right is the authority to appeal an accused's acquittal. In Bautista
79

v. Cuneta-Pangilinan, this Court elaborated:

80

The authority to represent the State in appeals of criminal cases before the Supreme Court and the
CA is solely vested in the Office of the Solicitor General (OSG). Section 35 (1), Chapter 12, Title III,
Book IV of the 1987 Administrative Code explicitly provides that the OSG shall represent the
Government of the Philippines, its agencies and instrumentalities and its officials and agents in any
litigation, proceeding, investigation or matter requiring the services of lawyers. It shall have specific
powers and functions to represent the Government and its officers in the Supreme Court and the
CA, and all other courts or tribunals in all civil actions and special proceedings in which the
Government or any officer thereof in his official capacity is a party. The OSG is the law office of the
Government.

To be sure, in criminal cases, the acquittal of the accused or the dismissal of the case against him
can only be appealed by the Solicitor General, acting on behalf of the State. The private complainant
or the offended party may question such acquittal or dismissal only insofar as the civil liability of the
accused is concerned. In a catena of cases, this view has been time and again espoused and
maintained by the Court. In Rodriguez v. Gadiane, it was categorically stated that if the criminal case
is dismissed by the trial court or if there is an acquittal, the appeal on the criminal aspect of the case
must be instituted by the Solicitor General in behalf of the State. The capability of the private
complainant to question such dismissal or acquittal is limited only to the civil aspect of the case. . .

Worthy of note is the case of People v. Santiago, wherein the Court had the occasion to bring this
issue to rest. The Court elucidated:

It is well-settled that in criminal cases where the offended party is the State, the interest of the
private complainant or the private offended party is limited to the civil liability. Thus, in the
prosecution of the offense, the complainant's role is limited to that of a witness for the prosecution. If
a criminal case is dismissed by the trial court or if there is an acquittal, an appeal therefrom on the
criminal aspect may be undertaken only by the State through the Solicitor General. Only the Solicitor
General may represent the People of the Philippines on appeal. The private offended party or
complainant may not take such appeal. However, the said offended party or complainant may
appeal the civil aspect despite the acquittal of the accused.

In a special civil action for certiorari filed under Section 1, Rule 65 of the Rules of Court wherein it is
alleged that the trial court committed a grave abuse of discretion amounting to lack of jurisdiction or
on other jurisdictional grounds, the rules state that the petition may be filed by the person aggrieved.
In such case, the aggrieved parties are the State and the private offended party or complainant. The
complainant has an interest in the civil aspect of the case so he may file such special civil action
questioning the decision or action of the respondent court on jurisdictional grounds. In so doing,
complainant should not bring the action in the name of the People of the Philippines. The action may
be prosecuted in name of said complainant.

Thus, the Court has definitively ruled that in a criminal case in which the offended party is the State,
the interest of the private complainant or the private offended party is limited to the civil liability
arising therefrom. If a criminal case is dismissed by the trial court or if there is an acquittal, an appeal
of the criminal aspect may be undertaken, whenever legally feasible, only by the State through the
solicitor general. As a rule, only the Solicitor General may represent the People of the Philippines on
appeal. The private offended party or complainant may not undertake such appeal. (Emphasis
81

supplied, citations omitted)

Here, although petitioner discussed respondent's criminal liability in its Petition for Certiorari, the
totality of its arguments concerns the civil aspect of the case. It reinforced its position in its
concluding paragraph:

All told, public respondent Judge clearly committed grave abuse of discretion amounting to lack
and/or excess of jurisdiction in holding that the prosecution was not able to prove private respondent
Choa's liability in the total amount of P7,875,904.96 as stated in the Information as well as
CAMDEN's total outstanding obligation to petitioner BDO as of 31 March 2011 in the amount of
P23,806,788.11. 82

Thus, petitioner has the legal personality to file a special civil action questioning the Regional Trial
Court Orders insofar as the civil aspect of the case is concerned.

II

This Court will first resolve the procedural issue of whether the trial court erred in not dismissing
outright respondent's Motion for Leave and Demurrer to Evidence for being filed out of time.

Demurrer to evidence in criminal cases is governed by Rule 119, Section 23 of the Revised Rules of
Criminal Procedure:

RULE 119

Trial

SECTION 23. Demurrer to Evidence. — After the prosecution rests its case, the court may dismiss
the action on the ground of insufficiency of evidence (1) on its own initiative after giving the
prosecution the opportunity to be heard or (2) upon demurrer to evidence filed by the accused with
or without leave of court.

If the court denies the demurrer to evidence filed with leave of court, the accused may adduce
evidence in his defense. When the demurrer to evidence is filed without leave of court, the accused
waives the right to present evidence and submits the case for judgment on the basis of the evidence
for the prosecution.

The motion for leave of court to file demurrer to evidence shall specifically state its grounds and shall
be filed within a non-extendible period of five (5) days after the prosecution rests its case. The
prosecution may oppose the motion within a non-extendible period of five (5) days from its receipt.

If leave of court is granted, the accused shall file the demurrer to evidence within a non-extendible
period often (10) days from notice. The prosecution may oppose the demurrer to evidence within a
similar period from its receipt.

The order denying the motion for leave of court to file demurrer to evidence or the demurrer itself
shall not be reviewable by appeal or by certiorari before judgment.

In Valencia v. Sandiganbayan, this Court clarified:

83

A demurrer to evidence tests the sufficiency or insufficiency of the prosecution's evidence. As such,
a demurrer to evidence or a motion for leave to file the same must be filed after the prosecution rests
its case. But before an evidence may be admitted, the rules require that the same be formally
offered, otherwise, it cannot be considered by the court. A prior formal offer of evidence concludes
the case for the prosecution and determines the timeliness of the filing of a demurrer to evidence. 84

A review of the case records reveals that when the prosecution filed its Formal Offer of Documentary
Evidence on August 20, 2014, it included a reservation in its Prayer, which states:
85
 PRAYER

The sale of goods, documents or instruments by a person in the business of selling goods,
documents or instruments for profit who, at the outset of the transaction, has, as against the buyer,
general property rights in such goods, documents or instruments, or who sells the same to the buyer
on credit, retaining title or other interest as security for the payment of the purchase price, does not
constitute a trust receipt transaction and is outside the purview and coverage of this Decree.

Simply put, "a trust receipt transaction imposes upon the entrustee the obligation to deliver to the
entruster the price of the sale, or if the merchandise is not sold, to return the same to the
entruster." Gonzalez v. Hongkong & Shanghai Banking Corporation explained:
89 90

There are thus two obligations in a trust receipt transaction: the first, refers to money received under
the obligation involving the duty to turn it over (entregarla) to the owner of the merchandise sold,
while the second refers to merchandise received under the obligation to "return" it (devolvera) to the
owner. A violation of any of these undertakings constitutes estafa defined under Art. 315 (1) (b) of
the Revised Penal Code, as provided by Sec. 13 of Presidential Decree 115[.] (Citations omitted)
91

In granting respondent's Demurrer to Evidence, the trial court consequently acquitted him of violation
of the Trust Receipts Law. The Decision was based on grounds that: (1) petitioner owed Camden,
which was represented by respondent, ₱90 million, while Camden owed petitioner ₱20 million, and
both amounts can be legally compensated; (2) petitioner failed to provide evidence that respondent
was liable for ₱7,875,904.96 as alleged in the Information, or that this amount formed part of the ₱20
million trust receipt; and (3) petitioner failed to provide evidence of respondent's criminal intent in not
paying or turning over the goods.

Under this (sic) circumstances, the transaction is a mere loan

extended to the accused who in turn is to pay the loan by way of
remittance of the proceeds of the sale. If the goods are unsold or
surrender (sic) the collateral[,] no criminal liability arises. Hence,
accused should not be held liable for violation of Presidential
Decree No. 115 [p]roviding for the Regulation of the Trust
Receipts Transactions.

A corporation, being a juridical entity, may act only through its

directors, officers, and employees. Debts incurred by these
individuals, acting as such corporate agents, are not theirs but the
direct liability of the corporation they represent. As an exception,
directors or officers are personally liable for the corporation's
debts only if they so contractually agree or stipulate.105 (Citations
omitted)
Without any evidence that respondent personally bound himself to
the debts of the company he represented, this Court cannot hold
him civilly liable under the Trust Receipt Agreements.
[ G.R. No. 208281, June 28, 2021 ]

METROPLEX BERHAD AND PAXELL INVESTMENT LIMITED, PETITIONERS, VS. SINOPHIL

CORPORATION, BELLE CORPORATION, DIRECTOR BENITO A. CATARAN, IN HIS CAPACITY
AS HEAD OF THE COMPANY REGISTRATION AND MONITORING DEPARTMENT DIRECTOR
JUSTINA F. CALLANGAN, IN HER CAPACITY AS HEAD OF THE CORPORATION FINANCE
DEPARTMENT, ASST. DIRECTOR FERDINAND B. SALES, IN HIS CAPACITY AS HEAD OF
CORPORATE AND PARTNERSHIP REGISTRATION DIVISION, ASST. DIRECTOR YOLANDA L.
TAPALES, IN HER CAPACITY AS HEAD OF THE FINANCIAL ANALYSIS AND AUDIT DIVISION,
AND JOHN DOES, RESPONDENTS.

DECISION

HERNANDO, J.:

Petitioner Metroplex Berhad (Metroplex) is a corporation in liquidation duly organized and existing
under and by virtue of the laws of Malaysia, while petitioner Paxell Investment Limited (Paxell) is a
corporation duly organized and existing under and by virtue of the laws of Western Somoa. Both
Metroplex and Paxell have their principal offices at Kuala Lumpur, Malaysia.5

On the other hand, respondent Sinophil is a publicly-listed corporation duly organized and existing
under and by virtue of the laws of the Philippines with principal office at Pasig City, Philippines.
Respondent Belle Corporation (Belle) is another publicly-listed corporation duly organized and
existing under and by virtue of the laws of the Philippines with principal office also at Pasig City.6

The other individual respondents are the SEC Directors, Assistant Directors, and officers of the SEC
who caused, facilitated, implemented, and approved the questioned actions of the Operating
Departments of the SEC. These Operating Departments included the Company Registration and
Monitoring Department (CRMD); the Corporation Finance Department (CFD); the Corporate and
Partnership Registration Division (CPRD); and the Financial Analysis and Audit Division (FAAD) of
the SEC.7

The Antecedents:

In August 1998, Sinophil entered into a Share Swap Agreement (Swap Agreement) with Metroplex
and Paxell. Under the Swap Agreement, Metroplex and Paxell would transfer 40% of their
shareholdings in Legend International Resorts Limited (Legend) for a combined 35.5% stake in
Sinophil.8

In their Comment/Opposition,9 however, Sinophil and Belle alleged that the Swap Agreement was
entered into in March 1997. Pursuant to the Swap Agreement, Sinophil issued 2.41 billion shares to
Metroplex and 1.45 billion shares to Paxell, totaling 3.87 billion shares in exchange for 46.38 million
shares of Legend which were transferred by the Metroplex Group (Metroplex and Paxell) to
Sinophil's name.
In the interim, Metroplex pledged two billion of its Sinophil shares with Union Bank and Asian Bank
to secure the loans of Legend with the said banks.10

The following pertinent sequence of events followed:

On August 23, 2001, Sinophil and Belle executed a Memorandum of Agreement (Unwinding
Agreement) with Metroplex and Paxell rescinding the 1998 Swap Agreement. After the execution of
the Unwinding Agreement, Metroplex and Paxell were unable to return 1.87 billion of the Sinophil
shares while another two billion Sinophil shares remained pledged by Metroplex in favor of
International Exchange Bank and Asian Bank.11

On February 18, 2002 and June 3, 2005, the shareholders of Sinophil voted for the reduction of
Sinophil's authorized capital stock.12

On March 28, 2006, the CRMD and the CFD approved the first amendment of the Articles of
Incorporation of Sinophil, reducing its authorized capital stock by 1.87 billion shares. The following
day, or on March 29, 2006, the approval of the reduction of Sinophil's authorized capital stock was
disclosed to the Philippine Stock Exchange, Inc. (PSE).13

On June 21, 2007, the shareholders of Sinophil again approved the proposal of the Board of
Directors to reduce its authorized capital stock by another one billion shares.14

On June 24, 2008, the CRMD and the CFD approved the second amendment of the Articles of
Incorporation of Sinophil which further reduced its authorized capital stock by one billion shares. On
June 30, 2008, the approval of the reduction of Sinophil's authorized capital stock was likewise
disclosed to the PSE.15

On July 21, 2008, petitioners Yaw Chee Cheow (Yaw), Metroplex and Paxell filed a Petition for
Review Ad Cautelam Ex Abundanti16 before the SEC assailing the approval by the CRMD and the
CFD of the amendments by Sinophil of its Articles of Incorporation. Petitioners claimed that:

1. They opposed the decrease of the authorized capital stock;

2. They were not given the opportunity to be heard by the CFD;

3. The reduction was approved by the CRMD and CFD despite the lack of more than two-
thirds (2/3) approval of the Sinophil shareholders;

4. The decrease in the authorized capital stock of Sinophil violated the legal requirement that
a corporation cannot reduce its issued capital unless it has unrestricted retained earnings;

5. The decreases involved the "selective reduction" of Sinophil 's authorized capital stock
which resulted in the diminution of the shareholdings of petitioner Yaw and other
shareholders of Sinophil, and the return of the investments of petitioners Metroplex and
Paxell ahead of Yaw and other shareholders of Sinophil;

6. The selective reduction entailed the assumption and payment of loans secured by
Metroplex and Paxell 's Sinophil shares, to the prejudice of Sinophil and its shareholders
including petitioner Yaw.17

Thus, the following three issues were raised by the petitioners:

 1. Whether the actions of the CRMD and the CFD allowing the reduction of the outstanding
capital stock of Sinophil authorized the "selective" reduction of its issued capital;

2. Whether such "selective" reduction had complied with all relevant and procedural
requirements and could be legally done through the cancellation and delisting of the 3.87
billion Sinophil shares of Metroplex and Paxell over the objection of the petitioners; and

3. Whether the questioned actions of the CRMD and the CFD constitute grave reversible
errors or abuse of discretion amounting to lack or excess of jurisdiction which should be set
aside and declared null and void.18

On the other hand, private and public respondents claimed, among others, that there was full
compliance with Section 38 of the Corporation Code by the submission of all the requirements and
that there was a presumption of regularity in the performance of public respondents' duties.19

Ruling of the Securities and Exchange Commission:

The SEC was confronted with these issues for resolution:

1. Whether the decrease of the capital stock of Sinophil Corporation was validly allowed by
the CRMD and the CFD; and

2. Whether the issuance of a cease and desist order is in order.20

On February 26, 2009, the SEC issued its assailed Order21 denying petitioners' Petition for
Review Ad Cautelam Ex Abundanti and essentially affirming the acts of the CRMD and CFD
regarding the decrease in the capital stock of Sinophil.

The SEC found that the decrease in capital stock complied with the requirements imposed by the
Corporation Code, particularly Section 38. It held that the equal or unequal reduction of a
corporation's capital stock is a matter solely between the stockholders and cannot be enjoined either
by the courts or the creditors.22

Moreover, the SEC found no basis to grant the prayer for the issuance of a cease and desist order.
Petitioners failed to raise valid grounds for its issuance. The Commission held that a cease and
desist order could not be ultimately issued because the grave and irreparable danger to the investing
public that petitioners fear is not present in the case.23

The dispositive portion of the Order of the SEC reads as follows:

CA affirmed

Our Ruling

The Court denies the Petition.

The appellate court is correct in finding that the decrease in respondent Sinophil's capital stock was
legal and that the public respondent SEC's approval thereof was proper.

Section 38 of the Corporation

Code clearly lists down the
requirements for a corporation
to decrease its capital stock.

Petitioners have been asserting from the beginning that private respondent Sinophil failed to comply
with the following legal requirements for a decrease in its authorized capital stock: (a) notice and
hearing; (b) approval of all stockholders; (c) legitimate business purposes; and (d) approval of all
creditors.

The Court agrees with the appellate court's rejection of petitioners' contentions considering that the
legal provisions they cited, i.e., Section 13 of the Securities Regulation Code, the SEC Opinions, and
the Trust Fund Doctrine, do not apply to the case at bar. What applies instead is Section 38 of the
Corporation Code, the pertinent portions of which provide:

Sec. 38. Power to increase or decrease capital stock; incur, create or

increase bonded indebtedness. - No corporation shall increase or decrease
its capital stock or incur, create or increase any bonded
indebtedness unless approved by a majority vote of the board of directors,
and at a stockholder's meeting duly called for the purpose, two-thirds (2/3)
of the outstanding capital stock shall favor the increase or diminution of the
capital stock, or the incurring, creating or increasing of any bonded
indebtedness. Written notice of the proposed increase or diminution of the
capital stock or of the incurring, creating, or increasing of any bonded
indebtedness and of the time and place of the stockholders' meeting at
which the proposed increase or diminution of the capital stock or the
incurring or increasing of any bonded indebtedness is to be considered,
must be addressed to each stockholder at his place of residence as shown
on the books of the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of the corporation and
countersigned by the chairman and the secretary of the stockholders' meeting, setting forth:

(1) That the requirements of this section have been complied with;

(2) The amount of the increase or diminution of the capital stock;

(3) x x x;

(4) x x x;

(5) The actual indebtedness of the corporation on the day of the meeting;

(6) The amount of stock represented at the meeting; and

(7) The vote authorizing the increase or diminution of the capital stock, or the incurring,
creating or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded
indebtedness shall require prior approval of the Securities and Exchange Commission.

One of the duplicate certificates shall be kept on file in the office of the corporation and the other
shall be filed with the Securities and Exchange Commission and attached to the original articles of
incorporation. From and after approval by the Securities and Exchange Commission and the
issuance by the Commission of its certificate of filing, the capital stock shall stand increased or
decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the
certificate of filing may declare: Provided, That the Securities and Exchange Commission shall not
accept for filing any certificate of increase of capital stock unless accompanied by the sworn
statement of the treasurer of the corporation lawfully holding office at the time of the filing of the
certificate, showing that at least twenty-five (25%) percent of such increased capital stock has been
subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid
either in actual cash to the corporation or that there has been transferred to the corporation property
the valuation of which is equal to twenty-five (25%) percent of the subscription:

Provided, further, That no decrease of the capital stock shall be approved by the Commission if its
effect shall prejudice the rights of corporate creditors.

x x x x (Emphasis supplied)

Section 38 is clear. A corporation can only decrease its capital stock if the following are present:

1. Approval by a majority vote of the board of directors;

2. Written notice of the proposed diminution of the capital stock, and of the time and place of
a stockholders' meeting duly called for the purpose, addressed to each stockholder at his
place of residence;

3. 2/3 of the outstanding capital stock voting favorably at the said stockholders' meeting duly;

4. Certificate in duplicate, signed by majority of the directors and countersigned by the

chairman and secretary of the stockholders' meeting stating that legal requirements have
been complied with;

5. Prior approval of the SEC; and

6. Effects do not prejudice the rights of corporate creditors.

The list of requirements under Section 38 is altogether different from the list of legal requirements
presented by petitioners. In short, petitioners plainly did not comply with the law. The Court agrees
with the appellate court when it held that:

We reject petitioners' contentions as they do not even cite any particular rule wherein notice and
hearing is required before approval for the increase or decrease in the capital stock is granted or
denied. The provision cited by petitioners in their brief, Section 13 of RA 8799, is not even
appropriate as it refers to the rejection or revocation of the registration of securities, on any of the
grounds stated in said section, none of which obtains in the case at bar. There is likewise no validity
nor legal basis to the allegation that prior approval of all the stockholders is required for the reduction
in capital stock. Suffice it to state that under Section 38 of the Corporation Code, such decrease only
requires the approval of a majority of the board of directors and, at a stockholder's meeting duly
called for the purpose, two-thirds (2/3) vote of the outstanding capital stock. So long as written notice
of the proposed increase or diminution of the capital stock was made to all stockholders, the
presence and approval of at least 2/3 of the capital stock is enough to make the increase or
diminution valid. This is the plain language of the provision over which no other interpretation may be
made.32 (Emphasis supplied)

Here, a judicious perusal of the records of the case reveals that Sinophil submitted to the SEC the
following documents in support of its application for the decrease of its authorized capital stock and
in full compliance with the requirements laid down under Section 38:

1. Certificate of Decrease of Capital Stock;

2. Director's Certificate;

3. Amended Articles of Incorporation;

4. Audited Financial Statements as of the last fiscal year stamped and received by the
Bureau of Internal Revenue and the SEC (as of December 31, 2004 and 2007);

5. Long Form Audit Report of the Audited Financial Statements (as of December 31, 2004
and 2007);

6. List of Creditors (Schedule of Liabilities as of December 31, 2004 and 2007), as certified
by the Accountant;

7. Written consent of Creditors;

8. Notice of Decrease of Capital; and

9. Affidavits of Publication of the Notice of Decrease of Capital.33

Three stockholders' meeting were likewise held on February 18, 2002, June 3, 2005 and June 21,
2007 where the stockholders voted for the reduction of the corporation's authorized capital stock.

SEC only has the ministerial

duty to approve the decrease of a
corporation's authorized capital
stock.

After a corporation faithfully complies with the requirements laid down in Section 38, the SEC has
nothing more to do other than approve the same. Pursuant to Section 38, the scope of the SEC's
determination of the legality of the decrease in authorized capital stock is confined only to the
determination of whether the corporation submitted the requisite authentic documents to support the
diminution. Simply, the SEC's function here is purely administrative in nature.

In Ong Yang v. Tiu,34 the Court held that decreasing a corporation's authorized capital stock, which

The "business judgment rule" simply means that "the SEC and the courts are barred from intruding
into business judgments of corporations, when the same are made in good faith."36
Furthermore, the SEC is not vested by law with any power to interpret contracts and interfere in the
determination of the rights between and among a corporation's stockholders. Neither can the SEC
adjudicate on the contractual relations among these same stockholders. Thus, petitioners'
ℒαwρhi ৷

allegation that it is the SEC that should determine the parties' rights under the contracts executed,
particularly the Swap Agreement, the Unwinding Agreement, and the general proxy, has no basis.
To stress, the SEC's only function here was to determine the corporation's compliance with the
formal requirements under Section 38 of Corporation Code.

The issuance of an injunctive

relief of temporary restraining
order (TRO) is not warranted.

Section 4, Rule 58 of the Rules of Court provides that a TRO may be granted only when:

(a) The applicant is entitled to the relief demanded, and the whole or part of such relief consists in
restraining the commission or continuance of the act or acts complained of, or in requiring the
performance of an act or acts, either for a limited period or perpetually;

(b) The commission, continuance or non-performance of the act or acts complained of during the
litigation would probably work injustice to the applicant; or

(c) The party, court, agency or a person is doing, threatening, or is attempting to do, or is procuring
or suffering to be done, some act or acts probably in violation of the rights of the applicant respecting
the subject of the action or proceeding, and tending to render the judgment ineffectual.

Petitioners argue that unless the questioned act of respondents of irregularly or illegally reducing
Sinophil's issued capital stock is restrained permanently, "the same will operate as a fraud on
investors such as the Petitioners and will also likely cause grave or irreparable injury or prejudice to
the investing public."37

The Court disagrees.

The alleged fraud as well as the grave or irreparable injury or prejudice to the investing public are
not present in the case.

Firstly, there is no fraudulent act committed by respondents as has been held by both the CA and
this Court, as discussed above.

Secondly, petitioners failed to show how the investing public would be prejudiced by the decrease
and delisting in view of its disclosure to the PSE.

Disclosure of corporate actions to the stock exchange is intended to apprise the investing public of
the condition and planned corporate actions of the listed corporation, thereby providing investors
with sufficient, relevant and material information as to the nature of the investment vehicle and the
relationship of the risks and returns associated with it.38 The corporation's simple act of disclosing
the decrease and delisting to the PSE was more than enough notice to the investing public. There
was nothing in the corporation's act that resulted in grave or irreparable injury or prejudice to the
investing public.

WHEREFORE, the Petition for Review on Certiorari with Application for the Issuance of a Temporary
Restraining Order and/or Writ of Preliminary Injunction is DENIED.
SO ORDERED.

Leonen, (Chairperson), Inting, Delos Santos, and J. Lopez, JJ., concur.

[ G.R. No. 223572. November 10, 2020 ]

JENNIFER M. ENANO-BOTE, VIRGILIO A. BOTE, JAIME M. MATIBAG,
WILFREDO L. PIMENTEL, TERESITA M. ENANO, PETITIONERS, VS. JOSE
CH. ALVAREZ, CENTENNIAL AIR, INC. AND SUBIC BAY METROPOLITAN
AUTHORITY, RESPONDENTS.

The CA Decision narrates the antecedents as follows:

On February 3, 1999, plaintiff-appellee Subic Bay Metropolitan Authority (SBMA for
brevity) entered into a Lease Agreement with defendant/third-party plaintiff Centennial
Air, Inc. (CAIR for brevity), represented by defendant Roberto Lozada (Lozada for
brevity), for the lease of Building 8324 (subject property for brevity) located at Subic Bay
International Airport (SBIA), Subic Bay Freeport Zone (SBFZ), for a period of five (5)
years commencing on February 1, 1999 until midnight of January 31, 2004.

Under the pertinent provisions of the lease, the parties agreed that the monthly rental
for the use and occupation of the subject property shall be payable as follows:
"[x x x] Section 1. Rental Payment - The LESSEE shall pay the LESSOR the amount
of Two United States Dollars and fifty cents (US$2.50) per square meter per month or
Four Thousand Seven Hundred Fifty Seven United States Dollars and Fifty cents
(US$4,757.50) per month or its equivalent in the Philippine Peso currency at the
prevailing exchange rate at the time of payment. [x x x]"
In addition to the payment of rental, [CAIR] was also required to remit a monthly amount
for the use of the facilities in relation to its operations. Concomitantly, in case of default
in the fulfillment of these obligations, an additional rent charged against [CAIR]
equivalent to twenty-four percent (24%) of any overdue amount was imposed. [SBMA]
was also authorized to seek judicial relief for damages incurred by reason of such
default as well as recovery of all amounts and penalties due under the lease contract
including court costs, attorney's fees and expenses.

For the duration of the lease, [CAIR] became delinquent and was constantly remiss in
the payment of its obligations. As a result, [SBMA], through its Accounting Department,
sent a letter dated November 9, 1999 to [CAIR] demanding the latter to settle its
outstanding obligation which, as of October 31, 1999, amounted to [P119,324.51]. In an
attempt to settle its account, [CAIR] proposed a payment scheme for its overdue debts
which, as of December 31, 2002, reached [P168,405.84]. Under this payment scheme,
[CAIR] vowed to: (1) pay an initial payment of [US$33,682.00]; (2) submit [18] post dated
checks to cover payment of its balance of [US$134,723.84] payable in monthly
installments of [US$7,484.66]; and pay current rental starting January 2003. While the
initial payment of US$33,682.00 was received, [CAIR] never delivered the 18 post dated
checks to [SBMA]. Thus, on February 7, 2003, another letter was sent to [CAIR], asking
the same to comply with its proposed payment scheme by submitting the 18 post dated
checks for the settlement of its outstanding balance of US$134,723.84 and pay the rent
for March 2003. Despite repeated demands, [CAIR] still failed to comply. On January
14, 2004, a Final Demand Letter was sent to [CAIR], requiring the latter to pay its
outstanding obligation within five (5) days from receipt thereof. In the same letter, the
Lease Agreement between [SBMA] and [CAIR] was terminated, and the latter was
ordered to vacate the premises.

Due to the continuous refusal of [CAIR] to settle its debts, [SBMA] was compelled to file
a Complaint against the former and its stockholders asking for the payment of [(1)] its
outstanding obligation in the total amount of US$163,341.89 plus legal interest; (2)
exemplary damages in the amount of [P]100,000.00[;] and (3) [a]ttorney's fees in the
amount of [P]20,000.00.

Subsequently, [summonses] were served on defendants-appellants Jennifer Enano-

Bote [(Jennifer for brevity)], Virgilio A. Bote [(Virgilio for brevity)], Amelita G. Simon,
Teresita M. Enano, Jaime M. Matibag,[6] Wilfredo Pimentel, Vicente T. Suazo
(hereinafter collectively referred to as [Enano-Bote, et al.] for brevity), [Lozada] and
[CAIR].

On September 3, 2004, [Enano-Bote, et al.] filed their Answer denying any liability to
[SBMA]. [They] argued that they were no longer stockholders of the corporation at the
time the Lease Agreement was executed between [CAIR] and [SBMA] on February 3,
1999. Allegedly, on December 1, 1998, they entered into a Deed of Assignment of
Subscription Rights ([DASR)] for brevity) with third-party defendant-appellee Jose Ch.
Alvarez (Alvarez for brevity), whereby they assigned, transferred, and conveyed their
aggregate subscription of [400,000] shares, representing [100%] of the outstanding
capital stock of [CAIR], in favor of [Alvarez]. Pursuant to the [DASR], [Alvarez] was
obliged to transfer and assign 76,000 and 4,000 of fully paid and non-assessable
shares of the corporation to [Jennifer] and [Virgilio]. Furthermore, [Alvarez] assumed to
pay the unpaid balance of their subscriptions in the amount of [P30,000,000.00]. In
effect, only [Jennifer] and [Virgilio] remained as nominal stockholders of the corporation
while the rest of them were totally divested of their corporate shares. Since they ceased
to be stockholders of the corporation, they were no longer parties to the Lease
Agreement, thus they cannot be held liable for any breach thereof.

On September 27, 2004, [Lozada] filed his Answer with Counterclaim alleging that:
[SBMA] has no cause of action against [Enano-Bote, et al.] because its cause of action
was barred by the Statute of Limitations; the obligation set forth in the complaint had
been paid, waived, abandoned or otherwise extinguished; and that there was novation,
compensation, confusion or remission of debt which extinguished the obligation. By way
of compulsory counterclaim, he prayed for the payment of attorney's fees and expenses
of litigation in the amount of [P]50,000.00, as well as exemplary damages in the amount
of [P]200,000.00 in view of the filing of the unfounded and uruneritorious claim against
them.

On February 4, 2005, [CAIR] was declared in default for failure to file an answer.
However, such order was lifted on June 15, 2006, and [CAIR] was allowed to adopt "en
toto" the answer filed by [Lozada].

xxxx

[After the preliminary and pre-trial conferences], trial ensued.

[SBMA] presented Editha Lim-Marzal[, the Division Chief of the Accounting Department,
Account Receivables Division of SBMA,[7]] and Kenneth Lemuel G. Rementilla[, the
Manager of the Locator's Registration and Licensing Department of SBMA, [8]] as its
witnesses.

xxxx

After [SBMA] rested its case, [CAIR] filed a Demurrer to Evidence, which the [RTC]
subsequently denied for lack of merit.

Meanwhile, defendants-appellants [Jennifer], [Virgilio], Jaime M. Matibag, Wilfredo L.

Pimentel and Teresita M. Enano ([petitioners for brevity]), with leave of court, filed a
Third[-]Party Complaint against [Alvarez]. In their complaint, they admitted that they
were the incorporators of [CAIR] when it was incorporated on December 29, 1997. On
December 1, 1998, they executed [the DASR] in favor of [Alvarez] covering their entire
shares of stock in [CAIR]. Among the conditions of this transfer was [Alvarez's]
undertaking to relieve each of them from the payment of their remaining unpaid
subscriptions to the corporation. Moreover, in consideration of the assignment, [Alvarez]
also agreed to transfer and assign 76,000 and 4,000 fully paid and non-assessable
shares to [Jennifer and Virgilio]. Thus, with the exception of [Jennifer and Virgilio], who
remained as nominal stockholders of the corporation, the rest of them were totally
divested of their corporate shares and were thereafter relieved from paying their unpaid
subscriptions as a consequence of the assignment. When the Lease Agreement was
executed between [SBMA] and [CAIR] on February 1, 1999, [petitioners] were no longer
the majority stockholders of the latter. At that time, it was [Alvarez] who stood as the
President and the authorized representative of [CAIR]. As such, he alone should be
held liable for the payment of their unpaid subscription which would cover the unpaid
rentals of the corporation.

On June 25, 2008, [s]ummons was issued upon [Alvarez]. On July 18, 2008, the latter
filed his Third-Party Answer with Counterclaim, reiterating the same defenses raised in
the answer filed by [Lozada] in the main case.

[The preliminary and pre-trial conferences for the third-party complaint ensued.]

In the interim, [petitioners] filed a Request for Admission addressed to [Alvarez], asking,
among others, for the latter to admit the genuineness of the [DASR] dated December 1,
1998, Minutes of the Special Meeting of the Board of Directors of [CAIR] held in
December 1998, and the Lease Agreement dated February 3, 1999. On September 24,
2009, [Alvarez] filed his Answer to Request for Admission and denied all the allegations
set forth in said request. On even date, [SBMA] commented [thereon], declaring the
same to be inappropriate for being a repetition of the claims stated in [petitioners']
previous pleadings. In resolving this pending incident, the [RTC] in its September 22,
2010 Order, echoed the comment of [SBMA], holding that a response to the request for
admission is no longer required since the allegations therein were mere reiteration of
the statements in the third-party complaint. The same has been effectively denied in the
third-party answer filed by [Alvarez].

Significantly, at the continuation of the trial, only [Jennifer] was presented as a witness x
x x.

[CAIR] did not present any evidence. On the other hand, [Alvarez] was given several
opportunities to present his evidence but he still failed to do so, thus he was deemed to
have waived his right.

On April 8, 2014, the [RTC] issued [its] Decision. [The dispositive portion of which,
states:
WHEREFORE, in light of the foregoing, judgment is hereby rendered ORDERING:
1. Defendant corporation Centennial Air, Inc. and individual defendants Jennifer
M. Enano-Bote, Virgilio A. Bote, Jaime M. Matibag, Wilfredo L. Pimentel,
Teresita M. Enano, Vicente Suazo and Amelita G. Simon jointly and severally
to pay plaintiff SBMA the total amount of US$163,341.89, plus legal interest;

2. Third-party defendant Jose Ch. Alvarez to refund/reimburse to individual

defendants Jennifer M. Enano-Bote, Virgilio A. Bote, Jaime M. Matibag,
Wilfredo L. Pimentel, Teresita M. Enano, Vicente Suazo and Amelita G. Simon
the total amount of US$163,341.89, plus legal interests, to be paid by the
latter to the plaintiff SBMA;

3. Third-party defendant Jose Ch. Alvarez to pay third-party plaintiff Jennifer M.

Enano-Bote the amount of three hundred thousand (P300,000.00) pesos by
way of moral damages and the amount of two hundred thousand
(P200,000.00) pesos as attorney's fees; and

4. The case as against defendant Roberto Lozada is dismissed for lack of merit.

The Petition raises two main issues: (1) whether the CA committed an error of law in
applying the trust fund doctrine to make petitioners personally and solidarily liable with
CAIR for the unpaid rentals claimed by SBMA against CAIR because of their
supposedly unpaid subscriptions in CAIR's capital stock; and (2) whether under the
Third-Party Complaint, Alvarez should be made liable to independently and separately
pay Jennifer and Virgilio moral damages in the amount of P300,000.00 and
P200,000.00 as attorney's fees, aside from cost of suit.

The Court's Ruling

The Petition is partly meritorious.

Anent the first issue, the CA affirmed the RTC's invocation of Halley v. Printwell, Inc.
[19]
(Halley) to justify the application of the trust fund doctrine in this wise:
Consistently, the [RTC] is convinced that [petitioners] may be held liable up to the extent
of their unpaid subscription for the payment of [CAIR's] outstanding obligation to
[SBMA]. The rationale [for] the [RTC's] rulings find support in the case of [Halley], which
held that:
"[x x x] The trust fund doctrine, first enunciated in the American case of Wood v.
Dummer, was adopted in our jurisdiction in Philippine Trust Co. v. Rivera, where this
Court declared that:

It is established doctrine that subscriptions to the capital of a corporation constitute a

fund to which creditors have a right to look for satisfaction of their claims and that the
assignee in insolvency can maintain an action upon any unpaid stock subscription in
order to realize assets for the payment of its debts. (Velasco vs. Poizat, 37 Phil., 802) ...

We clarify that the trust fund doctrine is not limited to reaching the stockholder's unpaid
subscriptions. The scope of the doctrine when the corporation is insolvent encompasses
not only the capital stock, but also other property and assets generally regarded in
equity as a trust fund for the payment of corporate debts. All assets and property
belonging to the corporation held in trust for the benefit of creditors that were distributed
or in the possession of the stockholders, regardless of full payment of their
subscriptions, may be reached by the creditor in satisfaction of its claim.

Also, under the trust fund doctrine, a corporation has no legal capacity to release an
original subscriber to its capital stock from the obligation of paying for his shares, in
whole or in part, without a valuable consideration, or fraudulently, to the prejudice of
creditors. The creditor is allowed to maintain an action upon any unpaid
subscriptions and thereby steps into the shoes of the corporation for the
satisfaction of its debt. To make out a prima facie case in a suit against
stockholders of an insolvent corporation to compel them to contribute to the
payment of its debts by making good unpaid balances upon their subscriptions, it
is only necessary to establish that the stockholders have not in good faith paid
the par value of the stocks of the corporation. [x x x]" (emphasis ours)[20]
Petitioners argue that Halley is inapplicable and takes the position that the facts
of Halley are "not substantially on 'all fours' with the present action."[21] They claim that
the corporate personality of Business Media Philippines, Inc. (the corporation subject
of Halley) was disregarded and the stockholders were held personally liable because it
was shown that the said stockholders were found and proved to be in charge of its
operation at the time the unpaid obligation was transacted and incurred which greatly
benefitted the corporation, and that Rizalino Vineza had assigned his "fully paid up"
shares to a certain Gerardo Jacinto in 1989 at the time when the directors and
stockholders of the corporation had resolved to dissolve the corporation during its
annual meeting.[22] They further claim that there was no evidence whatsoever presented
during the trial nor self-evident on the records of this case to show that petitioners were
in charge of the operation of CAIR and they acted in bad faith or fraudulently when the
lease was transacted with SBMA. Having sold, ceded and assigned their entire
subscription rights to the 400,000 shares in CAIR representing 100% of its entire
outstanding capital stock to Alvarez who as assignee agreed to assume the payment of
the unpaid balance of the price of the subscription rights in the total amount of
P30,000,000.00 and Alvarez being then in charge as President of CAIR and its major
stockholder as well as the signatory to the Lease Agreement, petitioners conclude that
when Halley is invoked correctly, Alvarez should be solely responsible and liable for the
unpaid rentals of CAIR to SBMA.[23]

Regarding petitioners' assignment of their subscription rights to Alvarez through the

DASR, the CA stated that for this to become a viable defense, it was incumbent upon
petitioners to show that a valid transfer/assignment of shares, binding against third
persons, took place under Section 63 of the Corporation Code, which provides:
SECTION 63. Certificate of stock and Transfer of Shares. - The capital stock of stock
corporation shall be divided into shares for which certificates signed by the president or
vice-president, countersigned by the secretary or assistant secretary, and sealed with
the seal of the corporation shall be issued in accordance with the by-laws. Shares of
stock so issued are personal property and may be transferred by delivery of the
certificate or certificates indorsed by the owner or his attorney-in-fact or other person
legally authorized to make the transfer. No transfer, however, shall be valid, except as
between the parties, until the transfer is recorded in the books of the corporation so as
to show the names of the parties to the transaction, the date of the transfer, the number
of the certificate or certificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation. (35) [24]
Citing The Rural Bank of Lipa City, Inc. v. Court of Appeals,[25] the CA noted that there
must be strict compliance with the mode of transfer prescribed by law before a valid
transfer of stock takes place wherein the following requirements are complied with: (1)
there must be delivery of the stock certificate; (2) the certificate must be endorsed by
the owner or his attorney-in-fact or other persons legally authorized to make the
transfer; and (3) to be valid against third persons, the transfer must be recorded in the
books of the corporation.[26] Based on these parameters, the CA stated that petitioners
failed to hurdle their burden as the record is bereft of any proof to show compliance with
the requirements for a valid transfer of shares; thus, without a valid transfer of shares,
petitioners are still deemed to be stockholders of CAIR at the time the lease was
enforced.[27] The CA further stated that the unrecorded transfer/assignment of shares
between petitioners and Alvarez is not binding on SBMA, and the latter can proceed
against petitioners, who in its eyes remained as stockholders, against their unpaid
subscriptions for the satisfaction of CAIR's rental arrears pursuant to the trust fund
doctrine.[28]

Petitioners counter by insisting that under the DASR, which Alvarez failed to deny under
oath its genuineness and due execution in his Third-Party Answer with Counterclaim,
Alvarez is deemed to have admitted that petitioners had already assigned, transferred
and conveyed to him their entire subscription rights representing 100% of the
outstanding capital stock of CAIR with the exception of Jennifer and Virgilio who
remained stockholders with fully paid and non-assessable shares numbering 76,000
and 4,000, respectively.[29] With the assignment, petitioners claim that they are no longer
stockholders of CAIR with unpaid subscription and should not be made primarily and
principally liable to SBMA, and that instead Alvarez should be solely be responsible for
the unpaid rentals because he is the majority stockholder and the active President in
charge of CAIR at the time he signed the lease contract. [30]

Petitioners further argue that as inactive stockholders with fully paid shares, Jennifer
and Virgilio cannot be liable for the debts of CAIR. [31] Given the separate personality of
CAIR, they posit that the piercing of the corporate veil is unwarranted without any
allegation in the complaint and proof that individual petitioners consented or connived to
commit patently unlawful acts of the corporation or that any of them was guilty of gross
negligence or bad faith.[32] In fact, they claim that, effective December 1, 1998, they
ceased to be directors of CAIR and had no participation in its operation, with Jennifer
being replaced by Bienvenido S. Santos as Treasurer based on the minutes of the
election of the corporate officers held in December 1998. [33]

Moreover, petitioners claim that the unpaid stock subscriptions are receivables of the
corporation, which can only become due and owing upon a subscription call by the
corporation's Board of Directors or when it undergoes bankruptcy or its assets are being
levied under an execution or attachment, and none of them obtains in this case. [34]

Lastly, petitioners claim that Alvarez has admitted liability to them when he did not
present contradictory evidence to the evidence presented by them despite the RTC
giving him several chances and a final opportunity to present evidence, with prior notice
to his counsel of record, on October 16, 2012.[35]

To have a historical perspective of the development of the common law trust fund
doctrine, theory or principle, the following excerpt from Edwin S. Hunt's article [36] on the
subject is insightful:
It was formerly supposed that the relations between a corporation and its creditors were
the same as those which existed between an individual debtor and his creditor. For
example, in the year 1826, in the case of Catlin v. The Eagle Bank (6 Conn. 233), Chief
Justice Hosmer said:
"Where no legal lien has been obtained, it is a reasonable supposition that the relation
between creditor and debtor must in all cases infer the same consequences; and that
where the same mischief exists, there is the same law. The cases of an individual and
of a corporation, in the matter under discussion, it appears to me are not merely
analogous but identical; and I discern no reason for the slightest difference between
them."
Since that time, however, the view has gradually grown up that the common law rights
of a creditor over his debtor's property did not adequately protect the creditor of a
corporation. In order to give the latter more extensive rights, it was thought that those
rights must be based upon a theory different from that which ordinarily applies between
debtor and creditor.

This new doctrine was for the first time announced in the year 1824 by Judge Story in
the well-known case of Wood v. Dummer (3 Mason 309). In that case, the stockholders
of a bank without paying its debts, had divided among themselves all the property of the
corporation. Manifestly, a great injustice had been done to the creditors and on some
theory or other they must be allowed to recover their claims from the persons who had
so received the property of the corporation. Apparently, Judge Story thought that none
of the principles of law applicable to the ordinary relation of debtor and creditor were
adequate to the situation. The stockholders did not owe the debt and how, therefore,
could the creditor compel them to pay? If, however, the property of the company be
regarded as a fund held by the corporation in trust for its creditors, then the difficulty
was overcome, for trust property could be followed into the hands of persons who have
notice of the trust. As Judge Story said:
"If I am right in this position, the principle difficulty in the cause is overcome. If the
capital stock is a trust fund, then it may be followed into the hands of any persons
having notice of the trust attaching to it."
As this new theory was so convenient to tl1e solution of this case, Judge Story
proceeded to show that the property of a corporation was a fund held in trust by it for its
creditors. He says:
"It appears to me very clear upon general principles as well as the Legislative intention,
that the capital stock is to be deemed a pledge or trust fund for payment of debts
contracted by the bank The public as well as the Legislature have always supposed this
to be a fund appropriated for such a purpose. The individual stockholders are not liable
for the debts of the bank in their private capacities. The charter relieves them from
personal responsibility and substitutes the capital stock in its stead. Credit is universally
given to this fund by the public as the only means of repayment. * * * The stockholders
have no tights until all the other creditors are satisfied. They have the full benefit of all
the profits made by the establishment, and cannot take any portion of the fund until all
the other claims on it are extinguished."
There would perhaps be little reason to object to calling the property of a corporation a
trust fund for the benefit of its creditors, if all that the phrase meant was, that a
corporation must pay its debts before dividing its assets among its stockholders.

But the trouble is that the "trust fund theory" thus originated has not been confined to
the case to which Judge Story first applied it. That could not be expected. x x x

xxxx

A trust implies a trustee holding a legal title and cestui que trusts who have the
beneficial interest. A court of equity will compel a trustee to hold and manage the
property for the sole benefit of a cestui, to whom alone, in its eyes, the property
belongs. The trustee can make no profit out of the property. His sole reward is his
commission. All the property and all the profits belong to the cestui que trust.
Manifestly, the property of a corporation is held by it in trust in no such sense. A
corporation has the beneficial or equitable as well as the legal title. It is in business to
make money for itself and its stockholders and not for its creditors; while a trustee can
only make money for his cestui que trust.

But it may be said that it is not claimed that the property of a going, solvent corporation
is a trust fund for its creditors; it is only when the corporation becomes insolvent and
ceases to do business that the assets become a trust fund. Many cases may be found
where it is so stated. For example, in the case of Appleton v. Turnbull (84 Me. 72), the
court said:
"It is too firmly established at the present day to be questioned, that the capital stock of
a corporation is a trust fund for the payment of its debts * * * during the existence of the
life of the corporation, it is a trust to be managed for the benefit of its stockholders, but
in the event of a dissolution or of insolvency, it becomes a trust fund for the benefit of its
creditors."

xxxx
x x x The trust fund theory has been, perhaps, most often applied to the case where a
creditor of an insolvent corporation seeks to compel a stockholder to pay a balance
claimed to be due on stock for which the par value has never been paid to the
corporation.[37]
The trust fund doctrine or theory has been, perhaps, most often applied to the case
where a creditor of an insolvent corporation seeks to compel a stockholder to pay a
balance claimed to be due on stock for which the par value has never been paid to the
corporation.[38]

"It is again insisted that plaintiffs cannot recover because the suit was not preceded by a
call or assessment against the defendant as a subscriber, and that until this is done no
right of action accrues. In a suit by a solvent going corporation to collect a subscription,
and in certain suits provided by statute this would be true; but it is now quite well settled
that when the corporation becomes insolvent, with proceedings instituted by creditors to
wind up and distribute its assets, no call or assessment is necessary before the
institution of suits to collect unpaid balances on subscription." (Ross-Meehan Shoe F.
Co. vs. Southern Malleable Iron Co., 72 Fed., 957, 960; see also Henry vs. Vermillion
etc. R. R. Co., 17 Ohio, 187, and Thompson on Corporations, 2d ed., vol. 3, sec. 2697.)

. The better doctrine is that when insolvency supervenes all unpaid subscriptions
become at once due and enforceable.[44] (Emphasis supplied)

Clearly, the first instance finds no relevance in the present case. It is the second which
SBMA, as creditor, may invoke to collect from CAIR's stockholders for their unpaid
subscriptions and apply the same to CAIR's unpaid rentals. But, as stressed in Halley:
"To make out a prima facie case in a suit against stockholders of an insolvent
corporation to compel them to contribute to the payment of its debts by making good
unpaid balances upon their subscriptions, it is only necessary to establish that the
stockholders have not in good faith paid the par value of the stocks of the
corporation."[55]

Unfortunately, SBMA has not even pleaded either insolvency of CAIR or its dissolution.
What is evident in SBMA's complaint is that it is a simple collection suit, to wit:
10. Despite the clear language of the Lease Agreement, however, Defendant
Corporation has been consistently remiss in paying its lease rentals and airport fees as
it failed to pay numerous monthly rentals and airport fees at the specified time each
month, despite repeated demands for its compliance.

xxxx

15. Despite the above demands and notices, Defendant Corporation still failed to heed
the same. x x x

xxxx

19. Despite several demands on Plaintiffs part for Defendant Corporation to fully settle
its outstanding accounts, the latter has utterly failed and/or refused to pay the same. x x
x

xxxx

21. Equally important to stress is the fact that the foregoing antecedents would only
prove Defendant Corporation's continuous and unfair disregard of its contractual
obligations to pay the amounts due the Plaintiff under the Lease Agreement, to Plaintiffs
extreme damage and prejudice.

22. By reason of its continued refusal to settle the above said amounts, Defendants
should therefore be adjudged liable to pay the amount
of US$163,641.89 (US$143,269.76 + US$20,372.13), plus legal interest until it has
effected full payment of the said amounts. [56]
As to petitioners, the only allegation of the complaint is:
4. Defendants [who are individually named with their respective addresses] are
impleaded herein being the incorporators/stockholders of [CAIR], and are liable to the
payment of the Defendant Corporation's unpaid obligations, incurred damages and
other amounts to be adjudged by this Honorable Court, to the extent of their unpaid
subscribed capital stock as follows:

x x x x[57]
Not only were the allegations of SBMA's complaint insufficient to justify the invocation
and application of the trust fund doctrine as appreciated in Halley, even the evidence
adduced by SBMA was solely to prove the uncollected rentals. SBMA presented two
witnesses, Editha Lim-Marzal (Editha) and Kenneth Lemuel G. Rementilla (Kenneth).
Editha, the Division Chief of the Accounting Department, Account Receivables of
SBMA, testified in the main that: as per records, CAIR was consistently remiss in paying
its lease rentals and airport fees; demand letters were sent to CAIR, which fell on deaf
ears; and according to the Summary of Outstanding Account, the obligation incurred by
CAIR amounted to US$212,135.55 or P10,171,899.60 as of March 28, 2007.
[58]
Kenneth, the Manager of the Locator's Registration and Licensing Department of
SBMA, testified that: he was familiar with CAIR; it underwent the usual process of
registration to become a free port enterprise and complied with all the documentary
requirements to prove its existence as a business enterprise, such as its Articles of
Incorporation (AOI) duly registered with the Securities and Exchange Commission; he
was not notified of any changes or amendments in the AOI with respect to the names of
the incorporators; and SBMA and CAIR entered into a Lease Agreement on February 3,
1999 but was pre-terminated on January 14, 2004 due to CAIR's failure to settle its
account.[59]

In short, SBMA failed to either allege or prove any of the two grounds recognized
in Halley when the trust fund doctrine may be applied to compel the stockholders to
contribute to the payment of CAIR's debts by compelling them to pay the unpaid
balances upon their subscriptions.

The CA indeed misapplied Halley in this case. The CA miserably failed to identify the
salient facts of the case constituting the specific ground to justify the application of the
trust fund doctrine. The CA relied on Halley without showing, either in the pleadings or
in the evidence, how its ratio could be applied.

Given the failure of SBMA to make a case for the application of the trust fund doctrine
against petitioners, the Court will not provide the basis for the former.

[ G.R. No. 217454, January 11, 2021 ]

AGRO FOOD AND PROCESSING CORP., Petitioner, v. VITARICH CORPORATION,

Respondent.

DECISION

HERNANDO, J.:

Antecedents

This case involves a corporation officer's authority to amend an original contract without actual
authority from the corporation's board of directors. Agro's position is that the amendments are not
binding on the corporation since the officer had no actual authority from its board of directors. For
Vitarich, the amendments are binding pursuant to the doctrine of apparent authority, among others.

The undisputed facts are as follows.

On October 5, 1995, Agro and Vitarich simultaneously executed two agreements:.first, a
Memorandum of Agreement (MOA) under which Vitarich offered to buy Agro's chicken dressing
plant located in Bulacan; and second, a Toll Agreement under which Agro agreed to dress the
chickens supplied by Vitarich for a toll fee.9

Ruling of the Regional Trial Court:

In its December 29, 2005 Decision, the trial court held that the amendments did not bind Agro
considering the lack of any signature or conforme to the documentary evidence presented by
Vitarich.19 Consequently, Vitarich was not entitled to its claim.20

Ruling of the Court of Appeals:

The appellate court, in its assailed Decision, set aside the December 29, 2005 Decision of the RTC
and held that the verbal amendments to the toll fees were valid and obligatory on Agro, pursuant to
the principle that contracts are obligatory in whatever form they may have been entered into.24

It found that Vitarich was able to establish the existence of the amendments based on the eighty
nine (89) weekly billings reflecting such amendments, which billings were notably prepared by Agro,
as well as from the testimony of Agro's President who admitted that his firm prepared such billings
and del Castillo's own testimony that he was authorized to implement the amendments.25

Further, the appellate court applied the doctrine of apparent authority in arriving at the conclusion
that del Castillo was clothed with authority by Agro's board of directors in concurring and
implementing the amendments.26 As for the trial court's award of P25,430,292.72 to Agro, the
appellate court set aside the same for lack of basis.27

Issues

The Petition raises two issues:

THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR OF LAW WHEN IT APPLIED

THE DOCTRINE OF APPARENT AUTHORITY AND HELD THAT THE REDUCED TOLL
DRESSING RATES PREPARED BY MR. DEL CASTILLO ARE BINDING ON AGRO, DESPITE THE
FACT THAT THE REDUCTION OF THE TOLL DRESSING RATES WERE NEVER AUTHORIZED
OR RATIFIED BY AGRO'S BOARD OF DIRECTORS.

II

THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR OF LAW WHEN IT HELD THAT
THE REDUCTION OF THE TOLL DRESSING RATES IS NOT BARRED BY THE PAROL
EVIDENCE RULE.37

The Petition is devoid of merit.

Agro is correct that "apparent authority is determined by the acts of the principal and not by the acts
of the agent."38 As applied to corporations, the doctrine of apparent authority provides that "a
corporation [is] estopped from denying the [officer's] authority if it knowingly permits [such officer] to
act within the scope of an apparent authority, and it holds him out to the public as possessing the
power to do those acts."39

Thus, it is the corporation's acts which determine the existence of apparent authority, i.e., whether
the corporation knowingly permits its officer to act on its behalf and holds such officer out to the
public as having the authority to do those acts. ℒαwρhi ৷

Here, a reading of the assailed Decision gives the impression that in applying the doctrine of
apparent authority, the appellate court only considered del Castillo's testimony that he was
authorized by Agro's President to implement the amendments, and not the acts of Agro itself as
required under the doctrine of apparent authority:

Under the doctrine of apparent authority, if a corporation knowingly permits one of its officers or any
other agent to act within the scope of an apparent authority, it holds the agent out to the public as
possessing the power to do those acts; thus the corporation will, as against anyone who has in good
faith dealt with it through such agent, be estopped from denying the agent's authority.

It bears stressing that the existence of apparent authority may be ascertained not only through the
"general manner in which the corporation holds out an officer or agent as having the apparent
authority to act in general", but also through the corporation's "acquiescence in his acts of a
particular nature, with actual or constructive knowledge thereof, whether within or beyond the scope
of his ordinary powers".44

Here, it is easy to see that Agro, reasonably appearing to have knowledge of the amendments,
acquiesced to the same. Indeed, Agro never contested nor protested the amendments; on the
contrary, it even accepted the benefits arising therefrom.45 "When a corporation intentionally or
negligently clothes its officer with apparent authority to act in its behalf, it is estopped from denying
its officer's apparent authority as to innocent third parties who dealt with this officer in good faith."46

Considering the foregoing, We do not find a reversible error in the appellate court's finding that the
amendments were binding on Agro under the doctrine of apparent authority.

Finally, We need not belabor the second point raised by Agro - that the existence of the verbal
amendments may not be proved pursuant to the parol evidence rule47 - because it has absolutely
no basis in fact and in law. The appellate court is correct that the issue of the amendments was
raised in Vitarich's Amended Complaint, and therefore covered by the exception to the parol
evidence rule.48

G.R. Nos. 200070-71. December 07, 2021 ]

TOTAL OFFICE PRODUCTS AND SERVICES (TOPROS), INC., PETITIONER, VS. JOHN
CHARLES CHANG, JR., TOPGOLD PHILIPPINES, INC., GOLDEN EXIM TRADING AND
COMMERCIAL CORPORATION, AND IDENTIC INTERNATIONAL CORP., REPRESENTED BY
JOHN CHARLES CHANG, JR., HECTOR AND CECILIA KATIGBAK, RESPONDENTS.

DECISION

INTING, J.:

A person cannot serve two masters without detriment to one of them.1 It is from this
basic human frailty that the "doctrine of corporate opportunity" was recognized and laws
were put in place to deter corporate officers from using their position of trust and
confidence to further private interests.

According to the Amended Petition, Spouses Ramon (Ramon) and Yaona Ang Ty (Yaona)
(collectively, Spouses Ty) wanted to establish a corporation during the latter part of 1982 that would
be the sole distributor of Minolta plain paper copiers in the Philippines. Chang, a former employee of
Pantrade, Inc., (Pantrade), a company also owned by the Ty Family, was given the duty to manage
the new corporation. The Ty Family gave Chang 10% shares in the corporation with the assurance
from Chang that he will render competent, exclusive, and loyal service thereto. On January 31,
1983, TOPROS was incorporated with an authorized capital stock of P4,000,000.00. Among the
incorporators, Chang was the only one who is not a member of the Ty Family.11

The Ty Family elected Chang as President and General Manager and entrusted to him the
management as well as the funds of TOPROS. Meanwhile Yaona served as Treasurer and Jennifer
Ty (Jennifer) stood as Corporate Secretary. Upon Chang's request, Elizabeth, Hector, and Cecilia,
all employees of Pantrade, were transferred to TOPROS.12

TOPROS grew into a multi-million enterprise; thus, Spouses Ty increased its authorized capital
stock to P10,000,000.00 and Chang's share to 20%. TOFROS included in its line of business the
distribution of various office equipment and supplies utilizing the brand names Ultimax, Maruzen,
Taros, and Intimus.13

However, despite its success, no substantial cash dividends were distributed to the stockholders
because, according to Chang, the corporation was investing its funds in several real properties in
Metro Manila, Visayas, and Mindanao.14

In 1998, the Ty Family sensed irregularities in Chang's dealings when their friends and relatives
began questioning the manner in which products and services from TOPROS were issued receipts
and vouchers from TOPGOLD, Golden Exim, and Identic. The Ty Family requested Chang to return
all corporate records of TOPROS. Chang, however, offered to buy them out of their interest at
TOPROS. This prompted the Ty Family to conduct an investigation which revealed that while still a
Corporate Director and an officer of TOPROS, Chang, together with the individual respondents,
incorporated the respondent-corporations to siphon the assets, funds, goodwill, equipment, and
resources of TOPROS. According to TOPROS, Chang used its properties in organizing the
respondent-corporations and obtained opportunities properly belonging to it and its stockholders to
their damage and prejudice. Chang was, thereafter, ousted as Corporate Director and officer of
TOPROS; and the instant case was filed against him.15

Meanwhile, TOPROS sought an ex parte issuance of a writ of preliminary attachment against the
respondent-corporations and individual respondents (collectively, respondents) and prayed for: (1)
an accounting for all the profits and the refund of the same to TOPROS; (2) the dissolution of the
respondent-corporations; (3) the declaration as illegal and fraudulent all the transfers and
acquisitions made by Chang in his favor and that of the other respondents; (4) respondents to
reconvey to TOPROS the properties which they fraudulently registered in their individual and
corporate names; and (5) payment of damages.16

The SEC issued a Writ of Preliminary Attachment in favor of TOPROS wherein the latter posted a
bond in the amount of P90,000,000.00 representing its alleged damage.17

For his part, Chang denied the charges and asserted that from TOPROS' inception until his ouster
as President and General Manager therein, he alone ran TOPROS and shouldered its liabilities. He
further asserted that: (1) even with the absence of assistance from the Ty Family, they received an
estimated P14,000,000.00 cash dividends spread throughout the 15 years of his incumbency in the
corporation; (2) he was able to save TOPROS from the economic crisis in 1983 through personal
loans and surety agreements with Chinabank; (3) he registered the trade name and logo of the
corporation and was able to develop its goodwill all over the country; (4) he promoted the only
Filipino brand of office machine, "Ultimax" and eventually patented it under the name of TOPROS,
even though he was the one who coined its name; and (5) it was during the time that he was signing
as surety for the loans of TOPROS that he, together with the individual respondents, formed the
respondent-corporations.18

Chang furthermore alleged that the Ty Family knew that he organized the three corporations during
his incumbency as President and General Manager of TOPROS. In 1993, Golden Exim and Identic
were exhibitors, together with TOPROS, in the Philippine Office Machine Distributors Association
(POMDA), wherein Ramon was a director while his son, Warren Ty (Warren), was a member of the
Exhibit Committee. Golden Exim, Identic, together with TOPROS, and Pantrade marketed the
product "Green-C Chlorella." In the minutes of the special meeting of Identic in April 1989, Warren
signed as a stockholder. Then in April 1989, Warren acquired the shares of Edwin Tan in Identic
through a Deed of Assignment.19

Chang also explained that: (1) from June 1997 to March 1998, he opened several letters of credit for
TOPROS through trust receipt arrangements with Chinabank and before the trust receipts fell due,
he took up the matter of repayment with Spouses Ty; (2) Ramon, however, passed the matter to him
and told Chang that if repayment was not possible, considering that TOPROS was already heavily in
debt, Chang should just let the corporation go bankrupt; (3) he personally guaranteed TOPROS'
loans, and, because of his fear of being charged with estafa, he was compelled to seek other
sources to pay off TOPROS' indebtedness; (4) when the patriarch, Ramon, was no longer interested
in rehabilitating TOPROS and Chang wanted to protect his credibility and the welfare of 200
employees who were about to lose jobs, he took it upon himself to serve the clients of TOPROS
through TOPGOLD which individual respondents incorporated in 1997; and (5) he alone was able to
pay TOPROS' loans including the payment of separation pay of its employees.20

In their Answer Ad Cautelam21 dated September 3, 1999, individual respondents, excluding Chang,
questioned the jurisdiction of the SEC. They alleged that the case is purely intra-corporate between
Chang and TOPROS of which they are not stockholders. They also averred that the SEC has no
jurisdiction to order the dissolution of Golden Exim, Identic, and TOPGOLD as there must be a
separate proceeding for such purpose.22

TOPROS presented, as witnesses, Yaona and Jennifer while respondents presented Chang, Hector,
Sheriff Eduardo Grueso, and Manuel Peralta.23

The RTC Decision

In its Decision24 dated March 18, 2008, the RTC ruled:

WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiff Total Office
Products and Services (Topros), Inc. and against defendants John Charles Chang, Jr., Topgold
Phils., Inc., Golden Exim Trading & [Commercial Corporation] and Identic International Corporation
who are hereby ordered, jointly and solidarily, to:

1. Account for all the profits and properties which otherwise should have accrued to Topros and
refund the same to Topros;
2. Pay actual damages suffered by Topros in an amount to be determined by the Court upon
submission by the Court-appointed Accounting Committee of its Final Report;

3. Pay One Hundred Thousand Pesos (P100,000.00) in exemplary damages to Topros;

4. Pay One Hundred Thousand Pesos (P100,000.00) as and by way of attorney's fees to Topros;
[and]

5. Pay the costs of suit.

To carry this judgment into effect, a three-man Accounting Committee is hereby ordered formed with
the Branch of [sic] Clerk of Court, Atty. Romeo Bautista IV, as Chairman, and two other certified
public accountants respectively nominated by the parties, as members.

This Accounting Committee shall undertake the accounting necessary to determine the amount of
actual damages suffered by Topros, the extent of loss of its business opportunities, the extent of
gain profited by Chang and the three defendant corporations to the detriment of Topros, the refund
of properties registered in the name of the three corporations which property pertains to Topros, and
such other matters relevant to the judgment for accounting of all profits and properties properly
accruing to Topros. It shall also include in its review the effects of the previously enforced Writ of
Preliminary Attachment.

Accordingly, the parties are hereby directed to submit to the Court, within fifteen (15) days from
receipt hereof, at least two (2) nominees each of certified public accountants from which the Court
shall appoint the other two (2) members of the Accounting Committee.

Meanwhile, let the Petition be dismissed insofar as defendants Saul Mari Chang, Hector Katigbak,
Cecilia Katigbak, Rosario Sarah Fernando and Elizabeth Jay are concerned.

SO ORDERED.25

The RTC held that the case filed by TOPROS is an intra-corporate controversy between TOPROS
and Chang. However, because of allegations of fraudulent utilization and siphoning of resources,
opportunities, and contracts belonging to TOPROS by Chang, together with the individual
respondents and the respondent-corporations, respondents are indispensable parties to the case
who must be joined as party defendants.26

The RTC also ruled that Chang violated his fiduciary duties and was guilty of disloyalty to TOPROS
for which he must be held accountable under Sections 31 and 34 of The Corporation Code of the
Philippines (Corporation Code).27 Chang established Identic, Golden Exim, and TOPGOLD which
are in the same line of business of TOPROS while still an officer and director thereof. He acquired
business opportunities which should have belonged to TOPROS.28

Chang and the other respondents filed their separate petitions for review which were consolidated
and resolved by the CA.29

The CA Decision

In its Decision30 dated June 17, 2011, the CA ruled:

WHEREFORE, the Petitions for Review in CA-G.R. SP No. 103047 and in CA-G.R. SP No. 103119
are GRANTED. The assailed RTC Decision dated 18 March 2011 in Civil Case No. 68327
is REVERSED and SET ASIDE, and accordingly, the Amended Petition is DISMISSED.

Consequently, the writ of attachment and all notices of garnishment issued relative thereto are
hereby dissolved.

SO ORDERED.31

According to the CA, records do not show that TOPROS even attempted to adduce evidence that
Chang and individual respondents have complete control over TOPGOLD, Golden Exim, and Identic
as all TOPROS did was to show that Chang and the other individual respondents were incorporators
and/or officers of the respondent-corporations and that Chang substantially owned them. It ruled that
given that Yaona, Jennifer, and Warren were the Corporate Treasurer, Secretary, and Chairman,
respectively, of the Board of Directors of TOPROS, it could not see how Chang could have complete
dominion over TOPROS' funds. It further held that TOPROS' mere allegation that Chang and the
other individual respondents fraudulently siphoned off its funds and assets based mainly, if not
solely, on the latter's establishment of the respondent-corporations does not amount to clear and
convincing evidence sufficient to support allegations of fraud. Thus, the RTC had no justifiable
reason to pierce the veil of corporate fiction.32

The CA furthermore held that there were only mere innuendos of disloyalty. Ramon, the patriarch of
the Ty Family with whom Chang directly dealt with, was not presented by TOPROS as a witness.
Yaona's statements, which were derived from pronouncements of her husband, Ramon, were mere
hearsay and of no probative value. The RTC's finding that Chang was guilty of disloyalty because of
his subsequent acquisition of the service contract previously entered into by TOPROS and Linde
Refrigeration Phils., Inc. (Linde) failed to consider that during that period, TOPROS was either
closing down or had already closed down. This was also the scenario with regard to the similar
advertisements of TOPROS and TOPGOLD considering that TOPROS did not refute that
TOPGOLD started using the advertisements only in 1997.33

TOPROS filed a Motion for Reconsideration, but the CA denied it on January 2, 2012.34

Hence, the petition.

The Issue

Whether Chang is liable for violation of his fiduciary duties under the Corporation Code.

Batas Pambansa Blg. (BP) 68 or the Corporation Code was enacted in 1980. In 2019, RA 11232,
otherwise known as the "Revised Corporation Code of the Philippines" (RCC), was passed and
repealed BP 68.42 As the acts complained of took place under BP 68, the Court shall refer to the
provisions under BP 68.

Our Ruling

The Court finds merit in the petition.

Generally, Rule 45 petitions can raise only questions of law, as this Court is not the proper venue to
consider factual issues. However, a departure from the general rule may be warranted where, as in
the case, the findings of the CA are contrary to those of the trial court.43
Here, the CA had different factual findings from the RTC which necessitates the Court's review of the
evidence presented by the parties. After a judicious review of the documentary and testimonial
evidence presented, the Court finds that a reversal of the CA ruling is warranted.

Doctrine of Corporate Opportunity

The doctrine of corporate opportunity traces its roots to the general principles on directors' and
officers' liabilities.

As a rule, a corporation is a juridical entity that is vested with a legal personality separate and
distinct from those acting in its behalf, and in general, from the people comprising it. Following this
principle, obligations incurred by the corporation, acting through its directors, officers and employees
are the corporation's sole liabilities. A corporate director, trustee, or officer is generally not held
personally liable for obligations that are incurred by the corporation. This legal fiction, however, may
be disregarded—through the piercing of the corporate veil—if, inter alia, it is used as a means to
perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, or to confuse legitimate issues.44

Section 31 of the Corporation Code (now Section 30 of the RCC) specifies the liabilities of directors,
trustees, or officers. It reads:

Sec. 31. Liability of directors, trustees or officers. — Directors or trustees who willfully and knowingly
vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or
bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the corporation, its stockholders or members and other
persons.

When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect of any matter which has been reposed in him in
confidence as to which equity imposes a disability upon him to deal in his own behalf, he shall be
liable as a trustee for the corporation and must account for the profits which otherwise would have
accrued to the corporation. (Italics supplied.)

Section 34 of the Corporation Code (now Section 33 of the RCC) also states:

Sec. 34. Disloyalty of a director. — Where a director, by virtue of his office, acquires for himself a
business opportunity which should belong to the corporation, thereby obtaining profits to the
prejudice of such corporation, he must account to the latter for all such profits by refunding the
same, unless his act has been ratified by a vote of the stockholders owning or representing at least
two-thirds (2/3) of the outstanding capital stock. This provision shall be applicable, notwithstanding
the fact that the director risked his own funds in the venture. (Italics supplied.)

Then in 1993, the Court in Prime White Cement Corp. v. IAC,52 highlighted the duty of loyalty of a
director, in this wise:

A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his
corporation. In case his interests conflict with those of the corporation, he cannot sacrifice the latter
to his own advantage and benefit. As corporate managers, directors are committed to seek the
maximum amount of profits for the corporation. This trust relationship "is not a matter of statutory or
technical law. It springs from the fact that directors have the control and guidance of corporate affairs
and property and hence of the property interests of the stockholders." In the case of Gokongwei v.
Securities and Exchange Commission, this Court quoted with favor from Pepper v. Litton, thus:

"x x x He cannot by the intervention of a corporate entity violate the ancient precept against serving
two masters x x x He cannot utilize his inside information and his strategic position for his own
preferment. He cannot violate rules of fair play by doing indirectly through the corporation what he
could not do directly. He cannot use his power for his personal advantage and to the detriment of the
stockholders and creditors no matter how absolute in terms that power may be and no matter how
meticulous he is to satisfy technical requirements. For that power is at all times subject to the
equitable limitation that it may not be exercised for the aggrandizement, preference, or advantage of
the fiduciary to the exclusion or detriment of the cestuis. x x x"53

In 2009, the Court summarized, through Strategic Alliance Development Corp. v. Radstock
Securities Limited,54 the three-fold duty of members of the board of directors: duty of obedience,
duty of diligence, and duty of loyalty. This means that directors: (1) shall direct the affairs of the
corporation only in accordance with the purposes for which it was organized; (2) shall not willfully
and knowingly vote for or assent to patently unlawful acts of the corporation or act in bad faith or with
gross negligence in directing the affairs of the corporation; and (3) shall not acquire any personal or
pecuniary interest in conflict with their duty as such directors or trustees.55

The duty of loyalty in particular prohibits corporate directors, trustees, and officers from acquiring or
attempting to acquire any personal or pecuniary interest—or any other interest for that matter—in
conflict with or adverse to their duty as corporate fiduciaries.56

The recent case of Ient v. Tullet Prebon (Philippines), Inc.,57 also discussed the relationship of the
doctrine of corporate opportunity to the duty of loyalty.58

Unfortunately, none of the aforementioned cases have set actual parameters to determine what is
considered as corporate opportunity that gives rise to a claim of damages. There are still no
guidelines as to what factors should be considered by the courts in determining the award of
damages under Section 34. Hence, the need at this time for the Court to fill the gaps of
jurisprudence.

The corporate opportunity doctrine in US jurisprudence prohibits one who occupies a fiduciary
relationship to a corporation from acquiring, in opposition to the corporation, property in which the
latter has an interest or tangible expectancy or that is essential to its existence. Varying tests,
however, have been established by different State jurisdictions in determining whether such doctrine
has been breached.

First, "the line of business test." This test holds that a transaction is a corporate opportunity if it is
within the scope of the corporation's own activities and of present or potential advantage to it. Under
this test, corporate participants must refrain from taking for themselves the types of transactions in
which their corporation normally engages.59

Second, "the interest or expectancy test." This test provides that "an opportunity is open to the
director unless the corporation has an interest already existing [in the opportunity], or x x x it has an
expectancy growing out of an existing right."60 It does not bar directors from every transaction that
appears useful to the corporation in hindsight, but only prevents the acquisition of property that the
corporation needs or is seeking.

Third, "the American Law Institute (ALI) test." This provides that a director or senior executive may
not take advantage of a corporate opportunity, unless: (a) he first offers the corporate opportunity to
the corporation and makes disclosure concerning the corporate opportunity; (b) the corporate
opportunity is rejected by the corporation; and (c) the rejection of the opportunity is fair to the
corporation, or authorized by disinterested directors in a manner that satisfies the standards of the
business judgment rule, or authorized or ratified by disinterested shareholders, and the
shareholders' action is not equivalent to a waste of corporate assets.

For this purpose, the ALI test defines a corporate opportunity as: (1) any opportunity to engage in
any business activity of which a director or senior executive becomes aware either in connection
with his functions as director or senior executive or under circumstances that should reasonably lead
him to believe that the person offering the opportunity expects him to offer it to the corporation, or
through the use of corporate information or property, if the resulting opportunity is one that the
director or senior executive should reasonably be expected to believe would be of interest to the
corporation; or (2) any opportunity to engage in a business activity—which includes the acquisition
or use of any contract right or other tangible or intangible property—of which a senior executive
becomes aware, if he knows or reasonably should know that the activity is closely related to the
business in which the corporation is engaged or may reasonably be expected to engage.61

Common to these three tests is that they all state that "corporate opportunity exists when a proposed
activity is reasonably an incident to the corporation's present or prospective business and is one in
which the corporation has the capacity to engage."62

In the case of Guth v. Loft, Inc.63 (Guth), the Supreme Court of the State of Delaware integrated
these tests and elucidated as to when a corporate opportunity exists, when a corporate director or
officer breaches his/her fiduciary duty to the corporation that he/she serves, and the consequences
of such breach. To quote:

Corporate officers and directors are not permitted to use their position of trust and confidence to
further their private interests. While technically not trustees, they stand in a fiduciary relation to the
corporation and its stockholders. A public policy, existing through the years, and derived from a
profound knowledge of human characteristics and motives, has established a rule that demands of a
corporate officer or director, peremptorily and inexorably, the most scrupulous observance of his
duty, not only affirmatively to protect the interests of the corporation committed to his charge, but
also to refrain from doing anything that would work injury to the corporation, or to deprive it of profit
or advantage which his skill and ability might properly bring to it, or to enable it to make in the
reasonable and lawful exercise of its powers. The rule that requires an undivided and unselfish
loyalty to the corporation demands that there shall be no conflict between duty and self-interest. The
occasions for the determination of honesty, good faith and loyal conduct are many and varied, and
no hard and fast rule can be formulated. The standards of loyalty is measured by no fixed scale.

If an officer or director of a corporation, in violation of his duty as such, acquires gain or advantage
for himself, the law charges the interest so acquired with a trust for the benefit of the corporation, as
its election, while it denies to the betrayer all benefit and profit. The rule, inveterate and
uncompromising in its rigidity, does not rest upon the narrow ground of injury or damage to the
corporation resulting from a betrayal of confidence, but upon a broader foundation of a wise public
policy that, for the purpose of removing all temptation, extinguishes all possibility of profit flowing
from a breach of the confidence imposed by the fiduciary relation. Given the relation between the
parties, a certain result follows; and a constructive trust is the remedial device through which
precedence of self is compelled to give way to the stern demands of loyalty.

The rule, referred to briefly as the rule of corporate opportunity, is merely one of the manifestations
of the general rule that demands of an officer or director the utmost good faith in his relation to the
corporation which he represents.
xxxx

x x x if there is presented to a corporate officer or director a business opportunity which the

corporation is financially able to undertake, is, from its nature, in the line of the corporation's
business and is of practical advantage to it, is one in which the corporation has an interest or a
reasonable expectancy, and, by embracing the opportunity, the self-interest of the officer or director
will be brought into conflict with that of his corporation, the law will not permit him to seize the
opportunity for himself. And, if in such circumstances, the interests of the corporation are betrayed,
the corporation may elect to claim all the benefits of the transaction for itself, and the law will impress
a trust in favor of the corporation upon the property, interests and profits so acquired.64

In the latter case of Broz v. Cellular Information Systems, Inc.65 (Broz), the Guth test on corporate
opportunity was synthesized into four aspects, viz.:

The corporate opportunity doctrine, as delineated by Guth and its progeny, holds that a corporate
officer or director may not take a business opportunity for his own if: (1) the corporation is financially
able to exploit the opportunity; (2) the opportunity is within the corporation's line of business; (3) the
corporation has an interest or expectancy in the opportunity; and (4) by taking the opportunity for his
own, the corporate fiduciary will thereby be placed in a position inimicable to his duties to the
corporation. x x x66

As clarified by Broz, however, the Guth test only sets guidelines, and that ultimately, "[n]o one factor
is dispositive and all factors must be taken into account insofar as they are applicable."67 Thus, the
determination of whether or not a corporate director/officer has violated the doctrine "is a factual
question to be decided by reasonable inference from objective facts."68

In addition to these cases, Associate Justice Alfredo Benjamin S. Caguioa raises other tests for
the En Banc's consideration.

First is the "fairness" test, under which the test of whether an opportunity is a corporate one rests on
the query of whether a fiduciary's appropriation would fail the "ethical standards of what is fair and
equitable in a particular set of facts."69

It is similar to the line-of-business test in that it may disallow appropriation of not only existing but
prospective opportunities of the corporation. While it admittedly poses "line-drawing"70 problems
with respect to delineating between appropriations that are fair to the corporation and those that are
not, this test allows for malleability in the appreciation of what constitutes the foundational premise of
fairness vis-a-vis corporations, consistent with the inclination of our legislative history, as pointed out
by Associate Justice Samuel H. Gaerlan, that sought to codify the premium placed on the fiduciary
duties of a corporate officer.71

Finally, another possible defense mentioned by Associate Justice Alfredo Benjamin S. Caguioa is
the "source" defense, which was acknowledged by the ALI and line-of-business tests. The source
defense mainly argues that the opportunity that the fiduciary appropriated was one pertaining to the
fiduciary's personal skills and expertise, and not the corporations.76

The doctrine of corporate opportunity arises out of the fundamental obligation of a fiduciary not to
allow a conflict of their duty with their own interests. The doctrine limits the ability of those who owe a
fiduciary duty to a corporation to take advantage of business opportunities that might otherwise be
available to them in the absence of the fiduciary relationship. According to a branch of common law,
these business opportunities refer to those that either already belongs to the company or even for
which it has been negotiating.79
As it is now broadly understood, the doctrine of corporate opportunity governs the legal responsibility
of directors, officers and controlling shareholders in a corporation, under the duty of loyalty, not to
take such opportunities for themselves, without first disclosing the opportunity to the board of
directors of the corporation and giving the board the option to decline the opportunity on behalf of the
corporation. If the procedure is violated and a corporate fiduciary takes the corporate opportunity
anyway, the fiduciary violates its duty of loyalty and the corporation will be entitled to a constructive
trust of all profits obtained from the wrongful transaction.80

Thus, a claim of damages under Section 34 of the Corporation Code (now Section 33 of the RCC)
arises when a corporate officer or director takes a business opportunity for his own, provided that it
is sufficiently shown by the claimant that:

(a) The corporation is financially able to exploit the opportunity;

(b) The opportunity is within the corporation's line of business;

(c) The corporation has an interest or expectancy in the opportunity; and

(d) By taking the opportunity for his own, the corporate fiduciary (i.e., corporate director, trustee or
officer) will thereby be placed in a position inimicable to his duties to the corporation.

In determining paragraph (b), whether the opportunity is within the corporation's line of business, the
involved corporations must be shown to be in competition with one another. They must be engaged
in related areas of businesses, producing the same products with overlapping markets.

As pointed out by Associate Justice Marvic M.V.F. Leonen, the test laid down in Gokongwei is very
much relevant to the instant case. In Gokongwei, it was held that "the test must be whether the
business does in fact compete."87 It further defined "competition," as "a struggle for advantage
between two or more forces, each possessing, in substantially similar if not identical degree, certain
characteristics essential to the business sought."88 Factors, such as "quantum and place of
business, identity of products and area of competition should be taken into consideration." The Court
even pointed out that it is "therefore, necessary to show that [the director's] business covers a
substantial portion of the same markets for similar products to the extent of not less than 10% of
[petitioner] corporation's market for competing products."89

Consequently, it is not enough to impute bare acts of transactions in which the claimant subjectively
perceives the duty of loyalty to be breached. Sufficient evidence must be presented to show that the
claim of damages is indeed premised on a concrete corporate opportunity falling under the
parameters above-stated. Only then may actual damages relative to such lost opportunity be
awarded.

Chang's Liability

Here, the Court agrees with the RTC that Chang committed several acts showing personal or
pecuniary interest that were in conflict with his duties as director and officer of TOPROS.

There is no dispute that Chang established Identic in 1989, Golden Exim in 1990, and TOPGOLD in
1998 which were in the same line of business and while still an officer and director of
TOPROS.90 The Articles of Incorporation of Golden Exim and TOPGOLD show that Chang owned
80% of the shares of Golden Exim; and Chang, together with his son, owned 99.76% of the shares
in TOPGOLD. The General Information Sheet of Identic also showed that Chang owned 65% of
Identic.91

However, the fact that Chang risked his own funds in running TOPROS and paying off its obligations
will not absolve him of his duties as director and officer of TOPROS.

Even if admitted, the circumstances cited by Chang, which suggest of knowledge, tolerance, or even
acquiescence of TOPROS to his establishment of the respondent-corporations which are in the
same business as TOPROS, do not amount to the compliance required of Section 34 to absolve a
director of disloyalty. The law explicitly requires that where a director, by virtue of his office, acquires
for himself a business opportunity which should belong to the corporation, he must account to the
latter for all profits by refunding them, unless his act has been ratified by a vote of the stockholders
owning or representing at least two-thirds of the outstanding capital stock.

The Court agrees with the RTC that even if the incorporation of the respondent-corporations was
with the full knowledge of the members of the Ty Family, this does not equate to consent to the
prejudicial transfer and acquisition of properties and opportunities of TOPROS which Chang, through
his corporations, has shown to have committed.103

To determine the exact liability of Chang, however, the instant case should be remanded to the trial
court for the reception of additional evidence and the reevaluation of evidence already submitted,
guided by the parameters aforementioned. That is, TOPROS as claimant bears the burden of
proving the specific business opportunities that gave rise to its claim of damages under Section 34 of
the Corporation Code. In turn, Chang may present evidence to support his claim that: (a) the
corporation was already heavily in debt and that TOPROS' patriarch, Ramon Ty, was no longer
interested in corporate rehabilitation, so much so that he was already letting Chang to allow
TOPROS to go bankrupt; and (b) that the corporation had already closed down prior to respondents'
taking of certain corporate opportunities, among others.

Also it should be made clear that the claim for damages under Section 34 of the Corporation Code
necessitates factual determinations which—while it may be arrived at with the aid of an accounting
committee—must be ultimately made by the RTC itself in the exercise of its judicial functions,
embodied in a final judgment.

In closing, it is well to recall that the doctrine of corporate opportunity is not based on theoretical
abstractions, but on human experience that a person cannot serve two hostile masters without
detriment to one of them. Where a director is so employed in the service of a rival company, he
cannot serve both, but must betray one or the other. An officer of a corporation cannot engage in a
business in direct competition with that of the corporation where he is a director by utilizing
information he has received as such officer, under the established law that a director or officer of a
corporation may not enter into a competing enterprise which cripples or injures the business of the
corporation of which he is an officer or director. It is also established that corporate officers are not
permitted to use their position of trust and confidence to further their private interests. Where two
corporations are competitive in a substantial sense, it would seem improbable, if not impossible, for
the director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations and
place the performance of his corporation duties above his personal concerns.110

With the guidelines set forth, the courts will now be able to determine in concrete and quantifiable
terms, the liability and accountability of erring directors and officers; thus, finally giving life to the
statutory provisions aimed to curb disloyal acts and punish erring corporate directors and officers.

G.R. No. 192530

TEE LING KIAT, Petitioner
vs.
AYALA CORPORATION (Substituted herein by its Assignee And Successor-in-Interest,
BIENVENIDO B.M. AMORA, JR.), Respondent

DECISION

CAGUIOA, J.:

The Antecedent Facts

On January 28, 1981, Ayala Corporation instituted a Complaint for Sum of Money with
9

an application for a writ of attachment against the Spouses Dee. The complaint was initially raffled to
Branch 15 of the Court of First Instance of Rizal. It appears that on May 21, 1980, Ayala
10

Investment and Development Corporation (AIDC) granted in favor of CMC a money market line in
the maximum amount of ₱2,000,000.00. With Dewey Dee as the President of CMC then, the
11

Spouses Dee executed a Surety Agreement on the same date, as guarantee for the money market
line. One of CMC's availments under the money market line was evinced by a Promissory
Note dated November 20, 1980 for ₱800,000.00 due on January 16, 1981. AIDC subsequently
12

endorsed the Promissory Note to Ayala Corporation. CMC defaulted on its obligation under the
13

promissory note, leading Ayala Corporation to institute a claim for sum of money against CMC and
the Spouses Dee. 14

Ruling on the Complaint for Sum of Money, the RTC - Makati City, Branch 149 (RTC Branch 149)
ruled in favor of Ayala Corporation in a Decision dated November 29, 1990, the dispositive portion
15

of which reads:

With the above Decision having attained finality, the RTC Branch 149 forthwith issued a Writ of
Execution against the Spouses Dee, commanding the sheriff to "cause the execution of the
17 18

aforesaid judgment against Sps. Dewey and Lily Dee, including payment in full of your lawful fees
for the service of this writ." (Italics supplied)
19

Thereafter, on November 21, 2006, a Notice of Levy on Execution was issued and addressed to the
20

Register of Deeds of Antipolo City, to levy upon "the rights, claims, shares, interest, title and
participation" that the Spouses Dee may have in parcels of land covered by Transfer Certificates of
21

Title (TCT) Nos. R-24038, R-24039, and R-24040 and any improvements thereon. The parcels
22 23 24 25

of land were registered in the name of Vonnel Industrial Park, Inc. (VIP). According to the Sheriffs
26

Retum filed on January 04, 2007, the titles over the subject properties are registered in the name of
27

VIP, in which Dewey Dee was an incorporator. 28

Tee Ling Kiat's Third-Party Claim

On March 26, 2007, before the scheduled sale on execution, Tee Ling Kiat filed a Third-Party
29

Claim, alleging that:

xx x the aforesaid levy was made based on the information that Mr. Dewey Dee was one of the
incorporators of VIP. Apparently, the Sheriff who caused the levy made the assumption that since
Mr. Dewey is one of the incorporators of VIP, then it follows that he is a stockholder thereof.
Consequently, as such stockholder, he would have rights, claims, shares, interest, title and
participation in the real properties belonging to VIP.
However, while Mr. Dewey Dee was indeed one of the incorporators of VIP, he is no longer a
stockholder thereof. He no longer has any rights, claims, shares, interest, title and participation in
VIP or any of its properties. As early as December 1980, Mr. Dewey Dee has already sold to Mr. Tee
Ling Kiat all his stocks in VIP, as evidenced by a cancelled check which he issued in Mr. Tee Ling
Kiat's favor. x x x

Attached to the Third-Party Claim was a copy of an Affidavit executed by Tee Ling Kiat, attesting to
31

the fact that he is a stockholder of VIP and that he acquired knowledge of the levy on the subject
properties only through newspaper, as well as a photocopy of cancelled checks issued by Tee
32 33

Ling Kiat in Dewey Dee's favor, allegedly as payment for the purchase of the latter's shares in VIP.

Acting on the Third-Party Claim, the Office of the Clerk of Court of the RTC issued a Notice of Third-
Party Claim on March 28, 2007. Amora, who by then had substituted Ayala Corporation, posted a
34

bond in the amount of ₱2,658,700.00. VIP and Tee Ling Kiat opposed the posting of the bond in
35

an Ex-Parte Motion , claiming that the bond was less than the value of the property levied upon.
36

Nevertheless, the court approved the bond, leading VIP and Tee Ling Kiat to file an Omnibus
Motion to declare null and void the Notice of Levy on Execution and all proceedings and issuances
37

arising out of the same. In the Omnibus Motion, VIP and Tee Ling Kiat reiterated that Dewey Dee
38

no longer had any interest in the levied property and that the bond was far less than the value of the
property levied. 39

In his Opposition to Third Party Claimants' Omnibus Motion, Amora claimed that from the date of
40

VIP's incorporation until present, no general information sheets and audited financial statements
have been submitted by VIP to the Securities and Exchange Commission (SEC). Further, nowhere
41

in the SEC records does Tee Ling Kiat's name appear as a stockholder. Meanwhile, the case was
42

re-raffled to the RTC Branch 59 due to the inhibition of the judge formerly hearing the case. 43

Ruling of the RTC Branch 59

The RTC, in an Order dated February 20, 2008, denied VIP and Tee Ling Kiat's Omnibus
Motion and disallowed the third-party claim because the alleged sale of shares of stock from Dewey
Dee to Tee Ling Kiat was not proven. Specifically, the RTC ruled that:

First, Tee Ling Kiat failed to adduce evidence to prove that the sale of shares of stock from Dewey
Dee to Tee Ling Kiat had taken place in accordance with the law.

Second, the SEC had revoked VIP's Certificate of Registration as early as August 11, 2003 for
48 49

failure to comply with reportorial requirements. Consequently, in accordance with Section 122 of the
Corporation Code which provides for the three-year period for the winding down of corporate
50

affairs, VIP no longer had any capacity to sue when the third-party claim was instituted on March 26,
2007.51

Finally, the indemnity bond posted by Amora was sufficient because Tee Ling Kiat was merely
claiming "rights, claims, shares, interest, title and participation" of Dewey Dee in the subject
52

property, and not the entire property.

Tee Ling Kiat's Motion for Reconsideration of the above Order having been denied in an
53

RTC Order dated June 26, 2008, Tee Ling Kiat filed a petition for certiorari under Rule 65 of the
Rules of Court before the CA. This time, however, the petition for certiorari was instituted solely in
Tee Ling Kiat's name. 54
Ruling of the CA

The CA, in the assailed Decision dated September 24, 2009, denied Tee Ling Kiat's petition
for certiorari, on the ground that Tee Ling Kiat is not a real party-in-interest, especially considering
that the alleged sale of Dewey Dee's shares of stock to Tee Ling Kiat has not been proven.

In particular, the CA observed that Tee Ling Kiat failed to prove to the Court the existence or veracity
of the claimed Deed of Sale of Shares of Stock. The CA held that "[i]t is not sufficient to attach
photocopies of the deed or payment of checks to the motion, [Tee Ling Kiat] needed to submit
evidence to prove that the transaction took place." Before the CA, Tee Ling Kiat also raised, for the
55

first time, that he can be properly considered a trustee of VIP, entitled to hold properties on the
latter's behalf. The CA observed, however, that there was no evidence produced to show that Tee
Ling Kiat is a trustee of the corporation. 56

Thus, the CA held that Tee Ling Kiat utterly failed: (i) to prove that he is a stockholder of VIP; and
assuming he is, (ii) to show that he was authorized by the corporation for the purpose of prosecuting
the claim on behalf of the corporation. 57

In a Resolution dated May 26, 2010, the CA denied Tee Ling Kiat's motion for reconsideration for
lack of merit. In denying Tee Ling Kiat's motion for reconsideration, the CA maintained its finding
58

that Tee Ling Kiat lacked any legal personality to file the third-party claim, and consequently, the
petition for certiorari before the CA.

Hence, this petition.

In asking the Court to set aside the assailed CA Decision and Resolution, Tee Ling Kiat submits
that: first, as regards the recording of the alleged sale of stocks, the burden was on Ayala
Corporation to overcome the disputable presumption that VIP followed its ordinary course of
business as provided for in Section 3(q), Rule 131 of the Rules of Court. Considering that the duty to
record the sale of shares of stock in the books lies with VIP, Tee Ling Kiat claims that such recording
"need not be proved" by him. Second, that assuming Dewey Dee was still a stockholder of VIP, that
59

what would have been the proper subjects of levy were the precise and actual shares of Dewey Dee
and not the subject properties. 60

Tee Ling Kiat further prays for the Court's issuance of a Temporary Restraining Order (TRO)
directing Amora and the sheriffs of RTC Branch 149 to immediately desist from executing the
RTC Orders and to issue a Writ of Preliminary Injunction (WPI) after due notice and hearing.
61 62

In a Resolution dated July 7, 2010, the Court required Amora to comment on the petition which he
63

did on October 15, 2010. In a Resolution dated June 13, 2011, the Court noted Tee Ling Kiat's
64 65

reply.
66

Issue

The sole issue for the Court's resolution is whether the CA committed any reversible error in issuing
its Decision dated September 24, 2009 and Resolution dated May 26, 2010.

Our Ruling

The petition lacks merit.

At the crux of determining whether the CA committed any reversible error in issuing the
assailed Decision and Resolution is the question of whether it has been sufficiently proven by Tee
Ling Kiat that Dewey Dee had in fact sold his shares of stock to Tee Ling Kiat in 1980, such that, as
a result, Tee Ling Kiat can be considered a real party-in-interest in the Third-Party Claim, and
consequently, in the petition for certiorari before the CA.

Such determination, however, inevitably necessitates a review of the probative value of the evidence
adduced by Tee Ling Kiat. In this regard, the Rules of Court categorically state that a Rule 45
1âшphi1
67

petition shall only raise questions of law. On the one hand, a question of law arises when there is
doubt as to what the law is on a certain state of facts. On the other hand, a question of fact arises
68

when doubt arises as to the truth or falsity of alleged facts. Once it is clear that the resolution of an
69

issue invites a review of the evidence presented by the parties, the question raised is one of
fact which this Court is precluded from reviewing in a Rule 45 petition.
70

Here, Tee Ling Kiat imputes error on the CA by the simple expedient of arguing that he did not
personally need to prove that the sale of shares of stock between Dewey Dee and himself had in
fact transpired, as the duty to record the sale in the corporate books lies with VIP. Such an
argument, however, fails to recognize that the very right of Tee Ling Kiat, as a thirdparty claimant, to
institute a terceria is founded on his claimed title over the levied property. 71

Consequently, although courts can exercise their limited supervisory powers in determining whether
the sheriff acted correctly in executing the judgment, they may only do so if the third-party claimant
has unmistakably established his ownership or right of possession over the subject
property. Accordingly, if the third-party claimant's evidence does not persuade the court of the
72

validity of his title or right possession thereto, the third-party claim will, and should be, denied.
73

Suffice it to state that the only evidence adduced by Tee Ling Kiat to support his claim that Dewey
Dee's shares in VIP have been sold to him are a cancelled check issued by Tee Ling Kiat in favor of
74

Dewey Dee and a photocopy of the Deed of Sale of Shares of Stock dated December 29, 1980. A
75

photocopy of a document has no probative value and is inadmissible in evidence. The records
76

likewise do not show that Tee Ling Kiat offered any explanation as to why the original Deed of Sale
of Shares of Stock could not be produced, instead alleging that because of the disputable
presumption "[t]hat the ordinary course of business has been followed' provided in Section 3(q) of
77

Rule 131 of the Rules of Court, then the burden is not on him to prove that he is a stockholder, but
on Amora, to prove that he is not a stockholder. 78

This argument is off tangent. Meaning, even if it could be assumed that the sale of shares of stock
contained in the photocopies had indeed transpired, such transfer is only valid as to the parties
thereto, but is not binding on the corporation if the same is not recorded in the books of the
corporation. Section 63 of the Corporation Code of the Philippines provides that: "No transfer, x x
x shall be valid, except as between the parties, until the transfer is recorded in the books of
the corporation showing the names of the parties to the transaction, the date of the transfer,
the number of the certificate or certificates and the number of shares transferred." Here, the
79

records show that the purported transaction between Tee Ling Kiat and Dewey Dee has never been
recorded in VIP's corporate books. Thus, the transfer, not having been recorded in the corporate
books in accordance with law, is not valid or binding as to the corporation or as to third persons.

On a final note, the Court observes that the judgment for a sum of money dated November 29, 1990
obtained by Ayala Corporation was against the Spouses Dewey and Lily Dee in their personal
capacities as sureties in the money market line transaction. Yet, in the execution of said judgment,
the properties levied upon were registered in the name of VIP, a juridical entity with personality
separate and distinct from Dewey Dee. It is a basic principle of law that money judgments are
enforceable only against property incontrovertibly belonging to the judgment debtor, and certainly, a
80

person other than the judgment debtor who claims ownership over the levied properties is not
precluded from challenging the levy through any of the remedies provided for under the Rules of
Court. In the pursuit of such remedies, however, the third-party must, to reiterate, unmistakably
81

establish ownership over the levied property, which Tee Ling Kiat failed to do.
82

G.R. No. 210906, October 16, 2019

AGO REALTY & DEVELOPMENT CORPORATION (ARDC), EMMANUEL F. AGO,

AND CORAZON CASTAÑEDA-AGO, PETITIONERS, v. DR. ANGELITA F. AGO,
TERESITA PALOMA-APIN, AND MARIBEL AMARO, RESPONDENTS.

[G.R. No. 211203, October 16, 2019]

DR. ANGELITA F. AGO, PETITIONER, v. AGO REALTY & DEVELOPMENT

CORPORATION, EMMANUEL F. AGO, CORAZON C. AGO, EMMANUEL VICTOR C.
AGO, AND ARTHUR EMMANUEL C. AGO, RESPONDENTS

DECISION

A. REYES, JR., J.:

Grounded on equity, the derivative suit has proven to be an effective tool for the
protection of minority shareholders. Such actions have for their object the vindication
of a corporate injury, even though they are not brought by the corporation, but by its
stockholders. That said, derivative suits remain an exception. As a general rule,
corporate litigation must be commenced by the corporation itself, with the imprimatur
of the board of directors, which, pursuant to the law, wields the power to sue.
Therefore, since the derivative suit is a remedy of last resort, it must be shown that the
board, to the detriment of the corporation and without a valid business consideration,
refuses to remedy a corporate wrong. A derivative suit may only be instituted after
such an omission. Simply put, derivative suits take a back seat to board-sanctioned
litigation whenever the corporation is willing and able to sue in its own name.

On appeal are the September 26, 2013 Decision1 and the January 10, 2014
Resolution2 rendered by the Court of Appeals (CA) in CA-G.R. CV No. 99771.

The Factual Antecedents

Petitioner Ago Realty & Development Corporation (ARDC) is a close corporation. 3 Its
stockholders are petitioner Emmanuel F. Ago (Emmanuel); his wife, petitioner Corazon
C. Ago (Corazon); their children, Emmanuel Victor C. Ago and Arthur Emmanuel C. Ago
(collectively Emmanuel, et al.); and Emmanuel's sister, respondent Angelita F. Ago
(Angelita). Per ARDC's General Information Sheet,4 their respective stockholdings are
as follows:

Number of Subscribed
Amount
Shares
 Emmanuel 2,498 P249,800.00

Corazon 1,000 P100,000.00

Victor 1 P100.00

Arthur 1 P100.00

Angelita 1,500 P150,000.00

TOTAL 5,000 P500,000.00

This controversy arose when Angelita introduced improvements on Lot No. H-3,
titled in the name of ARDC, without the proper resolution from the
corporation's Board of Directors. The improvements also encroached on Lot No. H-1
and Lot No. H-2, which also belonged to ARDC.5

Consequently, on August 11, 2006, ARDC and Emmanuel, et al. filed a

comp1aint6 before the Legazpi City Regional Trial Court (RTC). They essentially alleged
that Angelita, in connivance with Teresita P. Apin (Teresita), Maribel Amaro (Maribel),
and certain local officials of Legazpi City, introduced unauthorized improvements on
corporate property. For her part, Teresita was accused of operating a restaurant named
"Kicks Resto Bar" in the improvements,7 while Maribel was impleaded as Angelita's
employee.8 On the other hand, the local officials were impleaded as defendants since
they were responsible for issuing the permits relative to the improvements introduced
by Angelita and the business concerns thereon. 9

On September 15, 2006, Teresita filed her answer. She denied all the material
allegations and averred that her restaurant was operating not on Lot No. H-3, as stated
in the complaint, but on Lot No. 1-B, which is not ARDC's property. 10

On February 9, 2007, after their motion to dismiss was denied, 11 Angelita and Maribel
filed their answer.12 Angelita admitted to introducing improvements on the subject lots.
She narrated that sometime in the 1960s, Emmanuel and Corazon immigrated to the
United States, leaving the management of ARDC's properties to her. She thus took
control of the corporation's properties and introduced improvements thereon,
particularly a semi-permanent multipurpose structure 13 and a fence designed to protect
the lot.14

Angelita further claimed that the suit was brought because she refused to heed to
Emmanuel's demand that she buyout his shares in ARDC for $6,000,000.00. After she
failed to satisfy the unreasonable demand, Emmanuel, through two letters sent by
counsel, allegedly accused her of introducing improvements on ARDC's property and
allowing Teresita to operate a restaurant business thereon, without the necessary
authorization from the corporation's Board of Directors. For such acts, Emmanuel
supposedly demanded damages amounting to P10,000,000.00.15

Anent Maribel's inclusion as defendant, it was argued that the plaintiffs had no cause of
action against her since the complaint failed to point out any act for which she should
be held accountable. Being a mere employee of Angelita, she had no participation in the
acts complained of. 16

Notably, a defense common to all the defendants was that ARDC never
authorized the institution of the suit. Without a resolution emanating from the
corporation's Board of Directors, it was argued that Emmanuel, et al. had no
legal standing to bring the case since the lots in question belonged to ARDC.

On July 24, 2007, the local officials of Legazpi City were dropped as defendants on
motion of Emmanuel, et al. Hence, the case against them was dismissed. 17

After the pre-trial conference was terminated on July 31, 2007, trial on the merits
ensued.18

The RTC's Ruling

On September 20, 2012, the RTC rendered a Decision 19 dismissing the complaint and
holding Emmanuel and Corazon jointly and severally liable for damages. Finding ARDC
to be the real party in interest, the trial court ruled that the plaintiffs had no cause of
action.20 Since Emmanuel, et al. brought the case without the proper resolution from
the Board of Directors,21 it was held that they were not authorized to sue on behalf of
the corporation.22The RTC gave consideration to the undisputed fact that the
properties in litigation belonged to ARDC, concluding that Emmanuel, et al., in
their individual capacities, were not the real parties in interest. 23

Next, the trial court found that Teresita's restaurant business was not operating on
ARDC's property. The finding was based on Corazon's admission that the restaurant
was built on Lot No. 1-B, contrary to what was alleged in the complaint. 24

Lastly, the suit was held to be baseless, thus entitling the defendants to damages and
attorney's fees.25 Angelita was awarded moral damages since Emmanuel's claims
caused her embarrassment and tarnished her reputation in Bicol. Maribel was likewise
awarded moral damages because the suit took her by surprise, made her restless,
resulted in a rise in her blood pressure, and caused her to figure in an
accident.26 However, Teresita's claim for moral and exemplary damages failed, as she
did not take the witness stand.27 Nevertheless, she,28 Angelita, and Maribel29 were
awarded attorney's fees on the ground that the action was clearly unfounded.

The fallo of the RTC's Decision reads:

WHEREFORE, in view of the foregoing, the court hereby orders:

1. That the herein-entitled complaint be DISMISSED as it is hereby DISMISSED and

2. That Emmanuel F. Ago and Corazon Casta[ñ]eda-Ago be ordered to pay jointly and
solidarily the following in damages:

A. To Teresita Paloma Apin, the amount of P150,000.00 in attorney's fees;

B. To each of Dr. Angelita F. Ago and Maribel Amaro, the amount of P100,000.00 in
moral damages; and,

C. To both Dr. Angelita F. Ago and Maribel Amaro, the amount of P200,000.00 in
attorney's fees.

SO ORDERED.30 (Emphasis in the original)

The CA's Ruling

On September 26, 2013, the CA rendered the herein assailed Decision affirming the
RTC's ruling anent the plaintiffs' lack of cause of action, but deleting the lower court's
award of moral damages and attorney's fees. The appellate court held that the case
partook of the nature of a derivative suit. As such, Emmanuel, et al. needed the
imprimatur of ARDC's Board of Directors to institute the action.31 While they
were able to present a resolution purportedly authorizing the filing of the case, the CA
refused to give credence thereto on the ground that the same was passed by the
corporation's stockholders, and not its Board of Directors. 32

As for the award of moral damages, the CA held that the case was not totally baseless
considering that Angelita indeed introduced substantial improvements on ARDC's
property. The filing of the case was thus held to be free from malicious
intent.33 Likewise, the award of attorney's fees was erroneous since there was no
factual or legal basis for its grant. 34

The CA, therefore, disposed of the case, viz.:

WHEREFORE, the Decision dated September 20, 2012 of the Regional Trial Court of
Legazpi City, Branch 1, in Civil Case No. 10585 is AFFIRMED WITH MODIFICATION,
in that, the award of moral damages and attorney's fees in favor of the defendants-
appellees is DELETED.

SO ORDERED.35 (Emphasis in the original)

After the CA denied their respective motions for reconsideration through the herein
assailed Resolution, ARDC, Emmanuel, and Corazon, 36 on the one hand, and
Angelita,37 on the other, filed the instant consolidated petitions for review on certiorari,
raising the following issues:

The Issues

In G.R. No. 210906 (filed by ARDC and Emmanuel, et al.):

Whether or not Emmanuel, et al. may sue on behalf of ARDC absent a resolution or any
other grant of authority from its Board of Directors sanctioning the institution of the
case.38

In G.R. No. 211203 (filed by Angelita):

Whether or not the grant of moral damages and attorney's fees in favor of Angelita is
warranted.39

The Court's Ruling

The petitions have no merit. Hence, the CA's decision stands.

The historical development of corporation law in the Philippines

Towards the end of the Spanish occupation, the application of the Spanish Code of
Commerce was extended to the Philippine Islands. 40 This introduced the sociedad
anónima, a juridical entity formed "upon the execution of the public instrument in which
its articles of agreement appear, and the contribution of funds and personal
property."41 Just as today's corporations, sociedades anónimas could own and deal in
property, as well as sue and be sued. 42

With the conclusion of the Treaty of Paris, Spain ceded the Philippines to the United
States.43 The Americans brought with them their notion of the corporation through the
enactment of Act No. 1459, "a sort of codification of American corporate law." 44 Their
attention was caught by the fact that Spanish law did not provide for an entity that was
precisely equivalent to the American or English corporation. 45 To them, the sociedad
anónima was an inadequate business medium.

Appropriately named the Corporation Law, Act No. 1459 took effect on April 1, 1906
and was to serve as the principal corporate regulatory statute for the next 74 years.
The law defined a corporation as "an artificial being created by operation of law, having
the right of succession and the powers, attributes, and properties expressly authorized
by law or incident to its existence,"46 a definition that is still used to this day. It
contained special provisions expressly penalizing the employment of persons in
involuntary servitude47 and the unlicensed transaction of business by a foreign
corporation.48

However, as Act No. 1459 was unable to keep up with modern commerce, it was
replaced by Batas Pambansa Blg. 68, otherwise known as the Corporation Code. The
new law codified various jurisprudential pronouncements made under its predecessor,
clarified the obligations of corporate directors and officers, and defined close
corporations, providing special rules for their formation and the ownership of their
stock. It also dispensed with the old restrictions pertinent to agricultural and mining
corporations, the limitations on corporate ownership of real property, and the penal
clauses integrated into certain provisions of the law. 49

The Corporation Code was the law in effect at the time the factual antecedents of this
case occurred.

The most recent edition of our corporation law came with the passage of Republic Act
No. 11232, or the Revised Corporation Code, which took effect on February 23, 2019.
This new piece of legislation introduced many significant changes to the corporate
regulatory regime in this jurisdiction. Notably, it removed the requirement to
incorporate with at least five incorporators, 50 the minimum capitalization requirement
for stock corporations,51 and the 50-year limit on the duration of the corporate
term.52 Also, in an effort to strengthen corporate governance, the new law requires
corporations imbued with public interest to allocate a certain percentage of their board
seats to independent directors,53 as well as to elect a compliance officer to ensure
adherence to all relevant laws and regulations. 54

Corporate powers are exercised by the board of directors

If there is one constant that has been observed from the introduction of the Spanish
Code of Commerce to the enactment of the Revised Corporation Code, it is that
"[c]orporations are creatures of the law."55 They owe their existence to the sovereign
powers of the State, exercised by the Legislature, which—by general law or, in certain
instances, direct act—prescribes the manner of their formation or
organization.56 Throughout their lifetimes, corporations are subject to a plethora of
regulatory requirements, such as those involving annual reports,57 voting in
stockholders' or directors' meetings,58 and, depending on the industry where the firm
operates, limitations on foreign ownership.59 As so aptly put in Ang Pue & Co., et al. v.
Sec. of Comm. and Industry,60 "[t]o organize a corporation x x x is not a matter of
absolute right but a privilege which may be enjoyed only under such terms as the State
may deem necessary to impose."61

While corporations are subjected to the State's broad regulatory powers, it is their
directors and officers who are tasked with addressing questions of internal policy and
management.62The business of a corporation is conducted by its board of
directors, and so long as the board acts in good faith, the State, through the
courts, may not interfere with its management decisions.63 This finds support in
Section 23 of the Corporation Code, which provides that a corporation exercises its
powers, conducts its business, and controls and holds its property through its board of
directors.64

As creatures of the law, corporations only possess those powers that are granted
through statute, either expressly or by way of implication, or those that are incidental
to their existence.65

One of the powers expressly granted by law to corporations is the power to sue. 66 As
with other corporate powers, the power to sue is lodged in the board of directors,
acting as a collegial body.67 Thus, in the absence of any clear authority from the board,
charter, or by-laws,68 no suit may be maintained on behalf of the corporation. A case
instituted by a corporation without authority from its board of directors is subject to
dismissal on the ground of failure to state a cause of action. 69

In certain instances, however, the stockholders may sue on behalf of the corporation

As an exception70 to the foregoing rule, jurisprudence has recognized certain instances

when minority stockholders may bring suits on behalf of corporations.71 Where
the board of directors itself is a party to the wrong, either because it is the author
thereof or because it refuses to take remedial action, equity permits individual
stockholders to seek redress.72 These actions have come to be known as derivative
suits. In Chua v. Court of Appeals,73 the Court defined a derivative suit as "a suit by a
shareholder to enforce a corporate cause of action."74

In derivative suits, it is the corporation that is the victim of the wrong. As such,
it is the corporation that is properly regarded as the real party in interest, while the
relator-stockholder is merely a nominal party. 75 The corporation must be impleaded so
that the benefits of the suit accrue to it and also because it must be barred from
bringing a subsequent case against the same defendants for the same cause of
action.76 Stated otherwise, the judgment rendered in the suit must constitute res
judicata against the corporation, even though it refuses to sue through its board of
directors.77

That said, not every wrong suffered by a stockholder involving a corporation will vest in
him or her the standing to commence a derivative suit. 78 In Cua, Jr., et al. v. Tan, et
al.,79 the Court explained when such actions lie, viz.:

Suits by stockholders or members of a corporation based on wrongful or fraudulent acts

of directors or other persons may be classified into individual suits, class suits, and
derivative suits. Where a stockholder or member is denied the right of inspection, his
suit would be individual because the wrong is done to him personally and not to the
other stockholders or the corporation. Where the wrong is done to a group of
stockholders, as where preferred stockholders' rights are violated, a class or
representative suit will be proper for the protection of all stockholders belonging to the
same group. But where the acts complained of constitute a wrong to the
corporation itself, the cause of action belongs to the corporation and not to the
individual stockholder or member. Although in most every case of wrong to the
corporation, each stockholder is necessarily affected because the value of his interest
therein would be impaired, this fact of itself is not sufficient to give him an individual
cause of action since the corporation is a person distinct and separate from him, and
can and should itself sue the wrongdoer. Otherwise, not only would the theory of
separate entity be violated, but there would be multiplicity of suits as well as a violation
of the priority rights of creditors. Furthermore, there is the difficulty of determining the
amount of damages that should be paid to each individual stockholder.

However, in cases of mismanagement where the wrongful acts are committed by

the directors or trustees themselves, a stockholder or member may find that
he has no redress because the former are vested by law with the right to
decide whether or not the corporation should sue, and they will never be
willing to sue themselves. The corporation would thus be helpless to seek remedy.
Because of the frequent occurrence of such a situation, the common law gradually
recognized the right of a stockholder to sue on behalf of a corporation in what
eventually became known as a "derivative suit." It has been proven to be an
effective remedy of the minority against the abuses of management. Thus, an
individual stockholder is permitted to institute a derivative suit on behalf of the
corporation wherein he holds stock in order to protect or vindicate corporate rights,
whenever officials of the corporation refuse to sue or are the ones to be sued or hold
the control of the corporation. In such actions, the suing stockholder is regarded as the
nominal party, with the corporation as the party in interest. 80 (Emphasis and
underscoring supplied)
Here, the CA held that since the cause of action belongs to ARDC, the properties in
question being titled in its name, the case instituted by Emmanuel, et al. was derivative
in nature. As such, they should have first secured a board resolution authorizing them
to bring suit.81 Emmanuel, et al. counter, arguing that a derivative suit does not require
the imprimatur of the board of directors.82 Since, in derivative suits, the corporation is
usually under the control of the wrongdoers, it would be absurd to require the
stockholders to obtain board authority prior to the commencement of litigation.

Emmanuel et al. are correct.

A board resolution is not needed for the institution of a derivative suit

The record reveals that the complaint a quo was filed by Emmanuel, et al. While the
caption states that ARDC was also one of the plaintiffs, there is nothing showing that
the corporation's Board of Directors had authorized the filing of the case. Thus, the case
is deemed as instituted by Emmanuel, et al. without ARDC's acquiescence.

As discussed above, the corporate power to sue is exercised by the board of directors.
For this purpose, the board may authorize a representative of the corporation to
perform all necessary physical acts, such as the signing of
documents.83 Such authority may be derived from the by-laws or from a specific
act of the board of directors, i.e., a board resolution.84

In Rep. of the Phils. v. Coalbrine Int'l. Phils., Inc., et al.,85 the Court dismissed a
complaint for damages instituted by a corporation because the managing director who
signed the certification against forum shopping failed to show that the board of
directors authorized her to do so. Ruling that the lack of such certification was
prejudicial to the corporation's cause, the Court held that the managing director should
have first obtained a valid board resolution sanctioning the filing of the case and the
signing of the certification.

However, in derivative suits, the recognized rule is different. Since the board is guilty
of breaching the trust reposed in it by the stockholders, it is but logical to
dispense with the requirement of obtaining from it authority to institute the
case and to sign the certification against forum shopping. It has been held that
when "the corporation x x x is under the complete control of the principal defendants in
the case, x x x it is obvious that a demand upon the [board] to institute an action and
prosecute the same effectively would [be] useless, and the law does not require
litigants to perform useless acts."86Thus, the institution of a derivative suit need
not be preceded by a board resolution.

But, given that authority from the board of directors can be dispensed with in derivative
suits, can the case filed by Emmanuel, et al. even be classified as such in the first
place?

Emmanuel, et al. argue that they have the right to file a derivative suit on behalf of
ARDC.87 Since the corporation was the victim of the wrong committed by Angelita, i.e.,
the introduction of improvements on its property without its consent, a derivative suit
lies as the appropriate remedy.
On this score, they err.

The derivative suit is an equitable remedy and one of last resort

The right of stockholders to bring derivative suits is not based on any provision of the
Corporation Code or the Securities Regulation Code, but is a right that is implied by the
fiduciary duties that directors owe corporations and stockholders. 88Derivative suits
are, therefore, grounded not on law, but on equity.89

In Hi-Yield Realty, Incorporated v. Court of Appeals, et al.,90 a corporation, through its

controlling stockholder and without authority from its board of directors, entered into
loan obligations that later led to the foreclosure of its property. A minority stockholder
then instituted a petition to annul the subject mortgage deeds and the consequent
foreclosure sales. The complaint alleged that the suing minority stockholder had been
excluded from corporate affairs and that attempts between him and the other
stockholders to compromise the case had failed. Since the board of directors did
nothing to rectify the corporation's questionable transactions, the Court allowed the
institution of the complaint as a derivative suit.

In Gochan v. Young,91 minority stockholders instituted a complaint against directors and

officers who appropriated for themselves corporate funds through excessive salaries
and cash advances. It was stated that the capital of the corporation was impaired, as
the firm was prevented from using its own funds in the conduct of its regular business.
The Court held that the suit was correctly classified as derivative in nature since the
relator-stockholders had clearly alleged injury to the corporation. The fact that the
plaintiffs alleged damage to themselves in their personal capacities on top of the
damage done to the corporation merely gave rise to an additional cause of action, but it
did not disqualify them from filing a derivative suit.

In San Miguel Corporation v. Kahn,92 a significant number of shares of San Miguel

Corporation (SMC) were acquired by 14 other companies. SMC tried to repurchase
shares through its wholly-owned foreign subsidiary, Neptunia Corporation Limited
(Neptunia). However, the shares had been sequestered by the Presidential Commission
on Good Government (PCGG) on the ground that they were owned by one of the
cronies of former President Ferdinand E. Marcos. Later, SMC's Board of Directors passed
a resolution assuming Neptunia's liability for the purchase of the subject shares. The
board opined that there was nothing illegal about the assumption of liability since
Neptunia was wholly-owned by SMC. Subsequently, Eduardo de los Angeles (De los
Angeles), director and minority stockholder of SMC, brought a derivative suit
challenging the board resolution as constituting an improper use of corporate funds.
When the case reached the Court, it was held that De los Angeles had properly resorted
to a derivative suit. It was of no moment that he owned only 20 SMC shares or that he
was elected to the board of directors by the PCGG. Since the case concerned the
validity of the assumption by SMC of the indebtedness of Neptunia, a cause of action
that indeed belonged to the former corporation, the Court held that De los Angeles
could maintain the suit on behalf of SMC.
Despite derivative suits being grounded on equity, they cannot prosper in the absence
of any or some of the requisites enumerated in the Interim Rules of Procedure for Intra-
Corporate Controversies,93viz.:

Rule 8
DERIVATIVE SUITS

Section 1. Derivative action. - A stockholder or member may bring an action in the

name of a corporation or association, as the case may be, provided, that:

(1) He was a stockholder or member at the time the acts or transactions subject of the action
occurred and the time the action was filed;

(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint,
to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he desires;

(3) No appraisal rights are available for the acts or acts complained of; and

(4) The suits is not a nuisance or harassment suit.94

The second requisite does not obtain in this case.

Before instituting a derivative suit, the relator-stockholder must exert all

reasonable efforts to exhaust all remedies available under the articles of
incorporation, the by-laws, and the laws or rules governing the corporation or
partnership to obtain the relief he or she desires. Such fact must then be alleged
with particularity in the complaint.95 "The obvious intent behind the rule is to make the
derivative suit the final recourse of the stockholder, after all other remedies to obtain
the relief sought had failed."96

In their petition, Emmanuel, et al. allege that they exerted all reasonable efforts to
exhaust all remedies available to them. They point to the fact that they invited Angelita
to a meeting to amicably settle the dispute. 97 Indeed, the record shows that Emmanuel,
Corazon, and Angelita came together for a special stockholders' meeting on August 11,
2006. However, their attempt to resolve the dispute turned sour when Angelita walked
out before the meeting even started.98

Contrary to the postulation of Emmanuel and Corazon, their attempt to settle the
dispute with Angelita can hardly be considered "all reasonable efforts to exhaust all
remedies available."

In Yu, et al. v. Yukayguan, et al.,99 the Court rejected the argument that attempts
between stockholders to amicably settle a corporate dispute constitute "all reasonable
efforts to exhaust all remedies available." It was held that:
The allegation of respondent Joseph in his Affidavit of his repeated attempts to talk to
petitioner Anthony regarding their dispute hardly constitutes "all reasonable efforts to
exhaust all remedies available." Respondents did not refer to or mention at all any
other remedy under the articles of incorporation or by-laws of Winchester, Inc.,
available for dispute resolution among stockholders, which respondents unsuccessfully
availed themselves of. And the Court is not prepared to conclude that the articles of
incorporation and by-laws of Winchester, Inc. absolutely failed to provide for such
remedies.100

More importantly, an apparent remedy available to Emmanuel, et al. was to

cause ARDC itself, through its Board of Directors, to directly institute the
case. Because of their controlling interest in the corporation, Emmanuel, et al. could
have prevailed upon the board to pass a resolution authorizing any of them to file the
case and sign the certification against forum shopping.

The derivative suit has proven to be an effective tool for the protection of the minority
shareholder's corporate interest. It is essentially an exception to the rule that a wrong
done to a corporation must be vindicated through legal action commenced by the board
of directors.

Through the voting procedure found in the Corporation Code,101 the majority
shareholders exercise control over the board of directors. In Gamboa v. Finance
Secretary Teves, et al.,102 the Court, in no uncertain terms, declared that:
"[i]ndisputably, one of the rights of a stockholder is the right to participate in the
control or management of the corporation. This is exercised through his vote in the
election of directors because it is the board of directors that controls or manages the
corporation."103 Hence, in the normal course of things, when a corporation is
wronged, the board will readily litigate in order to protect the majority's
corporate interests. For the minority, on the other hand, this may not be the case.
There may be situations where a corporation is wronged, but the board of directors
refuses to take remedial action. The board's refusal may be based on valid business
considerations, such as that the costs of litigation exceed the potential judgment award.
But in situations where the board's decision is tantamount to breaching the
trust reposed in it by the minority, equity necessitates that the aggrieved
stockholders be given a remedy. Thus, the minority, in a derivative capacity, may
sue or defend104 on behalf of the corporation.

Due to their control over the board of directors, the majority should not ordinarily be
allowed to resort to derivative suits. Where a corporation under the effective
control of the majority is wronged, board-sanctioned litigation should take
precedence over derivative actions. After all, the law expressly vests the
power to sue in the board of directors,105and a remedy based on equity, such
as the derivative suit, can prevail only in the absence of one provided by
statute.106 In other words, majority stockholders who have undisputed corporate
control cannot resort to derivative suits when there is nothing preventing the
corporation itself from filing the case.

In the complaint they filed before the Legazpi City RTC, Emmanuel, et al. alleged
that, together, they own 70% of ARDC's shares of capital stock. 107 In support of
their allegation, they attached to their complaint the corporation's General Information
Sheet,108 which shows that, out of ARDC's 5,000 shares of stock, 3,500 belong to
Emmanuel, et al. collectively, while only 1,500 belong to Angelita.

Clearly, the case before the RTC was instituted by the stockholders holding the
controlling interest in ARDC. However, the wrong done directly to ARDC was a
wrong done only indirectly to the inchoate corporate interests of
Emmanuel, et al.109 If ARDC truly desired to vindicate its rights, it should have done
so through its Board of Directors. Considering the majority shareholdings of the
plaintiffs a quo, their interests should have been protected by the board
through affirmative action.

However, this could not happen because ARDC did not have a board of
directors. On this point, the record is bereft of any showing that ARDC's stockholders
ever met to elect its governing board. Before the trial court, Emmanuel admitted that
ARDC never held any stockholders' meetings from the time it was incorporated until
2005, viz.:

Q Mr. Ago, you would also agree with me that from 1989 until 2000 you had no meeting of
stockholders in Ago Realty and Development Corporation?
A No.

Q Do you mean to say that you had meeting?

A There were no meetings.

Q Similarly in 2000, 2001, 2003 until 2005[,] there were no meetings of stockholders in Ago
Realty and Development Corporation[?]
A No, there was no meeting.

Q And you would confirm or you would agree with me that there was no election likewise of
Ago Realty and Development Corporation as far as its corporate officers are concerned?
A Yes.

Q And that was from 1989 until 2005?

A Yes.

Q Likewise, during that period from 1989 up to 2005[,] there were no board resolutions
interpreted x x x or issued by Ago Realty and Development Corporation?
A No, there's no need.110 (Citation omitted)
There is likewise no showing that ARDC held an election for its Board of Directors from
2005 until the filing of the complaint before the RTC. While Emmanuel, Corazon, and
Angelita came together for a special stockholders' meeting on August 11, 2006, no
election was held then. As mentioned earlier, Angelita walked out before the meeting
started, and Emmanuel and Corazon were only able to pass a stockholders' resolution
purportedly authorizing the institution of the instant case. 111 However, as amply
discussed above, a corporation's power to sue is lodged in its board of directors. Hence,
the resolution, not emanating from the board, was inefficacious.

The failure of ARDC's majority stockholders to elect a board of directors must be taken
against them. To be sure, there was nothing preventing Emmanuel, et al. from
holding a meeting for the purpose of electing a board, even in Angelita's
absence or over her objection. It is admitted that the plaintiffs a quo hold a majority
of ARDC's capital stock, by virtue of which they could have constituted a board to
exercise the corporation's powers.112 If they had done so, the instant case could have
been instituted by ARDC itself.

The role of the board of directors is impressed with such importance that corporate business
cannot properly be conducted without it

Being necessary to the legitimate operation of business, the board of directors is an

organ that is indispensable to the corporate vehicle. If this case were allowed to
prosper as a derivative suit, the non-election of boards of directors would be
incentivized, and the stability brought by "centralized
management"113 eroded. Majority shareholders cannot be allowed to bypass the
formation of a board and directly conduct corporate business themselves. The
Court cannot stress enough that the law mandates corporations to exercise
their powers through their governing boards. Hence, if a person114 or group of
persons truly desires to conduct business through the corporate medium, then he, she,
or they, as a matter of law, must form a board of directors. To allow Emmanuel, et
al. to forego the election of directors, and directly commence and prosecute this case
would not only downplay the key role of the board in corporate affairs, but also
undermine the theory of separate juridical personality.

It is axiomatic that a corporation is an entity with a legal personality separate and

distinct from the people comprising it.115 Accordingly, a wrong done to a corporation
does not vest in its shareholders a cause of action against the wrongdoer. Since the
corporation is the real party in interest, it must seek redress itself. As stated above, a
case instituted by the stockholders would be subject to dismissal on the ground that the
complaint fails to state a cause of action. 116

Here, because ARDC is the victim of the act complained of, the cause of action does not
lie with Emmanuel, et al. The corporation should have filed the case itself through its
board of directors. However, this could not be done since those responsible for the
institution of this case never bothered to elect a governing body to wield ARDC's powers
and to manage its affairs. Their omission cannot be without consequence. Verily, by
virtue of their admitted controlling interest in ARDC, Emmanuel, et al. could
have come together and formed a board of directors consisting of all five of
the corporation's stockholders. Even without Angelita's participation, such a board
would have been able to validly conduct business 117 and, accordingly, could have
sanctioned the filing of the complaint before the Legazpi City RTC. The aggrieved
stockholders cannot now come before the Court, claiming that their remedy is a
derivative suit. Their failure to elect a board ultimately resulted in their failure
to exhaust all legal remedies to obtain the relief they desired. Since this case
could have been brought by ARDC, through its board, its stockholders cannot maintain
the suit themselves, purporting to sue in a derivative capacity. Emmanuel, et
al. should not be allowed to use a derivative suit to shortcut the law.

Neither can Emmanuel, et al. take refuge in their assertion that ARDC is a close family
corporation. They claim that the stockholders of a close corporation may take part in
the active management of corporate affairs. Hence, they, as ARDC's stockholders, are
legally invested with the power to sue for the corporation.

As correctly claimed, under Section 97 of the Corporation Code, 118 a close corporation
may task its stockholders with the management of business, essentially designating
them as directors. However, the law is clear that a close corporation must do so
through a provision to that effect contained in its articles of incorporation. Nowhere in
ARDC's Articles of incorporation119 can such a provision be found. There is nothing
that expressly or impliedly allows Emmanuel, et al. and Angelita, or any of
them, to manage the corporation. Hence, the merger of stock ownership and active
management that Emmanuel, et al. rely on cannot be applied to ARDC.

Further, assuming arguendo that ARDC is a close family corporation, the same cannot
be considered a justification for noncompliance with the requirements for the filing of a
derivative suit. In Ang v. Sps. Ang,120 the Court declared:

The fact that [SMBI] is a family corporation does not exempt private respondent Juanito
Ang from complying with the Interim Rules. In the x x x Yu case, the Supreme Court
held that a family corporation is not exempt from complying with the clear
requirements and formalities of the rules for filing a derivative suit. There is nothing in
the pertinent laws or rules which state that there is a distinction between x x x family
corporations x x x and other types of corporations in the institution by a stockholder of
a derivative suit.121 (Citation omitted)

The next contention of Emmanuel, et al. is that Emmanuel, as President of ARDC, had
the authority to institute the case and sign the certification against forum shopping. In
support of their argument, they point to the By-laws of ARDC, which provide that the
President is authorized "[t]o represent the corporation at all functions and proceedings"
and "[t]o perform such other duties as are incident in his office or are entrusted by the
Board of Directors."122 They assert that jurisprudence has consistently recognized the
legal standing of the president to bring corporate litigation. 123

The argument deserves scant consideration.

Emmanuel's designation as President was ineffectual because ARDC did not have a
board of directors. Section 25 of the Corporation Code explicitly requires the president
of a corporation to concurrently hold office as a director. 124 This only serves to further
highlight the key role of the board as a corporate manager. By designating a director as
president of the corporation, the law intended to create a close-knit relationship
between the top corporate officer and the collegial body that ultimately wields the
corporation's powers.

The lower courts correctly refused to award damages

Turning now to Angelita's petition, she argues that the CA erred in deleting the award
of moral damages and attorney's fees. According to her, the case filed before the
Legazpi City RTC was totally baseless and unfounded. 125 To support her assertion, she
points to the fact that Emmanuel and Corazon sued without the authority of ARDC's
Board of Directors.126 Essentially, Angelita claims that the filing of the case a
quo amounted to malicious prosecution.

The argument fails to persuade.

Jurisprudence has defined malicious prosecution as "an action for damages brought by
one against whom a criminal prosecution, civil suit, or other legal proceeding has been
instituted maliciously and without probable cause, after the termination of such
prosecution, suit, or other proceeding in favor of the defendant therein." 127 While
generally associated with criminal actions, "the term has been expanded to include
unfounded civil suits instituted just to vex and humiliate the defendant despite the
absence of a cause of action or probable cause." 128 For an action based on malicious
prosecution to prosper, it is indispensable that the institution of the prior legal
proceeding be impelled or actuated by legal malice. 129

Here, it was never shown that the institution of the case against Angelita was tainted
with bad faith or malice. Since it is settled that she introduced improvements on ARDC's
property without its consent, it follows that the complaint was not baseless at all.
However, because the case was not brought by the corporation, but by its stockholders,
its dismissal was properly decreed by the trial court.

The fact that Emmanuel, et al. brought the case without the consent of the corporation
cannot be equivalent to malice. Surely, they could have elected a board of directors to
run ARDC's affairs, but their failure to do so, coupled with the filing of the complaint
before the RTC, should not make them liable for moral damages. After all, the fact that
a case is dismissed does not per se make that case one of malicious prosecution and
subject the plaintiff to the payment of moral damages.130 Since it is not a sound public
policy to place a premium on the right to litigate, no damages can be charged on those
who exercise such precious right in good faith, even if done erroneously. 131

Neither does the Court see any cogent reason to award attorney's fees in favor of
Angelita. Certainly, she only has herself to blame for the filing of the case before the
RTC. If she did not introduce improvements on ARDC's property, Emmanuel et al. would
have no reason to institute an action against her. Since she treated corporate property
as if it was her own, she should have reasonably expected retaliatory action from the
other shareholders. Hence, the CA was correct to delete the award of attorney's fees.

WHEREFORE, the September 26, 2013 Decision and January 10, 2014 Resolution
rendered by the Court of Appeals in CA-G.R. CV No. 99771 are AFFIRMED.
SO ORDERED.

Peralta (Chairperson), Hernando, and Inting, JJ., concur.

G.R. No. 218738. March 09, 2022 ]

METROPOLITAN BANK & TRUST COMPANY (METROBANK), PETITIONER, VS. SALAZAR

REALTY CORPORATION* REPRESENTED BY INCORPORATORS/ STOCKHOLDERS RAMON
ANG SALAZAR, JR., ROBERT ANG SALAZAR, ROGER ANG SALAZAR, AND ROSEMARIE
SALAZAR FERNANDEZ,** RESPONDENTS.

DECISION

GAERLAN, J.:

The present petition for review on certiorari1 assails the Decision2 and the Resolution3 of the
Court of Appeals (CA) in CA-G.R. SP No. 05050, which dismissed Metropolitan Bank & Trust
Company's (Metrobank) petition for certiorari against the June 16, 20094 and February 23,
20105 Orders issued by Branch 9 of the Regional Trial Court (RTC) of Tacloban City, in Civil Case
No. 2001-11-164.

Antecedents

Petitioner Metrobank and respondent Salazar Realty Corporation (SARC) are both Philippine
corporations. Metrobank is engaged in the banking business,6 while SARC is engaged in the real
estate business.7 Also involved in the events preceding the present litigation is another Philippine
corporation, Tacloban RAS Construction Corporation (Tacloban RAS).

On November 5, 2001, SARC filed an action for quieting of title and nullification of contracts
against Metrobank before the RTC of Tacloban City.8 The petition was docketed as Civil Case No.
2001-11-164.9 SARC alleged that:

1) Based on its latest filings at the time of the filing of the petition, SARC had the following
officers, who also composed its board of directors:10 Raymund A. Salazar, President; Ramon Ve.
Salazar, Vice President; Ralph A. Salazar,11 Secretary; Rosemarie A. Salazar, Treasurer; Consuelo
A. Salazar,12 Member, Board of Directors.

2) On October 6, 1992, Tacloban RAS obtained a loan from Metrobank in the amount of ten
million pesos (P10,000,000.00).13 On January 9, 1996, the loan amount was increased to twelve
million pesos (P12,000,000.00); and on October 6, 1999 it was further increased to eighteen million
five hundred thousand pesos (P18,500,000.00).14 This final amount was reflected in a promissory
note executed on October 6, 1999 between Tacloban RAS and Metrobank, which was signed by
Consuelo and Ralph as president and corporate secretary, respectively, of Tacloban RAS.15 To
secure the loan, Metrobank and SARC entered into a mortgage contract on January 9, 1996, with
Consuelo and Ralph still signing, this time on behalf of SARC.16 The mortgage covered five parcels
of land located in Tacloban City, which were all registered in the name of SARC.17 The mortgage
was likewise amended to cover the final amount of the loan.18

3) Meanwhile, on March 30, 1995, Ramon Ve. Salazar, SARC's Vice President and director,
passed away. Consuelo likewise passed away on October 21, 2001. The vacancies left by their
passing were left unfilled.19
 4) The remaining directors of SARC, including Ralph, issued a board resolution approving the
mortgage of the five SARC-owned lots to secure the loan obligation of Tacloban RAS.20

5) Tacloban RAS defaulted on the loan, prompting Metrobank to initiate extrajudicial foreclosure
proceedings before the RTC of Tacloban City.21 Metrobank emerged as the winning bidder in the
auction sale.22 Upon issuance of the certificate of sale23 and filing of the affidavit of consolidation of
ownership,24 SARC's certificates of title were cancelled and new ones were issued in Metrobank's
favor.25

6) Upon hearing about the auction sale, Ramon Ang Salazar, Jr., Robert Ang Salazar, Roger
Ang Salazar and Rosemarie Salazar Fernandez (hereinafter referred to as Ramon et al.) as
incorporators and stockholders acting in behalf of SARC, immediately checked the status of the
disputed lands with the Register of Deeds. They discovered that SARC's certificates of title had been
cancelled.26 In response, Ramon et al. registered an adverse claim on the new certificates of title
that were issued to Metrobank.27

7) In view of the SARC board's inaction and tacit approval of the unauthorized encumbrance and
subsequent loss of the corporation's real properties, Ramon et al. filed the present suit on SARC's
behalf.

8) The loan agreement is void because Consuelo is not a stockholder or officer of Tacloban
RAS, based on its incorporation papers filed with the SEC.28

9) The mortgage agreement and the foreclosure proceedings are void because Tacloban RAS
has no authority to use SARC's properties as collateral. Rather, the authorization for such purpose
was issued by the SARC board to a single proprietorship named RAS Construction, which is an
entity distinct and separate from Tacloban RAS.29

10) SARC exceeded its corporate powers when it entered into a mortgage contract to secure the
obligation of a separate, distinct, and unrelated corporation. Tacloban RAS is not a subsidiary of
SARC. It likewise holds no shares or any other form of investment in the latter corporation. Thus, the
mortgage contract is void for being ultra vires insofar as SARC is concerned.30

11) SARC's principal corporate assets are limited to six (6) parcels of land. Consequently, the
mortgage of the five parcels in dispute, including the lot on which SARC's principal office is located,
constitutes an encumbrance of substantially all the assets of the corporation which must be
authorized by SARC's stockholders in a meeting for that purpose, pursuant to Section 40 of the
Corporation Code. Absent such authorization, the mortgage contract is null and void.31

12) SARC board and stockholder approvals for the mortgage contract and the amendments
thereto were not annotated on SARC's certificates of title, giving rise to the presumption that neither
the SARC board nor its stockholders approved said contract and the amendments thereto.32

13) Metrobank failed to exercise due diligence when it extended an eighteen-million-peso loan to
Tacloban RAS, whose authorized capital stock was only three million pesos. Furthermore, the loan
was secured by properties owned by SARC, whose authorized capital stock was only five million
pesos. More importantly, Metrobank was guilty of negligence when it failed to thoroughly investigate
Consuelo and Ralph's authority to enter contracts and encumber properties on behalf of Tacloban
RAS and SARC.33
 14) Assuming that the loan and mortgage contracts are valid and binding, the foreclosure
proceedings are nevertheless null and void, for the following reasons: a) Metrobank's petition for
foreclosure lacks several material details which render it fatally defective under A.M. No. 99-10-05-
0;34 b) SARC was not given personal notice of the foreclosure sale; c) the publication of the notice
of sale was defective because copies thereof were attached to the record only after the auction sale
had taken place, and notices of publication were not furnished for all instances of publication, in
violation of A.M. No. 99-10-05-0; d) there was only one bidder in the auction sale, in violation of item
5 of A.M. No. 99-10-05-0; and e) Section 47 of Republic Act No. 8791 which sets different
redemption periods for natural and juridical persons is unconstitutional.35

Accordingly, SARC prayed that the cloud on its title be removed by: 1) nullifying the loan and
mortgage agreements between Metrobank and Tacloban RAS/SARC; 2) nullifying the foreclosure
proceedings initiated by Metrobank; and 3) cancelling the certificates of title issued to Metrobank.36

SARC's petition was raffled to Branch 9 of the Tacloban City RTC, which assumed jurisdiction
over the case.

On February 13, 2002, Metrobank filed a Comment with Motion to Dismiss. It argued that Ralph
had authority to enter into the loan and mortgage agreements, and that the mortgaged properties
were personally owned by Ralph and Consuelo.37 Metrobank further alleged that Consuelo
personally bound herself as surety;38 and that the final amount of the loan was agreed upon
pursuant to a restructuring upon Ralph's request, with the approval of the boards of directors of both
Tacloban RAS and SARC.39

Metrobank also argued that SARC and its stockholders have no standing to seek the
cancellation of the loan and mortgage agreements since SARC is not a party thereto.40 It also
argued that the petition filed by SARC through Ramon et al. is in the nature of a derivative suit which
must be directed against SARC's officers, directors, or stockholders. Likewise, since the petition is in
the nature of a derivative suit, it is an intra-corporate controversy over which regular courts like
Branch 9 of the Tacloban City RTC have no jurisdiction.41 Metrobank thus prayed that the petition
be dismissed for lack of standing on the part of both Ramon et al. and SARC, and for lack of
jurisdiction.

In its Reply, SARC reiterated Ralph's lack of authority to bind Tacloban RAS and SARC. It also
disputed Metrobank's argument on standing, maintaining that the case was properly filed against
Metrobank, who was responsible for clouding its titles by initiating the foreclosure proceedings.42 In
the same vein, SARC also rejected Metrobank's characterization of the petition as an intra-corporate
controversy, arguing that the loan and mortgage contracts, as well as the foreclosure proceedings,
are clouds on SARC's title which may only be removed by the RTC, thus:43

12.3 x x x [W]hat [SARC] is claiming is that [Metrobank] violated the right of ownership of the [SARC]
over the lands which are the subject matter of this suit by having the same sold at foreclosure
proceedings and having the titles of [SARC] corporation cancelled and transferred in [Metrobank]'s
name when it did not have the right to do the same because [SARC] did not consent to the Mortgage
Contract under which [Metrobank] is claiming rights and such Mortgage is not supported by a valid
principal obligation as the loan was not consented to by [Tacloban RAS] based on the petition filed
by [Metrobank] for the extrajudicial foreclosure of the Mortgage allegedly executed by Petitioner
Salazar Ang Realty Corporation.

12.4 The relief sought which is the declaration of nullity of the mortgage contract and foreclosure
proceedings is demandable only from the [Metrobank] as the holder of rights under the contract as
Mortgagee and the public officials responsible for performing duties under Act 3135 and not from
Ralph Salazar who is not a party to the contract in question - the parties involved being Salazar Ang
Realty Corporation as the alleged Mortgagor and [Metrobank] as the Mortgagee.44

On April 25, 2002, the trial court denied Metrobank's motion to dismiss, and ordered SARC to file
an answer or other responsive pleading.45 Thereafter, the parties filed their respective pre-trial
briefs. On March 11, 2003, Metrobank filed a motion for inhibition,46 which was denied.47 On
November 6, 2005, the trial court granted SARC's request for preliminary injunction to prevent
Metrobank from further enforcing its claim to the properties.48 On February 1, 2005, Metrobank filed
a Motion for Leave to File an Amended Answer with Motion to Dismiss, which was denied in an
Order dated December 6, 2005.49

On February 2, 2009, Metrobank filed yet another motion to dismiss,50 reiterating its argument
that SARC's petition is a derivative suit and therefore an intra-corporate controversy. Under A.M. No.
00-11-03-SC, a special commercial court was created in the Tacloban City RTC; however, Branch 9,
which is a regular trial court, continued to exercise jurisdiction over the present case even if it has no
jurisdiction thereover other than to dismiss it.51 SARC filed an opposition to Metrobank' s motion to
dismiss,52 reiterating its stance that the case falls within the jurisdiction of the regular courts
regardless of its nature as a derivative suit because the reliefs sought are within the jurisdiction of
the regular courts.53

On June 16, 2009, the trial court issued the first assailed order denying Metrobank's latest
motion to dismiss. The trial court ruled that the requirement that cases formerly cognizable by the
SEC be filed with a special commercial court does not apply to the present case, which was filed
before A.M. No. 03-03-03-SC took effect on July 1, 2003. Assuming that the requirement is
applicable, the trial court ruled that it retains the jurisdiction to transfer the case to the special
commercial court in the Tacloban City RTC, on the ground that jurisdiction, once acquired, continues
until final resolution of the case.54 The trial court further ruled that the present case does not involve
an intra-corporate controversy, because it does not involve a dispute between a corporation and its
stockholders; rather, it involves a suit by a corporation through its shareholders against another
corporation and certain public officers. Furthermore, as SARC correctly points out, its causes of
action are within the jurisdiction of the regular courts.55

On February 23, 2010, the trial court rendered the second assailed order56 denying Metrobank's
motion for reconsideration.57

Still adamant that the case involves an intra-corporate controversy, Metrobank elevated the
matter to the CA, arguing that the trial court committed grave abuse of discretion in narrowly defining
intra-corporate controversies as limited to suits involving disputes between a corporation and its
stockholders.58

In dismissing Metrobank's petition, the CA ruled that under Rule 1 of A.M. No. 01-2-04-SC, or
the Interim Rules of Procedure Governing Intra-Corporate Controversies (2001 IRPIC), derivative
suits are also intra-corporate controversies. Therefore, to determine if SARC's petition must be tried
under the 2001 IRPIC by a special commercial court, it must pass the two-tier intra-corporate
controversy test. The appellate court found that SARC's petition does not pass the two-tier test. It
satisfies neither the relationship test, since it does not involve any of the intra-corporate relationships
enumerated in Section 5(b) of Presidential Decree No. 902-A;59 nor the controversy test, since it
does not involve a dispute which is intrinsically connected with the regulation of SARC or a dispute
which arises out of intra-corporate relations within SARC.60 Rather, the case involves the removal of
the cloud on SARC's titles, which was created by the contracts executed by Ralph and Consuelo
allegedly on behalf of Tacloban RAS and SARC.61 Furthermore, Ramon et al. are not stockholders
of the corporation they are suing; rather, they are suing on behalf of the corporation in which they
hold shares.62 Citing jurisprudence, the CA held that "Where the complaint is for annulment of
mortgage with the mortgagee bank as one of the defendants, the jurisdiction over said
complaint is lodged with the regular courts because the mortgagee bank has no intra-
corporate relationship with the stockholders;"63 and that "the question as to who is the true
owner of the disputed property is civil in nature and should be threshed out by a regular court," not
by a special commercial court.64

The CA denied Metrobank's motion for consideration65 through the assailed resolution; hence,
this petition, which raises the following errors:

1). THE COURT OF APPEALS SERIOUSLY ERRED IN USING THE TWO TIER TEST AS A
GAUGE IN DETERMINING WHETHER OR NOT A SUIT IS A DERIVATIVE SUIT. ITS
CONSEQUENT EMPLOYMENT OF SUCH TEST IS WITHOUT BASIS AND VIOLATES SETTLED
JURISPRUDENCE, SUCH AS, THE CASE OF FILIPINAS PORT SERVICES INC V. GO AND HI-
YIELD REALTY V. COURT OF APPEALS AND THE INTERIM RULES OF PROCEDURE
GOVERNING INTRACO[R]PORATE CASES.

2). THE REGIONAL TRIAL COURT, BRANCH 9 TACLOBAN CITY, WHICH IS AN ORDINARY
COURT AND NOT A COMMERCIAL COURT, DOES NOT HAVE JURISDICTION OVER A
DERIVATIVE SUIT.

3). THE FINDING OF THE COURT OF APPEALS THAT THE CASE A QUO IS NOT A DERIVATIVE
SUIT BECAUSE THE STOCKHOLDERS WHO BROUGHT THE SUIT FOR OR ON BEHALF OF
RESPONDENT CORPORATION ARE NOT STOCKHOLDERS OF PETITIONER, ASSUMING EX
ARGUMENTI, IS CORRECT WILL CAUSE THE DISMISSAL OF THE CASE A QUO ON THE
GROUND OF LACK OF CAUSE OF ACTION OR PERSONALITY TO SUE.66

The essential issue raised by the petition is whether Branch 9 of the Tacloban City RTC, not
being a special commercial court, has jurisdiction over a derivative suit to annul a mortgage
allegedly entered into by corporate officers without proper authorization and where the defendants
are third parties with no relation to the suing corporation.

The Court's Ruling

I.

Metrobank argues that jurisdiction over derivative suits is vested in the special commercial
courts. It asserts that the CA erred in applying the two-tier test to determine whether the case should
be tried by a special commercial court. The two-tier test applies only to the determination of the
existence of an intra-corporate controversy, and not to the determination of whether an action is a
derivative suit, which is determined using a different three-part test.

The special commercial courts were organized pursuant to the provisions of the Securities
Regulation Code (SRC).67 Sections 4.1 and 5.2 thereof provide:

Section 4. Administrative Agency. - 4.1. This Code shall be administered by the Securities and
Exchange Commission (hereinafter referred to as the "Commission") as a Collegial body, composed
of a chairperson and (4) Commissioners, appointed by the President for a term of (7) seven years
each and who shall serve as such until their successor shall have been appointed and qualified. A
Commissioner appointed to fill a vacancy occurring prior to the expiration of the term for which
his/her predecessor was appointed, shall serve only for the unexpired portion of their terms under
Presidential Decree No. 902-A. Unless the context indicates otherwise, the term "Commissioner"
includes the Chairperson.

5.2. The Commission's jurisdiction over all cases enumerated under section 5 of
Presidential Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or
the appropriate Regional Trial Court: Provided, That the Supreme Court in the exercise of its
authority may designate the Regional Trial Court branches that shall exercise jurisdiction
over the cases. The Commission shall retain jurisdiction over pending cases involving intra-
corporate disputes submitted for final resolution which should be resolved within one (1) year from
the enactment of this Code. The Commission shall retain jurisdiction over pending suspension of
payment/rehabilitation cases filed as of 30 June 2000 until finally disposed. (Underscoring and
emphasis supplied)

In turn, Section 5 of Presidential Decree No. 902-A, or the SEC Reorganization Decree, defines
certain classes of disputes and the tribunal with jurisdiction over them. Over time, these classes of
disputes have become known as intra-corporate disputes or intra-corporate controversies.68

Pursuant to the transfer of jurisdiction effected therein, Section 5.2 of the SRC also authorized
the Supreme Court to designate certain RTCs to try intra-corporate disputes. Thus, the Supreme
Court designated certain RTCs as special commercial courts69 and enacted the 2001 IRPIC to
provide for the procedure to be observed in trying the above-enumerated cases.70 Interestingly,
Rule 1, Section 1(a) of the 2001 IRPIC also enumerates the cases to which it shall be applicable. At
this point, we compare this provision with Section 5 of the SEC Reorganization Decree, which
remains the source provision for the subject matter jurisdiction of the special commercial courts:

Section 5, SEC Reorganization Decree Rule 1, Section 1(a), 2001 IRPIC

SECTION 5. In addition to the regulatory
and adjudicative functions of the Securities
and Exchange Commission over
corporations, partnerships and other forms
of associations registered with it as
expressly granted under existing laws and
decrees, it shall have original and
exclusive jurisdiction to hear and decide
cases involving:
a) Devices or schemes employed by or any
acts, of the board of directors, business
associates, its officers or partners,
amounting to fraud and misrepresentation
which may be detrimental to the interest of
the public and/or of the stockholder,
partners, members of associations or
organizations registered with the
Commission;
b) Controversies arising out of intra-
corporate or partnership relations, between
and among stockholders, members, or
associates; between any or all of them and
the corporation, partnership or association
of which they are stockholders, members or
SECTION 1. (a) Cases Covered — These
Rules shall govern the procedure to be
observed in civil cases involving the
following:
(1) Devices or schemes employed by, or
any act of, the board of directors, business
associates, officers or partners, amounting
to fraud or misrepresentation which may be
detrimental to the interest of the public
and/or of the stockholders, partners, or
members of any corporation, partnership, or
association;
(2) Controversies arising out of intra-
corporate, partnership, or association
relations, between and among
stockholders, members, or associates; and
between, any or all of them and the
corporation, partnership, or association of
 associates, respectively; and between such which they are stockholders, members, or
corporation, partnership or association and associates, respectively;
the state insofar as it concerns their
individual franchise or right to exist as such
entity;
c) Controversies in the election or (3) Controversies in the election or
appointments of directors, trustees, officers appointment of directors, trustees, officers,
or managers of such corporations, or managers of corporations, partnerships,
partnerships or associations. or associations;
(4) Derivative suits; and
(5) Inspection of corporate books.

Conspicuous here is the fact that the first three items of both enumerations are essentially the
same, for the obvious reason that the 2001 IRPIC was intended to serve as the procedural regime
for the cases defined in Section 5 of the SEC Reorganization Decree, jurisdiction over which has
been transferred to the RTCs. The confusion which arose in the present case is engendered partly
by the addition of derivative suits as a separate item in the 2001 IRPIC.

II.

A derivative suit is one of three kinds of suits that may be filed by a stockholder or member of a
corporation or association, viz.:

Suits by stockholders or members of a corporation based on wrongful or fraudulent acts of directors

or other persons may be classified into individual suits, class suits, and derivative suits. Where a
stockholder or member is denied the right of inspection, his suit would be individual because the
wrong is done to him personally and not to the other stockholders or the corporation. Where the
wrong is done to a group of stockholders, as where preferred stockholders' rights are violated, a
class or representative suit will be proper for the protection of all stockholders belonging to the same
group. But where the acts complained of constitute a wrong to the corporation itself, then the cause
of action belongs to the corporation and not to the individual stockholder or member. Although in
most every case of wrong to the corporation, each stockholder is necessarily affected because the
value of his interest therein would he impaired, this fact of itself is not sufficient to give him an
individual cause of action since the corporation is a person distinct and separate from him, and can
and should itself sue the wrongdoers. Otherwise, not only would the theory of separate entity be
violated, but there would be multiplicity of suits as well as a violation of the priority rights of creditors.
Furthermore, there is the difficulty of determining the amount of damages that should be paid to
each individual stockholder.

However, in cases of mismanagement where the wrongful acts committed by the directors or
trustees themselves, a stockholder or member may find that he has no redress because the
former are vested by law with the right to decide whether or not the corporation should sue,
and they will never be willing to sue themselves. The corporation would thus be helpless to
seek remedy. Because of the frequent occurrence of such a situation, the common law
gradually recognized the right of a stockholder to sue on behalf of the corporation in what
eventually became known as a "derivative suit." It has been proven to be an effective remedy
of the minority against abuses of management. Thus, an individual stockholder is permitted
to institute a derivative suit on behalf of the corporation wherein he holds stock in order to
protect or vindicate corporate rights, whenever officials of the corporation refuse to sue or
are the ones to be sued or hold the control of the corporation. In such actions, the suing
stockholder is regarded as the nominal party, with the corporation as the party in interest.71

In Ago Realty & Development Corp. v. Ago,72 we further elaborated on this basic principle that
derivative suits are equitable exception to the rule that a corporation's power to bring suits may only
be exercised through its board of directors:

While corporations are subjected to the State's broad regulatory powers, it is their directors and
officers who are tasked with addressing questions of internal policy and management. The business
of a corporation is conducted by its board of directors, and so long as the board acts in good faith,
the State, through the courts, may not interfere with its management decisions. This finds support in
Section 23 of the Corporation Code, which provides that a corporation exercises its powers,
conducts its business, and controls and holds its property through its board of directors.

As creatures of the law, corporations only possess those powers that are granted through statute,
either expressly or by way of implication, or those that are incidental to their existence.

One of the powers expressly granted by law to corporations is the power to sue. As with other
corporate powers, the power to sue is lodged in the board of directors, acting as a collegial body.
Thus, in the absence of any clear authority from the board, charter, or by-laws, no suit may be
maintained on behalf of the corporation. A case instituted by a corporation without authority from its
board of directors is subject to dismissal on the ground of failure to state a cause of action.

In certain instances, however,

the stockholders may sue on
behalf of the corporation

As an exception to the foregoing rule, jurisprudence has recognized certain instances when
minority stockholders may bring suits on behalf of corporations. Where the board of directors itself is
a party to the wrong, either because it is the author thereof or because it refuses to take remedial
action, equity permits individual stockholders to seek redress. These actions have come to be known
as derivative suits. In Chua v. Court of Appeals, the Court defined a derivative suit as "a suit by a
shareholder to enforce a corporate cause of action."

In derivative suits, it is the corporation that is the victim of the wrong. As such, it is the
corporation that is properly regarded as the real party in interest, while the relator-stockholder is
merely a nominal party. The corporation must be impleaded so that the benefits of the suit accrue to
it and also because it must be barred from bringing a subsequent case against the same defendants
for the same cause of action. Stated otherwise, the judgment rendered in the suit must constitute res
judicata against the corporation, even though it refuses to sue through its board of directors.

xxxx

The right of stockholders to bring derivative suits is not based on any provision of the Corporation
Code or the Securities Regulation Code, but is a right that is implied by the fiduciary duties that
directors owe corporations and stockholders. Derivative suits are, therefore, grounded not on law,
but on equity.73

Jurisprudence has developed three requisites for a derivative suit, which are first enumerated
together in the 1989 case of San Miguel Corporation v. Kahn:74
The requisites for a derivative suit are as follows:

a) the party bringing suit should be a shareholder as of the time of the act or transaction complained
of, the number of his shares not being material;

b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of
directors for the appropriate relief but the latter has failed or refused to heed his plea;

c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or
being caused to the corporation and not to the particular stockholder bringing the suit.75

This is the three-part test insisted upon by Metrobank; however, this test has been superseded
by Rule 8, Section 1 of the 2001 IRPIC, which obliquely defines a derivative suit, or a derivative
action, as an action brought by a stockholder or member in the name of a corporation or
association.76 That same provision states that such actions may be brought, provided that the
following requisites, which must be specifically alleged in the complaint,77 are met:

(1) The party suing on the corporation or association's behalf was a stockholder or member at the
time the acts or transactions subject of the action occurred and at the time the action was filed;

(2) Such party exerted all reasonable efforts, and alleges the same with particularity in the complaint,
to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing
the corporation or partnership to obtain the relief he desires;

(3) No appraisal rights are available for the act or acts complained of; and

(4) The suit is not a nuisance or harassment suit.

(5) The suit must be brought in the name of the corporation.78

III.

Prior to the enactment of the SEC Reorganization Decree in 1976, jurisdiction over derivative
suits was lodged with the courts of general jurisdiction.79

With the advent of the SEC Reorganization Decree, jurisprudence has resorted to Section 5
thereof to allocate jurisdiction between the SEC and the regular courts. The application of Section 5
was eventually standardized into a two-tier test which has been applied to all kinds of stockholder
suits, whether individual, class, or derivative.80 The two "tiers" are actually two separate tests: the
first test assesses the relationship of the parties of the case to one another,81 and the second test
assesses nature of the controversy among the parties:82

To determine whether a case involves an intra-corporate controversy, x x x two elements must

concur: (a) the status or relationship of the parties; and (2) the nature of the question that is the
subject of their controversy.

The first element requires that the controversy must arise out of intra-corporate or partnership
relations between any or all of the parties and the corporation, partnership or association of which
they are stockholders, members or associates; between any or all of them and the corporation,
partnership or association of which they are stockholders, members or associates, respectively; and
between such corporation, partnership or association and the State insofar as it concerns their
individual franchises. The second element requires that the dispute among the parties be intrinsically
connected with the regulation of the corporation. If the nature of the controversy involves matters
that are purely civil in character, necessarily, the case does not involve an intra-corporate
controversy.83

The two-tier test ensures that cases involving corporations but do not involve actual intra-
corporate disputes are filtered out:

[I]n the 1984 case of DMRC Enterprises v. Este del Sol Mountain Reserve, Inc., the Court introduced
the nature of the controversy test. We declared in this case that it is not the mere existence of an
intra-corporate relationship that gives rise to an intra-corporate controversy; to rely on the
relationship test alone will divest the regular courts of their jurisdiction for the sole reason that the
dispute involves a corporation, its directors, officers, or stockholders. We saw that there is no legal
sense in disregarding or minimizing the value of the nature of the transactions which gives rise to the
dispute.

Under the nature of the controversy test, the incidents of that relationship must also be considered
for the purpose of ascertaining whether the controversy itself is intra-corporate. The controversy
must not only be rooted in the existence of an intra-corporate relationship, but must as well pertain to
the enforcement of the parties' correlative rights and obligations under the Corporation Code and the
internal and intra-corporate regulatory rules of the corporation. If the relationship and its incidents
are merely incidental to the controversy or if there will still be conflict even if the relationship does not
exist, then no intra-corporate controversy exists.84

Subsequent decisions further hold that the following relationships are considered intra-corporate:
(1) those between the corporation, partnership or association and the public; (2) those between the
corporation, partnership or association and the State insofar as its franchise, permit or license to
operate is concerned; (3) those between the corporation, partnership or association and its
stockholders, partners, members or officers; and (4) those among the stockholders, partners or
associates themselves.85 Likewise, a controversy is intra-corporate in nature if it involves the
enforcement of the parties' correlative rights and obligations under the Corporation Code and the
internal and intra-corporate regulatory rules of the corporation.86

Thus, under the regime of the SEC Reorganization Decree, it appears that derivative suits which
satisfy the two-tier test must be tried by the SEC, while those that do not must be tried by the regular
courts.87 This view is manifested in the 2012 case of Lisam Enterprises v. Banco de Oro
Unibank (Lisam),88 which, like the present case, also involved a derivative suit for annulment of
mortgage filed by a shareholder against the president and the treasurer of the corporation, as well as
the mortgagee bank. The bank filed a motion to dismiss, claiming the stockholder's lack of legal
capacity to sue, failure to state a cause of action, and litis pendentia. The trial court granted the
motion to dismiss and denied the stockholder's motion to amend the complaint to include an
allegation that she tried to exhaust intra-corporate remedies. We allowed the stockholder to resort
directly to the Supreme Court to resolve pure questions of law, and reversed the trial court, viz.:

With the amendment stating "that plaintiff Lolita A. Soriano likewise made demands upon the Board
of Directors of Lisam Enterprises, Inc., to make legal steps to protect the interest of the corporation
from said fraudulent transaction, but unfortunately, until now, no such legal step was ever taken by
the Board, hence, this action for the benefit and in behalf of the corporation," does the amended
complaint now sufficiently state a cause of action? In Hi-Yield Realty, Incorporated v. Court of
Appeals, the Court enumerated the requisites for filing a derivative suit, as follows:
a) the party bringing the suit should be a shareholder as of the time of the act or transaction
complained of, the number of his shares not being material;

b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of
directors for the appropriate relief but the latter has failed or refused to heed his plea; and

c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or
being caused to the corporation and not to the particular stockholder bringing the suit.

A reading of the amended complaint will reveal that all the foregoing requisites had been alleged
therein. Hence, the amended complaint remedied the defect in the original complaint and now
sufficiently states a cause of action.

Respondent PCIB should not complain that admitting the amended complaint after they pointed out
a defect in the original complaint would be unfair to them. They should have been well aware that
due to the changes made by the 1997 Rules of Civil Procedure, amendments may now substantially
alter the cause of action or defense. It should not have been a surprise to them that petitioners
would redress the defect in the original complaint by substantially amending the same, which course
of action is now allowed under the new rules.

The next question then is, upon admission of the amended complaint, would it still be proper for the
trial court to dismiss the complaint? The Court answers in the negative.

Saura v. Saura, Jr. is closely analogous to the present case. In Saura, the petitioners therein,
stockholders of a corporation, sold a disputed real property owned by the corporation, despite the
existence of a case in the Securities and Exchange Commission (SEC) between stockholders for
annulment of subscription, recovery of corporate assets and funds, etc. The sale was done without
the knowledge of the other stockholders, thus, said stockholders filed a separate case for annulment
of sale, declaration of nullity of deed of exchange, recovery of possession, etc., against the
stockholders who took part in the sale, and the buyer of the property, filing said case with the regular
court (RTC). Petitioners therein also filed a motion to dismiss the complaint for annulment of sale
filed with the RTC, on the ground of forum shopping, lack of jurisdiction, lack of cause of action,
and litis pendentia among others. The Court held that the complaint for annulment of sale was
properly filed with the regular court, because the buyer of the property had no intra-corporate
relationship with the stockholders, hence, the buyer could not be joined as party-defendant in the
SEC case. To include said buyer as a party-defendant in the case pending with the SEC would
violate the then existing rule on jurisdiction over intra-corporate disputes. The Court also struck down
the argument that there was forum shopping, ruling that the issue of recovery of corporate assets
and funds pending with the SEC is a totally different issue from the issue of the validity of the sale,
so a decision in the SEC case would not amount to res judicata in the case before the regular court.
Thus, the Court merely ordered the suspension of the proceedings before the RTC until the final
outcome of the SEC case.

The foregoing pronouncements of the Court are exactly in point with the issues in the present case.
Here, the complaint is for annulment of mortgage with the mortgagee bank as one of the defendants,
thus, as held in Saura, jurisdiction over said complaint is lodged with the regular courts because the
mortgagee bank has no intra-corporate relationship with the stockholders. There can also be no
forum shopping, because there is no identity of issues. The issue being threshed out in the SEC
case is the due execution, authenticity or validity of board resolutions and other documents used to
facilitate the execution of the mortgage, while the issue in the case filed by petitioners with the RTC
is the validity of the mortgage itself executed between the bank and the corporation, purportedly
represented by the spouses Leandro and Lilian Soriano, the President and Treasurer of petitioner
LEI, respectively. Thus, there is no reason to dismiss the complaint in this case.89

Obviously, Lisam relies heavily on the earlier ruling in Saura v. Saura, Jr. (Saura),90 which was
decided prior to the transfer of jurisdiction over intra-corporate controversies from the SEC to the
courts. One of the reasons put forth by the Saura court in making a distinction between derivative
suits cognizable by the SEC and derivative suits cognizable by the regular courts is that the SEC is a
specialized administrative agency which has jurisdiction over intra-corporate disputes but not over
actions to annul mortgages or sales:

"It is true that the trend is towards vesting administrative bodies like the SEC with the power to
adjudicate matters coming under their particular specialization, to insure a more knowledgeable
solution of the problems submitted to them. This would also relieve the regular courts of a
substantial number of cases that would otherwise swell their already clogged dockets. But as
expedient as this policy may be, it should not deprive the courts of justice of their power to decide
ordinary cases in accordance with the general laws that do not require any particular expertise or
training to interpret and apply. Otherwise, the creeping take-over by the administrative agencies of
the judicial power vested in the courts would render the judiciary virtually impotent in the discharge
of the duties assigned to it by the Constitution."

Since Sandalwood has no intra-corporate relationship with the respondents, it cannot be joined
as party-defendant in the SEC case as to do so would violate the rule on jurisdiction. Therefore,
respondents' complaint against Sandalwood for the annulment of the sale of realty was properly filed
before the regular court. This action must await the final ruling of the issue raised in SEC Case No.
2968, questioning the validity of the deed of exchange, the resolution of which is a logical
antecedent of the issue involved in the civil action against Sandalwood. Thus, respondents'
complaint for annulment of sale can only succeed if final judgment is rendered in SEC Case No.
2968, annulling the deed of exchange executed in favor of VGFI.91

IV.

Upon the transfer of the SEC's jurisdiction over intra-corporate disputes pursuant to Section 5.2
of the SRC and the 2001 IRPIC, the distinction between "intra-corporate" and "non-intra-corporate"
derivative suits was obliterated; and jurisdiction over all derivative suits was returned to the trial
courts.

Relative thereto, we have already mentioned that the 2001 IRPIC was intended to serve as the
procedural regime to govern the cases defined in Section 5 of the SEC Reorganization Decree,
Thus, the express inclusion of derivative suits in the classes of cases governed by the 2001 IRPIC
implies that all derivative suits must now be tried by the special commercial courts. This conclusion
is further bolstered by an examination of the concept and nature of a derivative suit. Since a
derivative suit is an equity-based procedural device which allows an unauthorized person to sue on
behalf of a corporation in order to remedy official or directorial mismanagement, the very act of
instituting a derivative suit implies the existence of an intra-corporate dispute, regardless of the relief
sought by such suit or the parties impleaded therein. Couched in the language of Section 5(b) of the
SEC Reorganization Decree, the mere resort to a derivative suit implies the existence of a
"controvers[y] arising out of intra-corporate x x x relations, between and among stockholders
[or] members; between any or all of them and the corporation x x x or association of which
they are stockholders [or] members." In the case of a derivative suit, this would normally entail a
dispute between an individual stockholder or a group of stockholders, against the directors, the
officers, or the majority stockholders.
 This view is based not only on the text of the statute but also on jurisprudence. In an obiter
dictum in the 1997 case of Western Institute of Technology, Inc. v. Salas, the Court expressly
acknowledged that a derivative suit is an intra-corporate dispute as defined in Section 5(b) of the
SEC Reorganization Decree.92 This obiter dictum became doctrine in Forest Hills Golf and Country
Club, Inc. v. Fil-Estate Properties, Inc.,93 where we rejected the suing shareholder's argument that
the case, while admittedly a derivative suit, did not involve an intra-corporate dispute because he
was suing the other shareholders not in their capacity as shareholders but as third-party developers
of a property owned by the corporation, viz.:

Petitioner FHGCCI's contention that the instant case does not involve an intra-corporate controversy
as it was filed against respondents FEPI and FEGDI as developers, and not as shareholders of the
corporation holds no water. Apparent in the Complaint are allegations of the interlocking
directorships of the Board of Directors of petitioner FHGCCI and respondents FEPI and FEGDI, the
conflict of interest of the Board of Directors of petitioner FHGCCI, and their bad faith in carrying out
their duties. Likewise alleged is that respondent FEPI and, later, respondent FEGDI are
shareholders of petitioner FHGCCI which under the project agreement, respondent FEPI was tasked
to perform the development and construction work and other obligations and undertakings of the
project as full payment of its subscription to the authorized capital stock of petitioner FHGCCI, which
it later assigned to respondent FEGDI. Considering these allegations, we find that, contrary to the
claim of petitioner FHGCCI, there are unavoidably intra-corporate controversies intertwined in the
specific performance case.

Moreover, a derivative suit is a remedy designed by equity as a principal defense of the minority
shareholders against the abuses of the majority. Under the Corporation Code, the corporation's
power to sue is lodged with its board of directors or trustees. However, when its officials refuse to
sue, or are the ones to be sued, or hold control of the corporation, an individual stockholder may be
permitted to institute a derivative suit to enforce a corporate cause of action on behalf of a
corporation in order to protect or vindicate its rights. In such actions, the corporation is the real party
in interest, while the stockholder suing on behalf of the corporation is only a nominal party.
Considering its purpose, a derivative suit, therefore, would necessarily touch upon the internal
affairs of a corporation. It is for this reason that a derivative suit is among the cases covered by the
Interim Rules of Procedure Governing Intra-Corporate Controversies, A.M. No. 01-2-04-SC, March
13, 2001.94

V.

The cognizability of derivative suits by the special commercial courts is further bolstered by the
2015 case of Gonzales, et al. v. GJH Land, Inc., et al. (Gonzales),95 where the Court En Banc laid
down the following guidelines:

1. If a commercial case filed before the proper RTC is wrongly raffled to its regular branch, the
proper courses of action are as follows:

1.1 If the RTC has only one branch designated as a Special Commercial Court, then the case shall
be referred to the Executive Judge for re-docketing as a commercial case, and thereafter, assigned
to the sole special branch;

1.2 If the RTC has multiple branches designated as Special Commercial Courts, then the case shall
be referred to the Executive Judge for re-docketing as a commercial case, and thereafter, raffled off
among those special branches; and
1.3 If the RTC has no internal branch designated as a Special Commercial Court, then the case shall
be referred to the nearest RTC with a designated Special Commercial Court branch within the
judicial region. Upon referral, the RTC to which the case was referred to should re-docket the case
as a commercial case, and then: (a) if the said RTC has only one branch designated as a Special
Commercial Court, assign the case to the sole special branch; or (b) if the said RTC has multiple
branches designated as Special Commercial Courts, raffle off the case among those special
branches.

2. If an ordinary civil case filed before the proper RTC is wrongly raffled to its branch designated as a
Special Commercial Court, then the case shall be referred to the Executive Judge for re-docketing
as an ordinary civil case. Thereafter, it shall be raffled off to all courts of the same RTC (including its
designated special branches which, by statute, are equally capable of exercising general jurisdiction
same as regular branches), as provided for under existing rules.96

The Gonzales guidelines are based on the Court En Banc's ruling therein that the transfer of
jurisdiction effected by Section 5.2 of the SRC was directed at "the courts of general jurisdiction,"
that is, to the RTCs in general, rather than to the special commercial courts alone. In authorizing the
Supreme Court to designate special commercial courts, the statute did not delegate the power to
define subject matter jurisdiction; rather, it authorized the Supreme Court to designate the specific
branches of the RTCs which will exercise the jurisdiction that has been vested in the RTCs in
general.97 This interpretation supersedes previous rulings which mandated the dismissal of intra-
corporate cases that were mistakenly filed with the regular RTCs.98 Under the current rules,
mistakenly filed intra-corporate cases and non-intra-corporate cases can now be shuttled to the
proper RTC.

Given that jurisdiction over both derivative suits and intra-corporate controversies has now been
essentially coalesced with the RTCs, the objection interposed in Saura and Lisam with respect to the
SEC's lack of competence and jurisdiction over non-corporate issues that may be implicated in a
derivative suit, or over parties without any relation to the corporation, has already been obviated.
In Concorde Condominium, Inc. v. Baculio,99 we ruled that special commercial courts are still
considered courts of general jurisdiction, and are therefore empowered not only to hear and decide
cases under its general jurisdiction, but also to assume jurisdiction over parties unrelated to the
corporation.100

Furthermore, splitting the exercise of jurisdiction over cases governed by the 2001 IRPIC
between the regular courts and the special commercial courts, as the assailed CA decision decrees,
could lead to confusion and case management problems. For the sake of uniformity and efficiency in
judicial administration, it is imperative that all cases governed by the 2001 IRPIC, derivative suits
included, be tried by the special commercial courts.

VI.

Applying the foregoing disquisitions to the case at bar, we find that while SARC's suit is indeed a
derivative suit which is transferable to the relevant special commercial court in accordance with
the Gonzales guidelines, it nevertheless suffers from fatal defects which merit its dismissal.

SARC's petition expressly alleges that it is being filed as a derivative suit:

6. This is a stockholder's derivative suit instituted by PETITIONERS RAMON A. SALAZAR, JR.,

ROGER A. SALAZR, ROBERT A. SALAZAR and ROSEMARIE S. FERNANDEZ for and in behalf of
SALAZAR ANG REALTY CORPORATION (Plaintiff-corporation), as its incorporators and
stockholders x x x. Said Petitioners were stockholders of the corporation at the time that: 1) a loan in
the amount of EIGHTEEN MILLION FIVE HUNDRED THOUSAND PESOS was obtained from the
Respondent Bank evidenced by a promissory note (Annex "B") allegedly signed by the late
Consuelo Ang Salazar and Ralph Ang Salazar as representatives of Tacloban RAS Construction
Corporation x x x; 2) the mortgage contract (Annex "C") in favor of the Respondent bank was
allegedly executed by the corporation through the late Consuelo A. Salazar who was described as
the corporation's President and its Secretary Ralph A. Salazar x x x;

xxxx

7. This suit is brought by the above[-]mentioned incorporators and stockholders for the following
reasons:

xxxx

7.2. Ramon Ve. Salazar, director and Vice President of the Corporation died on March 30, 1995,
before the mortgage contract which is sought to be declared null and void was executed. No
document was filed with the SEC which shows that an election was held by the board of directors in
order to fill the vacancy. Consuelo A. Salazar passed away last October 21, 2001. The remaining
directors of the corporation have not taken any steps to vindicate the corporation's rights. Demand
upon the board of directors to file suit in behalf of the corporation would be useless in that the
mortgage contract, the validity of which is being questioned in this suit appeared to have been
approved by said board through a supposed board resolution certified by the corporate secretary
Ralph A. Salazar and the Secretary's Certificate of said resolution was annotated on the titles issued
in the name of Salazar Ang Realty Corporation. This however, cannot be determined with certainty
by the Petitioners stockholders as Ralph A. Salazar acting as the corporate secretary of Plaintiff
Corporation has custody of the stock and transfer book as well as the resolutions and other
documents and papers of the corporation.

7.3. Time is of the essence considering that corporate assets have now been registered in the name
of the Respondent Bank and the exhaustion of remedies within the corporation which would delay
the filing of a suit would only cause irreparable damage to the corporation.101

Apart from the express statement in paragraph 6, the rest of the petition's allegations clearly
reveal that the crux of the dispute is the illegal and ultra vires approval of the mortgage by the SARC
board without the consent of the suing shareholders, and despite the vacancies in the board created
by the deaths of Ramon Sr. and Consuelo. These allegations unmistakably show the existence of a
"controversy arising out of intra-corporate relations," with the suing shareholders assailing the
decisions of Ralph and the SARC board. The non-joinder of Ralph and the other officers or
shareholders of SARC, or even of Tacloban RAS, is of no moment, because non-joinder of parties is
not a ground for dismissal, and the court can order their inclusion at any time.102 While the reliefs
sought are directed at Metrobank and the officers who conducted the auction sale, the suing
shareholders' cause of action is ultimately rooted in the illegal and improper ratification and
authorization of the mortgage contract by Ralph and the SARC board.

Having established that the petition is a derivative suit, we determine its compliance with the
requisites therefor under the 2001 IRPIC. ℒαwρhi ৷

There is no question that the suit was brought in SARC's name by Ramon et al., who were
stockholders at the time the assailed mortgage contract was entered into. The petition also contains
allegations justifying the non-exhaustion of intra-corporate remedies.103 However, it does not
comply with Rule 1, Section 1(3) of the 2001 IRPIC, regarding the availment of appraisal rights.
 Among the grounds raised by SARC for the nullification of the mortgage contract is that it
constitutes an encumbrance of substantially all the assets of the corporation which must be
authorized by its stockholders in a meeting for that purpose, pursuant to Section 40 of the
Corporation Code.104 Under that provision, a mortgage of all or substantially all of the corporation's
assets is subject to the exercise of the appraisal right. It was therefore incumbent upon herein
respondents to make particular allegations regarding their availment of their appraisal rights or the
impossibility or futility thereof.105 Under the 2001 IRPIC, a derivative suit must particularly allege
that there are no appraisal rights available against the assailed corporate action.106 Conversely, if
appraisal rights are available, such fact must be alleged and the non-availment thereof must be
properly explained, moreso since a derivative suit must particularly allege that the stockholder
exerted all reasonable efforts to exhaust all remedies available under the laws and regulations
governing the corporation.107

Furthermore, SARC's petition lacks a categorical statement that it is not a nuisance or

harassment suit. In order to provide legal justification for what is essentially an unauthorized suit filed
on behalf of the corporation, stockholders who resort to the equitable remedy of a derivative suit
must categorically declare under oath that the remedy is being sought for just and legitimate
purposes and not as a form of nuisance or harassment.108 This principle is now enshrined in Rule
8, Section 1 of the 2001 IRPIC, which explicitly states that nuisance or harassment suits shall be
dismissed.109

To conclude, we reiterate that a derivative suit is an equitable exception to the rule that the
corporate power of suit is exercisable only through the board of directors. A proper resort to this
equitable procedural device must satisfy the requisites laid down by law and procedure for its
institution; thus, courts must deny resort when such requisites are not met.110

WHEREFORE, the present petition is GRANTED. The March 25, 2014 Decision and the May 8,
2015 Resolution of the Court of Appeals in CA-G.R. SP No. 05050 are hereby REVERSED and SET
ASIDE. Civil Case No. 2001-11-164, entitled Salazar Ang Realty Corporation, represented by
Incorporators-Stockholders Ramon A. Salazar, Jr., Robert A. Salazar, Roger A. Salazar and
Rosemarie Salazar-Fernandez, versus Metropolitan Bank & Trust Company, Ex Officio Sheriff Atty.
Blanche Astilla Salino, Sheriff IV Luis G. Copuaco, and the Register of Deeds, Tacloban City, is
hereby DISMISSED.

SO ORDERED.

G.R. No. 210538, March 07, 2018

DR. GIL J. RICH, Petitioner, v. GUILLERMO PALOMA III, ATTY. EVARISTA TARCE
AND ESTER L. SERVACIO, Respondents.

DECISION

REYES, JR., J.:

A corporation which has already been dissolved, be it voluntarily or involuntarily,

retains no juridical personality to conduct its business save for those directed towards
corporate liquidation.

The Case
Challenged before the Court via this Petition for Review on Certiorari under Rule 45 of
the Rules of Court are the Decision1 and Resolution2 of the Court of Appeals (CA) in CA-
G.R. CV No. 02948 dated February 28, 2013 and November 19, 2013, respectively. The
CA Decision and Resolution reversed and set aside the Decision of the Regional Trial
Court (RTC), Branch 25 of Maasin City, Southern Leyte, dated November 10, 2008.

The Antecedent Facts

Sometime in 1997, Dr. Gil Rich (petitioner) lent P1,000,000.00 to his brother,
Estanislao Rich (Estanislao).3 The agreement was secured by a real estate mortgage
over a 1000-square-meter parcel of land with improvements, more particularly
described as follows:
A parcel of residential land, located at Brgy. Abgao, Maasin City, Southern Leyte,
covered by Tax Declaration ARP No. 07001-00584, in the name of Estanislao Rich,
containing an area of 1,000 square meters, and bounded on the North by Donato
Demetrio - remaining portion; on the East by Felimon Saavedra; on the South by
Kangleon St.; and on the West by Tubman River.4
When Estanislao failed to make good on his obligations under the loan agreement, the
petitioner foreclosed on the subject property via a public auction sale conducted on
March 14, 2005 by respondent Guillermo Paloma III, Sheriff IV of the RTC. The
petitioner was declared the highest bidder, and subsequently, was issued a Certificate
of Sale as purchaser/mortgagee.5

Without the petitioner's knowledge, however, and prior to the foreclosure, it appeared
from the records that on January 24, 2005,6 Estanislao entered into an agreement with
Maasin Traders Lending Corporation (MTLC), where loans and advances amounting to
P2.6 million were secured by a real estate mortgage over the same prope1iy. 7

On the strength of this document, respondent Ester L. Servacio (Servacio), as president

of MTLC, exercised equitable redemption after the foreclosure proceedings. She
tendered the amount of P2,090,000.00 as the redemption money in the extra-judicial
foreclosure sale.8 On March 15, 2006, respondent Paloma III, again as sheriff of the
RTC, issued a Deed of Redemption in favor of MTLC.

The deed then became the subject of the complaint for "Annulment of Deed of
Redemption, Damages, Attorney's Fees, Litigation Expenses, Application for Issuance of
T.R.O. &/or Writ of Preliminary Prohibitory Injunction" filed before the RTC by the
petitioner against respondent Servacio.

According to the petitioner, MTLC no longer has juridical personality to effect the
equitable redemption as it has already been dissolved by the Securities and Exchange
Commission as early as September 2003.9 He also asserted that there was a pending
case against respondent Servacio for allegedly forging Estanislao's signature on the
same real estate mortgage that respondent Servacio used as basis for her equitable
redemption of the subject property.10

On January 8, 2007, the case was called for pre-trial. Unfortunately, neither defendant
Servacio nor her lawyer appeared, and as a result of which, defendant Servacio was
"declared as in default."11 The petitioner thus presented his evidence ex parte.
On the basis of the evidence presented by the petitioner, the RTC rendered a Decision
in the petitioner's favor dated November 10, 2008, the dispositive portion of which
states that:
WHEREFORE, premises considered, this Court orders the following:

1. Declaring the Real Estate Mortgage between Estanislao Rich and MLTC,
Annex B (sic) to the Complaint, as null and void;

2. Ordering the City Assessor of the City of Maasin, Southern Leyte to cancel
the Deed of Redemption in favor of MTLC appearing on the Tax
Declaration covering the property.

SO ORDERED.12
Aggrieved, Servacio appealed the case to the CA, arguing that: (1) the allegations of
forgery were not substantiated, nor were they duly proven in the proceedings before
the RTC;13 and (2) the RTC erred in declaring the petitioner as in default despite a valid
and meritorious excuse.14

Eventually, the CA granted the appeal, finding that forgery cannot be presumed and
must be proved by clear, positive, and convincing evidence, which the petitioner was
unable to fulfill.15 The CA likewise emphasized that the assailed real estate mortgage
between Estanislao and MTLC was duly notarized and thus enjoyed the presumption of
authenticity and due execution, which again, the petitioner was unable to disprove. 16

The CA, however, affirmed the RTC finding that respondent Servacio's reasons for her
non-appearance as well as her counsel's absence during the pre-trial were
unjustified17 to warrant a liberal application of Section 4, Rule 18 of the Rules of Court. 18

Thus, the fallo of the CA decision reads:

WHEREFORE, the appeal is GRANTED. The Decision dated November 10, 2008,
8th Judicial Region, Branch 25, Maasin City, Southern Leyte, in Civil Case No. R-3477
is REVERSED and SET ASIDE. The complaint for annulment of Deed of redemption,
damages, attorney's fees, litigation expenses, with application for issuance of TRO
and/or writ of preliminary prohibitory injunction is ordered DISMISSED. No costs.

SO ORDERED.19
Hence, this petition.

The Issues

The petitioner anchors his prayer for the reversal of the CA decision and resolution
based on the following questions of law:

I. MAY AN APPEAL BE DISMISSED ON ACCOUNT OF THE FAILURE OF THE

APPELLANT'S BRIEF TO COMPLY WITH THE RULES?

II. MAY A CORPORATION NOT INVESTED WITH CORPORATE PERSONALITY

AT THE TIME OF REDEMPTION REDEEM A PROPERTY?20
 The Court's Ruling

After a careful perusal of the arguments presented and the evidence submitted, the
Court finds partial merit in the petition.

On the first issue, the petitioner contends that respondent Servacio violated Section 13,
Rule 44 of the Rules of Court when the latter's Appellant's Brief, which was submitted
to the CA, "failed to contain a subject index with page of reference and compliant
statement of facts."21 This omission, according to the petitioner, should be enough to
warrant a reversal of the CA decision.

The Court does not agree.

Section 13, Rule 44 of the Rules of Court provides the requisite contents of an
appellant's brief that is to be submitted before the courts. It states that:
SECTION 13. Contents of appellant's brief. The appellant's brief shall contain, in the
order herein indicated, the following:

(a) A subject index of the matter in the brief with a digest of the arguments and page
references, and a table of cases alphabetically arranged, textbooks and statutes cited
with references to the pages where they are cited;

(b) An assignment of errors intended to be urged, which errors shall be separately,

distinctly and concisely stated without repetition and numbered consecutively;

(c) Under the heading "Statement of the Case," a clear and concise statement of the
nature of the action, a summary of the proceedings, the appealed rulings and orders of
the court, the nature of the judgment and any other matters necessary to an
understanding of the nature of the controversy, with page references to the record;

(d) Under the heading "Statement of Facts," a clear and concise statement in a
narrative form of the facts admitted by both parties and of those in controversy,
together with the substance of the proof relating thereto in sufficient detail to make it
clearly intelligible, with page references to the record;

(e) A clear and concise statement of the issues of fact or law to be submitted to the
court for its judgments;

(f) Under the heading "Argument," the appellant's arguments on each assignment of
error with page references to the record. The authorities relied upon shall be cited by
the page of the report at which the case begins and the page of the report on which the
citation is found;

(g) Under the heading "Relief," a specification of the order or judgment which the
appellant seeks: and

(h) In cases not brought up by record on appeal, the appellant's brief shall contain, as
an appendix, a copy of the judgment or final order appealed from. (16a, R46)
Any deviation from the required contents as provided thereunder is dealt with by Rule
50 of the Rules of Court. For the purpose of this case, the petitioner, while he did not so
specify in his petition, actually anchors his plea on Section 1(f) of Rule 50, which
particularly mentions the absence of page references in the subject index and
statement of facts in the appellant's brief. It provides that:
RULE 50
Dismissal of Appeal

SECTION 1. Grounds for dismissal of appeal. - An appeal may be dismissed by the

Court of Appeals, on its own motion or on that of the appellee, on the following
grounds:

xxxx

(f) Absence of specific assignment of errors in the appellant's brief, or of page

references to the record as required in Section 13, paragraphs (a), (c), (d) and (f) of
Rule 44;.

x x x x (Emphasis and underscoring supplied)

To buttress his arguments, the petitioner pointed out that Section 13, Rule 44 of the
Rules of Court uses the word "shall" which is thus "mandatory and compulsory." 22 The
petitioner further mentions that "an appealing party must strictly comply with the
requisites laid down in the Rules of Court." 23

Contrary to this argument, however, the Court, in De Leon vs. Court of Appeals,24 has
already ruled that the grounds for dismissal of an appeal under Section 1 of Rule 50 of
the Rules of Court are discretionary upon the CA. It said that:
x x x Rule 50, Section 1 which provides specific grounds for dismissal of appeal
manifestly "confers a power and does not impose a duty." "What is more, it is directory,
not mandatory." With the exception of Sec. 1(b), the grounds for the dismissal of an
appeal are directory and not mandatory, and it is not the ministerial duty of the court to
dismiss the appeal. The discretion, however, must be a sound one to be exercised in
accordance with the tenets of justice and fair play having in mind the circumstances
obtaining in each case.25 (Citations omitted)
Indeed, consistent with the ruling in De Leon, the guiding principle in the resolution of
the foregoing issues is that if the citations found in the appellants brief could sufficiently
enable the CA to locate expeditiously the portions of the records referred to, then there
is substantial compliance with the requirements of Section 13, Rule 44 of the Rules of
Court.

In this case, the CA did not exercise the discretion to dismiss the appeal based on the
absence of "a subject index with page of reference and compliant statement of facts" in
the appellant's brief. Clearly, the CA did not find that the tenets of justice and fair play
were disregarded by this omission. Rather, the CA chose to decide the case on the
merits, which impliedly found the appellant's brief to be substantially sufficient insofar
as the guiding principle mentioned above is concerned.

More, it is proper to emphasize that this discretion is particularly vested unto the CA
and not unto this Court. Thus, absent any grave abuse of discretion in the application of
the rules, the Court could not, and would not, interfere with the CA findings.
Considering too that the petitioner merely (1) quoted the provisions of the rules that
the appellant's brief"violated" and (2) showed the insufficiencies in the appellant's brief,
but did not present any proof of any grave abuse of discretion on the part of the CA,
the Court would not now dismantle a ruling that was reached based on a discretion
which was not improperly exercised.

On the second issue, the petitioner argues that respondent Servacio failed to contest
the RTC finding that MTLC has already lost its juridical personality upon the redemption
of the subject property, which makes the legal action void.

To answer this averment, the Court must qualify.

According to the case of Yu vs. Yukayguan,26 once a corporation is dissolved, be it

voluntarily or involuntarily, liquidation, which is the process of settling the affairs of the
corporation, will ensue. This consists of (1) collection of all that is due the corporation,
(2) the settlement and adjustment of claims against it, and (3) the payment of its
debts. Yu more particularly described this process as that which entails the following:
"Winding up the affairs of the corporation means the collection of all assets, the
payment of all its creditors, and the distribution of the remaining assets, if any among
the stockholders thereof in accordance with their contracts, or if there be no special
contract, on the basis of their respective interests. The manner of liquidation or winding
up may be provided for in the cor orate by-laws and this would prevail unless it is
inconsistent with law."27 (Citations omitted)
These pronouncements draw their basis from Section 122 of the Corporation
Code,28 which empowers every corporation whose corporate existence has been legally
terminated to continue as a body corporate for three (3) years after the time when it
would have been dissolved. This continued existence would only be for the purposes of
"prosecuting and defending suits by or against it and enabling it to settle and close its
affairs, to dispose of and convey its property and to distribute its assets." 29

The rationale for this has already been averred by the Court in the case of Rebollido vs.
Court of Appeals,30 citing Castle's Administrator v. Acrogen Coal, Co.,31viz:
This continuance of its legal existence for the purpose of enabling it to close
up its business is necessary to enable the corporation to collect the demands
due it as well as to allow its creditors to assert the demands against it. If this
were not so, then a corporation that became involved in liabilities might escape the
payment of its just obligations by merely surrendering its charter, and thus defeat its
creditors or greatly hinder and delay them in the collection of their demand. This course
of conduct on the part of corporations the law in justice to persons dealing with them
does not permit. The person who has a valid claim against a corporation, whether it
arises in contract or tort should not be deprived of the right to prosecute an action for
the enforcement of his demands by the action of the stockholders of the corporation in
agreeing to its dissolution. The dissolution of a corporation does not extinguish
obligations or liabilities due by or to it. 32 (Emphasis and underscoring supplied)
In addition, and as expressly mentioned by the Corporation Code, this extended
authority necessarily excludes the purpose of continuing the business for which it was
established.33 The reason for this is simple: the dissolution of the corporation carries
with it the termination of the corporation's juridical personality. Any new business in
which the dissolved corporation would engage in, other than those for the purpose of
liquidation, "will be a void transaction because of the non-existence of the corporate
party."34
Two things must be said of the foregoing in relation to the facts of this case. First, if
MTLC entered into the real estate mortgage agreement with Estanislao after its
dissolution, then resultantly, such real estate mortgage agreement would be void ab
initio because of the non-existence of MTLC's juridical personality.

Second, if, however, MTLC entered into the real estate mortgage agreement prior to its
dissolution, then MTLC's redemption of the subject property, even if already after its
dissolution (as long as it would not exceed three years thereafter), would still be valid
because of the liquidation/winding up powers accorded by Section 122 of the
Corporation Code to MTLC.

The discourse of this case then turns to one of proven facts. The Court scoured the
records, and after a perusal of all the submissions herein and the rulings of the lower
and appellate courts, the Court finds that: (1) MTLC has already been dissolved by the
Securities and Exchange Commission as early as September 2003; 35 (2) Estanislao and
MTLC entered into the real estate mortgage agreement only on January 24, 2005; 36 and
(3) MTLC, through respondent Servacio, redeemed the property on December 15,
2005, for which a Deed of Redemption was issued by respondent Paloma III on March
15, 2006.37

From the foregoing, it is clear that, by the time MTLC executed the real estate
mortgage agreement, its juridical personality has already ceased to exist. The
agreement is void as MTLC could not have been a corporate party to the same. To be
sure, a real estate mortgage is not part of the liquidation powers that could have been
extended to MTLC. It could not have been for the purposes of "prosecuting and
defending suits by or against it and enabling it to settle and close its affairs, to dispose
of and convey its property and to distribute its assets." It is, in fact, a new business in
which MTLC no longer has any business pursuing.

Consequently, and contrary to the CA Decision, any redemption exercised by MTLC

pursuant to this void real estate mortgage is likewise void, and could not be given any
effect.

WHEREFORE, premises considered, the Decision and Resolution of the Court of

Appeals in CA-G.R. CV No. 02948 dated February 28, 2013 and November 19, 2013,
respectively, are hereby REVERSED and SET ASIDE, and a new one is
entered DECLARING the Real Estate Mortgage executed by Estanislao Rich and MTLC
as NULL and VOID, and ORDERING the City Assessor of Maasin, Southern Leyte to
cancel the Deed of Redemption in favor of MTLC appearing on the Tax Declaration
covering the property.

SO ORDERED.
G.R. No. 208638

SPOUSES FRANCISCO ONG and BETTY LIM ONG, and SPOUSES JOSEPH ONG CHUAN and ESPERANZA O
CHUAN, Petitioners
vs.
BPI FAMILY SAVINGS BANK, INC.,, Respondent
 DECISION

REYES, JR., J.:

This is a Petition for Review under Rule 45 of the Rules of Court, as amended, seeking to reverse and set aside the
Decision dated January 3 1, 2013 and Resolution dated August 16, 2013 of the Court of Appeals (CA) in CA-G.R. C
1 2

92348

The Facts

Spouses Francisco Ong and Betty Lim Ong and Spouses Joseph Ong Chuan and Esperanza Ong Chuan (collectivel
as the petitioners) are engaged in the business of printing under the name and style "MELBROS PRINTING CENTER

Sometime in December 1996, Bank of Southeast Asia's (BSA) managers, Ronnie Denila and Rommel Nayve, visited
office and discussed the various loan and credit facilities offered by their bank. In view of petitioners' business expans
and the assurances made by BSA's managers, they applied for the credit facilities offered by the latter.

Sometime in April 1997, they executed a real estate mortgage (REM) over their property situated in Paco, Manila, co
Transfer Certificate of Title No. 143457, in favor of BSA as security for a ₱15,000,000.00 term loan and ₱5,000,000.0
or a total of ₱20,000,000.00.

With regard to the term loan, only ₱10,444,271.49 was released by BSA (the amount needed by the petitioners to pa
loan with Ayala life assurance, the balance was credited to their account with BSA).

With regard to the ₱5,000,000.00 credit line, only ₱3,000,000.00 was released. BSA promised to release the remaini
₱2,000,000.00 conditioned upon the payment of the ₱3,000,000.00 initially released to petitioners.

Petitioners acceded to the condition and paid the ₱3,000,000.00 in full. However, BSA still refused to release the ₱2,
Petitioners then refused to pay the amortizations due on their term loan.

Later on, BPI Family Savings Bank (BPI) merged with BSA, thus, acquired all the latter's rights and assumed its oblig
filed a petition for extrajudicial foreclosure of the REM for petitioners' default in the payment of their term loan.

In order to enjoin the foreclosure, petitioners instituted an action for damages with Temporary Restraining Order and
Injunction against BPI praying for ₱23,570,881.32 as actual damages; ₱1,000,000.00 as moral damages; ₱500,000.0
attorney's fees, litigation expenses and costs of suit.

On November 10, 2008, the trial court rendered its Decision, disposing, thus:
4

WHEREFORE, in view of all the foregoing, the Court hereby resolves in favor of the plaintiffs and against the defenda
the latter to pay the former the above-cited sum of Php20,469,498.00 by way of actual damages and Php500,000.00
attorney's fees.

No pronouncement as to costs.

SO ORDERED. 5

BPI thereafter appealed to the CA averring that the court a quo erred when it ruled that petitioners were entitled to da
posited that petitioners are liable to them on the principal balance of the mortgage loan agreement.

The CA reversed the decision of the lower court and ruled in favor of BPI, the dispositive portion of which states:

WHEREFORE, in the light of the foregoing, the assailed Decision dated 10 November 2008 of the Regional Trial Cou
49, Manila, in Civil Case No. 02-105189 is hereby REVERSED and SET ASIDE. The Complaint for Damages below i
DISMISSED for lack of merit.

SO ORDERED.

Petitioners filed a Motion for Reconsideration but the same was denied by the CA in a Resolution dated August 16, 2

Finding no new matter of substance which would warrant the modification much less the reversal of the assailed deci
plaintiffs-appellees' motion for reconsideration is hereby DENIED for lack of merit.

SO ORDERED. 6

Aggrieved, petitioners filed the present petition.

The Issues

I. WHETHER OR NOT THERE WAS ALREADY AN EXISTING AND BINDING CONTRACT BETWEEN PETITIONER
BSA WITH REGARD TO THE OMNIBUS CREDIT LINE;

II. WHETHER OR NOT BSA INCURRED DELAY IN THE PERFORMANCE OF ITS OBLIGATIONS; Ill. WHETHER O
PETITIONERS ARE ENTITLED TO DAMAGES; and

IV. WHETHER OR NOT BPI CAN FORECLOSE THE MORTGAGE ON THE LAND OF HEREIN PETITIONERS. 7

Ruling of the Court

The Court finds merit in the petition.

In fine, petitioners contend that the CA in its assailed decision erred in ruling that that there was no perfected contrac
the pai1ies with respect to the omnibus credit line and that being so, no delay could be 8:ttributed to BPI, the success
interest of BSA. Petitioners likewise pointed out that it was error for the CA to delve into the matter regarding existenc
perfection of a contract, especially when such issue was never raised by BPI in any of its pleadings or proceedings in
court.

As a rule, a contract is perfected upon the meeting of the minds of the two parties. It is perfected by mere consent, th
the moment that there is a meeting of the offer and acceptance upon the thing and the cause that constitute the contr

In the case of Spouses Palada v. Solidbank Corporation, et al., this Court held that under Article 1934 of the Civil Co
9

contract is perfected only upon the delivery of the object of the contract. In that case, although therein petitioners app
₱3,000,000.00 loan, only the amount of ₱1,000,000.00 was approved by therein respondent bank because petitioner
collaterally deficient. Nonetheless, the loan contract was deemed perfected on March 17, 1997, the date when petitio
received the ₱1,000,000.00 loan, which was the object of the contract and the date when the REM was constituted o
property. 10
Applying this to the case at bench, there is no iota of doubt that when BSA approved and released the ₱3,000,000.00
original ₱5,000,000.00 credit facility, the contract was perfected.

The conclusion reached by the appellate court that only the term loan of ₱15,000,000.00 was proved to have materia
actual contract while the ₱5,000,000.00 omnibus line credit remained non-existent is ludicrous. A careful perusal of th
reveal that the credit facility that BSA extended to petitioners was a credit line of ₱20,000,000.00 consisting of a term
sum of ₱15,000,000.00 and a revolving omnibus line of ₱3,000,000.00 to be used in the petitioner's printing business
separate Letters both dated January 31, 1997, BSA approved the term loan and the credit line. Such approval and su
release of the amounts, albeit delayed, perfected the contract between the parties.

Loan is a reciprocal obligation, as it arises from the same cause where one party is the creditor and the other the deb
obligation of one party in a reciprocal obligation is dependent upon the obligation of the other, and the performance s
be simultaneous. This means that in a loan, the creditor should release the full loan amount and the debtor repays it w
becomes due and demandable. 12

In this case, BSA did not only incur delay in releasing the pre-agreed credit line of ₱5,000,000.00 but likewise violated
of its agreement with petitioners when it deliberately failed to release the amount of ₱2,000,000.00 after petitioners co
their terms and paid the first ₱3,000,000.00 in full. The default attributed to petitioners when they stopped paying thei
amortizations on the term loan cannot be sustained by this Court because long before they sent a Letter to BSA infor
latter of their refusal to continue paying amortizations, BSA had already reneged on its obligation to release the amou
previously agreed upon, i.e., the ₱5,000,000.00 covered by the credit line.

Article 1170 of the Civil Code enumerates the instances when parties to a contract may be held liable for damages, v

Article 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those wh
manner contravene the tenor thereof, are liable for damages.

It bears stressing that petitioners entered into a credit agreement with BSA to enable them to buy machineries and eq
their printing business. On its face, it can be gleaned that the purpose of the credit agreement with BSA was indeed t
finance petitioner's business by way of providing additional funds as working capital or revolving fund. 13

The direct consequences therefore of the acts of BSA are: the machinery and equipment that were essential to petitio
business and requisite for its operations had to be procured so late in time and had crippled the printing of school sup
hence, petitioners were constrained to cancel purchase orders of their clients to petitioners' damage. 14

BSA claims that the release of the amount covered by the credit line was subject to the "availability of funds" thus onl
the proceeds of the entire omnibus line was released.

Assuming for the sake of discussion that the funds at the time were insufficient to cover the entire ₱5,000,000.00, BS
have at least informed petitioners in advance so that the latter could have resorted to other means to secure the amo
for their printing business. The omnibus line was approved and became effective on January 1997 yet BSA did not al
petitioners to draw from the line until November 1997. Moreover, BSA downgraded petitioners' drawdown to only ₱3,
despite the clear wordings of their credit agreement whereby petitioners were allowed to draw any portion or all of the
line not to exceed ₱5,000,000.00. The almost 10 months delay in releasing the amount applied for by petitioners neg
faith on the part of BSA.

BPI insists that it acted in good faith when it sought extrajudicial foreclosure of the mortgage and that it was not respo
acts committed by its predecessor, BSA. Good faith, however, is not an excuse to exempt BPI from the effects of a m
consolidation, viz.:
Section 80. Effects of merger or consolidation. - The merger or consolidation shall have the following effects:

1. The constituent corporations shall become a single corporation which, in case of merger, shall be the surviving cor
designated in the plan of merge; and, in case of consolidation, shall be the consolidated corporation designated in the
consolidation;

xxxx

4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the right, privileges, immu
franchises of each of the constituent corporations; and all property, real or personal, and all receivable due on whatev
including subscriptions to shares and other choses in action, and all and every other interest of, or belonging to, or du
constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation with
act or deed; and

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

Applying the pertinent provisions of the Corporation Code, BPI did not only acquire all the rights, privileges and asset
but likewise acquired the liabilities and obligations of the latter as if BPI itself incurred it.

Moreover, Section 1(e) of the Articles of Merger dated November 21, 2001 provides that all liabilities and obligations
be transferred to and become the liabilities and obligations of BPI in the same manner as if it had itself incurred such
obligations.15

Pursuant to such merger and consolidation, BPI's right to foreclose the mortgage on petitioner's property depends on
of the contract and the corresponding obligations of the parties originally involved, that is, the agreement between its
predecessor BSA and petitioner.

Since BSA incurred delay in the performance of its obligations and subsequently cancelled the omnibus line without p
consent, its successor BPI cannot be permitted to foreclose the loan for the reason that its successor BSA violated th
the contract even prior to petitioners' justified refusal to continue paying the amortizations.

The trial court pointed out that based on the evidence presented by petitioners, the latter conformed to the acquisition
precisely because BSA promised them working capital for the expansion of their business, viz.:

Clear from the plaintiffs' evidence actually presented and marked is the fact that plaintiffs conformed to the acquisition
principally upon the promise by BSA that the working capital would be made available to plaintiffs on time for the ope
classes, for plaintiffs to be able to secure their machineries and meet the orders of their clients.16

The subsequent refusal of BSA in releasing the maximum amount agreed upon, transgressed the very purpose of pe
availing the credit facility. Clearly, given the nature of petitioners' business, time is of the essence as they needed to h
orders ready before opening of classes.

To emphasize the injury caused to the petitioners due to the bank's delay and subsequent refusal to release the omn
the petitioners testified as follows:
Q The fact that the bank did not allow you to avail of the omnibus line, what is the effect to your business?

A Because I have already manufactured the notebooks/or St. Michael and I already sent them to supermarkets and fa
like SM and Gaisano and they have PO coming, I cannot deliver the goods because of lack of funds. They kept callin
confirming about their PO. Because of this my reputation is going down.

(TSN dated November 28, 2002 pp. 28-29)

Witness: And the 4.2 was released ... When we originally received the Php 4.2 Million, we could not push through wit
our business, sir.

Court: Why?

Witness: Because it was not sufficient and money came to us very late with the lines of our plans, because we are su
manufacture notebooks, school items in time for the school opening in June, and it was delayed, your Honor. We con
paying our amortization for two years. We paid almost 7 million.

(TSN dated September 24, 2007 pp. 13 and 14)

Q How important is your working capital to your business?

A: The omnibus line is the most important in the business.

Court: The question is, why is it important?

A: Because I need capital for my business to replenish my supply and to pay the labor and materials

Atty. Cinco: and when you said the proceeds of the omnibus line was released only on November 10, 1997, how did
your business?

A: My business suffered badly because I already got the orders from the department stores and book stores.

(TSN dated September 17, 2004 pp. 43-44) 17

The CA, on the other hand, is of the opinion that the delay and damages claimed by the petitioners are mere cloaks t
obligations in the mortgage loan agreement.

The Court disagrees.

No evidence was ever presented in the lower courts showing that the petitioners defaulted in paying their amortizatio
term loan prior to their refusal which was mainly grounded on BSA's failure to release the amount covered by the omn
Petitioners' continuous payment of amortizations even during the period between January 1997 and November 1997
incurred delay in releasing the omnibus line credit) is inconsistent with the appellate court's finding that petitioners int
hide their obligations in the mortgage loan agreement. Petitioners' refusal to continue paying was only prompted by B
to abide by the terms of the contract. Thus, it would be the height of injustice to allow BPI to foreclose on the mortgag
violation of its predecessor BSA of its principal obligation.

In the case of Development Bank of the Philippines v. Guariña Agricultural and Realty Development Corp., 18
the Cou
a debtor cannot incur delay unless the creditor has fully performed its reciprocal obligation, viz.:

It is true that loans are often secured by a mortgage constituted on real or personal property to protect the creditor's i
case of the default of the debtor. By its nature, however, a mortgage remains an accessory contract dependent on th
1âwphi1

obligation, such that enforcement of the mortgage contract will depend on whether or not there has been a violation o
principal obligation. While a creditor and a debtor could regulate the order in which they should comply with their recip
obligations, it is presupposed that in a loan the lender should perform its obligation - the release of the full loan amou
could demand that the borrower repay the loaned amount. In other words, Guariña Corporation would not incur in del
DBP fully performed its reciprocal obligation. 19

Since the credit facility that BSA extended to petitioners was a credit line total of ₱20,000,000.00, its refusal to releas
balance on the omnibus line prevented full performance of its obligation to petitioners. There being no release of the
amount, no default could be attributed to petitioners. In other words, foreclosure was premature.

In Metropolitan Bank v. Wong, the Court declared:

20

While the law recognizes the right of a bank to foreclose a mortgage upon the mortgagor's failure to pay his obligation
imperative that such right be exercised according to its clear mandate. Each and every requirement of the law must b
with, lest, the valid exercise of the right would end. It must be remembered that the exercise of a right ends when the
disappears, and it disappears when it is abused especially to the prejudice of others. 21

BPI was remiss in its duty of looking into the transaction involving the mortgage it sought to foreclose. As BSA's succ
interest, it cannot feign ignorance of transactions entered into by the former especially when it seeks to benefit from t
foreclosing the mortgage thereon.

Anent the propriety of awarding damages, the Court upholds the ruling of the trial court that actual damages in the am
₱2,772,000.00 is proper. Said amount is the computed total difference in interest paid to other sources and that which
have only been paid to BSA had the latter complied with the terms of the agreement. However, with regard to the clai
damages representing petitioners' unrealized profits of ₱23,570,881.32, the Court agrees with the CA that petitioners
prove with a reasonable degree of certainty, premised upon competent proof and on the best evidence obtainable, th
amount of loss. Although petitioners were able to present in evidence purchase orders, company records and checks
agrees with the appellate court that these are insufficient as they are self-serving. Although petitioners claimed that th
were cancelled, no other evidence was adduced to prove such fact of cancellation.

The law allows the grant of exemplary damages to set an example for the public good. The banking system has beco
indispensable institution in the modem world and plays a vital role in the economic life of every civilized society. Whe
passive entities for .the safe-keeping and saving of money or as active instruments of business and commerce, bank
attained an ubiquitous presence among the people, who have come to regard them with respect and even gratitude a
all, confidence. For this reason, banks should guard against injury attributable to negligence or bad faith on its part. 22

Court finds it proper to likewise award exemplary damages in the amount of ₱100,000.00.

Finally, as to the matter concerning attorney's fees, the Court finds the ₱500,000.00 awarded by the trial court to be e
and should accordingly be reduced to ₱300,000.00.

WHEREFORE, in light of the foregoing, the petition is hereby GRANTED. The Decision dated January 31, 2013 of th
Appeals in CA-G.R. CV No. 92348 is hereby REVERSED and SET ASIDE. The questioned extrajudicial foreclosure o
estate mortgage is likewise declared VOID. Respondent BPI Family Savings Bank, Inc. is hereby ORDERED to pay p
Spouses Francisco Ong and Betty Lim Ong and spouses Joseph Ong Chuan and Esperanza Ong Chuan the amoun
₱2,772,000.00 as actual or compensatory damages; ₱100,000.00 as exemplary damages; ₱300,000.00 as attorney's
interest of six percent (6%) per annum on all the amounts of damages reckoned from the finality of this decision.

SO ORDERED.

ANDRES B. REYES, JR.

Associate Justice

WE CONCUR:

ANTONIO T. CARPIO
Associate Justice
Chairperson

LUCAS P. BERSAMIN ESTELA M. PERLAS-BERNABE

Associate Justice Associate Justice
ALFREDO BENJAMIN S. CAGUIOA
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decisionhad been reached in consultation before the case was assigned to
the opinion of the Court’s Division.

ANTONIO T. CARPIO
Associate Justice
Chairperson, Second Division

CERTIFICATION

Pursuant to the Section 13, Article VIII of the Constitution and the Division Chairperson’s Attestation, I certify that the
in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of t
Division.

MARIA LOURDES P.A. SERENO

G.R. No. 207039. August 14, 2019 ]
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. INTERPUBLIC
GROUP OF COMPANIES, INC., RESPONDENT.

DECISION
REYES, J. JR., J.:
This resolves the Petition for Review on Certiorari under Rule 45 of the Rules of Court which seeks to reverse and set
aside the October 23, 2012 Decision[1] of the Court of Tax Appeals (CTA) En Banc and its April 15, 2013 Resolution,
[2]
affirming the Decision of the CTA Third Division and denying petitioner's Motion for Reconsideration, in CTA EB
No. 791.
Respondent Interpublic Group of Companies, Inc. (IGC) is a non-resident foreign corporation duly organized and
existing under and by virtue of the laws of the State of Delaware, United States of America.
The IGC owns 2,999,998 shares or 30% of the total outstanding and voting capital stock of McCann Worldgroup
Philippines, Inc. (McCann), a domestic corporation duly organized and existing under the laws of the Philippines
engaged in the general advertising business.

In 2006, McCann's Board of Directors declared cash dividends in the total amount of P205,648,685.02 in favor of its
stockholders of record, as follows:

Shareholder Percentage of Shares Amount of Dividend

Fintec Holdings, Inc. 70% P143,954,079.51
Interpublic Group of
30% 61,694,605.51
Companies, Inc.
TOTAL P205,648,685.02
The IGC received cash dividends from McCann in the amount of P61,694,605.51. On June 15, 2006, McCann
withheld a Final Withholding Tax (FWT) at the rate of 35% on IGC's cash dividends and remitted the payment of the
FWT in the amount of P21,593,111.93 to petitioner Commissioner of Internal Revenue (CIR).

On September 27, 2007, the IGC established a Regional Headquarters (RHQ) in the Philippines. On April 30, 2008,
the RHQ was converted into its Regional Operating Headquarters (ROHQ).

On March 5, 2008, the IGC filed an administrative claim for refund or issuance of tax credit certificate (TCC) in the
amount of P12,338,921.00, representing the alleged overpaid FWT on dividends paid by McCann to IGC. In the said
administrative claim, the IGC averred that as a non-resident foreign corporation, it may avail of the preferential FWT
rate of 15% on dividends received from a domestic corporation under Section 28(B)(5)(b) of the Tax Code.

On May 29, 2008, the IGC submitted to CIR additional documents in support of its administrative claim for refund or
issuance of TCC. The CIR failed to act on IGC's claim for refund or issuance of TCC. This prompted the IGC to file a
petition for review with the CTA on June 16, 2008.

On February 21, 2011, the CTA Third Division granted the IGC's petition for review. Accordingly, the CIR was
ordered to refund or to issue a TCC in favor of IGC in the amount of P12,338,921.00, representing the overpaid FWT
on cash dividends for taxable year 2006.[3]
On March 14, 2011, the CIR filed a Motion for Reconsideration of the Decision dated February 21, 2011. Said motion
was denied for lack of merit on May 31, 2011.

After being granted an extension, the CIR filed a Petition for Review with the CTA En Banc on July 7, 2011. On
January 11, 2012, the case was submitted for decision.
In the Decision dated October 23, 2012, the CTA En Banc denied the CIR's Petition for Review and accordingly
affirmed the February 21, 2011 Decision and the May 31, 2011 Resolution of the CTA Third Division.
The CIR filed a motion for reconsideration and the same was denied by the CTA En Banc for lack of merit in a
Resolution dated April 15, 2013.
Dissatisfied, the CIR filed the instant Petition with this Court on the lone ground of –

THE [CTA] ERRED IN RULING THAT IGC IS ENTITLED TO A TAX REFUND OR TAX CREDIT CERTIFICATE FOR
THE ALLEGED OVERPAID FINAL WITHHOLDING TAX ON ITS CASH DIVIDENDS FOR TAXABLE YEAR 2006. [4]
To support its contention, the CIR argued that: (1) the IGC failed to file a Tax Treaty Relief Application (TTRA) with
the International Tax Affairs Division (ITAD) of the Bureau of Internal Revenue (BIR) 15 days before it paid the tax on
dividends, in accordance with Revenue Memorandum Order (RMO) No. 1-2000; (2) the IGC, being an unlicensed
corporation, has no capacity to sue in Philippine courts in accordance with the Corporation Code; and (3) claim for
refund shall be construed strictissimi juris against the taxpayer and is subject to administrative
investigation/examination to ascertain the veracity of the claimant's allegations.
I.

We resolve first the issue of whether or not the IGC has the capacity to sue in Philippine courts. Otherwise stated,
can a non-resident foreign corporation which collects dividends from the Philippines sue here to claim tax refund?
We agree with the CTA that the issue is not one of first impression.

Section 133 of the Corporation Code provides:

SEC. 133. Doing business without a license. — No foreign corporation transacting business in the Philippines without
a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in
any court or administrative agency of the Philippines; but such corporation may be sued or proceeded against before
Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws.
The aforementioned provision bars a foreign corporation "transacting business" in the Philippines without a license
access to our courts. Thus, in order for a foreign corporation to sue in Philippine courts, a license is necessary only if
it is "transacting or doing business" in the country.[5] Conversely, if an unlicensed foreign corporation is not transacting
or doing business in the Philippines, it can be permitted to bring an action even without such license.
In the case of B. Van Zuiden Bros., Ltd. v. GTVL Manufacturing Industries, Inc.,[6] the court categorically explained:
The law is clear. An unlicensed foreign corporation doing business in the Philippines cannot sue before Philippine
courts. On the other hand, an unlicensed foreign corporation not doing business in the Philippines can sue before
Philippine courts.
Explaining the rationale for this rule, the Court held:

The purpose of the law in requiring that foreign corporations doing business in the country be licensed to do so, is to
subject the foreign corporations doing business in the Philippines to the jurisdiction of the courts, otherwise, a foreign
corporation illegally doing business here because of its refusal or neglect to obtain the required license and authority
to do business may successfully though unfairly plead such neglect or illegal act so as to avoid service and thereby
impugn the jurisdiction of the local courts.

The same danger does not exist among foreign corporations that are indubitably not doing business in the
Philippines. Indeed, if a foreign corporation does not do business here, there would be no reason for it to be subject
to the State's regulation. As we observed, in so far as the State is concerned, such foreign corporation has no legal
existence. Therefore, to subject such corporation to the courts' jurisdiction would violate the essence of sovereignty.[7]
Apparently, it is not the absence of the prescribed license, but the "doing of business" in the Philippines without such
license which debars the foreign corporation from access to our courts.[8] The operative phrase is "transacting or
doing business."
The threshold question therefore is whether the IGC was doing business in the Philippines when it collected dividend
earnings from sources within the Philippines. The Corporation Code provides no definition for the phrase "doing
business."[9]
In the old case of The Mentholatum Co. v. Mangaliman,[10] the Court discussed the test to determine whether a
foreign company is "doing business" in the Philippines, thus:
No general rule or governing principle can be laid down as to what constitutes "doing" or "engaging in" or
"transacting" business. Indeed, each case must be judged in the light of its peculiar environmental circumstances.
The true test, however, seems to be whether the foreign corporation is continuing the body or substance of the
business or enterprise for which it was organized or whether it has substantially retired from it and turned it over to
another. The term implies a continuity of commercial dealings and arrangements, and contemplates, 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, the purpose and object of its organization.[11] (Citations omitted)
The foregoing definition found its way in Republic Act (R.A.) No. 7042, otherwise known as the Foreign Investments
Act of 1991, which repealed Articles 44-56, Book II of the Omnibus Investments Code of 1987. Said law enumerated
not only the acts or activities which constitute "doing business," but also those activities which are not deemed "doing
business." Thus, Section 3(d) of R.A. No. 7042 provides:

SEC. 3. Definitions. – x x x
xxxx

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[.] (Underscoring
supplied)
Inferring from the aforecited provision, mere investment as a shareholder by a foreign corporation in a duly registered
domestic corporation shall not be deemed "doing business" in the Philippines. It is clear then that the IGC's act of
subscribing shares of stocks from McCann, a duly registered domestic corporation, maintaining investments therein,
and deriving dividend income therefrom, does not qualify as "doing business" contemplated under R.A. No. 7042.
Hence, the IGC is not required to secure a license before it can file a claim for tax refund.

The CIR argues that since IGC was already maintaining an RHQ in the Philippines, which was subsequently
converted into an ROHQ, said headquarters should be the proper claimant of the tax refund. The IGC explained that
the ROHQ had no involvement, whatsoever, in IGC's investments in McCann. It was only the IGC that is entitled to
receive dividend income arising from such investment.

True, the alleged overpayment of FWT were incurred from the dividend income earned by IGC, which is a separate
and distinct income taxpayer from their ROHQ in the Philippines. As explained by IGC, the ROHQ has a sole purpose
of servicing IGC's affiliates, subsidiaries, branches and markets in the Asia-Pacific Region, but certainly not of
investing in McCann. It can be concluded then that the investment in McCann was made for purposes peculiarly
germane to the conduct of IGC's corporate affairs and the same was not shown to be coursed through the ROHQ.
Having made an independent investment, then it is the ICG that should face the tax consequence and avail of tax
reliefs (i.e., refund, credit, preferential tax rate) appurtenant to such investment. Thus:
The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot
apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its
branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent
here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the
principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch.
Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation.

Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and
not the foreign corporation.[12]
II.

The tax treatment of dividends earned by a foreign corporation, not engaged in trade of business in the Philippines,
from Philippine sources is provided under Section 28(B)(1) of the Tax Code,[13] as follows:
SEC. 28. Rates of Income Tax on Foreign Corporations. –
xxxx

(B) Tax on [Non-resident] Foreign Corporation. —

(1) In General. — Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business
in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable
year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except
reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits
and income, and capital gains, except capital gains subject to tax under subparagraphs 5(c) and (d): Provided, That
effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate
shall be thirty-three percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent
(32%).
However, the ordinary 35% tax rate applicable to dividend remittances to non-resident corporate stockholders of a
Philippine corporation, goes down to 15% if the country of domicile of the foreign stockholder corporation "shall allow"
such foreign corporation a tax credit for "taxes deemed paid in the Philippines," applicable against the tax payable to
the domiciliary country by the foreign stockholder corporation.[14] Thus, Section 28(B)(5)(b) of the Tax Code,[15] which
is the very basis of respondent's claim for refund of its overpaid FWT on dividends, provides:
SEC. 28. – x x x

xxxx

(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. —

xxxx
(b) Intercorporate Dividends. — A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the
amount of cash and/or property dividends received from a domestic corporation, which shall be collected and paid as
provided in Section 57(A) of this Code, subject to the condition that the country in which the [non-resident] foreign
corporation is domiciled, shall allow a credit against the tax due from the [non-resident] foreign corporation taxes
deemed to have been paid in the Philippines equivalent to twenty percent (20%) for 1997, nineteen percent (19%) for
1998, eighteen percent (18%) for 1999, and seventeen percent (17%) thereafter, which represents the difference
between the regular income tax of thirty-five percent (35%) in 1997, thirty-four percent (34%) in 1998, thirty-three
percent (33%) in 1999, and thirty-two percent (32%) thereafter on corporations and the fifteen percent (15%) tax on
dividends as provided in this subparagraph[.]
As it is recognized, the application of the provisions of the National Internal Revenue Code (NIRC) must be subject to
the provisions of tax treaties entered into by the Philippines with foreign countries.[16] It remains only to note that
under the Philippines-US Convention "With Respect to Taxes on Income," the Philippines, by a treaty
commitment, reduced the regular rate of dividend tax to a maximum of 20% of the gross amount of dividends paid to
US parent corporations.[17] Thus, the RP-US Tax Treaty which applies on income derived or which accrued beginning
January 1, 1983 provides:
Article 11
DIVIDENDS
xxxx

(2) The rate of tax imposed by one of the Contracting States on dividends derived from sources within that
Contracting State by a resident of the other Contracting State shall not exceed —

(a) 25 percent of the gross amount of the dividend; or

(b) When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of the paying
corporation's taxable year which precedes the date of payment of the dividend and during the whole of its prior
taxable year (if any), at least 10 percent of the outstanding shares of the voting stock of the paying corporation was
owned by the recipient corporation.[18] (Italics supplied)
The foregoing RP-US Tax Treaty, at the same time, created a treaty obligation on the part of the US that it "shall
allow" to a US parent corporation receiving dividends from its Philippine subsidiary "a tax credit for the appropriate
amount of taxes paid or accrued to the Philippines by the said Philippine subsidiary. The US allowed a "deemed paid"
tax credit to US corporations on dividends received from foreign corporation. Thus, Section 902 of the US Internal
Revenue Code, as amended, provides:

SEC. 902 — CREDIT FOR CORPORATE STOCKHOLDERS IN FOREIGN CORPORATION.

(A) Treatment of Taxes Paid by Foreign Corporation — For purposes of this subject, a domestic corporation which
owns at least 10 percent of the voting stock of a foreign corporation from which it receives dividends in any taxable
year shall —
(1) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in
subsection (c) (1) (a)] of a year for which such foreign corporation is not a less developed country corporation, be
deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to be
paid by such foreign corporation to any foreign country or to any possession of the United States on or with respect to
such accumulated profits, which the amount of such dividends (determined without regard to Section 78) bears to the
amount of such accumulated profits in excess of such income, war profits, and excess profits taxes (other than those
deemed paid); and
(2) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in
subsection (c) (1) (b)] of a year for which such foreign corporation is a less developed country corporation, be
deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to be
paid by such foreign corporation to any foreign country or to any possession of the United States on or with respect
to such accumulated profits, which the amount of such dividends bears to the amount of such accumulated
profits.[19]
For this reason, it was established on the part of the Philippines a deliberate undertaking to reduce the regular
dividend tax rate of 35%.[20]
This goes to show that the IGC, being a non-resident US corporation is qualified to avail of the aforesaid 15%
preferential tax rate on the dividends it earned from the Philippines. It was proven that the country which it was
domiciled shall grant similar tax relief/credit against the tax due upon the dividends earned from sources within the
Philippines. Clearly, the IGC has made an overpayment of its tax due of FWT by using the 35% tax rate.
The question now is whether the IGC, by failing to file a TTRA with the ITAD of the BIR pursuant to RMO No. 1-2000,
was effectively deprived of its right to claim a tax refund based on the said overpayment. The issue is not of first
impression.

In the case of CBK Power Company Ltd. v. Commissioner of Internal Revenue,[21] the Court emphasized the binding
effect of international treaty which we entered into, thus:
The Philippine Constitution provides for adherence to the general principles of international law as part of the law of
the land. The time-honored international principle of pacta sunt servanda demands the performance in good faith of
treaty obligations on the part of the states that enter into the agreement. In this jurisdiction, treaties have the force
and effect of law.[22]
Specifically, the RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered into
and to which we are expected to observe compliance therewith in good faith. As explained by the Court, the purpose
of these international agreements is to reconcile the national fiscal legislations of the contracting parties in order to
help the taxpayer avoid simultaneous taxation in two different jurisdictions.[23] More precisely, the tax conventions are
drafted with a view towards the elimination of international juridical double taxation, which is defined as the imposition
of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for
identical periods.[24]
On the other hand, the mandatory wording of RMO No. 1-2000, reads:

III. Policies:

xxxx

2. Any availment of the tax treaty relief shall be preceded by an application by filing BIR Form No. 0901 (Application
for Relief from Double Taxation) with ITAD at least 15 days before the transaction i.e., payment of dividends,
royalties, etc., accompanied by supporting documents justifying the relief. x x x
The objective of RMO No. 1-2000 in requiring the application for treaty relief with the ITAD before a party's availment
of the preferential rate under a tax treaty is to avert the consequences of any erroneous interpretation and/or
application of treaty provisions, such as claims for refund/credit for overpayment of taxes, or deficiency tax liabilities
for underpayment.

This apparent conflict between which should prevail was settled in the case of Deutsche Bank AG Manila Branch v.
Commissioner of Internal Revenue,[25] where the Court lengthily discussed that the obligation to comply with a tax
treaty must take precedence over the objective of RMO No. 1-2000, thus:
x x x We recognize the clear intention of the BIR in implementing RMO No. 1-2000, but the CTA's outright denial of a
tax treaty relief for failure to strictly comply with the prescribed period is not in harmony with the objectives of the
contracting state to ensure that the benefits granted under tax treaties are enjoyed by duly entitled persons or
corporations.
Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty relief as required
by RMO No. 1-2000 should not operate to divest entitlement to the relief as it would constitute a violation of the
duty required by good faith in complying with a tax treaty. The denial of the availment of tax relief for the failure of a
taxpayer to apply within the prescribed period under the administrative issuance would impair the value of the tax
treaty. At most, the application for a tax treaty relief from the BIR should merely operate to confirm the entitlement
of the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-2000.
Logically, noncompliance with tax treaties has negative implications on international relations, and unduly
discourages foreign investors. While the consequences sought to be prevented by RMO No. 1-2000 involve an
administrative procedure, these may be remedied through other system management processes, e.g., the imposition
of a fine or penalty. But we cannot totally deprive those who are entitled to the benefit of a treaty for failure to
strictly comply with an administrative issuance requiring prior application for tax treaty relief. [26] (Emphases
supplied)
Since the RP-US Tax Treaty does not provide for any other prerequisite for the availment of the benefits under the
said treaty, to impose additional requirements would negate the availment of the reliefs provided for under
international agreements.[27]
At any rate, the application for a tax treaty relief from the BIR should merely operate to confirm the entitlement of the
taxpayer to the relief.[28] This is only applicable to taxes paid on the basis of international agreements and treaties.
Once it was settled that the taxpayer is entitled to the relief under the tax treaty, then by all means it could pay its tax
liabilities using the tax relief provided by the treaty. In other words, the requirements under RMO No. 1-2000 applies
only to a taxpayer who is about to pay their taxes on the basis of tax reliefs provided by international agreements and
treaties and to confirm its entitlement to the said reliefs.
The application for tax treaty relief is not applicable on claims for tax refund. As explained by the Court:

However, as pointed out in Deutsche Bank, the underlying principle of prior application with the BIR becomes moot
in refund cases — as in the present case — where the very basis of the claim is erroneous or there is excessive
payment arising from the non-availment of a tax treaty relief at the first instance. Just as Deutsche Bank was not
faulted by the Court for not complying with RMO No. 1-2000 prior to the transaction, so should CBK Power. In
parallel, CBK Power could not have applied for a tax treaty relief 15 days prior to its payment of the final withholding
tax on the interest paid to its lenders precisely because it erroneously paid said tax on the basis of the regular
rate as prescribed by the NIRC, and not on the preferential tax rate provided under the different treaties. As stressed
by the Court, the prior application requirement under RMO No. 1-2000 then becomes illogical.[29]
In the same manner, it would be illogical for the IGC to comply with the prior requirement under RMO No. 1-2000
before it paid the FWT on the dividends earned. At the time of the payment transaction, the IGC was not availing of
the 15% preferential tax rate as prescribed pursuant to the treaty, but it was applying the 35% regular tax rate. RMO
No. 1-2000 is clear that application must be filed 15 days before the transaction (time of payment). It appears then
that the prior application requirement under RMO No. 1-2000 is no longer a condition precedent to refund an
erroneously paid tax on the basis of the regular tax rate under the Tax Code.

Finally, we agree with the CTA that the IGC was able to comply with all the requisites in order for its claim for refund
to be granted. To be granted a refund, the IGC, in addition to being able to point out the specific provision of law
creating such right, the taxpayer must be able to establish the fact of payment of the tax sought to be refunded and
that the filing of the claim for refund was made within the reglementary period provided for under Section 204[30] of the
NIRC for its administrative claims for refund and Section 229[31] for its judicial claims for refund.
The well-settled doctrine is that factual findings of the CTA are binding upon this court and can only be disturbed on
appeal if not supported by substantial evidence.[32]
The fact of payment of the tax sought to be refunded is essentially a factual finding of the CTA and as such, the same
must be accorded weight and respect especially if supported by substantial evidence. Here, it was proven that on
June 13, 2006, McCann withheld FWT on the dividends earned by the IGC at the rate of 35% in the amount of
P21,593,111.93 and remitted the same on June 15, 2006. To prove this, the IGC submitted the Monthly Remittance
Return of the Final Income Taxes Withheld of McCann and the accompanying payment transaction.[33]
As to the timeliness of the claim for refund, both in the administrative and judicial level, we again concur with the
factual findings of the CTA that both were done within the reglementary period provided by law. Indeed, it was found
out that McCann withheld and paid to the BIR, in behalf of the IGC, the amount of P21,593,111.93 on June 15, 2006.
The IGC filed its administrative claim for refund on March 5, 2008.[34] The inaction of the CIR on IGC's claim for refund
prompted the latter to file a judicial claim for refund with the CTA on June 16, 2008.[35] Indeed, the IGC may, within the
statutory period of two years, proceed with its suit without waiting for the decision of the CIR.[36] The reason is that
both the claim for refund with the BIR and with the CTA must be filed within the two-year period. These are
mandatory requirements and non-compliance therewith is fatal to the action for refund or tax credit.
It bears stressing that tax refunds are in the nature of tax exemptions. As such they are regarded as in derogation of
sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption.[37] The
burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the
clearest grant of organic or statute law.[38] The IGC was able to discharge such burden of proof required by law.
WHEREFORE, the Petition is DENIED. The October 23, 2012 Decision and the April 15, 2013 Resolution of the
Court of Tax Appeals En Banc in CTA EB No. 791 are AFFIRMED.
SO ORDERED.

G.R. No. 212050, January 15, 2020 ]

QUINTIN ARTACHO LLORENTE, PETITIONER, V. STAR CITY PTY LIMITED, REPRESENTED

BY THE JIMENO AND COPE LAW OFFICES AS ATTORNEY-IN-FACT, RESPONDENT.

[G.R. No. 212216, January 15, 2020]

STAR CITY PTY LIMITED, REPRESENTED BY THE JIMENO COPE & DAVID LAW OFFICES AS
ITS ATTORNEY-IN-FACT, PETITIONER, V. QUINTIN ARTACHO LLORENTE AND EQUITABLE
PCI BANK (NOW BDO UNIBANK, INC.), RESPONDENTS.

DECISION
CAGUIOA, J.:

Before the Court are petitions for review on certiorari1 under Rule 45 of the Rules of Court
respectively filed by petitioner Quintin Llorente (Llorente) in G.R. No. 212050 and petitioner Star City
Pty Limited (SCPL) in G.R. No. 212216 assailing the Decision2 dated September 30, 2013
(Decision) and the Resolution3 dated April 10, 2014 of the Court of Appeals4 (CA) in CA-G.R. CV
No. 94736. The CA Decision affirmed with modification the Decision5 dated April 16, 2009 rendered
by the Regional Trial Court, Branch 134, City of Makati (RTC) in Civil Case No. 02-1423. The CA
Resolution dated April 10, 2014 denied the motions for reconsideration filed by Llorente and SCPL.

The Facts and Antecedent Proceedings

The CA Decision narrates the factual antecedents as follows:

x x x [SCPL] is an Australian corporation which operates the Star City Casino in Sydney, New South
Wales, Australia. Claiming that it is not doing business in the Philippines and is suing for an isolated
transaction, it filed on 25 November 2002 through its attorney-in-fact, Jimeno Jalandoni and Cope
Law Offices, a complaint for collection of sum of money with prayer for preliminary attachment
against x x x Llorente, who was a patron of its Star City casino and Equitable PCI Bank (EPCIB, for
brevity). This case was docketed as Civil Case No. 02-1423 and raffled to Branch 134 of the
Regional Trial Court (RTC) in the City of Makati.

[SCPL] alleged that Llorente is one of the numerous patrons of its casino in Sydney, Australia. As
such, he maintained therein Patron Account Number 471741. On 12 July 2000, he negotiated two
(2) Equitable PCI bank drafts with check numbers 034967 and 034968 worth US $150,000.00 each
or for the total amount of US $300,000.00 ("subject [demand/bank]6 drafts" [or simply "subject
drafts"]) in order to play in the Premium Programme of the casino. This Premium Programme offers
the patron a 1% commission rebate on his turnover at the gambling table and a .10% rebate for
complimentary expenses. Before upgrading x x x Llorente to this programme, [SCPL] contacted first
EPCIB to check the status of the subject drafts. The latter confirmed that the same were issued on
clear funds without any stop payment orders. Thus, Llorente was allowed to buy in on a Premium
Programme and his front money account in the casino was credited with US $300,000.00.

On 18 July 2000, [SCPL] deposited the subject drafts with Thomas Cook Ltd. On 1 August 2000, it
received the advice of Bank of New York about the "Stop Payment Order" prompting it to make
several demands, the final being on 22 August 2002, upon Llorente to make good his obligation.
However, the latter refused to pay. It likewise asked EPCIB on 30 August 2002 for a settlement
which the latter denied on the ground that it was Llorente who requested the Stop Payment Order
and no notice of dishonor was given.

On 28 January 2003, the [RTC] deemed it proper to grant and issue a writ of preliminary attachment
because the acts of Llorente, i.e., leaving the hotel premises without informing [SCPL] of his
whereabouts, failing to pay for all the services he had availed and/or not making sure that these
would be paid y the checks he negotiated and indorsed, requesting for a Stop Payment Order
despite knowledge that these checks are to answer for the payment for all services he had availed,
failing to communicate for the settlement of his outstanding obligation and for leaving and/or
transferring residence without notifying [SCPL] of his forwarding address, are clear indications of his
intention to renege on his obligation and defraud [SCPL].

For his part, Llorente alleged that he caused the stoppage of the subject drafts' payment because
(SCPL's] personnel and representatives committed fraud and unfair gaming practices during his stay
in the casino on 12 July up to 17 July 2000. He also countered that the case should be dismissed on
the ground that [SCPL] lacks the legal capacity to sue since the "isolated tr1nsaction rule" for which
it anchored its right to bring action in our courts presupposes that the transaction subject matter of
the complaint must have occurred in the Philippines, which however, is not the situation at bar since
it is clear from the narration that the same occurred in Australia.

On the other hand, EPCIB, in its Answer, not only alleged [SCPL's] lack of personality to sue before
Philippine courts, but denied also that it unjustifiably and maliciously refused to settle the obligation
since it merely complied with the instructions of Llorente, as payee of the subject drafts, to stop
payment thereon. It further went on saying that [SCPL] had no cause of action against it because
there was no privity of contract between them. EPCIB likewise filed a cross-claim against Llorente
since it already reimbursed the lace value of the subject drafts, pursuant to the demand of the latter.
For such reason, it should be relieved of any and all liabilities under the subject drafts.

Finding that [SCPL] had the legal capacity to sue and seek judicial relief before Philippine courts, the
[RTC], on 16 April 2009, rendered a Decision holding both [Llorente and EPCIB] solidarily liable for
the value of the subject drafts. It ruled that when Llorente, as payee of the subject drafts, signed at
the back thereof, he is said to ha[ve] become an indorser who warrants that on due presentment, the
instruments would be accepted or paid or both, as the case may be, according to their tenor, and
that if they be dishonored and the necessary proceedings on dishonor be duly taken, they will pay
the amount thereof to the holder. The same is also true for EPCIB, being the drawer of the subject
drafts. It is of no moment if the bank was not a privy to the transaction for its liability as a drawer is
not based on direct transaction but by virtue of the warranties it made within the purview of the
Negotiable Instruments Law. The [RTC] even pointed that [Llorente and EPCIB] could not seek
refuge on the alleged lack of notice of dishonor to them since they were responsible for the dishonor
of the subject drafts aside from the fact that it would be futile to require such notice since it was
EPCIB who countermanded the payment.

The trial court did not also consider Llorente's justification for ordering a stopped payment as it found
that it was done in order to escape liability of paying his obligations with [SCPL]. The decretal portion
of [the RTC] Decision reads as:

"WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff [SCPL]
and against both defendants Llorente and [EPCIB], as follows:

1. Ordering defendants Quintin Llorente and Equitable PCI Bank to pay the plaintiff [SCPL],
jointly and severally the amount of the subject bank drafts in the sum of us $300,000[.00;

2. Ordering defendants Quintin Llorente and Equitable PCI Bank to pay the plaintiff [SCPL],
jointly and severally, five (5%) percent of the amount claimed, or US $15,000.00, x x x as
and by way of attorney's fees; and,

3. Costs of suit.

For lack of merit, both defendants Llorente and Equitable PCI Bank's counterclaims as well as
defendant Equitable PCI Bank's cross-claim against defendant Llorente are DENIED.

SO ORDERED."

Aggrieved with the said ruling, both [Llorente and EPCIB] appealed before [the CA]. x x x7

Ruling of the CA
The CA identified the following 3 issues raised in the appeals filed by Llorente and Equitable PCI
Bank8 (EPCIB): (1) SCPL's personality to sue before Philippine courts under the isolated transaction
rule; (2) SCPL's being a holder in due course; and (3) solidary liability of EPCIB.9

Anent the first issue, the CA held that SCPL has pleaded the required averments in the complaint - it
is a foreign corporation not doing business in the Philippines suing upon a singular and isolated
transaction - which sufficiently clothed it the necessary legal capacity to sue in this
jurisdiction.10 The CA emphasized that the subject drafts were drawn by EPCIB, which is a
Philippine bank, and since the drawer is a bank organized and existing in the Philippines then
naturally a suit on the draft or check it issued can be filed in any of the places where the check is
drawn, issued, delivered or dishonored, which, in this case, can be either the Philippines where the
drafts were drawn and issued, or Australia where the indorsement and dishonor happened.11

On the second issue, the CA held that, contrary to EPCIB's assertion that the subject drafts were
drawn without any value, the fact that Llorente used them to "buy in" into the Premium Programme
of SCPL's casino which would entitle him to earn 1% cash commission or 0.1%12 rebate on his
gaming turn-over is enough to constitute as the "value" contemplated by the law, making SCPL a
holder in due course.13

On SCPL's good faith in view of Llorente's averment about the impossibility of having no face cards
coming out after seven consecutive deals, the CA found the following explanation in the judicial
affidavit of Paul Arbuckle14 (Arbuckle) sufficient:

x x x The game of Baccarat as played at Star City uses 8 decks of cards by 52 cards in each deck.
There are 416 cards in total with 128 cards being denoted as "face" cards including the "ten value
card". A single deal of [B]accarat consists of a minimum of 4 cards to a maximum of 6 cards. If we
use 5 cards as an average then over 6 or 7 deals of Baccarat approximately 35 to 42 cards will be
expended. Around 8.4% to a maximum of 10% of the total amount of cards available, I would
consider it possible, and in fact, very likely that with such a small percentage of the total number of
cards exposed that no face cards would appear.15

Also, the CA pointed out that Llorente's conduct - "in spite of the alleged irregularities in the
[B]accarat table, continued to play in said casino x x x [and] he should have · stopped playing and
betting because it would entail huge losses on his part"16 - counteracted whatever truth his claim
has.17

Regarding the third issue, the CA deemed it proper to discharge EPCIB from any responsibility
considering that it already paid Llorente the face amount of the subject drafts amounting to US
$300,000.00 as evidenced by the Quitclaim, Indemnity and Confidentiality Agreement18 (Indemnity
Agreement) executed on August 8, 2002.19 The CA further reasoned that allowing EPCIB 's solidary
liability would sanction unjust enrichment on Llorente's part who would be allowed to profit or enrich
himself inequitably at EPCIB's expense.20

Thus, the CA in its Decision dated September 30, 2013 ruled that Llorente's appeal was bereft of
any merit while that of EPCIB was partially considered.21 The dispositive portion of the CA Decision
states:

WHEREFORE, premises considered, the instant appeal is PARTIALLY GRANTED. The assailed
Decision dated 16 April 2009 of the Regional Trial Court is AFFIRMED with the modification that
EPCIB is ABSOLVED from any liability under Civil Case No. 02-1423.

SO ORDERED.22
Llorente filed a motion for reconsideration while SCPL filed a motion for partial reconsideration. The
CA denied both motions in its Resolution23 dated April 10, 2014.

Hence, the instant Rule 45 petitions for review on certiorari in G.R. No. 212050 filed by Llorente and
in G.R. No. 212216 filed by SCPL, respectively. Regarding G.R. No. 212050, SCPL filed its
Comment24 dated September 24, 2014 and Llorente filed his Reply25 dated October 8, 2014.
Regarding G.R. No. 212216, EPCIB filed its Comment26 dated October 4, 2014. Llorente filed an
Explanation27 dated August 14, 2015 wherein he manifested that he deemed it more proper and
appropriate to forego the filing of a Comment in G.R. No. 212216 considering the consolidation of
the two petitions and the issues and arguments raised therein are substantially the same and inter-
related with one another.28

The Issues

In G.R. No. 212050, Llorente raises the following issues:

1. whether the CA erred in affirming the RTC Decision despite the latter's lack of jurisdiction
over the subject matter of the complaint;

2. whether the CA erred in finding that SCPL has legal capacity to sue under the isolated
transaction rule; and

3. whether the designation of the law firm of Jimeno, Jalandoni and Cope (JJC Law) as
attorney-in-fact of SCPL constitutes gross violation of Section 69 of the Corporation Code.29

In G.R. No. 212216, SCPL raises the following issues:

1. whether the CA erred when it modified the RTC Decision by absolving EPCIB of any
liability; and

2. whether in absolving EPCIB the CA ignored the express provisions of law and anchored
its ratio on evidence that was not at all proven in trial.30

The Court's Ruling

G.R. No. 212050

Llorente's Petition lacks any merit.

On the issue of jurisdiction, Llorente argues that except for the mere issuance of the 2 bank drafts by
EPCIB, all the material acts and transactions between him and SCPL transpired in Australia; and, in
fact, his front money account with SCPL was even credited while he was in Australia.31 Thus, the
sole jurisdiction to hear and decide SCPL's complaint pertains to the Australian Court rather than the
Philippine Court.32

On SCPL's capacity to sue, Llorente argues that the condition sine qua non of the application of the
isolated transaction rule is that the alleged delict or wrongful act must have occurred in the
Philippines and the transaction between him and SCPL was in pursuance of the latter's casino
business.33
Regarding the resignation of JJC Law as SCPL's attorney-in-fact, Llorente argues that it is violative
of Section 69 of the Corporation Code because SCPL is not licensed to do business in the
Philippines.34 As such, SCPL's complaint is a mere scrap of paper and any judgment rendered in
connection therewith is a nullity which may be struck down even on appeal.35

On the capacity of a foreign corporation to sue before Philippine courts, the applicable law is clear.

Under Republic Act No. (RA) 1123236 or the Revised Corporation Code of the Philippines (Revised
Corporation Code), which became effective on February 23, 2019,37 the pertinent provision is
Section 150, which states:

SEC. 150. Doing Business Without a License. - No foreign corporation transacting business in the
Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene
in any action, suit or proceeding in any court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before Philippine courts or administrative tribunals on
any valid cause of action recognized under Philippine laws.

Section 150 of the Revised Corporation Code is a verbatim reproduction of Section 133 of Batas
Pambansa Blg. (BP) 68 or the Corporation Code of the Philippines (Corporation Code), which
provided:

Sec. 133. Doing business without a license. - No foreign corporation transacting business in the
Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene
in any action, suit or proceeding in any court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before Philippine courts or administrative tribunals on
any valid cause of action recognized under Philippine laws. (69a)

It must be noted that the Revised Corporation Code repealed the Corporation Code and any law,
presidential decree or issuance, executive order, letter of instruction, administrative order, rule or
regulation contrary or inconsistent with any provision of the Revised Corporation Code is modified or
repealed accordingly.38

While the law (presently the Revised Corporation Code or its predecessor, the Corporation Code)
grants to foreign corporations with Philippine license the right to sue in the Philippines, the Court,
however, in a long line of cases under the regime of the Corporation Code has held that a foreign
corporation not engaged in business in the Philippines may not be denied the right to file an action in
the Philippine courts for an isolated transaction.39 The issue on whether a foreign corporation which
does not have license to engage in business in the Philippines can seek redress in Philippine courts
depends on whether it is doing business or it merely entered into an isolated transaction.40 A foreign
corporation that is not doing business in the Philippines must disclose such fact if it desires to sue in
Philippine courts under the "isolated transaction rule" because without such disclosure, the court
may choose to deny it the right to sue.41

The right and capacity to sue, being, to a great extent, matters of pleading and procedure, depend
upon the sufficiency of the allegations in the complaint. Thus, as to a foreign corporation, the
qualifying circumstance that if it is doing business in the Philippines, it is duly licensed or if it is not, it
is suing upon a singular and isolated transaction, is an essential part of the element of the plaintiffs
capacity to sue and must be affirmatively pleaded.42

These pronouncements equally obtain under the Revised Corporation Code given the reproduction
of the exact wording of Section 133, Corporation Code in Section 150 of the Revised Corporation
Code.
Based on the parameters discussed above, the CA has correctly ruled that SCPL has personality to
sue before Philippine courts under the isolated transaction rule, to wit:

x x x [A] foreign corporation needs no license to sue before Philippine courts on an isolated
transaction.43 However, to say merely that a foreign corporation not doing business in the
Philippines does not need a license in order to sue in our courts does not completely resolve the
issue. When the allegations in the complaint have a bearing on the plaintiff's capacity to sue and
merely state that the plaintiff is a foreign corporation existing under the laws of a country, such
averment conjures two alternative possibilities: either the corporation is engaged in business in the
Philippines, or it is not so engaged. In the first, the corporation must have been duly licensed in order
to maintain the suit; in the second, and the transaction sued upon is singular and isolated, no such
license is required. In either case, compliance with the requirement of license, or the fact that the
suing corporation is exempt therefrom, as the case may be, cannot be inferred from the mere fact
that the party suing is a foreign corporation. The qualifying circumstance being an essential part of
the plaintiff's capacity to sue must be affirmatively pleaded. Hence, the ultimate fact that a foreign
corporation is not doing business in the Philippines must first be disclosed for it to be allowed to sue
in Philippine courts under the isolated transaction rule. Failing in his requirement, the complaint filed
by plaintiff with the trial court, it must be said, fails to show its legal capacity to sue. 44 x x x

In the case at bar, [SCPL] alleged in its complaint that "it is a foreign corporation which operates its
business at the Star City Casino in Sydney, New South Wales, Australia; that it is not doing business
in the Philippines; and that it is suing upon a singular and isolated transaction". It also appointed
Jimeno, Jalandoni and Cope Law Offices as its attorney-in-fact. Following the pronouncement
mentioned above and having pleaded these averments in the complaint sufficiently clothed [SCPL]
the necessary legal capacity to sue before Philippine courts.45

The appointment of JJC Law as attorney-in-fact of SCPL is irrelevant on the latter's capacity to sue
in the Philippines under an isolated transaction.

Further, the following observation of the RTC is apropos:

Besides, it is observed that defendant Llorente in [his] answer pleaded [an] affirmative relief for
damages from plaintiff [SCPL] by way of a counterclaim. This is contrary to his position that plaintiff
has no capacity to sue in the Philippines because such contention likewise entails that plaintiff may
be sued in the Philippines as defendant Llorente also prayed for affirmative relief against the plaintiff.
He is deemed to have admitted the capacity of plaintiff to be subject of our judicial process. It would
be unfair to rule that plaintiff may be sued in the Philippines without at the same time allowing it to
sue on an isolated transaction here.46

On the issue of jurisdiction, the argument of Llorente that Australian courts have jurisdiction over the
case because all the material acts and transactions between him and SCPL transpired in Australia,
except for the mere issuance of the two bank drafts by EPCIB in the Philippines also fails.

It must be remembered that the complaint filed by SCPL against Llorente and EPCIB is for collection
of sum of money, which is a civil case. Under BP 129, Section 19, RTCs have exclusive jurisdiction
"[i]n all other cases in which the demand, exclusive of interest, damages of whatever kind, attorney's
fees, litigation expenses, and costs or the value of property in controversy exceeds Three hundred
thousand pesos (P300,000.00) or, in such other cases in Metro Manila, where the demand,
exclusive of the abovementioned items exceeds Four hundred thousand pesos
(P400,000.00)."47 Since the amount demanded by SCPL against Llorente and EPCIB in solidary
capacity, which is "USD $300,000.00 plus legal interest from date of first demand on December 20,
2000 until full payment,"48 is above P400,000.00, the RTC has jurisdiction over SCPL's complaint.
Also, from the point of view of territorial jurisdiction in criminal cases49 involving checks, any of the
places where the check is drawn, issued, delivered, or dishonored has jurisdiction.50 As the CA
emphasized, "[w]hile it is true that the stopped payment occurred in Australia per advice of Union
Bank of California to the Bank of New York, x x x the subject matter of the instant complaint are the
subject drafts drawn by EPCIB, which is a Philippine bank."51

G.R. No. 212216

SCPL's Petition is meritorious.

The CA absolved EPCIB from any liability in this wise:

Relative to EPCIB's solidary liability, We deem it proper to discharge it from any responsibility
considering that it already paid Llorente the face value of the subject drafts amounting to US
$300,000.00 as evidenced by the Quitclaim, Indemnity and Confidentiality Agreement executed on 8
August 2002. It would be very unfair to hold EPCIB solidarily liable with Llorente because it already
paid/refunded to the latter the total amount of the subject drafts. Moreover, allowing such solidary
liability would, indeed, be to sanction unjust enrichment on the part of Llorente, who will be allowed
to profit or enrich himself inequitabl[y] at EPCIB's expense,52 since he was already paid and yet, the
latter, who was without any fault, is still bound to share the responsibility without any assurance of
being paid. Hence, it is only just and equitable to relieve the bank from any liability to pay
considering the execution of the above agreement in favor of Llorente.53

In its Petition, SCPL posits that it is an established fact that EPCIB issued the subject demand drafts
since it was never denied by EPCIB and was even confirmed by the bank's counsel in a letter dated
September 16, 2002 to SCPL's counsel.54

According to SCPL, in issuing the subject demand drafts, EPCIB is considered by law as the drawer
and being the drawer, it represented that on due presentment the checks would be accepted or paid,
or both, according to their tenor and if they be dishonored and the necessary proceedings be taken it
would be the one who would pay pursuant to Section 61 of the Negotiable Instruments Law (NIL).55

Additionally, SCPL argues that under the NIL, while the maker and the acceptor of the negotiable
instrument are primarily liable, the drawer and endorser are secondarily liable; and the drawer's
secondary liability to pay the amount of the checks arises from its warranties as the drawer.56 Being
a holder in due course, as the CA has recognized, SCPL may enforce payment of the instrument for
its full amount against all parties liable thereon.57 SCPL concludes that there is no room for the
application of equity and unjust enrichment because the rights, liabilities and representations of the
parties are explicitly provided in the NIL and equity, being invoked only in the absence of law, may
supplement the law but it can neither contravene nor supplant it.58

As to the Indemnity Agreement allegedly executed on August 8, 2002, SCPL further posits that the
CA has no basis to give it weight as it was never presented as evidenc1 e on EPCIB's behalf and
was never formally offered or identified by a proper witness in court.59 Even assuming that the
Indemnity Agreement can be used as evidence, SCPL takes the position that it is only valid between
Llorente and EPCIB and cannot be enforced to defeat SCPL's right as a holder in due course to
enforce payment of the instrument for the full amount thereof against all parties liable thereon.60

In its Comment,61 EPCIB counters that the CA correctly absolved EPCIB from any liability by reason
of unjust enrichment and cites Article 22 of the Civil Code, which provides that every person who
through an act or performance of another, or any other means, acquires or comes into possession of
something at the expense of the latter without just or legal ground, shall return the same to
him.62 EPCIB argues that the unjust enrichment principle is applicable considering that Llorente
already received the value of the subject bank drafts from EPCIB; and requiring it again to pay the
face value of the bank drafts would amount to Llorente's unjust enrichment to its prejudice.63

As another ground, EPCIB argues that SCPL and EPCIB have no privity of contract as they never
transacted with each other.64 Invoking the basic principle of relativity of contracts, EPCIB states that
it would be highly iniquitous if it is made liable in any way for whatever controversy that arose
between SCPL and Llorente.65

Given the foregoing, EPCIB has apparently abandoned its arguments before the CA that: (1) SCPL
is not a holder in due course because it took the subject bank drafts without any value since the
funds corresponding thereto had been withdrawn by Llorente, and (2) SCPL cannot be considered in
good faith because of Llorente's averment regarding the impossibility of having no face cards coming
out of several deals despite a considerable amount of time.66

The CA has rejected the said arguments and admitted that SCPL is a holder in due course, viz.:

Section 52 of the [NIL] gives the conditions in order to consider [a] person as a holder in due course,
to wit:

"SEC. 52. What constitutes a holder in due course. - A holder in due course is a holder who has
taken the instrument under the following conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue and without notice that it had been
previously dishonored, if such was the fact;

(c) That he took it in good [faith] and for value;

(d) That at the time it was negotiated to him, he had no notice of any infirmity or defect in the
title of [the] person negotiating it."

As a general rule, under the above provision, every holder is presumed prima facie to be a holder in
due course. One who claims otherwise has the onus probandi to prove that one or more of the
conditions required to constitute a holder in due course are lacking.67 At bar, EPCIB failed to prove
that the elements of good faith and value are wanting.

Anent the element of good faith, [SCPL] showed that Llorente's averment about the impossibility of
having no face cards coming out after seven consecutive deals, is not unusual in view of the small
percentage of the total number of cards exposed [as explained in the] judicial affidavit [of] Paul
Arbuckle, Head of Gaming of Star City Casino x x x [.]

xxxx

It bears to emphasize that Arbuckle had thirty (30) years work experience in the different casinos
located in Australia such that his knowledge and expertise about the different casino games
particularly Baccarat, cannot easily be disregarded and overturned by a simple allegation of cheating
which has not been substantiated in view of the absence of a complaint [by] Llorente to [SCPL's]
personnel.
Moreover, Llorente's conduct after he complained about the purported fraud in the casino
counteracted whatever truth his claim has. For this purpose, We acknowledge the [RTC's]
disquisition, viz[.]:

xxxx

The [c]ourt finds it quite interesting, and contrary to human behavior, that x x x Llorente, in spite of
the alleged irregularities in the [B]accarat table, continued to play in said casino. If there were indeed
irregularities, as being claimed by x x x Llorente, he should have stopped playing and betting the
cause it would entail huge losses on his part. Considering that the amount of capital involved was
very substantial and considering further that x x x Llorente, as his qualifications show, is admittedly
an experienced casino player x x x, the court finds it hard to believe that, if indeed there were
unlawful activities going on in the casino, specifically in the [B]accarat table, that x x x Llorente would
still choose to continue playing, further risking his money.

xxxx

Contrary to EPCIB's assertion that the subject drafts were taken without any value, We would like to
point out that value "in general terms, may be some right, interest, profit or benefit to the party who
makes the contract or some forbearance, detriment, loan, responsibility, etc. on the other
side."68 Here, it was established that Llorente used the subject drafts to buy-in into the Premium
Programme of [SCPL's] casino which would entitle him to earn one x x x percent [(1%)] cash
commission or [zero point] one x x x percent [(0.1%)] rebate on his gaming turn-over. This right to
play under the Premium Programme is enough to constitute as a "value" contemplated by the law,
thus, making [SCPL] a holder in due course.

Said status of [SCPL] remained despite the withdrawal of the funds because at the time Llorente
negotiated the subject drafts, [SCPL] had no notice that the same had been previously dishonored.
In fact, it even verified the status by calling x x x EPCIB, who advised it through the latter's employee
x x x Consuelo Conigado that the same were issued on clear funds and there [was] no stop payment
orders.69

The Court notes that while Llorente testified that he purportedly reported the fraud or "cheating"
incident in SCPL's casino to the branch office of the Australian Gaming Commission (AGC) at the
ground floor of the casino, he presented no proof, documentary or otherwise, that he in fact did file a
complaint; and the RTC found his account of how he allegedly brought the matter to the AGC "not
highly persuasive" noting that Llorente never mentioned anything about him having reported the
incident to the AGC in his Answer, an information so vital to support his claim of fraud.70

American jurisprudence explains the nature of drafts in this wise:

A draft in the law of bills and notes is a "drawing" and has been defined as an open letter of request
from, and an order by, one person on another to pay a sum of money therein mentioned to a third
person on demand or at a future time specified therein. A draft is a bill of exchange, and the term
"draft" is commonly employed as a synonym for the words "bill of exchange" or "check," although it
cannot be the latter if it lacks the requirements of a check as distinguished from other bills of
exchange. Banks are perhaps the greatest users of drafts, and they sell them to persons who desire
to transmit funds. Thus a draft has been defined as a check drawn by a bank, the only distinguishing
feature between a draft and an ordinary check being the character of the drawer. The instrument
which is usually denominated a "bank draft"71 is in the customary form of a check and is generally
drawn by one bank upon another bank in which it has deposits much the same as the ordinary
depositor draws his check upon his bank. The general rule is that such instrument is a check and
subject to the rules applicable to checks. Since the term check is limited to a demand instrument and
"draft" is not [as it may be payable on demand or at a fixed or determinable future time72], there is a
distinction between the two in this respect.

In its usual form a draft is a negotiable instrument.73 (Emphasis and underscoring provided)

When the CA recognized SCPL as a holder in due course74 and it did not overturn the finding of the
RTC that the subject demand/bank drafts are negotiable instruments,75 the CA in effect ruled that
the two demand/bank drafts drawn by EPCIB with Llorente as the payee are negotiable instruments.
The Court totally agrees with the RTC's finding, to wit:

A draft is a form of a bill of exchange used mainly in transactions between persons physically remote
from each other. It is an order made by one person, say the buyer of goods, addressed to a person
having in his possession funds of such buyer, ordering the addressee to pay the purchase price to
the seller of the goods. Where the order is made by one bank to another bank, as in this case, it is
referred to as a bank draft. Needless to say, the bank drafts, subject of this case are negotiable
instruments and are therefore governed by the provisions of the Negotiable Instruments Law.76

Both the RTC and CA correctly recognized EPCIB as the drawer of the subject demand/bank drafts.
The liability of the drawer is spelled out in Section 61 of the NIL, which provides:

Sec. 61. Liability of drawer. - The drawer by drawing the instrument admits the existence of the
payee and his then capacity to indorse; and engages that, on due presentment, the instrument will
be accepted or paid, or both, according to its tenor, and that if it be dishonored and the necessary
proceedings on dishonor be duly taken, he will pay the amount thereof to the holder or to any
subsequent indorser who may be compelled to pay it. But the drawer may insert in the instrument an
express stipulation negativing or limiting his own liability to the holder.

When the bank, as the drawer of a negotiable check, signs the instrument its engagement is then as
absolute and express as if it were written on the check;77 and a dual promise is implied from the
issuance of a check: first, that the bank upon which it is drawn will pay the amount thereof; and
second, if such bank should fail to make the payment, the drawer will pay the same to the holder.78

Generally, by drawing a check, the drawer: admits the existence of the payee and his then capacity
to endorse; impliedly represents that he (the payee) has funds or credits available for its payment in
the bank in which it is drawn; engages that if the bill is not paid by the drawee and due proceedings
on dishonor are taken by the holder, he will upon demand pay the amount of the bill together with
the damages and expenses accruing to the holder by reason of the dishonor of the instrument; and,
if the drawee refuses to accept a bill drawn upon him, becomes liable to pay the instrument
according to his original undertaking.79

However, the liability of the drawer is not primary but secondary, particularly after acceptance
because it is conditional upon proper presentment and notice of dishonor, and, in case of a 'foreign
bill of exchange, protest, unless such conditions are excused or dispensed with.80 Thus, under
Section 84 of the NIL, when the instrument is dishonored by non-payment, an immediate right of
recourse to all parties secondarily liable thereon accrues to the holder, subject to the provisions of
the NIL.

Regarding the effect of countermand or stopping payment, the drawer of a bill, including a draft or
check, as a general rule, may by notice to the drawee prior to acceptance or payment countermand
his order and command the drawee not to pay, in which case the drawee is obliged to refuse to
accept or pay.81 There are however cases which hold that a draft drawn by one bank upon another
and bought and paid for by a remitter, as the equivalent of money or as an executed sale of credit by
the drawer, is not subject to rescission or countermand so as to avoid the drawer's liability
thereon.82 Moreover, the right to stop payment cannot be exercised so as to prejudice the rights of
holders in due course without rendering the drawer liable on the instrument to such
holders.83 Stated differently, stopping payment does not discharge the liability of the drawer of a
check or other bill to the payee or other holder.84 However, where payment has been stopped by
the drawer the relation between the drawer and payee becomes the same as if the instrument had
been dishonored and notice thereof given to the drawer.85 Thus, the drawer's conditional liability is
changed to one free from the condition and his situation is like that of the maker of a promissory note
due on demand; and he is liable on the instrument if he has no sufficient defense.86

In the instant case, on July 27, 2002 Llorente applied for and executed a Stop Payment Order (SPO)
on the subject demand/bank drafts on the pretext that the said drafts which he issued/negotiated to
SCPL allegedly exceeded the amount he was obliged to pay SCPL87 contrary to his position that
SCPL committed fraud and unfair gaming practices. The execution of the SPO by Llorente did not
discharge the liability of EPCIB, the drawer, to SCPL, the holder of the subject demand/bank drafts.
Given that an SPO was issued, the dishonor and non-payment of the subject demand/bank drafts
were to be expected, triggering the immediate right of recourse of the holder to all parties
secondarily liable, including the drawer, pursuant to the NIL. As the RTC noted: "[Llorente and
EPCIB] could not seek refuge on the alleged lack of notice of dishonor to them since they were
responsible for the dishonor of the subject drafts aside from the fact that it would be futile to require
such notice since it was EPCIB who countermanded the payment."88

The finding of both the RTC and the CA that SCPL is a holder in due course is not even disputed by
EPCIB in its Comment89 dated October 4, 2014 to the SCPL Petition. To recall, EPCIB merely
argued that the CA was correct in absolving it from liability by applying the principle of unjust
enrichment.90 EPCIB added that it had no privity of contract between SCPL and Llorente.91

Under Section 57 of the NIL, "[a] holder in due course holds the instrument free from any defect in
the title of prior parties, and free from defenses available to prior parties among themselves, and
may enforce payment of the instrument for the full amount thereof against all parties liable thereon."
In addition, under Section 51 of the NIL, every holder of a negotiable in instrument may sue thereon
in his own name; and payment to him in due course discharges the instrument.

Having recognized the status of SCPL as a holder in due course and EPCIB as the drawer of the
subject demand/bank drafts, was the CA correct in absolving EPCIB from any liability in view of the
Indemnity Agreement dated August 8, 2002 between Llorente and EPCIB?

In absolving EPCIB from liability, the CA forwarded the following justification:

Relative to EPCIB's solidary liability, We deem it proper to discharge it from any responsibility
considering that it already paid Llorente the face value of the subject drafts amounting to US
$300,00[0.00 as evidenced by the Quitclaim, Indemnity and Confidentiality Agreement executed on
8 August 2002. It would be very unfair to hold EPCIB the total amount of the subject drafts.
Moreover, allowing such solidary liability would, indeed, be to sanction unjust enrichment on the part
of Llorente, who [would] be allowed to profit or enrich himself inequitabl[y] at EPCIB's expense, since
he was already paid and yet, the latter, who was without any fault, is still bound to share the
responsibility without any assurance of being paid. Hence, it is only just and equitable to relieve the
bank from any liability to pay considering the execution of the above agreement in favor of
Llorente.92
The Court finds, and so holds, that the CA erred in discharging EPCIB from its liability as the drawer
of the subject demand/bank drafts.

A review of the records confirms SCPL's argument that the Indemnity Agreement cannot be
considered as evidence because it was not formally offered. In addition, even if it were given some
evidentiary weight, it will nevertheless not bind SCPL pursuant to the principle of relativity of
contracts under Article 1311 of the Civil Code, which provides that "[c]ontracts take effect only
between the parties, their assigns and heirs, except in case where the rights and obligations arising
from the contract are not transmissible by their nature, or by stipulation or by provision of law."

As to the unjust enrichment principle applied by the CA, the same is not proper. EPCIB's invocation
of unjust enrichment to avoid its liability as the drawer of the subject demand/bank draft evinces bad
faith in that rather than discharging its obligation as the drawer, EPCIB presents the Indemnity
Agreement as an afterthought to shield itself from liability.

Firstly, the liability of EPCIB as the drawer cannot be abrogated by virtue of the Indemnity
Agreement because it arises from the subject demand/bank drafts, which are negotiable
instruments, that it issued. Its secondary liability under Section 61 of the NIL became primary when
the payment of the subject demand/bank drafts had been stopped which had the same effect as if
the instruments had been dishonored and notice thereof was given to the drawer pursuant to Section
84 of the NIL. Given the nature of the liability of the drawer of a negotiable instrument, EPCIB's
argument that it is not liable to SCPL because they have no privity of contract is utterly without merit.

Secondly, the reimbursement/return by EPCIB to Llorente of the face value of the subject
demand/bank drafts in the total amount ofUS$300,000.00 by virtue of the Indemnity Agreement,
assuming this had any probative value, is subject to the following provision:

4. Claimant ([Llorente)] also agrees to execute and post an indemnity bond in an amount equivalent
to US$300,000.00 in favor of EPCIBank, Star Casino (US$ Drafts Holder/Endorsee), Union Bank of
California: (UBOC), and to any other person or entity who may have been prejudiced by Claimant for
whatever damages that may be suffered by EPCIBank, and other third parties as a consequence of
Claimant's SPO [(Stop Payment Order)] and reimbursement of the amount of US$300,000.00.93

Thus, if EPCIB is made liable on the subject demand/bank drafts, it has a recourse against the
indemnity bond. To be sure, the posting of the indemnity bond required by EPCIB of Llorente is in
effect an admission of his liability to SCPL and the provision in the Whereas clause that: "On 27 July
2002, Claimant [(Llorente)] applied for and executed a Stop Payment Order (SPO) on the two drafts,
citing as reason that the drafts he issued/negotiated to Star Casino exceeded the amount he was
[obliged] to pay"94 may be taken against him to weaken his allegation of fraud and unfair gaming
practices against SCPL.

Lastly, for the unjust enrichment principle to apply against SCPL, it should be the party who is
benefitted from the reimbursement or return of the funds by EPCIB. In this case, the party who
received the benefit was Llorente. Any payment to SCPL arising from the subject demand/bank
drafts by EPCIB and/or Llorente can never be by mistake. As provided in Article 2154 of the Civil
Code, if something is received when there is no right to demand it, and it was unduly delivered
through mistake, the obligation to return it arises; and, under Article 2163, here is payment by
mistake if something which has never been due or has already been paid is delivered.

While EPCIB is clearly liable as the drawer of the subject demand/bank drafts, there is no legal basis
to make it solidarily liable with Llorente.
According to Article 1207 of the Civil Code, there is solidary liability only when the obligation
expressly so states, or when the law or the nature of the obligation requires solidarity. In this case,
there is no contract or agreement wherein the solidary liability of EPCIB is expressly provided. Under
the NIL and the nature of the liability of the drawer, solidary obligation is also not provided Thus,
EPCIB's liability is not solidary but primary due to the SPO that Llorente issued against the subject
demand/bank drafts.

Consequently both Llorente and EPCIB are individually and primarily liable as endorser and drawer
of the subject demand/bank drafts, respectively. Given the nature of their liability, SCPL may
proceed to collect the damages hereinafter awarded simultaneously against both Llorente and
EPCIB, or alternatively against either Llorente or EPCIB, provided that in no event can SCPL
recover from both more than the damages awarded.

In the event that SCPL is able to collect from EPCIB based on this judgment, any amount that
EPCIB pays to SCPL can be collected by EPCIB from Llorente by virtue of its cross-claim against
Llorente and pursuant to the indemnity clause of the Indemnity Agreement, which is valid as
between Llorente and EPCIB

The monetary awards imposed by the RTC upon Llorente and EPCIB have to be modified pursuant
to Lara's Gifts & Decors, Inc. v. Midtown Industrial Sales, Inc.,95 wherein the majority of the Court en
banc revised the guidelines on interest in Eastern Shipping Lines, Inc. v. Court of Appeals96 and
Nacar v. Gallery Frames97 and the ponente filed a Concurring and Dissenting Opinion. Thus, the
payment of the amount of the subject bank drafts in the sum of US$300,000.00 should bear interest
at the legal rate of 12% per annum from the date of extrajudicial demand, which is August 30,
200298 (as this is the date the extrajudicial demand against EPCIB that was made subsequent to
the extrajudicial demand for payment against Llorente), to June 30, 2013 and at 6% per annum from
July 1, 2013 until full payment and the payment of the attorney's fees equivalent to 5% of the amount
of demand or US$15,000.00 should bear interest at the rate of 6% per annum from finality of this
Decision until full payment.

WHEREFORE, the Petition in G.R. No. 212050 is hereby DENIED while the Petition in G.R. No.
212216 is GRANTED. The Decision dated September 30, 2013 and the Resolution dated April 10,
2014 of the Court of Appeals in CA-G.R. CV No. 94736 are PARTIALLY REVERSED and SET
ASIDE insofar as the Court of Appeals absolved Equitable PCI Bank from any liability is concerned.
The Decision dated April 16, 2009 rendered by the Regional Trial Court, Branch 134, Makati City in
Civil Case No. 02-1423 is REINSTATED with MODIFICATION:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff Star City
Pty Limited and against both defendants Quintin Llorente and Equitable PCI Bank, as follows:

1. Finding both defendants Quintin Llorente and Equitable PCI Bank individually and primarily liable
and:

(a) Ordering defendants Quintin Llorente and Equitable PCI Bank to pay the plaintiff Star City
Pty Limited the amount of the subject bank drafts in the sum of US $300,000.00 with interest
at 12% per annum from August 30, 2002 to June 30, 2013 and at 6% per annum from July 1,
2013 until full payment;

(b) Ordering defendants Quintin Llorente and Equitable PCI Bank to pay the plaintiff Star City
Pty Limited 5% of the amount claimed, or US $15,000.00, as and by way of attorney's fees
with interest at 6% per annum from the finality of this Decision until full payment; and,
2. Costs of suit.

For lack of merit, both defendants Quintin Llorente's and Equitable PCI Bank's counterclaims
are DENIED. Defendant Equitable PCI Bank's cross-claim against defendant Quintin Llorente
is GRANTED.

SO ORDERED.

Peralta, C.J., (Chairperson), J. Reyes, Jr., Lazaro-Javier, and Lopez, JJ., concur.

G.R. No. 196158, January 20, 2021

MAGNA READY MIX CONCRETE CORPORATION, Petitioner, v. ANDERSEN BJORNSTAD KANE

JACOBS, INC., Respondent.

DECISION

HERNANDO, J.:

This Petition for Review on Certiorari1 assails the September 8, 2010 Decision2 and March 14, 2011
Resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 92647, which affirmed with modifications
the August 19, 2008 Decision4 of the Regional Trial Court (RTC), Branch 161 of Pasig City in Civil Case
No. 69953.

The CA ordered petitioner Magna Ready Mix Concrete Corporation (MAGNA) to pay respondent
Andersen Bjornstad Kane Jacobs, Inc. (ANDERSEN) the amounts of US$60,786.59, 5 plus 12% legal
interest computed from the time of extrajudicial demand on June 26, 1998 6 until full payment, as well
as P30,000.00 as exemplary damages and P50,000.00 as attorney's fees.

The Factual Antecedents:

This case stemmed from a complaint for collection of a sum of money and damages filed on April 20,
2004 by ANDERSEN against MAGNA.

MAGNA is a corporation organized and existing under the laws of the Philippines. 7 ANDERSEN is a
corporation organized and existing under the laws of the State of Washington, United States of
America.8 In its Complaint, ANDERSEN alleged that it was neither doing business in the Philippines nor
licensed to do business herein; it is suing on an isolated transaction that it entered into with MAGNA. 9

In 1996, MAGNA ordered from ANDERSEN the form design and drawing development for its project on
the development of a precast plant and PIC double tee design. 10 In this connection, MAGNA issued a
purchase order dated October 21, 1996; the parties also allegedly executed an Agreement for
Professional Services11 dated November 29, 199612 which provided that MAGNA would compensate
ANDERSEN for the performance of services described therein. 13 In February 1997, MAGNA asked
ANDERSEN to prepare a preliminary design for its Ecocentrum Garage Project. 14 Pursuant to the
contract, ANDERSEN delivered the designs.15

MAGNA made partial payments, but left an unpaid balance in the amount of US$60,786.59 pertaining
to: (a) precast plant inspection and consultation; (b) PIC double tee form design and plant
development design; and, (c) Ecocentrum Garage preliminary design for bidding. 16

ANDERSEN made repeated demands for MAGNA to pay, but to no avail; hence the filing of the
complaint.17 ANDERSEN claimed that MAGNA acted "maliciously, fraudulently, and in gross and evident
bad faith" in refusing to pay the balance.18 ANDERSEN also sought payment of interest, exemplary
damages, and attorney's fees.19
In its defense, MAGNA claimed that ANDERSEN did not render any inspection or consultation services
for it.20 It averred that ANDERSEN's claims had no basis because the contract upon which they were
based was executed after the services had been performed. 21 MAGNA further stated that it could not
be liable for the PIC double tee design and plant development design because these were not
delivered.22 The Ecocentrum Garage preliminary design was also not delivered. 23 MAGNA sought moral
and exemplary damages, and attorney's fees in its compulsory counterclaim. 24

Gene Lim (Lim), MAGNA's general manager, testified that the services ANDERSEN allegedly rendered
were not for MAGNA's benefit, but were for business development, due diligence, and feasibility
studies undertaken for the creation of Structural Pre-cast Inc. (SPI). 25 SPI was allegedly a corporation
that Bharat Soli (Soli), ANDERSEN's principal owner, and Lim had planned to incorporate for their
business venture.26 However, SPI was not formally incorporated due to the Asian Financial Crisis. 27

During the trial, MAGNA filed a Motion to Dismiss with Motion to Cancel Hearing 28 claiming that it later
discovered (after filing its answer) that ANDERSEN previously filed a case against another Philippine
corporation.29 In that earlier case, ANDERSEN sought to collect a sum of money from the defendant for
the design and development of the latter's projects. 30 MAGNA claimed that the earlier case covered
several transactions different from the subject of the instant case but involved the same Ecocentrum
design drawing.31 Due to this discovery, MAGNA asserted that ANDERSEN was indeed doing business in
the Philippines but without the necessary license. Hence, it filed the motion to dismiss alleging that
ANDERSEN has no legal capacity to sue.

The RTC, in its Order dated March 19, 2007, denied MAGNA's motion to dismiss on the ground that it
was already estopped from challenging ANDERSEN's personality after having acknowledged the same
by virtue of its entering into a contract with it. 32 Trial then continued.

Ruling of the Regional Trial Court:

It its August 19, 2008 Decision, the RTC ruled in favor of ANDERSEN. However, it did not grant the
complete relief of payment of US$60,786.59 which ANDERSEN prayed for but only USD35,694.03 with
legal interest, P50,000.00 as attorney's fees, and costs of suit. 33 In arriving at the amount of
US$35,694.03, the RTC deducted the purported equity participation of Soli and a certain Jun Pelaez
(Pelaez) in SPI.34

The RTC ruled that ANDERSEN was able to establish by preponderance of evidence that a contract
(Agreement for Professional Services) indeed existed between the parties. 35 The trial court also found
that there was a series of exchanges of memoranda and notes between the parties showing that
MAGNA instructed ANDERSEN to work on the design of the precast manufacturing even prior to the
signing of the contract. The former was therefore liable for the services that the latter rendered even
prior to the execution ofthe contract. 36

The dispositive portion of the RTC Decision reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff Andersen Bjornstad Kane Jacobs,
Inc. and against defendant Magna Ready Mix Concrete Corporation [which] is directed to pay plaintiff
the following:

1. The amount of $35,694.03 computed at the exchange rate prevailing at the time of the
consummated contract on November 29, 1996 with 12% legal interest per annum
computed from the time of the filing of the complaint until fully paid.
2. The amount of P50,000 as attorney'S fees and litigation expenses.
3. The costs of suit.

SO ORDERED.37
Dissatisfied, both parties appealed the case to the CA.

ANDERSEN contended that the RTC erred in: (a) finding that MAGNA is liable only in the amount of
US$35,694.03 out of the US$60,786.59 prayed for; (b) holding that the legal interest shall be
computed from the time of filing the complaint and not from the time when written demand was made
on June 24, 1998; (c) not awarding exemplary damages; and, (d) awarding only P50,000.00 as
attorney's fees considering that the legal fees it incurred far exceeds that amount. 38

On the other hand, MAGNA contended that the RTC erred in: (a) not dismissing the complaint despite
ANDERSEN's concealment of the fact that it is a foreign corporation doing business in the Philippines
without a license, and filing a suit not based on an isolated transaction; (b) ruling that there was a
consummated contract between the parties; and (c) holding MAGNA liable for the services ANDERSEN
rendered prior to the date of the supposed contract; and, (d) holding that MAGNA was liable for the
services ANDERSEN rendered regarding the precast double tee form design, plant development
design, and Ecocentrum Garage preliminary design as these were not delivered to MAGNA as agreed. 39

Ruling of the Court of Appeals:

In its assailed September 8, 2010 Decision, the CA partially granted ANDERSEN'S appeal and
dismissed MAGNA's. It affirmed the RTC Decision with modification by ordering MAGNA to pay the
complete relief ANDERSEN prayed for in the amount of US$60,786.59, subject to 12% legal interest
from time of extrajudicial demand on June 26, 1998 until full payment. 40 It also ordered MAGNA to pay
exemplary damages and attorney's fees.41

The CA ruled that ANDERSEN's filing of another case against another domestic corporation covering
transactions different from the subject of the instant case does not necessarily prove that it is doing
business in the Philippines without the requisite license. 42 As the subject matter or transaction in the
earlier case is not related nor relevant to the subject of the instant case, the latter is still deemed
isolated.43 Further, the CA held that MAGNA has already waived its right to contest ANDERSEN's legal
capacity to sue.44 Prior to filing of the motion to dismiss, MAGNA had already filed an answer and
participated in the proceedings without assailing ANDERSEN's legal capacity to sue. 45 The defense of
plaintiffs lack of legal capacity to sue is not deemed waived even if not raised in a motion to dismiss or
answer as provided in the Rules of Court and jurisprudence. 46

The CA ruled that there was a perfected and binding contract between the parties; 47 and that MAGNA
is estopped from disclaiming the existence of the contract in view of its stipulation during the pre-trial
that it executed the said contract with ANDERSEN, which constitutes a judicial admission. 48 Also, Lim
himself admitted in his testimony that he signed the said contract. 49 Further, the CA sustained the
RTC's finding that even prior to the execution of the contract, MAGNA was already obtaining
consultation services from ANDERSEN, making the former liable for the latter's services rendered prior
to the contract.50 With regard to MAGNA's contentions that the various designs and drawings were not
delivered, the CA ruled that the evidence (in the form of letters, purchase orders, and
correspondences) adequately showed that MAGNA, through Lim, sought ANDERSEN'S services and the
latter indeed performed the services required of it. 51

In awarding the whole amount of US$60,786.59, theCA found that the amount the RTC deducted
pertaining to the equity participation of Soli and Pelaez in SPI were conditioned on the shares of stock
to be issued by SPI.52 However, as SPI was not formally incorporated, MAGNA therefore remained
liable for the amount previously deducted.53 There was no showing of a new agreement nor a valid
novation of the contract transferring the liability to Soli and Pelaez. 54

The CA reckoned the imposition of legal interest from the time a written demand was made on June
26, 1998.55 On the award of exemplary damages, it ruled that MAGNA's utter disregard of its
contractual obligations to ANDERSEN evinced wanton, reckless, and malevolent conduct. 56 Lastly, the
CA found no cogent reason to warrant the increase of attorney's fees as awarded by the RTC. 57

The dispositive portion of the CA Decision reads:

WHEREFORE, premises considered, the appeal of plaintiff-appellant (Andersen) is PARTIALLY

GRANTED, while the appeal of defendant appellant (Magna) is DISMISSED. The decision of the

Regional Trial Court of Pasig City, Branch 161 dated 19 August 2008,

is AFFIRMED with MODIFICATIONS. Defendant-appellant is ordered to pay plaintiff-appeallant the

amount of $60,786.59 computed at the exchange rate prevailing at the date of the subject contract on

29 November 1996, plus 12% legal interest per annum computed from the time of the extrajudicial

demand on June 26, 1998 until full payment. It is further directed to pay plaintiff-appellant exemplary

damages in the amount of P30,000.00 and attorney's fees in the amount of 50,000.00.

SO ORDERED.58

MAGNA moved for a reconsideration but it was subsequently denied by the appellate court in its March
14, 2011 Resolution.59

Hence, this Petition.

Issue

The sole issue for the resolution of the Court is whether ANDERSEN has legal capacity to sue in the
Philippines.

Our Ruling

Well-established is the rule that only questions of law should be raised in a petition for review
on certiorari under Rule 45 of the Rules of Court. This Court is generally not a trier of facts. This rule
admits of exceptions60 but the instant case does not fall under any of these. This Court has repeatedly
stated that:
A question of law exists when the doubt centers on what the law is on a certain set of facts while a
question of fact results when the issue revolves around the truth or falsity of the alleged facts. For a
question to be one of law, the question must not involve an examination of the probative value of the
evidence presented by any of the litigants. The resolution of the issue must solely depend on what the
law provides on the given set of circumstances. Once it is obvious that the issue invites a review of the
evidence presented, the question posed is one offact. 61

Except for the issue concerning ANDERSEN's legal capacity to sue, the Petition raises questions of
facts already ruled upon by the RTC and affirmed by the CA.

The Court resolves that ANDERSEN has no legal capacity to sue for doing business in the Philippines
without procuring the necessary license. It is not suing on an isolated transaction on the basis of the
contract it entered into with MAGNA. However, MAGNA is already estopped from challenging
ANDERSEN's legal capacity when it entered into a contract with it.

Section 133 of the Corporation Code of the Philippines (1980) 62 provides:

Section 133. Doing Business Without License. -No foreign corporation transacting business in the
Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene
in any action, suit or proceeding in any court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before Philippine courts or administrative tribunals on
any valid cause of action recognized under Philippine laws.
Thus, a foreign corporation that conducts business in the Philippines must first secure a license for it
to be allowed to initiate or intervene in any action in any court or administrative agency in the
Philippines. A corporation has legal status only in the state that granted it personality. 63 Hence, a
foreign corporation has no personality in the Philippines, much less legal capacity to file a case, unless
it procures a license as provided by law.64

The case of Agilent Technologies v. Integrated Silicon,65 citing Mentholatum v. Mangaliman,66 discusses
the two tests to determine whether a foreign corporation is doing business in the Philippines:

In Mentholatum, this Court discoursed on the two general tests to determine whether or not a foreign
corporation can be considered as "doing business" in the Philippines. The first of these is the
substance test, thus:
The true test [for doing business], however, seems to be whether the foreign corporation is continuing
the body of the business or enterprise for which it was organized or whether it has substantially
retired from it and turned it over to another.

The second test is the continuity test, expressed thus:

The term [doing business] implies a continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or works or the exercise of some of the
functions normally incident to, and in the progressive prosecution of, the purpose and object of its
organization.67

The number of the transactions entered into is not determinative whether a foreign corporation is
doing business in the Philippines; the intention to continue the body of its business prevails. 68 The
number or quantity is merely an evidence of such intention. 69 A single act or transaction may then be
considered as doing business when a corporation performs acts for which it was created or exercises
some of the functions for which it was organized. 70

As an exception, a foreign corporation may sue without a license on the basis of an isolated
transaction. Eriks Pte. Ltd. v. Court of Appeals71 describes the concept of isolated transaction, to wit:

The phrase "isolated transaction" has a definite and fixed meaning, i.e. a transaction or series of
transactions set apart from the common business of a foreign enterprise in the sense that there is no
intention to engage in a progressive pursuit of the purpose and object of the business organization.
Whether a foreign corporation is "doing business" does not necessarily depend upon the frequency of
its transactions, but more upon the nature and character of the transactions. 72

Based on the foregoing, a single act may be considered as either doing business or an isolated
transaction depending on its nature. It may be considered as doing business if it implies a continuity
of commercial dealings and contemplates the performance of acts or the exercise of functions
normally incidental to and in the progressive pursuit of its purpose. Contrarily, it may be considered as
an isolated transaction if it is different from or not related to the common business of the foreign
corporation in the sense that there is no objective to increasingly pursue its purpose or object. And as
stated, a license is not required if the foreign corporation is suing on an isolated transaction.

Here, ANDERSEN alleged in its Complaint that it was suing on an isolated transaction based on its
contract with MAGNA but admitting at the same time that it did not have a license to do business in
the Philippines. The CA ruled that ANDERSEN was indeed suing on an isolated transaction.

This Court does not agree with theCA's finding in this regard.

ANDERSEN's act of entering into a contract with MAGNA does not fall into the category of isolated
transactions. The contract clearly shows that ANDERSEN was to render professional services to
MAGNA for a fee. These professional services included the following: (1) providing master plant site
layout and plant design; (2) providing plant operation procedures and organization matrix; (3)
providing plant management and production staff training; (4) providing plant construction and
operation start-up services; and (5) providing consultation services for developing a precast plant
program.73 It is clear then that ANDERSEN, in entering into that contract with MAGNA, was performing
acts that were in progressive pursuit of its business purpose, which, as found by the RTC, involved
consultation and design services.74

Though it was a single transaction, ANDERSEN's act of entering into a contract with MAGNA
constitutes doing business in the Philippines. It cannot be considered as an isolated transaction
because the act is related to ANDERSEN's specific business purpose. Thus, in doing business without a
license, ANDERSEN had no legal capacity to sue in the Philippines.

However, the Court agrees that MAGNA is already estopped from challenging ANDERSEN's legal
capacity to sue. The doctrine of estoppel states that the other contracting party may no longer
challenge the foreign corporation's personality after acknowledging the same by entering into a
contract with it.75 This principle is applied in order to "prevent a person (or another corporation)
contracting with a foreign corporation from later taking advantage of its noncompliance with the
statutes, chiefly in cases where such person has received the benefits of the contract." 76 The case
of Communications Materials and Design, Inc. v. Court of Appeals 77 elaborates on the doctrine:

A foreign corporation doing business in the Philippines may sue in Philippine Courts although not

authorized to do business here against a Philippine citizen or entity who had contracted with and

benefited by said corporation. To put it in another way, a party is estopped to challenge the

personality of a corporation after having acknowledged the same by entering into a contract with it.

And the doctrine of estoppel to deny corporate existence applies to a foreign as well as to domestic

corporations. One who has dealt with a corporation of foreign origin as a corporate entity is estopped

to deny its corporate existence and capacity. The principle will be applied to prevent a person

contracting with a foreign corporation from later taking advantage of its noncompliance with the

statutes chiefly in cases where such person has received the benefits of the contract.

The rule is deeply rooted in the time-honored axiom of commodum ex injuria sua non habere debet -

no person ought to derive any advantage of his own wrong. This is as it should be for as mandated by

law, "every person must in the exercise of his rights and in the performance of his duties, act with

justice, give everyone his due, and observe honesty and good faith."

x x x x78

By virtue of the doctrine of estoppel, a party cannot take undue advantage by challenging the foreign
corporation's personality or legal capacity to sue when the former already acknowledged the same by
entering into a contract with the latter and derived benefits therefrom.

In this case, MAGNA is already estopped from challenging ANDERSEN's legal capacity to sue due to its
prior dealing with the latter, that is, entering into a contract with it. As ruled by the courts below,
there was a perfected and binding contract between the parties. By such contract, MAGNA effectively
acknowledged ANDERSEN's personality. MAGNA's allegation that it only discovered during the trial
that ANDERSEN was doing business in the Philippines without a license, is therefore irrelevant.
Moreover, MAGNA had already benefited from the contract because as found by the lower and
appellate courts, ANDERSEN indeed rendered services to MAGNA pursuant to their contract and even
prior thereto.

Finally, the Court modifies the legal interest imposed by the CA. The appellate court applied the earlier
case of Eastern Shipping Lines v. Court of Appeals79 in imposing 12% legal interest
per annum reckoned from the date of extrajudicial demand on June 26, 1998 until full payment.
Subsequently, as the Court discussed and applied in Nacar v. Gallery Frames,80 Resolution No. 796
issued by the Monetary Board of the Bangko Sentral ng Pilipinas which took effect on July 1, 2013,
lowered the interest rate from 12% to 6% per annum for loans or forbearance of money, goods, and
credit, in the absence of an express stipulation. 81 Therefore, the interest on the amount due must be
bifurcated, and is to be imposed as follows: (a) interest at the rate of 12% per annum is to be
computed on the amount due from June 26, 1998, the date of extrajudicial demand, until June 30,
2013; and subsequently, (b) interest at the rate of 6% per annum is to be computed on the amount
due from July 1, 2013 until full payment thereof. 82

WHEREFORE, the Petition is DENIED. The September 8, 2010 Decision and March 14, 2011
Resolution of the Court of Appeals in CA-G.R. CV No. 92647 are AFFIRMED with MODIFICATION in
that the amount of US$60,786.59 shall bear legal interest as follows: (a) 12% per annum from June
26, 1998, the date of extrajudicial demand, until June 30, 2013; and (b) 6% per annum from July 1,
2013 until full payment thereof. Costs on petitioner.

SO ORDERED.

Leonen, J, (Chairperson), Inting, and Delos Santos, JJ., concur.

Transportation law

SECOND DIVISION

G.R. No. 212136, October 04, 2021

KLM ROYAL DUTCH AIRLINES, Petitioner, v. DR. JOSE M. TIONGCO,

Respondent.

DECISION

HERNANDO, J.:

Petitioner KLM Royal Dutch Airlines (petitioner/KLM) assails the April 10, 2013
Decision,1 and the March 27, 2014 Resolution2 of the Court of Appeals (CA/appellate
court) in CA-G.R. CV No. 00884-MIN which affirmed with modifications the January 16,
2006 Decision3 of the Regional Trial Court (RTC/trial court), Branch 10 of Davao City.

The Antecedent Facts:

In October 1998, respondent Dr. Jose M. Tiongco (Dr. Tiongco), a prominent surgeon
and one of the founders of the Medical Mission Group Hospital and Health Services in
Davao City, was invited by the United Nations - World Health Organization (UN-WHO)
to be a keynote speaker in the 20th Anniversary of Alma-Ata Declaration to be held in
Almaty, Kazakhstan from November 27-28, 1998. Thus, Dr. Tiongco secured his visa
for Kazakhstan and purchased tickets for his flights. 4

There being no direct flight from Manila to Kazakhstan, Dr. Tiongco had to fly to
Singapore via Singapore Airlines where he would then take two connecting flights to
Almaty on board petitioner KLM, his main carrier. Below was his travel
itinerary:5chanrobleslawlibrary
 DESTINATION AIRLINE FLIGHT DATE ETD ETA
Manila- Singapore SQ75 Nov. 25, 1998 1800 2130
Singapore Airlines
Singapore- KLM KL838 Nov. 25, 1998 2335 0600
Amsterdam
Amsterdam- KLM KL1765 Nov. 26, 1998 0820 0935
Frankfurt
Frankfurt- Lufthansa LH3346 Nov. 26, 1998 1025 2205
Almaty German
Airlines
On November 25, 1998, Dr. Tiongco arrived at the Ninoy Aquino International Airport in
Manila for the first leg of his two-day flight to Almaty. He went to the counter of
Singapore Airlines and checked-in a suitcase containing a copy of his speech, resource
materials, clothing for the event, and other personal items. Singapore Airlines departed
from Manila as scheduled. Upon arrival in Singapore at 9:30 in the evening, Dr. Tiongco
proceeded to the KLM counter to check in for his flight to Amsterdam, Netherlands. KLM
flight no. KL838 departed at 11:35 in the evening as scheduled. 6

Dr. Tiongco arrived at Amsterdam the next day in time for his third flight to Frankfurt,
Germany. However, his flight to Frankfurt on board KLM flight no. KL1765 departed
from Amsterdam 45 minutes late, or at 9:00 o'clock in the morning. As a result, Dr.
Tiongco missed his fourth flight, i.e. from Frankfurt to Almaty. 7

Upon his arrival in Frankfurt, Dr. Tiongco searched for a KLM employee. After two
hours, he found a KLM employee whom he informed at once about his missed flight to
Almaty, as well as his speaking engagement and his checked-in suitcase. The employee
assured him that his suitcase would be travelling with him. He also instructed the
doctor to approach a Turkish Airlines employee to assist with the logistics of his trip to
Almaty.8 The KLM employee then took Dr. Tiongco's boarding pass and gave him a new
itinerary,9 to wit:
DESTINATION AIRLINE FLIGHT DATE ETD ETA
Frankfurt- Lufthansa LH3454 Nov. 26, 1998 1235 0435
Instanbul German
Airlines
Instanbul- Turkish TK1350 Nov. 26, 1998 1930 0439
Almaty Airlines
Dr. Tiongco then boarded Lufthansa German Airlines (Lufthansa) from Frankfurt to
Instanbul. As instructed, he approached a Turkish Airlines employee who introduced
him to a certain Miss Chizem, an employee of Lufthansa who, in turn, gave Dr. Tiongco
a new boarding pass. She also assured him that his checked-in suitcase will be
transported in the same flight. 10

Before the passengers of Turkish Airlines flight no. TK1350 boarded, its personnel
asked them to identify their luggages on the tarmac. Dr. Tiongco looked for his suitcase
but could not locate it. He asked Mr. Osman Bey (Bey) of Turkish Airlines to ask Miss
Chizem to find his missing suitcase. Thirty minutes passed and yet his suitcase was not
in sight. The Turkish Airlines flight no. TK1350 personnel then instructed its passengers
to board the plane. So as not to miss his flight, Mr. Bey told Dr. Tiongco to go on board.
He likewise assured Dr. Tiongco that his suitcase will be loaded in the next available
flight to Almaty as soon as it is found. Dr. Tiongco was left with no other option but to
board with only his carry-on bag.11

When Dr. Tiongco arrived in Almaty, nobody from KLM, Lufthansa, or Turkish Airlines
assisted him. His suitcase was still nowhere to be found. He then exited the airport,
hailed a taxi cab, and proceeded to Regency Hotel where the UN-WHO convention
would be held.12

Upon arrival in the hotel, Dr. Tiongco took a shower and changed into a pair of slacks
and a sweatshirt. He went downstairs where the conference would be held. Initially,
however, Dr. Tiongco was not allowed entry into the venue because of his inappropriate
attire. Dr. Tiongco explained to the organizers that his suitcase containing his clothes
and important materials for his speech got lost during his flight. It was only then that
he was allowed inside the venue.13

Dr. Tiongco then delivered his lecture without any of his visual aids and despite being
inappropriately attired. When he finished his speech, some of the attendees approached
him and asked for his resource materials. However, he was unable to give them the
materials since these were also in his missing suitcase. 14

On December 14, 1998, Dr. Tiongco returned to the Philippines. Three months passed
and still there was no news about what happened to his luggage. Thus, on March 15,
1999, respondent wrote Singapore Airlines, KLM and Lufthansa, demanding for
compensation for his lost luggage and the inconvenience he suffered. 15 Lufthansa, in its
letter16 dated March 31, 1999, denied his claim for compensation while KLM and
Singapore Airlines, in separate letters,17 asked for time to investigate the incident. In a
letter18 dated April 21, 1999, Singapore Airlines denied any liability. KLM, unfortunately,
did not write back to Dr. Tiongco.19

Thus, on August 5, 1999, Dr. Tiongco filed a Complaint 20 for Damages and Attorney's
Fees against KLM, Turkish Airlines, Singapore Airlines, and Lufthansa.

KLM, Singapore Airlines, and Lufthansa filed their separate answers. 21 They all denied
liability for the lost suitcase of Dr. Tiongco, and instead asked for indemnification from
Dr. Tiongco.22

KLM23 insisted that it performed extraordinary diligence in transporting Dr. Tiongco to

his last destination. It denied liability for the lost suitcase since it is not his first or last
carrier. Even if found liable, KLM averred that the amount of actual damages should
only be $400, i.e., $20 per kilo, pursuant to the Warsaw Convention since Dr. Tiongco
did not declare the actual value of his suitcase. 24

KLM further averred that contrary to Dr. Tiongco's claim, he did not immediately notify
any personnel of the airline about the missing luggage. It was only when he sent a
demand letter to KLM that the latter was informed of the incident. Moreover, Dr.
Tiongco did not suffer any damage as he was able to deliver his speech in the
convention.

Singapore Airlines also denied any liability since it transported Dr. Tiongco and his
checked-in suitcase to Singapore. His suitcase was duly transferred to KLM's flight no.
KL838, the second leg of Dr. Tiongco's flight, as acknowledged by its handling agent.
Assuming it has any liability arising from the lost suitcase, Singapore Airlines insisted
that it is only limited in nature under the Warsaw Convention. 25

Lastly, Lufthansa averred that it is KLM which should be held liable for the lost suitcase
being the intermediate carrier of Dr. Tiongco to Kazakhstan. Like KLM, it maintained
that its liability, if there is any, is limited to $20 per kilo under the Warsaw
Convention.26

On June 13, 2001, Dr. Tiongco filed an Omnibus Motion 27 before the RTC praying for the
dropping of Turkish Airlines as one of the defendants and for the admission of his
An1ended Complaint.28 In its September 3, 2001 Order,29 the RTC granted respondent's
Omnibus Motion and admitted the Amended Complaint. 30
�
Ruling of the
Regional �
Trial Court:

In its January 16, 2006 Decision,31 the RTC ruled that KLM is solely liable for the
damages suffered by Dr. Tiongco on account of his lost suitcase. KLM failed to exercise
extraordinary care in handling the suitcase of Dr. Tiongco when it wrongfully
transferred it to Lufthansa flight no. LH10381 instead of LH3346, Dr. Tiongco's flight to
Almaty. KLM also failed to immediately inquire about what happened to the suitcase
after Dr. Tiongco informed its personnel.32

Further, the RTC rejected KLM's claim that Singapore Airlines and Turkish Airlines,
being the first and last carriers of Dr. Tiongco, should be held liable instead of KLM. It
noted that KLM, being the airline which issued the tickets, is the principal in the
contract of carriage and, hence, is liable for the acts and omissions of the other carriers
to which it endorsed the other legs of the flight. 33

The RTC awarded Dr. Tiongco nominal damages considering his failure to sufficiently
prove the amount of actual damages he suffered. He was likewise awarded moral
damages, exemplary damages, and attorney's fees as prayed for in the Complaint. 34

The fallo of the Decision reads:chanroblesvirtualawlibrary

WHEREFORE, this Court hereby sentences Defendant KLM to indemnify Plaintiff the
following, to wit:
�
1. Nominal Damages in the amount of P3,000,000.00;
2. Moral Damages in amount of P3,000,000.00;
3. Exemplary Damages in the amount of P5,000,000.00;
4. Attorney's Fees in the amount of P1,600,000.00.

Cost against Defendant KLM.35 chanRoblesvirtualLawlibrary

KLM filed a Motion for Reconsideration36 but it was denied by the RTC in its
Order37 dated May 30, 2006. Hence, KLM appealed to the CA.

Ruling of the Court of Appeals:

�
In its April 10, 2013 Decision,38 the appellate court agreed with the trial court on KLM's
liability for breach of contract of carriage. However, it modified the awards of damages
for being excessive. The dispositive portion of the CA Decision
reads:chanroblesvirtualawlibrary
WHEREFORE, the Appeal is PARTLY GRANTED. The Decision dated January 16, 2006 of
the Regional Trial Court, Branch 10, Davao City, is AFFIRMED with MODIFICATION that
KLM Royal Dutch Airlines shall pay Dr. Jose M. Tiongco the following:

1) The awards of moral damages, exemplary damages and nominal damages are
hereby reduced to P1,000,000.00, P300,000.00 and P50,000.00, respectively;

2) All of these amounts shall earn interest at the rate of 6% per annum from January
16, 2006. Thereafter, the interest rate of 12% per annum shall be applied from the
finality of this Decision until fully satisfied;

3) The award of attorney's fees shall be reduced to the amount equivalent to 20% of
the total amount adjudged to Dr. Tiongco, and;

4) Costs.

SO ORDERED.39 chanRoblesvirtualLawlibrary

KLM sought for reconsideration40 but it was denied in the CA's Resolution41 dated March
27, 2014 for lack of merit.

Hence, this petition for review on certiorari.42

Issues

KLM submits the following issues before this Court:chanroblesvirtualawlibrary

31. Whether or not there is legal basis to support the findings of the trial court and the
CA that KLM's actions were attended by gross negligence, bad faith and willful
misconduct to justify the award of moral and exemplary damages.

32. Whether or not the CA committed reversible error when it ignored the fact that the
trial court awarded attorney's fees in the dispositive portion of its decision only and did
not explain the reason for its imposition in the body of the said decision.

33. The amounts awarded to respondent as moral and exemplary damages are
excessive, unconscionable and unreasonable.43 chanRoblesvirtualLawlibrary

In essence, the main issue for resolution is whether KLM acted in gross negligence, bad
faith and willfull misconduct in relation to the loss of Dr. Tiongco's suitcase so that the
latter can be entitled to award of damages.

KLM alleges that its mere failure to deliver Dr. Tiongco's suitcase does not constitute
gross negligence, willful misconduct, or proof of bad faith to warrant the award of
damages. Its personnel did not act rudely or use profane language towards Dr. Tiongco.
In fact, Dr. Tiongco did not complain about any improper behavior of KLM's personnel
when he was searching for his missing suitcase. KLM also avers that there are no bases
for the awards of damages, attorney's fees, and costs. Assuming that respondent is
entitled to these awards, KLM prays that they be reduced for being exorbitant, and that
interest charges not be applied for lack of basis thereof. 44 Lastly, KLM also maintains
that Dr. Tiongco is only entitled to nominal damages pursuant to the Court's ruling
in Alitalia v. Intermediate Appellate Court45 (Alitalia).46

Our Ruling

The petition lacks merit.

�
The issues
raised in the
instant
petition are
factual in
nature
which are �
not subject
to review
under Rule
45 of the
Rules of
Court.

Only questions of law may be raised in a petition for review on certiorari under Rule 45
of the Rules of Court. The Court is not a trier of facts. Hence, it is not our function to
re-evaluate the probative value of the evidence of both parties which were already
considered in the proceedings below.47

The parameters of a judicial review under a Rule 45 petition is discussed in Miro v. Vda.
De Eredoros,48viz.:chanroblesvirtualawlibrary
a. Rule 45 petition is limited to questions of law

Before proceeding to the merits of the case, this Court deems it necessary to
emphasize that a petition for review under Rule 45 is limited only to questions of law.
Factual questions are not the proper subject of an appeal by certiorari. This Court will
not review facts, as it is not our function to analyze or weigh all over again evidence
already considered in the proceedings below. As held in Diokno v. Hon. Cacdac, a re-
examination of factual findings is outside the province of a petition for review on
certiorari to wit:chanroblesvirtualawlibrary
It is aphoristic that a re-examination of factual findings cannot be done through a
petition for review on certiorari under Rule 45 of the Rules of Court because as earlier
stated, this Court is not a trier of facts. xxx The Supreme Court is not duty-bound to
analyze and weigh again the evidence considered in the proceedings below. This is
already outside the province of the instant Petition for Certiorari.
There is a question of law when the doubt or difference arises as to what the law is on a
certain set of facts; a question of fact, on the other hand, exists when the doubt or
difference arises as to the truth or falsehood of the alleged facts. Unless the case falls
under any of the recognized exceptions, we are limited solely to the review of legal
questions.
b. Rule 45 petition is limited to errors of the appellate court

Furthermore, the "errors" which we may review in a petition for review on certiorari are
those of the CA, and not directly those of the trial court or the quasi-judicial agency,
tribunal, or officer which rendered the decision in the first instance. It is imperative that
we refrain from conducting further scrutiny of the findings of fact made by trial courts,
lest we convert this Court into a trier of facts. As held in Reman Recio v. Heirs of the
Spouses Agueda and Maria Altamirano etc. et al. our review is limited only to the errors
of law committed by the appellate court, to wit:

Under Rule 45 of the Rules of Court, jurisdiction is generally limited to the review of
errors of law committed by the appellate court. The Supreme Court is not obliged to
review an over again the evidence which the parties adduced in the court a quo. Of
course, the general rule admits of exceptions, such as where the factual findings of the
CA and the trial court are conflicting or contradictory. 49 (Citations Omitted.)
However, the rule is not without exception. In Medina v. Asistio, Jr.,50 the findings of
fact of the CA may be passed upon and reviewed by this Court in the following
instances:chanroblesvirtualawlibrary
(1) When the conclusion is a finding grounded entirely on speculation, surmises or
conjectures; (2) When the inference made is manifestly mistaken, absurd or
impossible; (3) Where there is a grave abuse of discretion; (4) When the judgment is
based on a misapprehension of facts; (5) When the findings of fact are conflicting: (6)
When the Court of Appeals, in making its findings, went beyond the issues of the case
and the same is contrary to the admissions of both appellant and appellee; (7) The
findings of the Court of Appeals are contrary to those of the trial; (8) When the findings
of fact are conclusions without citation of specific evidence on which they are based; (9)
When the facts set forth in the petition as well as in the petitioner's main and reply
briefs are not disputed by the respondents; and (10) The finding of fact of the Court of
Appeals is premised on the supposed absence of evidence and is contradicted by the
evidence on record.51 (Citations omitted.)
Upon careful perusal of the issues raised by KLM, the Court finds that these are factual
in nature which is beyond our jurisdiction in a petition for review on certiorari. The
arguments it posited in the petition are also noticeably similar to those raised before
the CA. Thus, to give due course to the petition necessitates an evaluation all over
again of the evidence presented by the parties which were already thoroughly reviewed
by the RTC and the CA.

None of the exceptions is likewise present in the instant case. We note that the CA
affirmed the factual findings of the RTC that KLM, being the main carrier, is liable for
the lost suitcase of Dr. Tiongco and that it acted in bad faith. The appellate court
likewise agreed with the trial court's disposition on the awards of damages and
attorney's foes, except that these were reduced.

Unfortunately, KLM failed to substantiate its claim that the CA misapprehended any
facts or failed to consider relevant facts to warrant a reversal of its assailed decision.
We stress that a party praying that this Court review the factual findings of the
appellate court must demonstrate and prove that the case clearly falls under the
exceptions to the rule.52 He or she must duly prove to this Court that a review of the
factual findings is necessary.53 Mere assertion and claim that the case falls under the
exceptions is insufficient.54 Hence, the hornbook doctrine that factual findings of the CA
affirming those of the RTC are final and conclusive 55 stands as these findings are
supported by substantial evidence and in accord with law and jurisprudence. There is
therefore no cogent reason to disturb the factual findings of both the RTC and the CA.

Assuming arguendo that the Court gives due course to the petition, We find that the
CA, in affirming the findings of the RTC, did not commit any reversible error.
�
KLM is
liable for
breach of �
contract of
carriage.

A contract of carriage is one whereby a certain person or association of persons obligate

themselves to transport persons, things, or goods from one place to another for a fixed
price.56 Under Article 1732 of the Civil Code, a common carrier refers to "persons,
corporations, firms, or associations engaged in the business of carrying or transporting
passengers or goods or both, by land, water, or air, for compensation, offering their
services to the public."

The nature of the business which involves the transportation of persons or goods makes
a contract of carriage imbued with public interest. It is therefore bound to observe not
just the due diligence of a good father of a family but that of "extraordinary" care in the
vigilance over the goods as required under Article 1733 of the Civil Code. 57 The nature
of a contract of carriage is elucidated in Singson v. Court of Appeals58 in this
wise:chanroblesvirtualawlibrary
A contract of air carriage is a peculiar one. Imbued with public interest, common
carriers are required by law to carry passengers safely as far a human care and
foresight can provide, using the utmost diligence of a very cautious person, with due
regard for all the circumstances. A contract to transport passengers is quite different in
kind and degree from any other contractual relation. And this is because its business is
mainly with the traveling public. In invites people to avail of the comforts and
advantages it offers. The contract of carriage, therefore, generates a relation attended
with a public duty. Failure of the carrier to observe this high degree of care and
extraordinary diligence renders it liable for any damage that may be sustained by its
passengers.59 chanRoblesvirtualLawlibrary

Considering that a contract of carriage is vested with public interest, a common carrier
is presumed to have been at fault or to have acted negligently in case of lost or
damaged goods unless they prove that they observed extraordinary diligence. 60 Hence,
in an action based on a breach of contract of carriage, the aggrieved party does not
need to prove that the common carrier was at fault or was negligent. 61 He or she is only
required to prove the existence of the contract and its non-performance by the carrier. 62
There is no dispute that KLM and Dr. Tiongco entered into a contract of carriage. Dr.
Tiongco purchased tickets from the airline for his trip to Almaty, Kazakhstan. KLM,
however, breached its contract with Dr. Tiongco when it failed to deliver his checked-in
suitcase at the designated place and time. The suitcase contained his clothing for the
conference where he was a guest speaker, a copy of his speech, and his resource
materials. Worse, Dr. Tiongco's suitcase was never returned to him even after he
arrived in Manila from Almaty. Thus, KLM's liability for the lost suitcase was sufficiently
established as it failed to overcome the presumption of negligence.
�
Bad faith on
the part of
KLM was �
duly
established.

Both the trial court and the appellate court already found KLM to have acted in bad
faith in dealing with Dr. Tiongco. Bad faith is a factual question which is beyond the
purview of this petition under Rule 45. Thus, We are not obliged to go over the
evidence once more and recalibrate them for purposes of this appeal.

We agree with the RTC and the CA that KLM acted in bad faith. It is undisputed that Dr.
Tiongco's luggage went missing during his flight, Even after his return to the
Philippines, Dr. Tiongco's suitcase was still missing. Nobody from KLM's personnel
updated him of what happened to the search. It was only when Dr. Tiongco wrote KLM
a demand letter that the latter reached out to him asking for time to investigate the
matter. Yet, it did not even notify him of the result of the purported investigation.

To make matters even worse, the Customer Relations Officer of KLM, Arlene Almario,
categorically testified that the suitcase was eventually found in Almaty as shown in the
baggage report dated December 18, 1998 of Turkish Airlines. The said airline
immediately notified KLM. However, KLM did not bother to inform Dr. Tiongco that his
suitcase had been found or took the necessary steps to transport it back to Manila.

The case of Alitalia,63 contrary to KLM's claim, is inapplicable in the case at bench. While
both cases involve a lost luggage of an airline's passenger, the luggage of Dr. Felipa in
the Alitalia case was subsequently returned to her after it was lost unlike in the case
here where Dr. Tiongco's suitcase was never returned to him even after it was found.
More importantly, there was no bad faith on the part of the airline in Alitalia when it
breached its contract of carriage unlike in this case where KLM acted in bad faith.
�
The awards
of moral and
exemplary �
damages are
proper.

The bad faith on the part of KLM as found by the RTC and the CA thus renders the same
liable for moral and exemplary damages. However, the amounts thereof must be
modified further to be fair, reasonable, and commensurate to the injury sustained by
the passenger.

Under Article 2216 of the Civil Code, the assessment of damages is left to the discretion
of the court according to the circumstances of each case. The courts must adhere to the
principle that the amount of damages awarded should not be palpably excessive as to
indicate that it was the result of prejudice or corruption on the part of the trial
court.64 It must therefore be fair, reasonable, and proportionate to the injury suffered. 65

The award of moral damages is proper to enable the injured party to obtain means of
diversion or amusement that will serve to alleviate the moral suffering they underwent
because of another's culpable action.66 Here, KLM displayed indifference to the plight
and inconvenience suffered by Dr. Tiongco when he lost his luggage. It made empty
promises that his luggage would be travelling with him and even failed to inform Dr.
Tiongco that his suitcase had been found. Moreover, it did not return the luggage to
him even after it was found. Undeniably, KLM's bad faith, gross negligence, and lack of
care warrant the award of moral damages in accordance with Article 2220 of the Civil
Code, to wit:chanroblesvirtualawlibrary
Article 2220. Willful injury to property may be a legal ground for awarding moral
damages if the court should find that, under the circumstances, such damages are
justly due. The same rule applies to breaches of contract where the defendant acted
fraudulently or in bad faith.
Guided by the foregoing, the Court modifies the award of moral damages from
P1,000,000.00 to P300,000.00 in favor of Dr. Tiongco pursuant to our pronouncement
in Kierulf v. Court of Appeals67 that "[t]he social and financial standing of a claimant of
moral damages may be considered in awarding moral damages only if he or she was
subjected to contemptuous conduct despite the offender's knowledge of his or her
social and financial standing."

The award of exemplary damages likewise needs to be modified. Undoubtedly, KLM

acted in a wanton, and reckless manner. Given the surrounding facts and circumstances
in the instant case, the Court holds that the amount of P100,000.00 is sufficient. �
�
KLM liable
for
temperate, �
not nominal,
damages.

Article 2221 of the Civil Code states that nominal damages may be awarded in order
that the plaintiff's right, which has been violated or invaded by the defendant, may be
vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any
loss suffered. They are "recoverable where a legal right is technically violated and must
be vindicated against an invasion that has produced no actual present loss of any kind
or where there has been a breach of contract and no substantial injury or actual
damages whatsoever have been or can be shown." 68

On the other hand, A1iicle 2224 of the same Code states that temperate damages or
moderate damages, which are more than nominal but less than compensatory
damages, may be recovered when the court finds that some pecuniary loss has been
suffered but its amount cannot, from the nature of the case, be provided with certainty.
Simply put, temperate damages are awarded when the injured party suffered some
pecuniary loss but the amount thereof cannot, from the nature of the case, be proven
with certainty.69

Dr. Tiongco incurred pecuniary loss when his suitcase containing his personal
belongings was lost during his flight and was never returned. Unfortunately, he did not
present any actual receipt that would have proved the actual amount due, as mandated
under Article 2199 of the Civil Code, so as to entitle him to the award of actual
damages.70 This, however, does not preclude Dr. Tiongco from recovering temperate
damages, and not nominal damages, since the exact amount of damage or pecuniary
loss he sustained was not duly established by competent evidence. Verily, the Court
finds the award of P50,000.00 as temperate damages fair and reasonable in view of the
circumstances in this case.

KLM's liability for temperate damages may not be limited to that prescribed in Article
22(2)71 of the Warsaw Convention, as amended by the Hague Protocol, in the presence
of bad faith.72 As aptly held in Northwest Airlines, Inc. v. Court of
Appeals,73 citing Alitalia:74chanrobleslawlibrary
The [Warsaw] Convention does not operate as an exclusive enumeration of the
instances of an airline's liability, or as an absolute limit of the extent of that liability.
Such a proposition is not borne out by the language of the Convention, as this Court
has now, and at an earlier time, pointed out. Moreover, slight reflection readily leads to
the conclusion that it should be deemed a limit of liability only in those cases where the
cause of the death or injury to person, or destruction, loss or damage to property or
delay in its transport is not attributable to or attended by any willful misconduct, bad
faith, recklessness, or otherwise improper conduct on the part of any official or
employee for which the carrier is responsible, and there is otherwise no special or
extraordinary form of resulting injury. The Convention's provisions, in short, do not
"regulate or exclude liability for other breaches of contract by the carrier" or misconduct
of its officers and employees, or for some particular or exceptional type of damage. 75

Imposition
of attorney's
fees and �
legal interest
was proper.

KLM avers that the award of attorney's fees should have been deleted for lack of basis
thereof. We disagree.

As a general rule, attorney's fees and expenses of litigation, other than judicial costs,
cannot be recovered in the absence of stipulation. This is because of the policy that no
premium should be placed on the right to litigate. 76 Hence, attorney's fees are not to be
awarded every time a party wins a suit. 77 They may only be awarded in the following
instances:78

Article 2208 of the Civil Code states:chanroblesvirtualawlibrary

Art. 2208. In the absence of stipulation, attorney's fees and expenses of litigation,
other than judicial costs, cannot be recovered, except:
(1) When exemplary damages are awarded;
(2) When the defendant's act or omission has compelled the plaintiff to litigate with
third persons or to incur expenses to protect his interest;
(3) In criminal cases of malicious prosecution against the plaintiff;
(4) In case of a clearly unfounded civil action or proceeding against the plaintiff;
(5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the
plaintiff's plainly valid, just and demandable claim;
(6) In actions for legal support;
(7) In actions for the recovery of wages of household helpers, laborers and skilled
workers;
(8) In actions for indemnity under workmen's compensation and employer's liability
laws;
(9) In a separate civil action to recover civil liability arising from a crime;
(10) When at least double judicial costs are awarded;
(11) In any other case where the court deems it just and equitable that attorney's fees
and expenses of litigation should be recovered.

In all cases, the attorney's fees and expenses of litigation must be reasonable.
An award of attorney's fees under Article 2208 demands factual, legal, and equitable
justification to avoid speculation and conjecture surrounding the grant thereof. 79 It is
therefore required for the courts to clearly and distinctly set forth in their decisions their
factual findings for the basis of the award. 80 The Court's pronouncement in Benedicto v.
Villaflores81 elucidated the rationale on why courts must explain their decision for
granting attorney's fees:chanroblesvirtualawlibrary
It is settled that the award of attorney's fees is the exception rather than the general
rule; counsel's fees are not awarded every time a party prevails in a suit because of the
policy that no premium should be placed on the right to litigate. Attorney's fees, as part
of damages, are not necessarily equated to the amount paid by a litigant to a lawyer. In
the ordinary sense, attorney's fees represent the reasonable compensation paid to a
lawyer by his client for the legal services he has rendered to the latter; while in its
extraordinary concept, they may be awarded by the court as indemnity for damages to
be paid by the losing party to the prevailing party. Attorney's fees as part of damages
are awarded only in the instance; specified in Article 2208 of the Civil Code. As such, it
is necessary for the court to make findings of fact and law that would bring the case
within the ambit of these enumerated instances to justify the grant of such award, and
in all cases it must be reasonable. 82
chanRoblesvirtualLawlibrary

The Court agrees with KLM that the RTC failed to elaborate why Dr. Tiongco is entitled
to the award of attorney's fees. Admittedly, it simply made a categorical statement that
"other just and equitable reliefs were likewise prayed for by Plaintiff".83 The RTC then
merely stated the amount thereof in the dispositive portion.

However, a perusal of the assailed Decision shows that the CA explained that the award
of attorney's fees is proper because exemplary damages are likewise awarded to Dr.
Tiongco pursuant to Article 2208(1) of the Civil Code. The CA did not simply adopt the
findings of the RTC but it made an independent assessment as to why attorney's fees
should be awarded to him. Although brief, the appellate court's explanation is sufficient
to show that there is factual and legal justification for the award thereof. Thus, the
Court sustains the the award of attorney's fees to Dr. Tiongco. The amount of
attorney's fees, equivalent to 20% of the total amount of the awards adjudged to Dr.
Tiongco is also proper for being reasonable and just.

KLM also argues that the CA erred in imposing legal interest because neither was it
granted by the RTC nor questioned on appeal by Dr. Tiangco. KLM is clearly mistaken.

It must be remembered that when a case is appealed, as in this case, the CA has the
power to review the case in its entirety. It makes its own judgment as it deems just
under the circumstances.84 Thus, the appellate court can modify and/or include
damages not awarded by the trial court if so warranted after an independent evaluation
of the case. This is in accord with its authority to either affirm, reverse or modify the
appealed decision of the trial court. As aptly held in Heirs of Alcaraz v.
Republic:85chanrobleslawlibrary
In any event, when petitioners interposed an appeal to the Court of Appeals, the
appealed case was thereby thrown wide open for review by that court, which is thus
necessarily empowered to come out with a judgment as it thinks would be a just
determination of the controversy. Given this power, the appellate court has the
authority to either affirm, reverse or modify the appealed decision of the trial court. To
withhold from the appellate court its power to render an entirely new decision would
violate its power of review and would, in effect, render it incapable of correcting patent
errors committed by the lower courts.86 chanRoblesvirtualLawlibrary

In Eastern Shipping Lines, Inc. v. Court of Appeals,87 the Court laid down the guidelines
in determining the appropriate legal interest, to wit:chanroblesvirtualawlibrary
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed,
as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an

interest on the amount of damages awarded may be imposed at the discretion of the
court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established
with reasonable ce1iainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall begin to run
only from the date the judgment of the court is made (at which time the quantification
of damages may be deemed to have been reasonably ascertained). The actual base for
the computation of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.88
chanRoblesvirtualLawlibrary

However, these guidelines were modified pursuant to Bangko Sentral ng

Pilipinas Monetary Board (BSP-MB) Circular No. 799, Series of 2013, which took effect
on July 1, 2013.

Moreover, the Court laid down the new guidelines regarding the imposition of legal
interest in Nacar v. Gallery Frames89 in this wise:chanroblesvirtualawlibrary
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,
delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The
provisions under Title XVIII on "Damages" of the Civil Code govern in determining the
measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed,
as follows:

When the obligation is breached, and it consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation, the rate of
interest shall be 6% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.

When an obligation, not constituting a loan or forbearance of money, is breached, an

interest on the amount of damages awarded may be imposed at the discretion of the
court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages, except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall begin to run
only from the date the judgment of the court is made (at which time the quantification
of damages may be deemed to have been reasonably ascertained). The actual base for
the computation of legal interest shall, in any case, be on the amount finally adjudged.

When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 6% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to a forbearance of credit.

And, in addition to the above, judgments that have become final and executory prior to
July 1, 2013, shall not be disturbed and shall continue to be implemented applying the
rate of interest fixed therein.90 chanRoblesvirtualLawlibrary

Applying the above-mentioned guidelines, the Court modifies the legal interest to
twelve percent (12%) per annum from January 16, 2006, the date of the RTC Decision,
until June 30, 2013, and six percent (6%) per annum from July 1, 2013 until full
payment.
WHEREFORE, the Petition for Review on Certiorari is DENIED. The April 10, 2013
Decision of the Court of Appeals in CA-G.R. CV No. 00884-MIN is hereby AFFIRMED
with MODIFICATION in that:
�
(a) the awards of damages and exemplary damages are hereby reduced to P300,000,00 and
P100,000.00, respectively;
(b) temperate damages in the amount of P50,000.00 is awarded to Dr. Jose M. Tiongco in lieu
of nominal damages;
(c) the attorney's fees which is equivalent to 20% of the total monetary awards is maintained
for being reasonable; and
(d) the total monetary awards shall bear interest of twelve percent (12%) per annum from
January 16, 2006, the date of the RTC Decision, to June 30, 2013, and six percent (6%)
per annum from July 1, 2013 until full payment.

Costs against petitioner KLM.chanroblesvirtualawlibrary

SO ORDERED.
SECOND DIVISION
[ G.R. No. 209969. September 27, 2017 ]
JOSE SANICO AND VICENTE CASTRO, PETITIONERS, VS. WERHERLINA P.
COLIPANO, RESPONDENT.

DECISION
CAGUIOA, J:
Before the Court is a Petition for Review on Certiorari[1] under Rule 45 of the Rules of Court filed by petitioners Jose
Sanico (Sanico) and Vicente Castro (Castro), assailing the Decision[2] dated September 30, 2013 of the Court of
Appeals (CA) in CA-G.R. CEB-CV No. 01889. The CA affirmed with modification the Decision [3] dated October 27,
2006 of the Regional Trial Court, Branch 25, Danao City (RTC) which found Sanico and Castro liable for breach of'
contract of carriage and awarded actual and compensatory damages for loss of income in favor of respondent
Werherlina P. Colipano (Colipano). The CA reduced the compensatory damages that the RTC awarded.

Antecedents

Colipano filed a complaint on January 7, 1997 for breach of contract of carriage and damages against Sanico and
Castro.[4] In her complaint, Colipano claimed that at 4:00 P.M. more or less of December 25, 1993, Christmas Day,
she and her daughter were; paying passengers in the jeepney operated by Sanico, which was driven by Castro.
[5]
Colipano claimed she was made to sit on an empty beer case at the edge of the rear entrance/exit of the jeepney
with her sleeping child on her lap.[6] And, at an uphill incline in the road to Natimao-an, Carmen, Cebu, the jeepney
slid backwards because it did not have the power to reach the top.[7] Colipano pushed both her feet against the step
board to prevent herself and her child from being thrown out of the exit, but because the step board was wet, her left
foot slipped and got crushed between the step board and a coconut tree which the jeepney bumped, causing the
jeepney to stop its backward movement.[8] Colipano's leg was badly injured and was eventually amputated.[9] Colipano
prayed for actual damages, loss of income, moral damages, exemplary damages, and attorney's fees.[10]

In their answer, Sanico and Castro admitted that Colipano's leg was crushed and amputated but claimed that it! was
Colipano's fault that her leg was crushed.[11] They admitted that the jeepney slid backwards because the jeepney lost
power.[12] The conductor then instructed everyone not to panic but Colipano tried to disembark and her foot got
caught in between the step board and the coconut tree.[13] Sanico claimed that he paid for all the hospital and medical
expenses of Colipano,[14] and that Colipano eventually freely and voluntarily executed an Affidavit of Desistance and
Release of Claim.[15]

After trial, the RTC found that Sanico and Castro breached the contract of carriage between them and Colipano but
only awarded actual and compensatory damages in favor of Colipano. The dispositive portion of the RTC Decision
states:
WHEREFORE, premises considered, this Court finds the defendants LIABLE for breach of contract of carriage and
are solidarily liable to pay plaintiff:
1. Actual damages in the amount of P2,098.80; and

2. Compensatory damages for loss of income in the amount of P360,000.00.

No costs.

SO ORDERED.[16]
Only Sanico and Castro appealed to the CA, which affirmed with modification the RTC Decision. The dispositive
portion of the CA Decision states:
IN LIGHT OF ALL THE FOREGOING, the instant appeal is PARTIALLY GRANTED. The Decision dated October 27,
2006 of the Regional Trial Court, Branch 25, Danao City, in Civil Case No. DNA-418, is AFFIRMED with
MODIFICATION in that the award for compensatory damages for loss of income in paragraph 2 of the dispositive
portion of the RTC's decision, is reduced to P200,000.00.

SO ORDERED.[17]
Without moving for the reconsideration of the CA Decision, Sanico and Castro filed this petition before the Court
assailing the CA Decision.
Issues
a. Whether the CA erred in finding that Sanico and Castro breached the contract of carriage with Colipano;

b. Whether the Affidavit of Desistance and Release of Claim is binding on Colipano; and

c. Whether the CA erred in the amount of damages awarded.

The Court's Ruling

The Court partly grants the petition.

Only Sanico breached the contract of carriage.

Here, it is beyond dispute that Colipano was injured while she was a passenger in the jeepney owned and operated
by Sanico that was being driven by Castro. Both the CA and RTC found Sanico and Castro jointly and severally
liable. This, however, is erroneous because only Sanico was the party to the contract of carriage with Colipano.

Since the cause of action is based on a breach of a contract of carriage, the liability of Sanico is direct as the contract
is between him and Colipano. Castro, being merely the driver of Sanico's jeepney, cannot be made liable as he is not
a party to the contract of carriage.

In Soberano v. Manila Railroad Co.,[18] the Court ruled that a complaint for breach of a contract of carriage is
dismissible as against the employee who was driving the bus because the parties to the contract of carriage are only
the passenger, the bus owner, and the operator, viz.:
The complaint against Caccam was therefore properly dismissed. He was not a party to the contract; he was a mere
employee of the BAL. The parties to that contract are Juana Soberano, the passenger, and the MRR and its
subsidiary, the BAL, the bus owner and operator, respectively; and consequent to the inability of the defendant
companies to carry Juana Soberano and her baggage arid personal effects securely and safely to her destination as
imposed by law (art. 1733, in relation to arts. 1736 and 1755, N.C.C.), their liability to her becomes direct and
immediate.[19]
Since Castro was not a party to the contract of carriage, Colipano had no cause of action against him and the
complaint against him should be dismissed. Although he was driving the jeepney, he was a mere employee of
Sanico, who was the operator and owner of the jeepney. The obligation to carry Colipano safely to her destination
was with Sanico. In fact, the elements of a contract of carriage existeid between Colipano and Sanico: consent, as
shown when Castro, as employee of Sanico, accepted Colipano as a passenger when he allowed Colipano to board
the jeepney, and as to Colipano, when she boarded the jeepney; cause or consideration, when Colipano, for her part,
paid her fare; and, object, the transportation of Colipano from the place of departure to the place of destination.[20]

Having established that the contract of carriage was only between Sanico and Colipano and that therefore Colipano
had no cause of action against Castro, the Court next determines whether Sanico breached his obligations to
Colipano under the contract.

Sanico is liable as operator and owner of a common carrier.

Specific to a contract of carriage, the Civil Code requires common carriers to observe extraordinary diligence in safely
transporting their passengers. Article 1733 of the Civil Code states:
ART. 1733. Common carriers, from the nature of their business and for reasons of public policy, are bound to observe
extraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by them,
according to all the circumstances of each case.

Such extraordinary diligence in the vigilance over the goods is further expressed in Articles 1734, 1735 and 1745,
Nos. 5, 6, and 7, while the extraordinary diligence for the safety of the passengers is further set forth in Articles 1755
and 1756.
This extraordinary diligence, following Article 1755 of the Civil Code, means that common carriers have the obligation
to carry passengers safely as far as human care and foresight can provide, using the utmost diligence of very
cautious persons, with due regard for all the circumstances.

In case of death of or injury to their passengers, Article 1756 of the Civil Code provides that common carriers are
presumed to have been at fault or negligent, and this presumption can be overcome only by proof of the extraordinary
diligence exercised to ensure the safety of the passengers.[21]

Being an operator and owner of a common carrier, Sanico was required to observe extraordinary diligence in safely
transporting Colipano. When Colipano's leg was injured while she was a passenger in Sanico's jeepney, the
presumption of fault or negligence on Sanico's part arose and he had the burden to prove that he exercised the
extraordinary diligence required of him. He failed to do this.

In Calalas v. Court of Appeals,[22] the Court found that allowing the respondent in that case to be seated in an
extension seat, which was a wooden stool at the rear of the jeepney, "placed [the respondent] in a peril greater than
that to which the other passengers were exposed."[23] The Court further ruled that the petitioner in Calalas was not
only "unable to overcome the presumption of negligence imposed on him for the injury sustained by [the respondent],
but also, the evidence shows he was actually negligent in transporting passengers."[24]

Calalas squarely applies here. Sanico failed to rebut the presumption of fault or negligence under the Civil Code.
More than this, the evidence indubitably established Sanico's negligence when Castro made Colipano sit on an
empty beer case at the edge of the rear entrance/exit of the jeepney with her sleeping child on her lap, which put her
and her child in greater peril than the other passengers. As the CA correctly held:
For the driver, Vicente Castro, to allow a seat extension made of an empty case of beer clearly indicates lack of
prudence. Permitting Werherlina to occupy an improvised seat in the rear portion of the jeepney, with a child on her
lap to boot, exposed her and her child in a peril greater than that to which the other passengers were exposed. The
use of an improvised seat extension is undeniable, in view of the testimony of plaintiffs witness, which is consistent
with Werherlina's testimonial assertion. Werherlina and her witness's testimony were accorded belief by the RTC.
Factual findings of the trial court are entitled to great weight on appeal and should not be disturbed except for strong
and valid reasons, because the trial court is in a better position to examine the demeanor of the witnesses while
testifying.[25]
The CA also correctly held that the!defense of engine failure, instead of exonerating Sanico, only aggravated his
already precarious position.[26] The engine failure "hinted lack of regular check and maintenance to ensure that the
engine is at its best, considering that the jeepney regularly passes through a mountainous area."[27] This failure to
ensure that the jeepney can safely transport passengers through its route which required navigation through a
mountainous area is proof of fault on Sanico's part. In the face of such evidence, there is no question as to Sanico's
fault or negligence.

Further, common carriers may also be liable for damages when they contravene the tenor of their obligations. Article
1170 of the Civil Code states:
ART. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who
in any manner contravene the tenor thereof, are liable for damages.
In Magat v. Medialdea,[28] the Court ruled: "The phrase 'in any manner contravene the tenor' of the obligation includes
any illicit act or omission which impairs the strict and faithful fulfillment of the obligation and every kind of defective
performance."[29] There is no question here that making Colipano sit on the empty beer case was a clear showing of
how Sanico contravened the tenor of his obligation to safely transport Colipano from the place of departure to the
place of destination as far as human care and foresight can provide, using the utmost diligence of very cautious
persons, and with due regard for all the circumstances.

Sanico's attempt to evade liability by arguing that he exercised extraordinary diligence when he hired; Castro, who
was allegedly an experienced and time-tested driver, whom he had even accompanied on a test-drive and in whom
he was personally convinced of the driving skills,[30] are not enough to exonerate him from liability - because the
liability of common carriers does not cease upon proof that they exercised all the diligence of a good father of a family
in the selection and supervision of their employees. This is the express mandate of Article 1759 of the Civil Code:
ART. 1759. Common carriers are liable for the death of or injuries to passengers through the negligence or willful acts
of the former's employees, although such employees may have acted beyond the scope of their authority or in
violation of the orders of the common carriers.

This liability of the common carriers does not cease upon proof that they exercised all the diligence of a good father
of a family in the selection and supervision of their employees.
The only defenses available to common carriers are (1) proof that they observed extraordinary diligence as
prescribed in Article 1756,[31] and (2) following Article 1174 of the Civil Code, proof that the injury or death was
brought about by an event which "could not be foreseen, or which, though foreseen, were inevitable," or a fortuitous
event.

The Court finds that neither of these defenses obtain. Thus, Sanico is liable for damages to Colipano because of the
injury that Colipano suffered as a passenger of Sanico's jeepney.

The Affidavit of Desistance and Release of Claim is void.

Sanico cannot be exonerated from liability under the Affidavit of Desistance and Release of Claim[32]and his payment
of the hospital and medical bills of Colipano amounting to P44,900.00.[33]

The RTC ruled that "the Affidavit of Desistance and Release of Claim is not binding on plaintiff [Colipano] in the
absence of proof that the contents thereof were sufficiently translated and explained to her."[34] The CA affirmed the
findings of the RTC and ruled that the document was not binding on Colipano, as follows:
Finally, We sustain the RTC's finding that the affidavit of desistance and release of claim, offered by defendants-
appellants, are not binding on Werherlina, quoting with approval its reflection on the matter, saying:
xxx this Court finds that the Affidavit of Desistance and Release of Claim is not binding on plaintiff in the absence of
proof that the contents thereof were sufficiently explained to her. It is clear from the plaintiffs circumstances that she
is not able to understand English, more so stipulations stated in the said Affidavit and Release. It is understandable
that in her pressing need, the plaintiff may have been easily convinced to sign the document with the promise that
she will be compensated for her injuries.[35]
The Court finds no reason to depart from these findings of the CA and the RTC.

For there to be a valid waiver, the following requisites are essential:

(1) that the person making the waiver possesses the right, (2) that he has the capacity and power to dispose of the
right, (3) that the waiver must be clear and unequivocal although it may be made expressly or impliedly, and (4) that
the waiver is not contrary to law, public policy, public order, morals, good customs or prejudicial to a third person with
a right recognized by law.[36]
While the first two requirements can be said to exist in this case, the third and fourth requirements are, however,
lacking.

For the waiver to be clear and unequivocal, the person waiving the right should understand what she is waiving and
the effect of such waiver. Both the CA and RTC made the factual determination that Colipano was not able to
understand English and that there was no proof that the documents and their contents and effects were explained to
her. These findings of the RTC, affirmed by the CA, are entitled to great weight and respect.[37] As this Court held
in Philippine National Railways Corp. v. Vizcara[38]:
It is a well-established rule that factual findings by the CA are conclusive on the parties and are not reviewable by this
Court. They are entitled to great weight and respect, even finality, especially when, as in this case, the CA affirmed
the factual findings arrived at by the trial court.[39]
Although there are exceptions to this rule,[40] the exceptions are absent here.

Colipano could not have clearly and unequivocally waived her right to claim damages when she had no
understanding of the right she was waiving and the extent of that right. Worse, she was made to sign a document
written in a language she did not understand.

The fourth requirement for a valid waiver is also lacking as the waiver, based on the attendant facts, can only be
construed as contrary to public policy. The doctrine in Gatchalian v. Delim,[41] which the CA correctly cited,[42] is
applicable here:
Finally, because what is involved here is the liability of a common carrier for injuries sustained by passengers in
respect of whose safety a common carrier must exercise extraordinary diligence, we must construe any such
purported waiver most strictly against the common carrier. For a waiver to be valid and effective, it must not be
contrary to law, morals, public policy or good customs. To uphold a supposed waiver of any right to claim damages
by an injured passenger, under circumstances like those exhibited in this case, would be to dilute and weaken the
standard of extraordinary diligence exacted by the law from common carriers and hence to render that standard
unenforceable. We believe such a purported waiver is offensive to public policy.[43]
"[P]ublic policy refers to the aims of the state to promote the social and general well-being of the inhabitants."[44] The
Civil Code requires extraordinary diligence from common carriers because the nature of their business requires the
public to put their safety and lives in the hands of these common carriers. The State imposes this extraordinary
diligence to promote the well-being of the public who avail themselves of the services of common carriers. Thus, in
instances of injury or death, a waiver of the right to claim damages is strictly construed against the common carrier so
as not to dilute or weaken the public policy behind the required standard of extraordinary diligence.

It was for this reason that in Gatchalian, the waiver was considered offensive to public policy because it was shown
that the passenger was still in the hospital and was dizzy when she signed the document. It was also shown that
when she saw the other passengers signing the document, she signed it without reading it. .

Similar to Gatchalian, Colipano testified that she did not understand the document she signed.[45] She also did not
understand the nature and extent of her waiver as the content of the document was not explained to her.[46] The
waiver is therefore void because it is contrary to public policy.[47]

The Court reiterates that waivers executed under similar circumstances are indeed contrary to public policy and are
void.[48] To uphold waivers taken from injured passengers who have no knowledge of their entitlement under the law
and the extent of liability of common carriers would indeed dilute the extraordinary diligence required from common
carriers, and contravene a public policy reflected in the Civil Code.

Amount of compensatory damages granted is incorrect.

On the amount of damages, the RTC awarded P2,098.80 as actual damages and P360,000.00 as compensatory
damages for loss of income, as follows:
[T]his Court can only award actual damages in the amount that is duly supported by receipts, that is, P2,098.80 mid
not P7,277.80 as prayed for by plaintiff as there is no basis for the amount prayed for. However, considering that
plaintiff has suffered the loss of one leg which has caused her to be limited in her movement thus resulting in loss of
livelihood, she is entitled to compensatory damages for lost income at the rate of P12,000.00/year for thirty years in
the amount of P360,000.00.[49]
The CA, on the other hand, modified the award of the RTC by reducing the compensatory damages from
P360,000.00 to P200,000.00, thus:
By virtue of their negligence, defendants-appellants are liable to pay Werherlina compensatory damages for loss of
earning capacity. In arriving at the proper amount, the Supreme Court has consistently used the following formula:
Net Earning Life Expectancy x [Gross Annual Income - Living Expenses (50% of
=
Capacity gross annual income)]

where life
= 2/3 (80 - the age of the deceased).
expectancy
Based on the stated formula, the damages due to Werherlina for loss of earning capacity is:
Net Earning
= [2/3 x (80-30)] x (P12,000.00 x (50%)
Capacity

= (2/3 x 50) x P6,000.00

= 33.33 x P6,000.00

= P200,000.00
The award of the sum of P200,000.00 as compensatory damages for loss of earning capacity is in order,
notwithstanding the objections of defendants-appellants with respect to lack of evidence on Werherlina's age and
annual income.[50]
Sanico argues that Colipano failed to present documentary evidence to support her age and her income, so that her
testimony is self-serving and that there was no basis for the award of compensatory damages in her favor.[51] Sanico
is gravely mistaken.

The Court has held in Heirs of Pedro Clemeña y Zurbano v. Heirs of Irene B. Bien[52] that testimonial evidence cannot
be objected to on the ground of being self-serving, thus:
"Self-serving evidence" is not to be taken literally to mean any evidence that serves its proponent's interest. The term,
if used with any legal sense, refers only to acts or declarations made by a party in his own interest at some place and
time out of court, and it does not include testimony that he gives as a witness in court. Evidence of this sort is
excluded on the same ground as any hearsay evidence, that is, lack of opportunity for cross-examination by the
adverse party and on the consideration that its admission would open the door to fraud and fabrication. In contrast, a
party's testimony in court is sworn and subject to cross-examination by the other party, and therefore, not
susceptible to an objection on the ground that it is self-serving. [53]
Colipano was subjected to cross-examination and both the RTC and CA believed her testimony on her age and
annual income. In fact, as these are questions of facts, these findings of the RTC and CA are likewise binding on the
Court.[54]

Further, although as a general rule, documentary evidence is required to prove loss of earning capacity, Colipano's
testimony on her annual earnings of P12,000.00 is an allowed exception. There are two exceptions to the general
rule and Colipano's testimonial evidence falls under the second exception, viz.:
By way of exception, damages for loss of earning capacity may be awarded despite the absence of documentary
evidence when (1) the deceased is self-employed earning less than the minimum wage under current labor laws, and
judicial notice may be taken of the fact that in the deceased's line of work no documentary evidence is available; or
(2) the deceased is employed as a daily wage worker earning less than the minimum wage under current labor laws.
[55]

The CA applied the correct formula for computing the loss of Colipano's earning capacity:
Net earning capacity = Life expectancy x [Gross Annual Income - Living Expenses (50% of gross annual income)],
where life expectancy = 2/3 (80-the age of the deceased).[56]
However, the CA erred when it used Colipano's age at the time she testified as basis for computing the loss of
earning capacity.[57] The loss of earning capacity commenced when Colipano's leg was crushed on December 25,
1993. Given that Colipano was 30 years old when she testified on October 14, 1997, she was roughly 27 years old on
December 25, 1993 when the injury was sustained. Following the foregoing formula, the net earning capacity of
Colipano is P212,000.00.[58]

Sanico is liable to pay interest.

Interest is a form of actual or compensatory damages as it belongs to Chapter 2[59] of Title XVIII on Damages of the
Civil Code. Under Article 2210 of the Civil Code, "[i]nterest may, in the discretion of the court, be allowed upon
damages awarded for breach of contract." Here, given the gravity of the breach of the contract of carriage causing
the serious injury to the leg of Colipano that resulted in its amputation, the Court deems it just and equitable to award
interest from the date of the RTC decision. Since the award of damages was given by the RTC in its Decision dated
October 27, 2006, the interest on the amount awarded shall be deemed to run beginning October 27, 2006.

As to the rate of interest, in Eastern Shipping Lines, Inc. v. Court of Appeals,[60] the Court ruled that "[w]hen an
obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the rate of 6% per annum."[61] Further, upon finality of the
judgment awarding a sum of money, the rate of interest shall be 12% per annum from such finality until satisfaction
because the interim period is considered a forbearance of credit.[62] Subsequently, in Nacar v. Gallery Frames,[63] the
rate of legal interest for loans or forbearance of any money, goods or credits and the rate allowed in judgments was
lowered from 12% to 6%. Thus, the applicable rate of interest to the award of damages to Colipano is 6%.

WHEREFORE, premises considered, the petition for review is hereby PARTLY GRANTED. As to petitioner Vicente
Castro, the Decision of the Court of Appeals dated September 30, 2013 is REVERSED and SET ASIDE and the
complaint against him is dismissed for lack of cause of action. As to petitioner Jose Sanico, the Decision of the Court
of Appeals is hereby AFFIRMED with MODIFICATIONS, Petitioner Jose Sanico is liable and ordered to pay
respondent Werherlina Colipano the following amounts:
1. Actual damages in the amount of P2,098.80;

2. Compensatory damages for loss of income in the amount of P212,000.00;

 3. Interest on the total amount of the damages awarded in 1 and 2 at the rate of 6% per annum reckoned
from October 27, 2006 until finality of this Decision.
The total amount of the foregoing shall, in turn, earn interest at the rate of 6% per annum from finality of this Decision
until full payment thereof.

SO ORDERED.

[ G.R. No. 211850, September 08, 2020 ]

ZUNECA PHARMACEUTICAL, AKRAM ARAIN AND/OR VENUS ARAIN, M.D., AND STYLE OF
ZUNECA PHARMACEUTICAL, PETITIONERS, VS. NATRAPHARM, INC., RESPONDENT.

DECISION

CAGUIOA, J.:

Businesses generally thrive or perish depending on their reputation among customers. Logically,
consumers gravitate towards products and services they believe are of a certain quality and provide
perceived benefits. Thus, entrepreneurs and businesses actively seek to set apart their reputation
and goodwill from every other enterprise with the goal of being the top-of-mind choice for the
consumers. As signs differentiating the wares or services offered by enterprises, trademarks serve
this purpose of making the products and services of each business uniquely memorable.
Trademarks have several functions: they indicate the origin or ownership of the articles or services in
which they are used; they guarantee that the articles or services come up to a certain standard of
quality; and they advertise the articles and services they symbolize.1 Indeed, the goodwill of a
business, as symbolized and distinguished by its trademarks, helps ensure that the enterprise
stands out, stays afloat, and possibly flourish amidst the sea of commercial activity where the
consumers' continued patronage is a lifebuoy that may determine life or death.

Faced with this intrinsic need to survive, enterprises are becoming increasingly aware of the need to
protect their goodwill and their brands. The State, too, is interested in the protection of the
intellectual property of enterprises and individuals who have exerted effort and money to create
beneficial products and services.2 In line with this, and considering the extent to which intellectual
property rights impact on the viability of businesses, a common controversy in the field of intellectual
property law is to whom these rights pertain.

In this case of first impression, this is precisely the issue at hand. This case concerns trademarks
which are used for different types of medicines but are admitted by both parties to be confusingly
similar. Exacerbating this controversy on the issue of ownership, however, are conflicting
interpretations on the rules on the acquisition of ownership over trademarks, muddled by
jurisprudential precedents which applied principles inconsistent with the current law. Thus, in
resolving this issue, the Court needed to examine and ascertain the meaning and intent behind the
rules that affect trademark ownership.

Facts

This is a Petition for Review on Certiorari3 (Petition) under Rule 45 with Prayer for Temporary
Restraining Order (TRO) and/or Preliminary Injunction filed by petitioners Zuneca Pharmaceutical,
Akram Arain and/or Venus Arain, M.D., and Style of Zuneca Pharmaceutical (collectively, Zuneca)
assailing the Decision4 dated October 3, 2013 and Resolution5 dated March 19, 2014 of the Court
of Appeals (CA) in CA-G.R. CV No. 99787. The CA denied Zuneca's appeal and affirmed the
Decision6 dated December 2, 2011 of the Regional Trial Court of Quezon City, Branch 93 (RTC) in
Civil Case No. Q-07-61561, which found Zuneca liable for trademark infringement under Sections
155 to 155.27 of Republic Act No. (R.A.) 8293,8 also known as the Intellectual Property Code of the
Philippines (IP Code), and awarded damages in favor of respondent Natrapharm, Inc. (Natrapharm).

Petitioner Zuneca Pharmaceutical has been engaged in the importation, marketing, and sale of
various kinds of medicines and drugs in the Philippines since 1999.9 It imports generic drugs from
Pakistan and markets them in the Philippines using different brand names.10 Among the products it
has been selling is a drug called carbamazepine under the brand name "ZYNAPS", which is an anti-
convulsant used to control all types of seizure disorders of varied causes like epilepsy.11 Petitioner
Venus S. Arain, M.D. (Dr. Arain) was the proprietor of Zuneca Pharmaceutical before Zuneca, Inc.
was incorporated.12 Akram Arain, meanwhile, is the husband of Dr. Arain, who later on became the
President of Zuneca, Inc.13

Natrapharm, on the other hand, is a domestic corporation engaged in the business of manufacturing,
marketing, and distribution of pharmaceutical products for human relief.14 One of the products being
manufactured and sold by Natrapharm is citicoline under the trademark "ZYNAPSE", which is
indicated for the treatment of cerebrovascular disease or stroke.15 The trademark "ZYNAPSE" was
registered with the Intellectual Property Office of the Philippines (IPO) on September 24, 200716 and
is covered by Certificate of Trademark Registration No. 4-2007-005596.17

On November 29, 2007, Natrapharm filed with the RTC a Complaint against Zuneca for Injunction,
Trademark Infringement, Damages and Destruction with Prayer for TRO and/or Preliminary
Injunction, alleging that Zuneca's "ZYNAPS" is confusingly similar to its registered trademark
"ZYNAPSE" and the resulting likelihood of confusion is dangerous because the marks cover medical
drugs intended for different types of illnesses.18 Consequently, Natrapharm sought to enjoin Zuneca
from using "ZYNAPS" or other variations thereof, in addition to its demand for Zuneca's payment of
Two Million Pesos (P2,000,000.00) in damages; Five Million Pesos (P5,000,000.00) in exemplary
damages; and Three Hundred Thousand Pesos (P300,000.00) as attorney's fees, expenses of
litigation, and costs of suit.19 Further, it prayed that all infringing goods, labels, signs, etc. of Zuneca
be impounded and destroyed without compensation.20

In its Answer (With Compulsory Counterclaim and Prayer for Preliminary Injunction), Zuneca claimed
that it has been selling carbamazepine under the mark "ZYNAPS" since 2004 after securing a
Certificate of Product Registration on April 15, 2003 from the Bureau of Food and Drugs (BFAD, now
Food and Drug Administration).21 It alleged that it was impossible for Natrapharm not to have known
the existence of "ZYNAPS" before the latter's registration of "ZYNAPSE" because Natrapharm had
promoted its products, such as "Zobrixol" and "Zcure", in the same publications where Zuneca had
advertised "ZYNAPS".22 Further, Zuneca pointed out that both Natrapharm and Zuneca had
advertised their respective products in identical conventions.23 Despite its knowledge of prior use by
Zuneca of "ZYNAPS", Natrapharm had allegedly fraudulently appropriated the "ZYNAPSE" mark by
registering the same with the IPO.24 As the prior user, Zuneca argued that it is the owner of
"ZYNAPS" and the continued use by Natrapharm of "ZYNAPSE" causes it grave and irreparable
damage.25

On the basis of such arguments, Zuneca insisted that it is Natrapharm which should be liable for
damages.26 On this score, Zuneca prayed that its counterclaims against Natrapharm be granted by
the RTC,27 namely, the cancellation of Natrapharm's "ZYNAPSE" registration; the prohibition of
Natrapharm from manufacturing, advertising, selling, and distributing "ZYNAPSE" products; the
destruction of "ZYNAPSE" products and labels; the payment of Two Million Pesos (P2,000,000.00),
or double such amount, in the discretion of the court, as damages for fraudulent registration; and the
payment of Five Million Pesos (P5,000,000.00) as moral damages, Two Million Pesos
(P2,000,000.00) as exemplary damages, Three Hundred Thousand Pesos (P300,000.00) as
attorney's fees, and Fifty Thousand Pesos (P50,000.00) as costs of suit.28
Subsequently, after a summary hearing, the prayer for TRO was denied.29 The preliminary
injunction and counter preliminary injunction prayed for by the parties were likewise rejected.30

As summarized by the CA, the following evidence were presented during the trial:

First to testify on the part of Natrapharm was Cristina Luna Ravelo who is the vice president for
marketing of Natrapharm. According to her, she was the one who conceptualized the name
"ZYNAPSE"[,] taking it from "Synapse" which was a publication she sponsored when she was the
product manager of [the Philippine] Neurological Association. Further[,] "Synapse" is a neurological
term referring to the junction between 2 nerves where nerve signals are transmitted, hence
appropriate for a medicine for stroke. Afterwardfs], the witness verified using the research tool IMS-
PPI, which lists the pharmaceutical products marketed in the Philippines, any other
cerebroprotective products (CO4A) that [are] confusingly similar with "ZYNAPSE". Finding none in
the list covering the period of the fourth quarter of 2004 up to the first quarter of 2007, the witness
proceeded with the registration of "ZYNAPSE" with the IPO. After the IPO issued a [certificate of
trademark registration], the BFAD, in turn, released a Certificate of Product Listing for "ZYNAPSE".
The witness likewise revealed that she was informed in late September 2007 of the existence of
"ZYNAPS" after a sales personnel had informed her of such drug being sold in Visayas and
Mindanao. After learning this, the witness brought the matter to Dr. Arain, but no resolution was
agreed upon by the parties due to a difference in opinion.

On cross-examination, the witness averred that she did not check with drugstores and other
publications for similar brand names as "ZYNAPSE", as she only relied with [the] IMS[-PPI]. Further,
the witness explained that the formulation of the drug "ZYNAPSE" is owned by Patriot
Pharmaceutical [(Patriot)] and this formulation is marketed by Natrapharm through the brand name
"ZYNAPSE".

On re-direct, the witness clarified that she did not conduct any field survey to find if there [we]re
similar brand names as "ZYNAPSE", because of the difficulty posed by inquiring from each [of the
3,000 to 4,000 drug stores] nationwide. In addition, it was x x x Natrapharm's strategy to remain
quiet about [its] product.

Next to testify was Jeffrey Silang, the Analyst Programmer of Natrapharm. His function [was] to
create a system and generate reports for accounting, inventory and sales for Natrapharm. The
witness stated that Patriot is a mere supplier of Natrapharm and that Natrapharm has other
suppliers. The witness then identified a sales report which indicate[d] that WMMC Hospital bought
several quantities of "ZYNAPSE" products from Natrapharm. Also included in said report [was] an
entry "non-psyche Patriot" which represented] its supplier.

On cross-examination, the witness reiterated that Patriot supplies the raw materials to Natrapharm.
Natrapharm, in turn, repackage[s] these materials to bear the brand "ZYNAPSE". The witness also
admitted that he d[id] not know exactly why "ZYNAPSE" is qualified as non-psyche, as he is a mere
Information Technology expert.

Last to testify was Atty. Caesar J. Poblador who identified his Judicial Affidavit dated [November 4,
2009 which contained] the several invoices charged by his law firm to Natrapharm in consideration
of the law firm's legal service.

On the part of [Zuneca], Dr. Arain took the stand and identified her Supplemental Affidavit dated
[February 12, 2010. On said Affidavit, it [was] stated that Dr. Arain established Zuneca
[Pharmaceutical] in 1999. Subsequently, [Zuneca, Inc.] was incorporated on [January 8, 2008 and [it]
took over the business of Zuneca Pharmaceutical. Verily, among the products that Zuneca sells is
[carbamazepine] with the brand name "ZYNAPS" for which Zuneca applied for a Certificate of
Product Registration (CPR) from BFAD. On [April 15, 2003, Zuneca was able to obtain a CPR over
its [carbamazepine] product valid for five (5) years which was [then] renewed for another five (5)
years or until [April 15, 2013. Zuneca then started importing [carbamazepine] "ZYNAPS" in
December 2003 and began promoting, marketing and selling them in 2004. In order to promote
"ZYNAPS", Zuneca advertised it through paid publications such as the (1) Philippine Pharmaceutical
Directory or PPD; (2) PPD's Better Pharmacy; and (3) PPD's Philippine Pharmaceutical Directory
Review (PPDr). Apparently, said publications also cover[ed] the different products of Natrapharm
and its affiliate [Patriot]. Allegedly, the two companies (Natrapharm and Patriot) participated as
partners in a medical symposi[um] on [October 22 to 23, 2009.

When asked why she did not register her trademark with the IPO, x x x [Dr.] Arain answered that she
could not find the time because of the illness of her father.

On cross-examination, Dr. Arain testified that she remained as an adviser of Zuneca, Inc., after its
incorporation. She then told her husband, who became the President of Zuneca, Inc. and the vice
president about the dispute with Natrapharm. Further, the witness admitted that she did not secure
an advertising page for "ZYNAPS" in the [PPD].

Last to testify was Emmanuel Latin, the president of Medicomm Pacific (Medicomm). The witness
attested that Medicomm is engaged in the publication of lists of drugs which it gives to doctors as
reference in the preparation of prescriptions for their patients. The witness then enumerated their
publications as PPD, PPDr, and PPD's Better Pharmacy which the company publishes annually and
distributes to doctors for free. According to the witness, several years ago, Medicomm invited
pharmaceutical companies to list with its publications for free. Thereafter, the said pharmaceutical
companies started advertising with Medicomm for a fee which then became the source of revenues
for Medicomm. The witness also affirmed that Zuneca, Natrapharm and Patriot are advertisers of
PPD.

However, the witness admitted that "ZYNAPSE" [was] not listed in the PPD.31

The RTC Ruling

After trial, the RTC issued its Decision32 dated December 2, 2011, the dispositive portion of which
states:

WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of [Natrapharm] and
against [Zuneca].

[Zuneca], jointly and severally, [is] hereby directed to pay [Natrapharm] the following amounts, to wit:

One Million Pesos (P1,000,000.00) as damages;

One Million Pesos (P1,000,000.00) as exemplary damages;
Two Hundred Thousand Pesos (P200,000.00) as attorney's fees;
and the Costs.

[Zuneca is] further enjoined from henceforth using ["ZYNAPS"] or any other variations thereto which
are confusingly similar to [Natrapharm's "ZYNAPSE".]

It is likewise ordered that all infringing goods, labels, signs, prints, packages, wrappers, receptacles
and advertisements in possession of [Zuneca], bearing the registered mark or any reproduction,
counterfeit, copy or colourable imitation thereof, all plates, molds, matrices and other means of
making the same, implements, machines and other items related to the conduct, and predominantly
used, by [Zuneca] in such infringing activities, be disposed of outside the channels of commerce or
destroyed, without compensation.

The counterclaim of [Zuneca] is DISMISSED for lack of merit.

SO ORDERED.33

The RTC ruled that the first filer in good faith defeats a first user in good faith who did not file any
application for registration.34 Hence, Natrapharm, as the first registrant, had trademark rights over
"ZYNAPSE" and it may prevent others, including Zuneca, from registering an identical or confusingly
similar mark.35 Moreover, the RTC ruled that there was insufficient evidence that Natrapharm had
registered the mark "ZYNAPSE" in bad faith.36 The fact that "ZYNAPS" and Natrapharm's other
brands were listed in the Philippine Pharmaceutical Directory (PPD) was not sufficient to show bad
faith since Zuneca's own witness admitted to not having complete knowledge of the drugs listed in
the PPD.37 Natrapharm should also therefore be accorded the benefit of the doubt that it did not
have complete knowledge of the other brand names listed in the PPD.38 Further, following the use
of the dominancy test, the RTC likewise observed that "ZYNAPS" was confusingly similar to
"ZYNAPSE".39 To protect the public from the disastrous effects of erroneous prescription and
mistaken dispensation, the confusion between the two drugs must be eliminated.40

The CA Ruling

Aggrieved, Zuneca appealed the RTC's Decision to the CA, raising the following issues: (1) whether
the RTC erred in ruling that the first-to-file trademark registrant in good faith defeats the right of the
prior user in good faith, hence, Natrapharm has the right to prevent Zuneca from using or registering
the trademark "ZYNAPS" or marks similar or identical thereto; (2) whether the RTC erred in finding
that Natrapharm was in good faith when it registered the trademark "ZYNAPSE" for citicoline; (3)
whether the RTC erred in ruling that Zuneca is liable for trademark infringement and therefore liable
for damages and attorney's fees and should be enjoined from the use of the trademark "ZYNAPS"
and marks similar thereto, and that Zuneca's goods and materials in connection with the trademark
"ZYNAPS" must be disposed outside the channels of trade or destroyed without compensation; and
(4) whether the RTC erred in dismissing Zuneca's counterclaims for lack of merit.41

In a Decision42 dated October 3, 2013, the CA denied Zuneca's appeal for lack of merit, the
dispositive portion of which states:

WHEREFORE, premises considered, the instant Appeal is DENIED for lack of merit, and the
assailed decision rendered by the Regional Trial Court of Quezon City, Branch 93 dated [December
2, 2011 is AFFIRMED.

SO ORDERED.43

In affirming the RTC, the CA stated that registration, not prior use, is the mode of acquiring
ownership of a trademark.44 The mark must be registered in order to acquire ownership and the
failure to do so renders the non-registering user susceptible to a charge of
infringement.45 Moreover, those who intend to register their mark need not look at the other marks
used by other persons but must confine only their search to the marks found in the database of the
IPO.46 If there are no similar or identical marks, the mark should be registered as a matter of
course.47 Hence, as the registered owner of the trademark "ZYNAPSE", Natrapharm has every right
to prevent all other parties from using identical or similar marks in their business, as provided in the
IP Code.48 Further, only the registered owner of the trademark may file a civil action against the
infringer and seek injunction and damages.49

On the issue of good faith, the CA affirmed the findings of the RTC that Natrapharm had no
knowledge of the existence of "ZYNAPS" prior to the registration of "ZYNAPSE".50 The CA also
found that the testimony of Natrapharm's witness Cristina Luna Ravelo51 (Ravelo) showed that
Natrapharm was able to register "ZYNAPSE" after it was cleared using the databases of the IPO and
the BFAD.52 The CA ruled that good faith is presumed and it was incumbent on Zuneca to show
that Natrapharm was in bad faith when it registered "ZYNAPSE", which Zuneca failed to
show.53 The CA stated that it was not enough that Zuneca and Natrapharm had exhibited in the
same convention two years prior to the registration of "ZYNAPSE" and ruled that it was unlikely that
the participants would remember each and every medicine or drug exhibited during said
convention.54 Besides, Zuneca failed to show that the people who had attended the convention on
behalf of Natrapharm were also the ones who were responsible for the creation of "ZYNAPSE" or
that they were still connected to Natrapharm at the time the "ZYNAPSE" mark was registered with
the IPO in 2007.55

In a Resolution56 dated March 19, 2014, the CA denied Zuneca's motion for reconsideration.

Hence, Zuneca filed the instant Petition.

In compliance with the Court's Resolution57 dated June 2, 2014, Natrapharm filed its
Comment.58 Zuneca thereafter filed its Reply59 to Natrapharm's Comment. In a Resolution60 dated
June 6, 2016, the Court required each party to file their respective Memoranda. In compliance with
this, Natrapharm filed its Memorandum61 dated September 6, 2016 and Zuneca filed its
Memorandum62 dated September 16, 2016.

The Issues

As stated by Zuneca, the issues for the Court's resolution are as follows:

WHETHER OR NOT THE [CA] ERRED IN AFFIRMING THE RTC'S RULING THAT THE FIRST-TO-
FILE TRADEMARK REGISTRANT IN GOOD FAITH DEFEATS THE RIGHT OF THE PRIOR USER
IN GOOD FAITH, HENCE, [NATRAPHARM] HAS THE RIGHT TO PREVENT [ZUNECA] FROM
USING/REGISTERING THE TRADEMARK "ZYNAPS" OR [MARKS] SIMILAR [OR] IDENTICAL
THERETO.

II

WHETHER OR NOT THE [CA] ERRED IN AFFIRMING THE RTC'S FINDING THAT
[NATRAPHARM] WAS IN GOOD FAITH WHEN IT REGISTERED THE TRADEMARK "ZYNAPSE"
FOR [CITICOLINE].

III

WHETHER OR NOT THE [CA] ERRED IN AFFIRMING THE RTC'S RULING THAT [ZUNECA IS]
LIABLE FOR TRADEMARK INFRINGEMENT AND [IS] THUS LIABLE FOR DAMAGES AND
ATTORNEY'S FEES AND [IS] ENJOINED FROM THE USE OF THE TRADEMARK "ZYNAPS" AND
MARKS SIMILAR THERETO; AND THAT ALL [OF ZUNECA'S] GOODS AND MATERIALS IN
CONNECTION WITH THE TRADEMARK "ZYNAPS" MUST BE DISPOSED OUTSIDE THE
CHANNELS OF TRADE OR DESTROYED WITHOUT COMPENSATION.

IV

WHETHER OR NOT THE [CA] ERRED IN AFFIRMING THE RTC'S DISMISSAL OF [ZUNECA'S]
COUNTERCLAIMS FOR LACK OF MERIT.

WHETHER OR NOT THE [CA] ERRED IN RULING THAT [ZUNECA], FOR FAILURE TO
REGISTER "ZYNAPS" AND FOR FAILURE TO OPPOSE [NATRAPHARM'S] APPLICATION FOR
"ZYNAPSE"[, IS] BARRED BY LACHES AND [IS] DEEMED TO HAVE ABANDONED [ITS]
TRADEMARK.63

It bears stressing at this juncture that the confusing similarity of the "ZYNAPS" and "ZYNAPSE"
marks was admitted by both parties.64 The resolution of this controversy necessitates determining
who has the right to prevent the other party from using its confusingly similar mark. Thus, the
following questions must be answered: (1) How is ownership over a trademark acquired? (2)
Assuming that both parties owned their respective marks, do the rights of the first-to-file registrant
Natrapharm defeat the rights of the prior user Zuneca, i.e., may Natrapharm prevent Zuneca from
using its mark? (3) If so, should Zuneca be held liable for trademark infringement?

The Court's Ruling

Under the law, the owner of the mark shall have the exclusive right to prevent all third parties not
having the owner's consent from using identical or similar marks for identical or similar goods or
services where such use would result in a likelihood of confusion.65

Further, in Prosource International, Inc. v. Horphag Research Management SA,66 the Court held
that, to establish trademark infringement, the following elements must be proven: (l)the trademark
being infringed is registered in the IPO; (2) the trademark is reproduced, counterfeited, copied, or
colorably imitated by the infringer; (3) the infringing mark is used in connection with the sale, offering
for sale, or advertising of any goods, business, or services; or the infringing mark is applied to labels,
signs, prints, packages, wrappers, receptacles, or advertisements intended to be used upon or in
connection with such goods, business, or services; (4) the use or application of the infringing mark is
likely to cause confusion or mistake or to deceive purchasers or others as to the goods or services
themselves or as to the source or origin of such goods or services or the identity of such business;
and (5) it is without the consent of the trademark owner or the assignee thereof.67

Thus, to determine the prevailing party in this controversy and the existence of trademark
infringement, the Court first has to rule on the issue of acquisition of ownership of marks by both
parties.

I. How trademark ownership is acquired

The RTC and the CA both ruled that, having been the first to register in good faith, Natrapharm is the
owner of the trademark "ZYNAPSE" and it has the right to prevent others, including Zuneca, from
registering and/or using a confusingly similar mark.
Zuneca, however, contends that, as the first user, it had already owned the "ZYNAPS" mark prior to
Natrapharm's registration and, invoking Berris Agricultural Co., Inc. v. Abyadang 68 (Berris) and E.
Y. Industrial Sales, Inc. et al. v. Shen Dar Electricity and Machinery Co., Ltd.69 (E.Y. Industrial
Sales, Inc.), its rights prevail over the rights of Natrapharm, the first registrant of a confusingly similar
mark.

The Court holds that Zuneca's argument has no merit because: (i) the language of the IP Code
provisions clearly conveys the rule that ownership of a mark is acquired through registration; (ii) the
intention of the lawmakers was to abandon the rule that ownership of a mark is acquired through
use; and (iii) the rule on ownership used in Berris and E.Y. Industrial Sales, Inc. is inconsistent with
the IP Code regime of acquiring ownership through registration.

i. Under the IP Code, ownership

of a mark is acquired through registration

Special laws have historically determined and provided for the acquisition of ownership over marks,
and a survey thereof shows that ownership of marks is acquired either through registration or use.

Spanish Royal Decree of October 26, 1888

As early as the Spanish regime, trademarks were already protected in the Philippines. The Real
Decreto de 26 de octubre de 188870 or the Spanish Royal Decree of October 26, 1888 provided for
the concession and use of Philippine trademarks as follows:

Art. 4. Tudo fabricante, comerciante, agricultor ó industrial de otra clase, que individual ó
coleclivamente desee usar alguna marca para distinguir los productos de una fábrica, los objetos de
comercio, las primeras materias agrícolas ú otras cualesquiera, ó la ganadería, y lo mismo los que
deseen conservar la propiedad de dibujos y modelos industriales, tendrán que solicitar el certificado
de propiedad con arregto a las prescripciones de esie decreto.

El que carezca de dicho certificado, no podrá usar marcas ó distintivo alguno para los productos de
su industria. ni evitar que otros empleen sus estampaciones ó dibujos industriales.
Ꮮαwρhi ৷

xxxx

Art. 21. El derecho á la propiedad de las marcas, dibujos, y modelos industriales que esta
disposición reconoce, se adquirirá por el certifwado y el cumplimienlo de las demás disposiciones
que la misma determina.

Based on the above provisions, one who wished to own and use a trademark had to request for a
certificate of ownership in accordance with the royal decree. The use of unregistered trademarks
was prohibited. In other words, because trademarks could not be used without first securing the
necessary certificate, the ownership of trademarks under the Spanish Royal Decree of October 26,
1888 was acquired only by means of registration.

Act No. 666

The manner of acquiring ownership over trademarks changed during the American period. In 1903,
Act No. 666 71 was enacted, which provided that the ownership of a mark was acquired through
actual use thereof. The pertinent provisions of said law are reproduced below:
SECTION 2. Anyone who produces or deals in merchandise of any kind by actual use thereof in
trade may appropriate to his exclusive use a trade-mark, not so appropriated by another, to
designate the origin or ownership thereof: Provided, That a designation or part of a designation
which relates only to the name, quality, or description of the merchandise or geographical place of its
production or origin cannot be the subject of a trade-mark.

SECTION 3. The ownership or possession of a trade-mark, heretofore or hereafter appropriated, as

in the foregoing section provided, shall be recognized and protected in the same manner and to the
same extent, as are other property rights known to the law. To this end any person entitled to the
exclusive use of a trade-mark to designate the origin or ownership of goods he has made or deals in
may recover damages in a civil action from any person who has sold goods of a similar kind, bearing
such trade-mark, and the measure of the damages suffered, at the option of the complaining party,
shall be either the reasonable profit which the complaining party would have made had the
defendant not sold the goods with the trade-mark aforesaid, or the profit which the defendant
actually made out of the sale of the goods with the trade-mark, and in cases where actual intent to
mislead the public or to defraud the owner of the trade-mark shall be shown, in the discretion of the
court, the damages may be doubled. The complaining party, upon proper showing, may have a
preliminary injunction, restraining the defendant temporarily from use of the trade-mark pending the
hearing, to be granted or dissolved in the manner provided in the Code of Civil Procedure, and such
injunction upon final hearing, if the complainant's property in the trade-mark and the defendant's
violation thereof shall be fully established, in these Islands, nor shall it be necessary to show that the
trade-mark shall be made perpetual, and this injunction shall be part of the judgment for damages to
be rendered in the same cause as above provided.

SECTION 4. In order to justify recovery for violation of trade-mark rights in the preceding sections
defined, it shall not be necessary to show that the trade-marks have been registered under the royal
decree of eighteen hundred and eight-eight, providing for registration of trademarks in the Philippine
Islands, in force during the Spanish sovereignty in these Islands, nor shall it be necessary to show
that the trade mark has been registered under this Act. It shall be sufficient to invoke protection of
his property in a trade-mark if the party complaining shall prove that he has used the trade-
mark claimed by him upon his goods a sufficient length of time so that the use of the trade-mark by
another would be an injury to him and calculated to deceive the public into the belief that the goods
of that other were the goods manufactured or dealt in by the complaining party. (Emphasis and
underscoring supplied)

R.A. 166

On June 20, 1947, R.A. 166 72 (Trademark Law) was enacted and approved. It is worth noting that
the Trademark Law, as clarified through its subsequent amendment, explicitly stated that actual use
was a prerequisite for the ownership of marks.

Section 4 of the Trademark Law stated that the owner of the mark had the right to register the same.
Despite not categorically defining who the owner of the mark was, the same section also provided
that one could not register a mark that was previously used and not abandoned by another.
Consequently, prior use and non-abandonment determined the ownership of the mark because it
effectively barred someone else from registering the mark and representing himself73 to be the
owner thereof. In other words, the only person who was entitled to register the mark, and therefore
be considered as the owner thereof, was the person who first used and who did not abandon the
mark, viz.:
SECTION 4. Registration of Trade-marks, Trade-names and Service-marks. - The owner of a trade-
mark, trade-name or service-mark used to distinguish his goods, business or services from the
goods, business or services of others shall have the right to register the same, unless it:

xxxx

(d) Consists of or comprises a mark or trade-name which so resembles a mark or trade-name

registered in the Philippines or a mark or trade-name previously used in the Philippines by another
and not abandoned, as to be likely, when applied to or used in connection with the goods, business
or services of the applicant, to cause confusion or mistake or to deceive purchases[.] (Emphasis and
underscoring supplied)

Civil Code

When the Civil Code took effect in 1950, it included the rule that the owner of the trademark was the
person, corporation, or firm registering the same, but said rule was made subject to the provisions of
special laws. Hence, the manner of acquiring ownership was still through actual use because the
special law in effect at that time was the Trademark Law, viz.:

CHAPTER 3
TRADEMARKS AND TRADENAMES

ART. 520. A trademark or tradename duly registered in the proper government bureau or office is
owned by and pertains to the person, corporation, or firm registering the same, subject to the
provisions of special laws. (Emphasis supplied)

Amendment to the Trademark Law

In 1951, the Trademark Law was amended by R.A. 638,74 which added Section 2-A, among others.
As previously mentioned, this amendment explicitly provided that ownership over a mark was
acquired through actual use, viz.:

Sec. 2-A. Ownership of trade-marks, trade-names and service-marks; how acquired. - Anyone who
lawfully produces or deals in merchandise of any kind or who engages in any lawful business, or
who renders any lawful service in commerce, by actual use thereof in manufacture or trade, in
business, and in the service rendered, may appropriate to his exclusive use a trade-mark, a trade-
name, or a service-mark not so appropriated by another, to distinguish Ms merchandise, business or
service from the merchandise, business or services of others. The ownership or possession of a
trade-mark, trade-name, service-mark, heretofore or hereafter appropriated, as in this section
provided, shall be recognized and protected in the same manner and to the same extent as are
other property rights known to the law. (Emphasis and underscoring supplied)

IP Code

Forty-seven years later, upon the effectivity of the IP Code on January 1, 1998, the manner of
acquiring ownership of trademarks reverted to registration. This is expressed in Section 122 of the IP
Code, viz.:

SECTION 122. How Marks are Acquired. - The rights in a mark shall be acquired through
registration made validly in accordance with the provisions of this law. (Sec. 2-A, R.A. No. 166a)
(Emphasis and underscoring supplied)
Related to this, Section 123. l(d) of the IP Code expresses the first-to-file rule as follows:

SECTION 123. Registrability. - 123.1. A mark cannot be registered if it:

xxxx

(d) Is identical with a registered mark belonging to a different proprietor or a mark with an earlier
filing or priority date, in respect of:

(i) The same goods or services, or

(ii) Closely related goods or services, or

(iii) If it nearly resembles such a mark as to be likely to deceive or cause confusion[.]

(Emphasis and underscoring supplied)

To clarify, while it is the fact of registration which confers ownership of the mark and enables the
owner thereof to exercise the rights expressed in Section 14775 of the IP Code, the first-to-file rule
nevertheless prioritizes the first filer of the trademark application and operates to prevent any
subsequent applicants from registering marks described under Section 123.1(d) of the IP Code.

Reading together Sections 122 and 123. l(d) of the IP Code, therefore, a registered mark or a mark
with an earlier filing or priority date generally bars the future registration of- and the future acquisition
of rights in - an identical or a confusingly similar mark, in respect of the same or closely-related
goods or services, if the resemblance will likely deceive or cause confusion.

The current rule under the IP Code is thus in stark contrast to the rule on acquisition of ownership
under the Trademark Law, as amended. To recall, the Trademark Law, as amended, provided that
prior use and non-abandonment of a mark by one person barred the future registration of an
identical or a confusingly similar mark by a different proprietor when confusion or deception was
likely.76 It also stated that one acquired ownership over a mark by actual use.77

Once the IP Code took effect, however, the general rule on ownership was changed and
repealed.78 At present, as expressed in the language of the provisions of the IP Code, prior use no
longer determines the acquisition of ownership of a mark in light of the adoption of the rule that
ownership of a mark is acquired through registration made validly in accordance with the provisions
of the IP Code.79 Accordingly, the trademark provisions of the IP Code use the term "owner" in
relation to registrations.80 This fact is also apparent when comparing the provisions of the
Trademark Law, as amended, and the IP Code, viz.:

Trademark Law, as amended IP Code

Sec. 4. Registration of trade-marks, trade-
names and service-marks on the principal
register. - There is hereby established a
register of trade-mark, tradenames and
service-marks which shall be known as the
principal register. The owner of a trade-
mark, a trade-name or servicemark used to
distinguish his goods, business or services
from the goods, business or services of
SECTION 123. Registrability. — 123.1. A
mark cannot be registered if it:
(a) Consists of immoral, deceptive or
scandalous matter, or matter which may
disparage or falsely suggest a connection
with persons, living or dead, institutions,
beliefs, or national symbols, or bring them
 others shall have the right to register the
same on the principal register, unless it: into contempt or disrepute;

(a) Consists of or compnses immoral, (b) Consists of the flag or coat of arms or
deceptive or scandalous matter; or matter other insignia of the Philippines or any of its
which may disparage or falsely suggest a political subdivisions, or of any foreign
com1ection with persons, living or dead, nation, or any simulation thereof;
institutions, beliefs, or national symbols, or
bring them into contempt or disrepute; (c) Consists of a name, portrait or signature
identifying a particular living individual
(b) Consists of or comprises the flag or coat except by his written consent, or the name,
of arms or other insignia of the Philippines signature, or portrait of a deceased
or any of its political subdivisions, or of any President of the Philippines, during the life
foreign nation, or any simulation thereof; of his widow, if any, except by written
consent of the widow;
(c) Consists of or compnses a name,
pmirait, or signature identifying a particular (d) Is identical with a registered mark
living individual except by his written belonging to a different proprietor or a
consent, or the name, signature, or portrait mark with an earlier filing or priority
of a deceased President of the Philippines, date, in respect of:
during the life of his widow, if any, except
by the written consent of the widow; (i) The same goods or services, or

(d) Consists of or comprises a mark or (ii) Closely related goods or services, or

trade-name which so resembles aa mark
or trade-name registered in the
(iii) If it nearly resembles such a mark as
Philippines or a mark or trade-name
to be likely to deceive or cause
previously used in the Philippines by
confusion;
another and not abandoned, as to be
likely, when applied to or used in
connection with the goods, business or xxx (Sec. 4, R.A. No. 166a) (Emphasis
services of the applicant, to cause supplied)
confusion or mistake or to deceive
purchasers; or

x x x x (Emphasis supplied)

Subparagraph (d) of the above provision of the Trademark Law was amended in the IP Code to,
among others, remove the phrase "previously used in the Philippines by another and not
abandoned."81 Under the Trademark Law, as amended, the first user of the mark had the right81 to
file a cancellation case against an identical or confusingly mark registered in good faith by another
person. However, with the omission in the IP Code provision of the phrase "previously used in the
Philippines by another and not abandoned,,"said right of the first user is no longer available. In
effect, based on the language of the provisions of the IP Code, even if the mark was previously used
and not abandoned by another person, a good faith applicant may still register the same and thus
become the owner thereof, and the prior user cannot ask for the cancellation of the latter's
registration. If the lawmakers had wanted to retain the regime of acquiring ownership through use,
this phrase should have been retained in order to avoid conflicts in ownership. The removal of such
a right unequivocally shows the intent of the lawmakers to abandon the regime of ownership under
the Trademark Law, as amended.
On this point, our esteemed colleagues Associate Justices Leonen and Lazaro-Javier have
expressed their doubts regarding the abandonment of the ownership regime under the Trademark
Law, as amended, because of the continued requirement of actual use under the IP Code and
because of the prima facie nature of a certificate of registration.82 In particular, Sections
124.2 83 and 14584 of the IP Code provide that the applicant/registrant is required to file a
Declaration of Actual Use on specified periods, while Section 13885 provides that a certificate of
registration of a mark shall be prima facie evidence of the validity of the registration, the registrant's
ownership of the mark, and of the registrant's exclusive right to use the same in connection with the
goods or services and those that are related thereto specified in the certificate.

Certainly, while the IP Code and the Rules86 of the IPO mandate that the applicant/registrant must
prove continued actual use of the mark, it is the considered view of the Court that this does not imply
that actual use is still a recognized mode of acquisition of ownership under the IP Code. Rather,
these must be understood as provisions that require actual use of the mark in order for the
registered owner of a mark to maintain87 his ownership.

In the same vein, the prima facie nature of the certificate of registration88 is not indicative of the fact
that prior use is still a recognized mode of acquiring ownership under the IP Code. Rather, it is
meant to recognize the instances when the certificate of registration is not reflective of ownership of
the holder thereof, such as when: 1 the first registrant has acquired ownership of the mark through
registration but subsequently lost the same due to non-use89 or abandonment90 (e.g., failure to file
the Declaration of Actual Use91); 2 the registration was done in bad faith;92 3 the mark itself
becomes generic;93 4 the mark was registered contrary to the IP Code (e.g., when a generic mark
was successfully registered for some reason);94 or 5 the registered mark is being used by, or with
the permission of, the registrant so as to misrepresent the source of the goods or services on or in
connection with which the mark is used.95

ii. Legislative intent to abandon the

rule that ownership of a mark is
acquired through use

The lawmakers' intention to change the system of acquiring rights over a mark is even more evident
in the sponsorship speech of the late Senator Raul Roco for the IP Code. The shift to a new system
was brought about by the country's adherence to treaties, and Senator Roco specifically stated that
the bill abandons the rule that ownership of a mark is acquired through use, thus:

Part III of the Code is the new law on trademarks.

On September 27, 1965, Mr. President, the Philippines adhered to the Lisbon Act of the Paris
Convention for the Protection of Industrial Property [(Paris Convention)]. This obliged the country to
introduce a system of registration of marks of nationals of member-countries of the Paris Convention
which is based not on use in the Philippines but on foreign registration. This procedure is defective in
several aspects: first, it provides to a foreign applicant a procedure which is less cumbersome
compared to what is required of local applicants who need to establish prior use as a condition for
filing a trademark; and second, it is incompatible with the "based on use" principle which is followed
in the present Trademark Law.

Furthermore, Mr. President, our adherence to the Paris Convention binds us to protect well-known-
marks. Unfortunately, the provisions of 6bis of the Paris Convention on this matter are couched in
broad terms which are not defined in the Convention. This has given rise to litigation between local
businessmen using the mark and foreigners who own the well-known marks. The conflicting court
decisions on this issue aggravate the situation and they are a compendium of contradictory cases.
The proposed [IP] Code seeks to correct these defects and provides solutions to these
problems and make a consistency in ruling for future purposes.

To comply with [the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS
Agreement)]96 and other international commitments, this bill no longer requires prior use of the mark
as a requirement for filing a trademark application. It also abandons the rule that ownership of a
mark is acquired through use by now requiring registration of the mark in the Intellectual Property
Office. Unlike the present law, it establishes one procedure for the registration of marks. This feature
will facilitate the registration of marks.

Senate Bill No. 1719 also no longer requires use or registration in the Philippines for the protection
of well-known marks. If the mark is registered, such registration can prohibit its use by another in
connection with goods or services which are not similar to those with respect to which the
registration is applied for. This resolves many of the questions that have remained unanswered by
present law and jurisprudence.97 (Emphasis and underscoring supplied)

The legislative intent to abandon the rule that ownership is acquired through use and to adopt the
rule that ownership is acquired through registration is therefore crystal clear. On this score, Justice
Leonen prudently cautions against deriving legislative intent from these deliberations, especially
since they are limited to the opinions of those present, and neither consider the opinions of those
who did not or were not able to speak, nor do they account for changing circumstances.98 While this
may be true, the Court is of the considered view that this does not mean that its interpretation of the
statute based on such deliberations is inaccurate or wrong, especially in this case because, at the
risk of belaboring the point, the provisions of the IP Code and the legislative deliberations are
consistent in showing that the regime of ownership under the Trademark Law, as amended, has
been abandoned.

iii. Rule on ownership based on prior

use in Berris and E.Y. Industrial
Sales, Inc. inconsistent with the IP
Code regime of ownership through
registration

As mentioned, Zuneca argues that as the prior user, following Berris and E. Y. Industrial Sales, Inc.,
it had already owned the "ZYNAPS" mark prior to Natrapharm's registration of its confusingly similar
mark, thus, its rights prevail over the rights of Natrapharm.

As will be further explained, however, a closer look at the cases cited by Zuneca reveals that the rule
on ownership used in resolving these cases is inconsistent with the rule on acquisition of ownership
through registration under the IP Code.

In Berris, Norvy Abyadang (Abyadang) filed a trademark application for "NS D-10 PLUS" in 2004.
This was opposed by Berris Agricultural Co., Inc. (Berris, Inc.) on the ground that it was confusingly
similar to its registered mark, "D-10 80 WP", which was applied for in 2002 and eventually registered
in 2004. The marks were indeed found to be confusingly similar. However, in ruling that Bems, Inc.
was the rightful owner of the mark, the Court did not just decide based on the fact that Berris, Inc.
filed the application and registered the mark prior to Abyadang. Instead, it also contained the
following discussion with the conclusion that actual use was required to own a mark:

The basic law on trademark, infringement, and unfair competition is [the IP Code], specifically
Sections 121 to 170 thereof. It took effect on January 1, 1998. Prior to its effectivity, the applicable
law was [the Trademark Law], as amended.
Interestingly, [the IP Code] did not expressly repeal in its entirety [the Trademark Law, as amended],
but merely provided in Section 239.1 that [a]cts and parts of [a]cts inconsistent with it were repealed.
In other words, only in the instances where a substantial and irreconcilable conflict is found between
the provisions of [the IP Code] and of [the Trademark Law, as amended] would the provisions of the
latter be deemed repealed.

[The IP Code] defines a "mark" as any visible sign capable of distinguishing the goods (trademark)
or services (service mark) of an enterprise and shall include a stamped or marked container of
goods. It also defines a "collective mark" as any visible sign designated as such in the application for
registration and capable of distinguishing the origin or any other common characteristic, including
the quality of goods or services of different enterprises which use the sign under the control of the
registered owner of the collective mark.

On the other hand, [the Trademark Law, as amended] defines a "trademark" as any distinctive word,
name, symbol, emblem, sign, or device, or any combination thereof, adopted and used by a
manufacturer or merchant on his goods to identify and distinguish them from those manufactured,
sold, or dealt by another. A trademark, being a special property, is afforded protection by law. But for
one to enjoy this legal protection, x x x ownership of the trademark should rightly be established.

The ownership of a trademark is acquired by its registration and its actual use by the manufacturer
or distributor of the goods made available to the purchasing public. Section 122 of [the IP Code]
provides that the rights in a mark shall be acquired by means of its valid registration with the IPO. A
certificate of registration of a mark, once issued, constitutes prima facie evidence of the validity of
the registration, of the registrant's ownership of the mark, and of the registrant's exclusive right to
use the same in connection with the goods or services and those that are related thereto specified in
the certificate. [The IP Code], however, requires the applicant for registration or the registrant to file
a declaration of actual use (DAU) of the mark, with evidence to that effect, within three (3) years
from the filing of the application for registration; otherwise, the application shall be refused or the
mark shall be removed from the register. In other words, the prima facie presumption brought about
by the registration of a mark may be challenged and overcome, in an appropriate action, by proof of
the nullity of the registration or of non-use of the mark, except when excused. Moreover,
the presumption may likewise be defeated by evidence of prior use by another person, i.e., it will
controvert a claim of legal appropriation or of ownership based on registration by a subsequent user.
This is because a trademark is a creation of use and belongs to one who first used it in trade or
commerce.99 (Citations omitted; emphasis and underscoring supplied)

In Berris, despite the fact that Berris, Inc. was eventually decided to be the owner of the mark
consistent with the rule on ownership under the IP Code, the Court mistakenly gave undue weight to
the fact of prior use.100 To be sure, it was unnecessary to also anchor Berris, Inc.'s ownership of the
mark on the fact that it was the prior user as this was inconsistent with the express provisions of the
IP Code and the legislative intent behind the law. Stated differently, the Court's decision in Berris
was correct based on the fact that Berris, Inc. was the first to file the application and register the
mark.

Significantly, in giving weight to the fact of prior use, the Court cited101 the author Ruben E. Agpalo
who had, in turn, cited jurisprudence decided under the Trademark Law, as amended. As a result,
the rule that prior use was determinative of ownership was also used to resolve the issue of
ownership in Berris. As stated, however, this is contrary to the IP Code.

To repeat, after the IP Code became effective starting 1998, use was no longer required in order to
acquire or perfect ownership of the mark. In this regard, the Court now rectifies the inaccurate
statement in Berris that "[t]he ownership of a trademark is acquired by its registration and its actual
use."102 The rectified statement should thus read: "Under the IP Code, the ownership of a
trademark is acquired by its registration." Any pronouncement in Berris inconsistent herewith should
be harmonized accordingly. To clarify, while subsequent use of the mark and proof thereof are
required to prevent the removal or cancellation of a registered mark or the refusal of a pending
application under the IP Code,103 this should not be taken to mean that actual use and proof thereof
are necessary before one can own the mark or exercise the rights of a trademark owner.104

Likewise, the rule on acquiring ownership discussed in E. Y. Industrial Sales, Inc. is inconsistent with
the current rule under the IP Code. In said case, E.Y. Industrial Sales, Inc. (EYIS) imported air
compressors from Shen Dar from 1997 to 2004. In 1997, during the effectivity of the Trademark Law,
as amended, Shen Dar filed a trademark application for "VESPA, Chinese Characters and Device"
for use on air compressors and welding machines. Subsequently, in 1999, or already during the
effectivity of the IP Code, EYIS filed a trademark application for "VESPA" for use on air
compressors. On January 18, 2004, the IPO issued the certificate of registration for "VESPA" in
favor of EYIS. Subsequently, on February 8, 2007, the certificate of registration for "VESPA, Chinese
Characters and Device" was issued in favor of Shen Dar.

Claiming to be the owner of the mark, Shen Dar filed 9887registration. The Bureau of Legal Affairs
(BLA) and the Director General of the IPO both ruled that EYIS was the owner of the mark and
likewise directed the cancellation of Shen Dar's certificate of registration.

Once the case reached the Court, the dispute was resolved in favor of EYIS. The ponencia cited
Section 123.1(d), the first-to-file rule adopted by the IP Code, and likewise included the following
discussion in Shangri-la International Hotel Management, Ltd. v. Developers Group of Companies,
Inc.105 (Shangri-la) in concluding that the prior user EYIS was the owner of the mark, viz.:

In any event, given the length of time already invested by the parties in the instant case, this Court
must write finis to the instant controversy by determining, once and for all, the true owner of the mark
"VESPA" based on the evidence presented.

[The IP Code] espouses the "first-to-file" rule as stated under Sec. 123.1 (d) which states:

Section 123. Registrability. - 123.1. A mark cannot be registered if it:

xxxx

(d) Is identical with a registered mark belonging to a different proprietor or a mark with an earlier
filing or priority date, in respect of:

(i) The same goods or services, or

(ii) Closely related goods or services, or

(iii) If it nearly resembles such a mark as to be likely to deceive or cause confusion, x x x

Under this provision, the registration of a mark is prevented with the filing of an earlier application for
registration. This must not, however, be interpreted to mean that ownership should be based upon
an earlier filing date. While [the IP Code] removed the previous requirement of proof of actual use
prior to the filing of an application for registration of a mark, proof of prior and continuous use is
necessary to establish ownership of a mark. Such ownership constitutes sufficient evidence to
oppose the registration of a mark.
Sec. 134 of the IP Code provides that "any person who believes that he would be damaged by the
registration of a mark x x x" may file an opposition to the application. The term "any person"
encompasses the true owner of the mark - the prior and continuous user.

Notably, the Court has ruled that the prior and continuous use of a mark may even overcome the
presumptive ownership of the registrant and be held as the owner of the mark. As aptly stated by the
Court in [Shangri-la]:

Registration, without more, does not confer upon the registrant an absolute right to the registered
mark. The certificate of registration is merely a prima facie proof that the registrant is the owner of
the registered mark or trade name. Evidence of prior and continuous use of the mark or trade name
by another can overcome the presumptive ownership of the registrant and may very well entitle the
former to be declared owner in an appropriate case.

xxxx

Ownership of a mark or trade name may be acquired not necessarily by registration but by adoption
and use in trade or commerce. As between actual use of a mark without registration, and registration
of the mark without actual use thereof, the former prevails over the latter. For a rule widely accepted
and firmly entrenched, because it has come down through the years, is that actual use in commerce
or business is a pre-requisite to the acquisition of the right of ownership.

xxxx

By itself, registration is not a mode of acquiring ownership. When the applicant is not the owner of
the trademark being applied for, he has no right to apply for registration of the same. Registration
merely creates a prima facie presumption of the validity of the registration, of the registrant's
ownership of the trademark and of the exclusive right to the use thereof. Such presumption, just like
the presumptive regularity in the performance of official functions, is rebuttable and must give way to
evidence to the contrary.106 (Citations omitted and emphasis supplied)

However, a careful reading of Shangri-la will unmistakably show that, despite having been
promulgated in 2006, the applicable law of the case was the Trademark Law, as amended,
considering the following excerpts:

While the present law on trademarks has dispensed with the requirement of prior actual use at the
time of registration, the law in force at the time of registration[, i.e., the Trademark Law, as
amended,! must be applied, and thereunder it was held that as a condition precedent to registration
of trademark, trade name or service mark, the same must have been in actual use in the Philippines
before the filing of the application for registration. Trademark is a creation of use and therefore
actual use is a prerequisite to exclusive ownership and its registration with the Philippine Patent
Office is a mere administrative confirmation of the existence of such right.

xxxx

However, while the Philippines was already a signatory to the Paris Convention, the [IP Codel only
took effect on January 1, 1998, and in the absence of a retroactivitv clause, [the Trademark Law, as
amendedl still applies, x x x107 (Emphasis and underscoring supplied)

It is worth noting that in E.Y. Industrial Sales, Inc., the Court upheld the factual finding that the first
actual use by EYIS was earlier than Shen Dar's. The earliest dates of use by both parties therein
were during the effectivity of the Trademark Law, as amended. It is also important to reiterate that
EYIS had applied and registered the mark under the IP Code, while Shen Dar had applied for the
mark under the Trademark Law, as amended, and its registration was obtained after the effectivity of
the IP Code.

To be sure, the rule used to resolve the issue of ownership in E. Y. Industrial Sales,
Inc. and Shangri-la should not be made to apply in a situation involving marks which are both used
and/or registered after the effectivity of the IP Code. In the case at bar, both "ZYNAPS" and
"ZYNAPSE" have been used and/or registered after the IP Code became effective. Clearly, the use
or citation of Trademark Law jurisprudence to resolve the question on acquisition of ownership of
marks in the case at bar or in cases involving marks registered or first used under the IP Code will
be irrelevant and inappropriate.

In light of the foregoing, Zuneca thus erred in using Berris and E. Y. Industrial Sales, Inc. as bases
for its argument that the prior user is the owner of the mark and its rights prevail over the rights of
the first-to-file registrant. To emphasize, for marks that are first used and/or registered after the
effectivity of the IP Code, ownership is no longer dependent on the fact of prior use in light of the
adoption of the first-to-file rule and the rule that ownership is acquired through registration.

II. Bad faith and good faith in

trademark registration and use

In a bid to invalidate Natrapharm's rights as first registrant, Zuneca further argues that Natrapharm
had registered the mark fraudulently and in bad faith.108

The existence of bad faith in trademark registrations may be a ground for its cancellation at any time
by filing a petition for cancellation under Section 151 (b) of the IP Code, viz.:

SECTION 151. Cancellation. - 151.1. A petition to cancel a registration of a mark under this Act may
be filed with the Bureau of Legal Affairs by any person who believes that he is or will be damaged by
the registration of a mark under this Act as follows:

(a) Within five (5) years from the date of the registration of the mark under this Act.

(b) At any time, if the registered mark becomes the generic name for the goods or services,
or a portion thereof, for which it is registered, or has been abandoned, or its registration was
obtained fraudulently or contrary to the provisions of this Act, or if the registered mark is
being used by, or with the permission of, the registrant so as to misrepresent the source of
the goods or services on or in connection with which the mark is used. If the registered mark
becomes the generic name for less than all of the goods or services for which it is registered,
a petition to cancel the registration for only those goods or services may be filed. A
registered mark shall not be deemed to be the generic name of goods or services solely
because such mark is also used as a name of or to identify a unique product or service. The
primary significance of the registered mark to the relevant public rather than purchaser
motivation shall be the test for determining whether theregistered mark has become the
generic name of goods or services on or in connection with which it has been used, (n)

(c) At any time, if the registered owner of the mark without legitimate reason fails to use the
mark within the Philippines, or to cause it to be used in the Philippines by virtue of a license
during an uninterrupted period of three (3) years or longer. (Emphasis supplied)
Notably, this ground for cancelling marks was already present under the Trademark Law, as
amended. The table below shows how the language in the IP Code provision mirrors the provision
under the Trademark Law, as amended:

Trademark Law, as amended IP Code

CHAPTER IV SECTION 151. Cancellation. - 151.1. A
Cancellation of Registration petition to cancel a registration of a mark
under this Act may be filed with the Bureau
SECTION 17. Grounds for Cancellation. - of Legal Affairs by any person who believes
Any person, who believes that he is or will that he is or will be damaged by the
be damaged by the registration of a mark or registration of a mark under this Act as
tradename, may, upon the payment of the follows:
prescribed fee, apply to cancel said
registration upon any of the following xxxx
grounds:
(b) At any time, if the registered mark
(a) That the registered mark or trade-name becomes the generic name for the goods or
becomes the common descriptive name of services, or a portion thereof, for which it is
an article or substance on which the atent registered, or has been abandoned, or its
has expired; registration was obtained fraudulently or
contrary to the provisions of this Act, or if
(b) That it has been abandoned; the registered mark is being used by, or
with the permission of, the registrant so as
(c) That the registration was obtained to misrepresent the source of the goods or
fraudulently or contrary to the services on or in connection with which the
provisions of section four, Chapter II mark is used. If the registered mark
hereof; becomes the generic name for less than all
of the goods or services for which it is
registered, a petition to cancel the
(d) That the registered mark or trade-name
registration for only those goods or services
has been assigned, and is being used by,
may be filed. A registered mark shall not be
or with the permission of, the assignee so
deemed to be the generic name of goods or
as to misrepresent the source of the goods,
services solely because such mark is also
business or services in connection with
used as a name of or to identify a unique
which the mark or trade-name is used; or
product or service. The primary significance
of the registered mark to the relevant public
(e) That cancellation is authorized by other rather than purchaser motivation shall be
provisions of this Act. (Emphasis and the test for determining whether the
underscoring supplied) registered mark has become the generic
name of goods or services on or in
connection with which it has been used.
(Emphasis and underscoring supplied)

Resultantly - unlike the rule on acquisition of ownership - the pronouncements of the Court relative to
registrations obtained in bad faith under the Trademark Law, as amended, still subsist even after the
effectivity of the IP Code. Thus, the following cases where the Court defined bad faith and fraud,
although decided under the regime of the Trademark Law, as amended, are still applicable.

The concepts of bad faith and fraud were defined in Mustang-Bekleidungswerke GmbH + Co. KG v.
Hung Chiu Ming,109 a case decided by the Office of the Director General of the IPO under the
Trademark Law, as amended, viz.:
What constitutes fraud or bad faith in trademark registration? Bad faith means that the applicant or
registrant has knowledge of prior creation, use and/or registration by another of an identical or
similar trademark. In other words, it is copying and using somebody else's trademark. Fraud, on the
other hand, may be committed by making false claims in connection with the trademark application
and registration, particularly, on the issues of origin, ownership, and use of the trademark in
question, among other things.110

The concept of fraud contemplated above is not a mere inaccurate claim as to the origin, ownership,
and use of the trademark. In civil law, the concept of fraud has been defined as the deliberate
Ꮮαwρhi ৷

intention to cause damage or prejudice.111 The same principle applies in the context of trademark
registrations: fraud is intentionally making false claims to take advantage of another's goodwill
thereby causing damage or prejudice to another. Indeed, the concepts of bad faith and fraud go
hand-in-hand in this context. There is no distinction between the concepts of bad faith and fraud in
trademark registrations because the existence of one necessarily presupposes the existence of the
other.

Shangri-la supports the definition of bad faith in trademark registrations as knowledge by the
registrant of prior creation, use, and/or registration by another of an identical or similar trademark. In
said case, since respondent Developers Group of Companies, Inc.'s (DGI) president was a previous
guest at one of petitioner's hotels, it was found that DGI was in bad faith when it appropriated and
registered the "SHANGRI-LA" mark and the "S" logo, viz.:

The CA itself, in its Decision of May 15, 2003, found that the respondent's president and chairman of
the board, Ramon Syhunliong, had been a guest at the petitioners' hotel before he caused the
registration of the mark and logo, and surmised that he must have copied the idea there[.]

To jump from a recognition of the fact that the mark and logo must have been copied to a
rationalization for the possibility that both the petitioners and the respondent coincidentally chose the
same name and logo is not only contradictory, but also manifestly mistaken or absurd. Furthermore,
the "S" logo appears nothing like the "Old English" print that the CA makes it out to be, but is
obviously a symbol with oriental or Asian overtones. At any rate, it is ludicrous to believe that the
parties would come up with the exact same lettering for the word "Shangri-La" and the exact same
logo to boot. As correctly observed by the petitioners, to which we are in full accord:

xxx When a trademark copycat adopts the word portion of another's trademark as his own, there
may still be some doubt that the adoption is intentional. But if he copies not only the word but also
the word's exact font and lettering style and in addition, he copies also the logo portion of the
trademark, the slightest doubt vanishes. It is then replaced by the certainty that the adoption was
deliberate, malicious and in bad faith.

It is truly difficult to understand why, of the millions of terms and combination of letters and designs
available, the respondent had to choose exactly the same mark and logo as that of the petitioners, if
there was no intent to take advantage of the goodwill of petitioners' mark and logo.

One who has imitated the trademark of another cannot bring an action for infringement, particularly
against the true owner of the mark, because he would be coming to court with unclean
hands. Priority is of no avail to the bad faith plaintiff. Good faith is required in order to ensure that a
second user may not merely take advantage of the goodwill established by the true
owner."112 (Emphasis supplied)

Pagasa Industrial Corporation v. Court of Appeals113 likewise supports the definition of bad faith as
prior knowledge. In said case, the Court found that Pagasa registered the "YKK" mark in bad faith
because it had previously known that there was another person using the mark. Hence, the Court
affirmed the cancellation of the mark as decided by the Director of Patents and the CA:

Pagasa appealed to the [CA] which in its decision dated February 6, 1980 affirmed the cancellation.
It found that prior to 1968 Pagasa knew that Yoshida was the registered owner and user of the YKK
trademark which is an acronym of its corporate name.

Tadao Yoshida, the president of Yoshida, and Tsutomu Isaka, the export manager, visited in 1960
(1965) Pagasa's factory which was manufacturing zippers under the Royal brand. Anacleto Chi,
Pagasa's president, visited in turn Yoshida's factory in Toyoma, Japan.

The Appellate Court concluded that Pagasa's knowledge that Yoshida was using the YKK
trademark precludes the application of the equitable principle of laches, estoppel and
acquiescence. It noted that Pagasa acted in bad faith. As observed by Yoshida's counsel, Pagasa's
registration of YKK as its own trademark was an act of ingratitude.

xxxx

Pagasa cannot rely on equity because he who comes into equity must come with clean hands.
Equity refuses to lend its aid in any manner to one seeking its active interposition who has been
guilty of unlawful or inequitable conduct in the matter with relation to which he seeks relief (30 C.J.S.
1009).

"Registration is sufficient prima-facie proof that all acts necessary to entitle the mark to registration
were duly performed." (87 C.J.S. 421). Obviously, Yoshida's prior registration is superior and must
prevail.114 (Emphasis and underscoring supplied)

Birkenstock Orthopaedie GmbH and Co. KG v. Phil. Shoe Expo Marketing Corp.115 also involved a
finding that a party was in bad faith because it had known of the existence and use by another
person of the mark before said party appropriated and registered the same, viz.:

In view of the foregoing circumstances, the Court finds the petitioner to be the true and lawful owner
of the mark "BIRKENSTOCK" and entitled to its registration, and that respondent was in bad faith in
having it registered in its name. In this regard, the Court quotes with approval the words of the IPO
Director General, viz.:

The facts and evidence fail to show that [respondent] was in good faith in using and in registering the
mark BIRKENSTOCK. BIRKENSTOCK, obviously of German origin, is a highly distinct and arbitrary
mark. It is very remote that two persons did coin the same or identical marks. To come up with a
highly distinct and uncommon mark previously appropriated by another, for use in the same line of
business, and without any plausible explanation, is incredible. The field from which a person may
select a trademark is practically unlimited. As in all other cases of colorable imitations, the
unanswered riddle is why, of the millions of terms and combinations of letters and designs available,
[respondent] had to come up with a mark identical or so closely similar to the [petitioner's] if there
was no intent to take advantage of the goodwill generated by the [petitioner's] mark. Being on the
same line of business, it is highly probable that the [respondent] knew of the existence of
BIRKENSTOCK and its use by the [petitioner], before [respondent] appropriated the same mark and
had it registered in its name.116 (Emphasis supplied)

More importantly, however, there is also jurisprudential basis to declare these trademark
registrations done in bad faith as void. In the case of Shangri-La International Hotel Management,
Ltd. v. Developers Group of Companies, Inc.117 (Shangri-la Resolution), the Court classified the
respondent's registration as void due to the existence of bad faith and because it failed to
comply118 with the provisions of the Trademark Law, as amended.

While the Court in the Shangri-la Resolution declared the trademark registration as void based on
two grounds, i.e., the presence of bad faith and the fact that the mark was registered contrary to
provisions of the law, either one of these grounds may be used as sufficient basis for the courts or
the IPO to declare trademark registrations as void.

A perusal of the above cancellation provisions in the IP Code and the Trademark Law, as amended,
would reveal that these two grounds differ from the others in the sense that, unlike the other grounds
for cancellation, they both exist prior to the registration. That is, one can have a registration in bad
faith only if he applied for the registration of the mark despite knowing that someone else has
created, used, or registered that mark. In the same vein, an unregistrable mark which was
mistakenly allowed to be registered was already inherently unregistrable even prior to its
registration.119 Accordingly, because these marks should not have been registered in the first place,
the presence of either of these grounds renders them void. Thus, even if these marks subsequently
became registered, the registrations do not confer upon their owners the rights under Section
147.1120 of the IP Code because the marks were registered contrary to the provisions of the same
law.121

To emphasize, the presence of bad faith alone renders void the trademark registrations. Accordingly,
it follows as a matter of consequence that a mark registered in bad faith shall be cancelled by the
IPO or the courts, as the case may be, after the appropriate proceedings.

This concept of bad faith, however, does not only exist in registrations. To the mind of the Court, the
definition of bad faith as knowledge of prior creation, use and/or registration by another of an
identical or similar trademark is also applicable in the use of trademarks without the benefit of
registration.

Accordingly, such bad faith use is also appropriately punished in the IP Code as can be seen in its
unfair competition provisions.122

It is apparent, therefore, that the law intends to deter registrations and use of trademarks in bad
faith.

Concurrent with these aims, the law also protects prior registration and prior use of trademarks in
good faith.

Being the first-to-file registrant in good faith allows the registrant to acquire all the rights in a mark.
This can be seen in Section 122 vis-a-vis the cancellation provision in Section 155.1 of the IP Code.
Reading these two provisions together, it is clear that when there are no grounds for cancellation -
especially the registration being obtained in bad faith or contrary to the provisions of the IP Code,
which render the registration void - the first-to-file registrant acquires all the rights in a mark, thus:

SECTION 122. How Marks are Acquired. - The rights in a mark shall be acquired through
registration made validly in accordance with the provisions of this law. (Sec. 2-A, R.A. No. 166a)

xxxx
SECTION 151. Cancellation. - 151.1. A petition to cancel a registration of a mark under this Act may
be filed with the Bureau of Legal Affairs by any person who believes that he is or will be damaged by
the registration of a mark under this Act as follows:

(a) Within five (5) years from the date of the registration of the mark under this Act.

(b) At any time, if the registered mark becomes the generic name for the goods or services,
or a portion thereof, for which it is registered, or has been abandoned, or its registration was
obtained fraudulently or contrary to the provisions of this Act, or if the registered mark is
being used by, or with the permission of, the registrant so as to misrepresent the source of
the goods or services on or in connection with which the mark is used. If the registered mark
becomes the generic name for less than all of the goods or services for which it is registered,
a petition to cancel the registration for only those goods or services may be filed. A
registered mark shall not be deemed to be the generic name of goods or services solely
because such mark is also used as a name of or to identify a unique product or service. The
primary significance of the registered mark to the relevant public rather than purchaser
motivation shall be the test for determining whether the registered mark has become the
generic name of goods or services on or in connection with which it has been used,(n)

(c) At any time, if the registered owner of the mark without legitimate reason fails to use the
mark within the Philippines, or to cause it to be used in the Philippines by virtue of a license
during an uninterrupted period of three (3) years or longer. (Emphasis and underscoring
supplied)

In the same vein, prior users in good faith are also protected in the sense that they will not be made
liable for trademark infringement even if they are using a mark that was subsequently registered by
another person. This is expressed in Section 159.1 of the IP Code, which reads:

SECTION 159. Limitations to Actions for Infringement. - Notwithstanding any other provision of this
Act, the remedies given to the owner of a right infringed under this Act shall be limited as follows:

159.1. Notwithstanding the provisions of Section 155 hereof, a registered mark shall have no effect
against any person who, in good faith, before the filing date or the priority date, was using the mark
for the purposes of his business or enterprise: Provided, That his right may only be transferred or
assigned together with his enterprise or business or with that part of his enterprise or business in
which the mark is used. (Underscoring supplied)

III. The resolution of the controversy

At this point, it is important to highlight that the following facts were no longer questioned by both
parties: (a) Natrapharm is the registrant of the "ZYNAPSE" mark which was registered with the IPO
on September 24, 2007;123 (b) Zuneca has been using the "ZYNAPS" brand as early as
2004;124 and (c) "ZYNAPSE" and "ZYNAPS" are confusingly similar125 and both are used for
medicines.

In light of these settled facts, it is clear that Natrapharm is the first-to-file registrant of "ZYNAPSE".
Zuneca, on the other hand, is a prior user in good faith of a confusingly similar mark, "ZYNAPS".
What remains contentious is Natrapharm's good or bad faith as Zuneca contends that the mark was
registered in bad faith by Natrapharm. Indeed, if Zuneca's contention turns out to be true,
Natrapharm would not be the owner of "ZYNAPSE" and it would not have the right under Section
147.1 of the IP Code to prevent other entities, including Zuneca, from using confusingly similar
marks for identical or similar goods or services. Further, Natrapharm's infringement case would fail
because its "ZYNAPSE" registration would then be voided.

To be sure, the finding of good faith or bad faith is a matter of factual determination. Considering that
a petition for review on certiorari under Rule 45 should only raise questions of law, it is improper to
put into issue at this juncture the existence of bad faith in Natrapharm's registration.

Further, it is a well-recognized rule that the factual findings of the RTC, its calibration of the
testimonies of the witnesses, and its assessment of their probative weight are given high respect, if
not conclusive effect, unless cogent facts and circumstances of substance, which if considered,
would alter the outcome of the case, were ignored, misconstrued or misinterpreted.126

Assuming, however, that the Court should still review this factual issue, it finds no reason to depart
from the findings of facts of the RTC, which findings were affirmed by the CA. In fact, the Court also
conducted a review of the testimonies and evidence presented by the parties and finds that the RTC
and the CA were correct in their factual findings.

The RTC ruled that there was no sufficient evidence to convince it that Natrapharm had acquired the
registration in bad faith.127 The RTC ruled as follows:

Apparently claiming an exception to the first-to-register rule, the defendants [Zuneca] insist that the
plaintiff [Natrapharm] knew of the existence of ["ZYNAPS"] at the time the plaintiff filed its application
for registration. The defendants support this position by presenting a copy of the Philippine
Pharmaceutical Directory (PPD) where ["ZYNAPS"] is listed on the same page as the other brand
names of the plaintiff.

However, defendant Arain admitted on cross[-]examination that even if ["ZYNAPS"] was listed in the
PPD, this does not give her complete knowledge of the brand names of the other pharmaceuticals
also listed in the same Directory. [Consistent] with this admission, plaintiff should also be accorded
the benefit of the doubt that it could not have complete knowledge of the other brand names listed in
the PPD.

Likewise, the defendants claim that in some medical conventions where Patriot, the sister company
of the plaintiff, attended, the ["ZYNAPS"] product of the defendants was advertised and displayed.

It was, however, clearly shown that Patriot is not the same company as the plaintiff. It could not be
safely concluded that [the plaintiff] knew of ["ZYNAPS"] through Patriot.

In both arguments, this Court finds no sufficient evidence to convince it that there was bad faith in
the registration made by the plaintiff128

The CA thereafter upheld the finding of the RTC that Natrapharm was not aware of the existence of
"ZYNAPS" prior to the registration of "ZYNAPSE".129 The CA quoted and affirmed the foregoing
findings of the RTC.

The CA added that Natrapharm's good faith was established through the testimony of Natraphann's
witness, Ravelo, whose testimony essentially contained the following points: (a) Natrapharm had
used the BFAD and IPO databases and the Philippine Pharmaceutical Index (PPI) - a research tool
accepted by the Philippine pharmaceutical industry which contains pharmaceutical products
marketed in the Philippines in determining whether "ZYNAPSE" was confusingly similar to an
existing brand name in the market;130 (b) only Ravelo, Mr. Gasgonia, Natraphann's Chief
Operations Officer, and Mrs. Agnes Casiding, Natraphann's Regulatory Manager, knew about the
launch of the new product;131 (c) she had based the name "ZYNAPSE" from an internal newsletter
in the Philippine Neurological Association as well as from the neurological term "synapse" - the
junction between two nerves where they transmit nerve signals - which relates to the neurological
problem of stroke;132 (d) she had checked the PPI as far back as fourth quarter of 2004 and found
that there was no confusingly similar name;133 and (e) she had then submitted the name to
Natrapharm's trademark lawyers who had it registered with the IPO134 and then with the BFAD.135

The CA thus concluded that Zuneca failed to prove that Natrapharm had registered "ZYNAPSE" in
bad faith, viz.:

This Court would also like to add that even if both Zuneca and Natrapharm have interacted with
each other through a convention, it does not automatically mean that Natrapharm already acted in
bad faith in registering "ZYNAPSE". First, just like the PPD, it is highly unlikely that the participants
would remember each and every medicine or drug exhibited during said convention. Secondly, the
convention happened two (2) years prior to the registration of "ZYNAPSE" and it is not proven that
those who attended the convention on the part of Natrapharm were the same people who were
responsible for the creation of "ZYNAPSE" or that they were still connected with Natrapharm in
2007. As a rule, good faith is always presumed, and upon him who alleges bad faith on the part of a
possessor rests the burden of proof. The appellants, however, miserably failed to carry that
burden.136 (Emphasis supplied)

The Court affirms the factual findings of the lower courts. Since Zuneca is making the allegations of
bad faith, it was incumbent on Zuneca to overcome the evidence that Natrapharm was the owner of
the mark "ZYNAPSE" and to show that Natrapharm had registered "ZYNAPSE" in bad faith.
However, Zuneca failed to show that the registration was made fraudulently or in bad faith. In
contrast, Natrapharm was able to convince the lower courts, as it likewise convinces this Court, that
it had acted in good faith when it came up with the name "ZYNAPSE" and that it had no knowledge
of Zuneca's use of "ZYNAPS" after it had checked the PPI, BFAD, and IPO databases.

Zuneca's evidence clearly falls short of establishing that Natrapharm had knowledge of the prior
creation or use by Zuneca of the "ZYNAPS" mark. Zuneca's evidence only tends to prove that there
was a possibility that someone from Natrapharm might have known of Zuneca's use of "ZYNAPS"
because Natrapharm and Zuneca attended the same conferences and that Zuneca had listed
"ZYNAPS" in the PPD publication.

Such possibility is not, however, sufficient to prove bad faith, especially when weighed against
Natrapharm's evidence and explanation on how it coined "ZYNAPSE" and the steps it took to ensure
that there were no other marks that were confusingly similar to it. Not only was Natrapharm able to
explain the origin of the name, it was also able to show that it had checked the IMS-PPI, IPO, and
BFAD databases and found that there was no brand name which was confusingly similar to
"ZYNAPSE".

Since Natrapharm was not shown to have been in bad faith, it is thus considered to have acquired all
the rights of a trademark owner under the IP Code upon the registration of the "ZYNAPSE" mark.

Consequently, Zuneca's counterclaims against Natrapharm were correctly dismissed by the lower
courts. To be sure, Zuneca did not have any right to prevent third parties, including Natrapharm,
from using marks confusingly similar to its unregistered "ZYNAPS" mark because it is not an "owner
of a registered mark" contemplated in Section 147.1 of the IP Code.
In any event, while Natrapharm is the owner of the "ZYNAPSE" mark, this does not, however,
automatically mean that its complaint against Zuneca for injunction, trademark infringement,
damages, and destruction with prayer for TRO and/or preliminary injunction should be granted. The
application of Section 159.1 of the IP Code in the case at bar results in Zuneca's exemption from
liability for trademark infringement.

On the interpretation of Section 159.1 of the IP Code, Natrapharm argues that the limitation to
actions for infringement under this section means that only acts prior to the filing and/or claim of
priority of the registered mark are exempted. The good faith prior user's use of the mark subsequent
to the filing and/or registration date is, however, no longer exempted and makes the prior user liable
for infringement.137 This echoes the CA which held that:

Moreover, the supremacy of the prior registrant over the prior user is further elucidated in Section
159.1 of the same law x x x.

xxxx

Based on [said] provision, it is manifest that the prior-registrant (sic) cannot run after the prior-user
(sic) for any usage before the registration, but not after, as indicated by the helping verb "was" in the
phrase "was using the mark for the purposes of his business or enterprise".138 (Emphasis supplied)

The Court believes, and so holds, that the above interpretation is erroneous.

If Section 159.1 of the IP Code is only meant to exempt from an action for infringement the use in
good faith prior to the filing or priority date of the subsequently registered mark, then this entire
provision would be rendered useless and a mere surplusage. Stated otherwise, there is no point in
adding Section 159.1 of the IP Code as an exception under "Limitations to Actions for Infringement"
because it merely repeats the general rule that, after the mark has been registered, the registrant
may file an infringement case against third parties using an identical or confusingly similar mark in
commerce without its consent, when such use results in a likelihood of confusion.139 Even without
Section 159.1 of the IP Code, a third party's prior use of an unregistered mark, if said mark
subsequently becomes registered by another, could not be considered as trademark infringement
because there was no trademark registration - a requirement for a trademark infringement action to
prosper - when the third party was using its mark.

More importantly, the proviso of Section 159.1 of the IP Code states: "[t]hat [the good faith prior
user's] right may only be transferred or assigned together with his enterprise or business or with that
part of his enterprise or business in which the mark is used." To adhere to the theories of the CA and
Natrapharm that the prior user's use of the identical or confusingly similar mark subsequent to the
filing or registration date of the registered mark should be considered as trademark infringement
renders this proviso useless and nugatory and logically subjects the possible transferee or assignee
to inevitable liability for trademark infringement. The lawmakers could not have intended this absurd
outcome.

Read as a whole, Section 159.1 of the IP Code clearly contemplates that a prior user in good faith
may continue to use its mark even after the registration of the mark by the first-to-file registrant in
good faith, subject to the condition that any transfer or assignment of the mark by the prior user in
good faith should be made together with the enterprise or business or with that part of his enterprise
or business in which the mark is used. The mark cannot be transferred independently of the
enterprise and business using it.
From the provision itself, it can be gleaned that while the law recognizes the right of the prior user in
good faith to the continuous use of its mark for its enterprise or business, it also respects the rights
of the registered owner of the mark by preventing any future use by the transferee or assignee that
is not in conformity with Section 159.1 of the IP Code. Notably, only the manner of use by the prior
user in good faith - that is, the use of its mark tied to its current enterprise or business - is
categorically mentioned as an exception to an action for infringement by the trademark owner. The
proviso in Section 159.1 of the IP Code ensures that, despite the transfer or assignment of its mark,
the future use by the assignee or transferee will not go beyond the specific confines of such
exception. Without the proviso, the prior user in good faith would have the free hand to transfer or
assign the "protected use" of its mark for any purpose to a third person who may subsequently use
the same in a manner unduly curtailing the rights of the trademark owner. Indeed, this unilateral
expansion of the exception by a third person could not have been intended, and is guarded against,
by the legislature through the foregoing proviso.

In any event, the application of Section 159.1 of the IP Code necessarily results in at least two
entities - the unregistered prior user in good faith or their assignee or transferee, on one hand; and
the first-to-file registrant in good faith on the other - concurrently using identical or confusingly similar
marks in the market, even if there is likelihood of confusion. While this situation may not be ideal, as
eruditely explained in the Concurring Opinion of Justice Perlas-Bernabe, the Court is constrained to
apply Section 159.1 of the IP Code as written.

To recall, the RTC imposed on Zuneca the following penalties in light of its finding that Zuneca had
committed trademark infringement, which penalties were later affirmed by the CA:

Defendants, jointly and severally, are hereby directed to pay the plaintiff the following amounts, to
wit:

One Million Pesos (P1,000,000.00) as damages;

One Million Pesos (P1,000,000.00) as exemplary damages;
Two Hundred Thousand Pesos (P200,000.00) as attorney's
fees;
and the Costs.

Defendants are further enjoined from henceforth using Zynaps or any other variations thereto which
are confusingly similar to the plaintiffs Zynapse.

It is likewise ordered that all infringing goods, labels, signs, prints, packages, wrappers, receptacles,
and advertisements in possession of the defendants, bearing the registered mark or any
reproduction, counterfeit, copy, or colourable imitation thereof, all plates, molds, matrices and other
means of making the same, implements, machines, and other items related to the conduct, and
predominantly used, by the defendants in such infringing activities, be disposed of outside the
channels of commerce or destroyed, without compensation.

The counterclaim of the defendants is DISMISSED for lack of merit.140

Because Zuneca is not liable for trademark infringement under Section 159.1 of the IP Code, the
Court finds that there is no basis for the above imposition of penalties.

The penalties ordered by the lower courts - that is, the payment of damages, injunction, and
destruction of goods of Zuneca - are based on Sections 156 and 157 of the IP Code, which provide:
SECTION 156. Actions, and Damages and Injunction for Infringement. - 156.1. The owner of a
registered mark may recover damages from any person who infringes his rights, and the measure of
the damages suffered shall be either the reasonable profit which the complaining party would have
made, had the defendant not infringed his rights, or the profit which the defendant actually made out
of the infringement, or in the event such measure of damages cannot be readily ascertained with
reasonable certainty, then the court may award as damages a reasonable percentage based upon
the amount of gross sales of the defendant or the value of the services in connection with which the
mark or trade name was used in the infringement of the rights of the complaining party. (Sec. 23,
first par., R.A. No. 166a)

156.2. On application of the complainant, the court may impound during the pendency of the action,
sales invoices and other documents evidencing sales, (n)

156.3. In cases where actual intent to mislead the public or to defraud the complainant is shown, in
the discretion of the court, the damages may be doubled. (Sec. 23, first par., R.A. No. 166)

156.4. The complainant, upon proper showing, may also be granted injunction. (Sec. 23, second
par., R.A. No. 166a)

SECTION 157. Power of Court to Order Infringing Material Destroyed. - 157.1 In any action arising
under this Act, in which a violation of any right of the owner of the registered mark is established,
the court may order that goods found to be infringing be, without compensation of any sort, disposed
of outside the channels of commerce in such a manner as to avoid any harm caused to the right
holder, or destroyed; and all labels, signs, prints, packages, wrappers, receptacles and
advertisements in the possession of the defendant, bearing the registered mark or trade name or
any reproduction, counterfeit, copy or colorable imitation thereof, all plates, molds, matrices and
other means of making the same, shall be delivered up and destroyed. (Emphasis supplied)

A plain reading of the above provisions reveals that that these remedies may only be ordered by the
court if there was a finding that a party had committed infringement. Here, because of the application
of Section 159.1 of the IP Code, Zuneca is not liable for trademark infringement. Consequently, it
follows that the award of damages, issuance of an injunction, and the disposition and/or destruction
of allegedly infringing goods could not be ordered by the court.

Indeed, directing the foregoing remedies despite a finding of the existence of a prior user in good
faith would render useless Section 159.1 of the IP Code, which allows the continued use and, in
certain situations, the transfer or assignment of its mark by the prior user in good faith after the
registration by the first-to-file registrant. To reiterate, Section 159.1 of the IP Code contemplates a
situation where the prior user in good faith and the first-to-file registrant in good faith concurrently
use identical or confusingly similar marks in the market, even if there is likelihood of confusion.

While Section 147.1141 of the IP Code provides that the owner of a registered mark shall have the
exclusive right to prevent third parties' use of identical or similar marks for identical or similar goods
where such use would result in a likelihood of confusion, this provision should be interpreted in
harmony with Section 159.1 of the IP Code, especially the latter's proviso which allows the transfer
or assignment of the mark together with the enterprise or business of the prior user in good faith or
with that part of his enterprise or business in which the mark is used. The lawmakers intended for
the rights of the owner of the registered mark in Section 147.1 to be subject to the rights of a prior
user in good faith contemplated under Section 159.1. Essentially, therefore, Section 159.1 is an
exception to the rights of the trademark owner in Section 147.1 of the IP Code.
Bearing in mind the current ownership regime based on registration under the IP Code which
likewise protects and respects the rights of prior users in good faith, it is thus reasonable to infer that
the new system of acquiring ownership effectively protects potential entrants in the market.
Consistent with the expressed State policy142 under the law, the system under the IP Code
encourages potential market entrants who may lack resources to venture into business with the
assurance that their intellectual property rights are protected and may be enforced under the law,
especially if they register their marks.

By having a uniform, easily-verifiable system of acquiring ownership, potential entrepreneurs have

the guarantee that once they avail in good faith of the relatively inexpensive procedure of registration
with the IPO, they already have the upper-hand against someone who could make a claim of
ownership based on a supposed "prior use" - an issue that may entail expensive and extensive
litigation effectively favoring those who have more resources. As explained, due to the change in the
language of Section 123.1 of the IP Code, the registered owners in good faith who dutifully maintain
their registrations generally do not have to worry that their rights over the registered mark may one
day be subject to a cancellation proceeding by someone with claims of prior actual use. This uniform
system of ownership also gives a sense of stability to potential foreign entrepreneurs wanting to offer
their products and services in the Philippines because, if they register their marks in good faith and
diligently maintain said marks, they no longer have to worry about their ownership over the mark
being attacked by someone appearing out of the blue claiming to be a local prior user of the mark all
along. Such sense of stability given by the current system of acquiring trademark ownership is in
consonance with the expressed State policy that describes an effective intellectual and industrial
property system as one that "attracts foreign investments."143

In the same vein, those who do not have the resources to apply for trademark registrations are
protected from infringement cases and may exercise certain rights under the law, albeit their rights
under the IP Code are more limited compared to the owners of the mark.

Lastly, as additional rationale for initiating the complaint for trademark infringement against Zuneca
and presumably to prevent the coexistence of the subject marks in the market, Natrapharm points
out the dire consequence of the possibility of medical switching in the case at bar, especially since
"ZYNAPSE" and "ZYNAPS" are admitted to be confusingly similar.144 Allegedly, if a stroke patient
who is supposed to take citicoline ("ZYNAPSE") mistakenly ingests carbamazepine ("ZYNAPS"),
said patient will not only be not cured of stroke but also be exposed to the risk of suffering Stevens-
Johnson syndrome, a side effect of carbamazepine, which is a serious systemic body-wide allergic
reaction with a characteristic rash which attacks and disfigures the skin and mucous membrane.145

While there is no issue as to the likelihood of confusion between "ZYNAPSE" and "ZYNAPS", the
Court believes that the evil of medical switching will likely not arise, considering that the law requires
the generic names of drugs to be written in prescriptions.

R.A.6675146 (Generics Act of 1988), as amended by R.A. 9502147 or the Universally Accessible
Cheaper and Quality Medicines Act of 2008, reads:

SEC. 6. Who Shall Use Generic Terminology. - (a) All government health agencies and their
personnel as well as other government agencies shall use generic terminology or generic names in
all transactions related to purchasing, prescribing, dispensing and administering of drugs and
medicines.

(b) All medical, dental and veterinary practitioners, including private practitioners, shall write
prescriptions using the generic name. The brand name may be included if so desired. (Emphasis
supplied)
Pertinently, the said law also provides for the appropriate penalties for failure to comply with these
requirements. Section 12 of the Generics Act of 1988, as amended, reads:

SEC. 12. Penalty. - (A) Any person who shall violate Section 6(a) or 6(b) of this Act shall suffer the
penalty graduated hereunder, viz.:

(a) for the first conviction, he shall suffer the penalty of reprimand which shall be officially
recorded in the appropriate books of the Professional Regulation Commission.

(b) for the second conviction, the penalty of fine in the amount of not less than Ten thousand
pesos (Php10,000.00) but not exceeding Twenty- five thousand pesos (Php25,000.00), at
the discretion of the court.

(c) for the third conviction, the penalty of fine in the amount of not less than Twenty-five
thousand pesos (Php25,000.00) but not exceeding Fifty thousand pesos (Php50,000.00) and
suspension of his license to practice his profession for sixty (60) days at the discretion of the
court.

(d) for the fourth and subsequent convictions, the penalty of fine of not less than One
hundred thousand pesos (Php100,000.00) and suspension of his license to practice his
profession for one (1) year or longer at the discretion of the court.

xxxx

(C) The Secretary of Health shall have the authority to impose administrative sanctions such as
suspension or cancellation of license to operate or recommend suspension of license to practice
profession to the Professional Regulation Commission as the case may be for the violation of this
Act.

The administrative sanctions that shall be imposed by the Secretary of the Department of Health
shall be in a graduated manner in accordance with Section 12.A.

An administrative case may be instituted independently from the criminal case: Provided, That, the
dismissal of the criminal case or the withdrawal of the same shall in no instance be a ground for the
dismissal of the administrative case.

Still, even as the Generics Act of 1988, as amended, provides protection to the consumers - and
despite the Court's recognition of the respective rights under the IP Code of the first registrant in
good faith and the prior user in good faith - the Court is nonetheless mindful of potential switching of
medicines. As amply elaborated by Justice Gesmundo in his Concurring Opinion, the issue on
likelihood of confusion on medicines may pose a significant threat to public health, hence, there is a
need to improve our intellectual property laws and the government's manner of regulation of drug
names to prevent the concurrent use in the market of confusingly similar names for medicines.

To further reduce therefore, if not totally eliminate, the likelihood of switching in this case, the Court
hereby orders the parties to prominently state on the packaging of their respective products, in plain
language understandable by people with no medical background or training, the medical conditions
that their respective drugs are supposed to treat or alleviate and a warning indicating what
"ZYNAPS" is not supposed to treat and what "ZYNAPSE" is not supposed to treat, given the
likelihood of confusion between the two.
As well, by this Decision, the Court furnishes the Food and Drug Administration a copy of this
decision, and accordingly directs it to monitor the continuing compliance by the parties of the above
directives.

WHEREFORE, premises considered, the petition is PARTLY GRANTED and the Court hereby
declares petitioners ZUNECA PHARMACEUTICAL AND/OR AKRAM ARAIN AND/OR VENUS
ARAIN, M.D., AND STYLE OF ZUNECA PHARMACEUTICAL as the prior users in good faith of the
"ZYNAPS" mark and accordingly protected under Section 159.1 of the Intellectual Property Code of
the Philippines.

The assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 99787, which
affirmed the Decision of the Regional Trial Court of Quezon City, Branch 93 dated December 2,
2011, are AFFIRMED insofar as they declared respondent NATRAPHARM, INC. as the lawful
registrant of the "ZYNAPSE" mark under the Intellectual Property Code of the Philippines, and
are SET ASIDE insofar as they hold petitioners liable for trademark infringement and damages,
directed the destruction of petitioners' goods, and enjoined petitioners from using "ZYNAPS".
Petitioners' application for the issuance of a Temporary Restraining Order and/or Preliminary
Injunction is DENIED.

ZUNECA PHARMACEUTICAL AND/OR AKRAM ARAIN AND/OR VENUS ARAIN, M.D., AND
STYLE OF ZUNECA PHARMACEUTICAL and NATRAPHARM, INC. are likewise ORDERED to: (1)
indicate on their respective packaging, in plain language understandable by people with no medical
background or training, the medical conditions that their respective drugs are supposed to treat or
alleviate and a warning indicating what "ZYNAPS" is not supposed to treat and what "ZYNAPSE"
is not supposed to treat; and (2) submit to the Court a written report showing compliance with this
directive within thirty (30) days from receipt of this Decision.

Let a copy of this Decision be furnished the Food and Drug Administration which is, by this Decision,
directed to monitor the parties' continuing compliance with the above directives.

Let copies of this Decision likewise be forwarded to the Senate President, the Speaker of the House
of Representatives, and the Intellectual Property Office, for their information and guidance.

SO ORDERED.

Peralta, C.J., Perlas-Bernabe, Leonen, Gesmundo, Reyes, Jr., Hernando*, Carandang, Lazaro-
Javier, Inting, Zalameda, Lopez, Delos Santos, Gaerlan and Baltazar-Padilla**, JJ., concur.

October 30, 2020

NOTICE OF JUDGEMENT

Sirs/Mesdames:

Please take notice that on September 8, 2020 a Decision, copy attached herewith, was rendered by
the Supreme Court in the above-entitled case, the original of which was received by this Office on
November 3, 2020 at 11:10 a.m.

Very truly yours,

(Sgd.) MISAEL DOMINGO C. BATTUNG III
Division Clerk of Court

G.R. Nos. 211820-21. June 06, 2018 ]

KENSONIC, INC., PETITIONER, VS. UNI-LINE MULTI-RESOURCES, INC.,
(PHIL.), RESPONDENT.

[G.R. Nos. 211834-35]

UNI-LINE MULTI-RESOURCES, INC., PETITIONER, VS. KENSONIC, INC.,

RESPONDENT.

DECISION
BERSAMIN, J.:
The case concerns the cancellation of the registration of the trademark SAKURA for the goods of Uni-Line Multi
Resources, Inc. (Phils.) (Uni-Line) being sought by Kensonic, Inc. (Kensonic) on the ground that the latter had prior
use and registration of the SAKURA mark.

The Case

Under consideration are the consolidated appeals urging the review and reversal of the decision promulgated on July
30, 2013[1] and the amended decision promulgated on March 19, 2014,[2] whereby the Court of Appeals (CA) affirmed
the decision rendered on June 11, 2012 by the Director General of the Intellectual Property Office (IPO) upholding the
cancellation of the application of Uni-Line for the registration of the SAKURA mark for goods falling under Class 09 of
the Nice International Classification of Goods (Nice Classification), and allowing the registration of Uni-Line's
SAKURA mark registration for goods falling under Class 07 and Class 11 of the Nice Classification.[3]

Antecedents

The CA summarized the following factual and procedural antecedents, viz.:

On June 15, 1999, Uni-Line filed an application for the registration of the mark "SAKURA" for amplifier, speaker,
cassette, cassette disk, video cassette disk, car stereo, television, digital video disk, mini component, tape deck,
compact disk charger, VHS, and tape rewinder falling under Class 9 of the Nice International Classification of Goods.
Kensonic opposed Uni-Line's application which was docketed as IPC No. 14-2004-00160 (IPC 1). The Director of the
Bureau of Legal Affairs (BLA) rendered Decision No. 2005-01 dated November 29, 2005 finding that Kensonic was
the first to adopt and use the mark SAKURA since 1994 and thus rejecting Uni-Line's application. On January 19,
2006, said Decision became final and executory.

While IPC Case 1 was pending, Uni-Line filed an application and was issued a certificate of registration for the mark
"SAKURA & FLOWER DESIGN" for use on recordable compact disk (CD-R) computer, computer parts and
accessories falling under Class 9. On September 7, 2006, Kensonic filed a petition for cancellation docketed as IPC
No. 14-2006-00183 (IPC 2) of Uni-Line's registration. In Decision No. 08-113 dated August 7, 2008, the BLA Director
held that Uni-Line's goods are related to Kensonic's goods and that the latter was the first user of the mark SAKURA
used on products under Class 9. The BLA Director thus cancelled Uni-Line's certificate of registration. Uni-Line
moved for reconsideration of the BLA Director's Decision which is pending resolution to date.

On June 6, 2002, Uni-Line filed an application for the registration of the trademark SAKURA for use on the following:

Goods Nice Classification

Washing machines, high pressure washers, Class 07
vacuum cleaners, floor polishers, blender,
electric mixer, electrical juicer
Television sets, stereo components, DVD/VCD Class 09
players, voltage regulators, portable generators,
switch breakers, fuse
Refrigerators, air conditioners, oven toaster, Class 11
turbo broiler, rice cooker, microwave oven,
coffee maker, sandwich/waffle maker, electric
stove, electric fan, hot & cold water dispenser,
airpot, electric griller and electric hot pot
Uni-Line's application was thereafter published, and there being no opposition thereto, Certificate of Registration No.
4-2002-004572 for the mark SAKURA effective March 18, 2006 was issued.

On September 7, 2006, Kensonic filed with the BLA a Petition for Cancellation of Uni-Line's Certificate of Registration
alleging that in October 1994, it introduced the marketing of SAKURA products in the Philippines and that it owned
said SAKURA products and was the first to use, introduce and distribute said products. Kensonic also alleged that in
IPC 1, it opposed Uni-Line's application to register SAKURA and was already sustained by the Director General,
which Decision is now final and executory. Kensonic further alleged that it is the owner of a copyright for SAKURA
and that since 1994, has maintained and established a good name and goodwill over the SAKURA products.

Kensonic filed its Supplemental Petition for Cancellation and its Reply to Uni-Line's Answer. Uni-Line filed its
Rejoinder thereto.[4]
Decision of the Bureau of Legal Affairs (BLA), IPO

After due proceedings, the BLA issued Decision No. 2008-149 dated August 11, 2008,[5] whereby it ruled in favor of
Kensonic and against Uni-Line, and directed the cancellation of Registration No. 4-2002-004572 of the latter's
SAKURA mark. It observed that an examination of the SAKURA mark of Kensonic and that of Uni-Line revealed that
the marks were confusingly similar with each other; that the goods sought to be covered by the SAKURA registration
of Uni-Line were related to the goods of Kensonic, thereby necessitating the cancellation of the registration of Uni-
Line's mark; and that considering that Kensonic had used the SAKURA mark as early as 1994 in Class 09 goods
(namely: amplifiers, speakers, cassette disks, video cassette disks, car stereos, televisions, digital video disks, mini
components, tape decks, compact disk chargers, VHS and tape rewinders), Kensonic had acquired ownership of the
SAKURA mark, and should be legally protected thereon. The dispositive portion reads:
WHEREFORE, premises considered, the Verified Petition for Cancellation is hereby GRANTED. Accordingly,
Certificate of Registration No. 4-2002-004572 issued on 18 March 2006 for the trademark "SAKURA" in the name of
Uni-Line Multi Resources, Inc. Phils., is hereby ordered CANCELLED.

Let the file wrapper of this case be forwarded to the Bureau of Trademark (BOT) for appropriate action in accordance
with this Decision.

SO ORDERED.[6]
Decision of the Director General, IPO

On appeal,[7] the Director General of the IPO modified the decision of the BLR by upholding Uni-Line's registration of
the SAKURA mark as to goods classified as Class 07 and Class 11, thereby effectively reversing the BLR, but
affirmed the BLR as regards the treatment of the SAKURA mark that covered the goods falling under Class 09. The
Director General clarified that the marks of Uni-Line and Kensonic were similar if not identical; that considering that
Inter Partes Case No. 14-2004-00160 (IPC 1) already effectively ruled that the products registered by Uni-Line were
goods related to those covered by the registration of Kensonic, the registration of Uni-Line insofar as those products
sought to be registered under Class 09 were concerned (i.e., television sets, stereo components, DVD/VCD players,
voltage regulators, portable generators, switch breakers, fuse) was correctly cancelled; that the registration of
products of Uni-Line falling under Class 07 and Class 11 should not be cancelled because the products were different
from the goods registered under Class 09 in the name of Kensonic; that there should be evidence showing how the
continued registration of the SAKURA mark of Uni-Line would cause damage to Kensonic; and that the goods
covered by the SAKURA registration of Uni-Line and the SAKURA registration of Kensonic should be distinguished
because:
In addition, the ordinary purchaser must be thought of, as having, and credited with, at least a modicum of
intelligence. It does not defy common sense to assert that a purchaser would be cognizant of the product he is
buying. As a general rule, an ordinary buyer does not exercise as much pendence in buying an article for which he
pays a few centavos as he does in purchasing a more valuable thing. Expensive and valuable items are normally
bought only after deliberate, comparative and analytical investigation.

In this instance, the products of the Appellants under Classes 7 and 11 are home appliances which are not the
ordinary everyday goods the public buys and consumes. These products are not inexpensive items and a purchaser
would ordinarily examine carefully the features and characteristics of the same. It is, therefore, farfetched that the
purchasing public would be misled or be deceived as to the source or origin of the products. Furthermore, there is
nothing in the records that indicate any plans by the Appellee to enter into business transactions or to the
manufacture and distribution of goods similar to the products of the Appellants under Classes 7 and 11.[8]
The Director General of the IPO decreed as follows:
Wherefore, premises considered, the appeal is hereby dismissed in so far as the cancellation of the Appellant's Cert.
of Reg. No. 4-2002- 004572 for goods enumerated and falling under Class 9 is concerned. However, the appeal is
hereby granted in so far as the cancellation of Cert. of Reg. No. 4-2002-004572 for goods enumerated and falling
under Classes 7 and 11 is concerned.

Accordingly, Cert. of Reg. No. 4-2002-004572 issued in favor of the Appellant for the mark SAKURA is hereby
amended. The registration of goods enumerated under Class 9, namely television sets, stereo components,
DVD/VCD players, voltage regulators, portable generators, switch breakers, fuse is hereby cancelled.

Let a copy of this Decision as well as the records of this case be furnished and returned to the Director of the Bureau
of Legal Affairs for appropriate action. Further, let also the Director of the Bureau of Trademarks and the library of
Documentation, Information and Technology Transfer Bureau be furnished a copy of this Decision for information,
guidance, and records purposes.

SO ORDERED.[9]
Judgment of the CA

Both parties appealed to the CA, which promulgated its decision on July 30, 2013 dismissing the appeal of Kensonic
(C.A.-G.R. SP No. 125420) and granting Uni-Line's appeals (C.A.-G.R. SP No. 125424). The CA upheld Kensonic's
ownership of the SAKURA mark based on its showing of its use of the mark since 1994, but ruled that despite the
identical marks of Kensonic and Uni-Line, Kensonic's goods under Class 09 were different from or unrelated to Uni-
Line's goods under Class 07 and Class 11. It observed that the protection of the law regarding the SAKURA mark
could only extend to television sets, stereo components, DVD and VCD players but not to Uni-Line's voltage
regulators, portable generators, switch breakers and fuses due to such goods being unrelated to Kensonic's goods;
that Kensonic's registration only covered electronic audio-video products, not electrical home appliances; and that the
similarity of the marks would not confuse the public because the products were different and unrelated. It ruled:
WHEREFORE, the Petition filed by Kensonic, Inc., in C.A.G.R. SP No. 125420 is DENIED and the Petition filed by
Uni-Line Multi Resources, Inc. (Phils.) is GRANTED.

Accordingly, the Decision dated June 11, 2012 of Director General Ricardo R. Blancaflor of the Intellectual Property
Office is MODIFIED such that Uni-Line's Appeal insofar as the cancellation of its Certificate of Registration No. 4-
2002-004572 for goods enumerated and falling under Class 9 is GRANTED but DELETING therefrom the goods
television sets, stereo components, DVD players and VCD players. The Decision dated June 11, 2012 of the Director
General is hereby UPHELD insofar as it granted Uni-Line's Appeal on the cancellation of its Certificate of Registration
No. 4-2002-004572 for goods enumerated and falling under Class 7 and Class 11.

SO ORDERED.[10]
Kensonic sought partial reconsideration, submitting that voltage regulators, portable generators, switch breakers and
fuse were closely related to its products; that maintaining the two SAKURA marks would cause confusion as to the
source of the goods; and that Uni-Line's goods falling under Class 07 and Class 11 were closely related to its goods
falling under Class 09.

In the assailed amended decision promulgated on March 19, 2014,[11] the CA sided with Kensonic, and reverted to the
ruling by the Director General of IPO cancelling the registration of the SAKURA mark covering all the goods of Uni-
Line falling under Class 09 on the basis that all the goods belonged to the general class of goods. The CA decreed:
WHEREFORE, the Motion for Partial Reconsideration filed by Kensonic Inc. is PARTIALLY GRANTED. Uni-Line is
prohibited from using the mark SAKURA for goods falling under Class 9, but is allowed to use the mark SAKURA for
goods falling under Classes 7 and 11. Thus, the DENIAL of Uni-Line's Appeal insofar as the cancellation of its
Certificate of Registration No. 4-2002-004572 for goods enumerated and falling under Class 9 is UPHELD. The
Decision dated June 11, 2012 of the Director General is AFFIRMED in toto.

SO ORDERED.[12]
Issues

Hence, this appeal by both parties.

Kensonic (G.R. Nos. 211820-21) insists that the CA erred in not considering that Uni-Line's goods under Class 07
and Class 11 were related to its goods falling under Class 09; and that all the agencies below were unanimous in
declaring that the marks were identical, and, as such, the use of the SAKURA marks would lead to confusion about
the source of the goods.

Uni-Line (G.R. Nos. 211834-35) contends that the SAKURA mark could not be appropriated because it simply
referred to cherry blossom in Japanese and was thus a generic name that was not copyrightable; that it was grave
error for the IPO and the CA to rule that Kensonic owned the mark; and that voltage regulators, portable generators,
switch breakers and fuse were unrelated to Kensonic's products because Uni-Line's products were not electronic.

The following issues are, therefore, to be resolved:

(1) Is the SAKURA mark capable of appropriation?

(2) Are Kensonic's goods falling under Class 09 related to UniLine's goods falling under Class
07 and Class 11?; and

(3) Are Uni-Line's goods falling under Class 9, namely: voltage regulators, portable generators,
switch breakers and fuses, related to Kensonic's goods falling under Class 9?
Ruling of the Court

The appeal of Kensonic in G.R. Nos. 211820-21 is dismissed but the petition in G.R. Nos. 211834-35 is partially
granted.

I.

The SAKURA mark can be appropriated

Uni-Line's opposition to Kensonic's ownership of the SAKURA mark insists that the: SAKURA mark is not
copyrightable for being generic. Such insistence is unacceptable.

To be noted is that the controversy revolves around the SAKURA mark which is not a copyright. The distinction is
significant. A mark is any visible sign capable of distinguishing the goods (trademark) or services (service mark) of an
enterprise, and includes a stamped or marked container of goods.[13] In contrast, a copyright is the right to literary
property as recognized and sanctioned by positive law; it is an intangible, incorporeal right granted by statute to the
author or originator of certain literary or artistic productions, whereby he or she is invested, for a specific period, with
the sole and exclusive privilege of multiplying copies of the same and publishing and selling them.[14] Obviously, the
SAKURA mark is not an artistic or literary work but a sign used to distinguish the goods or services of one enterprise
from those of another.

An examination of the pertinent laws also reveals that Uni-Line mistakenly argues that the SAKURA mark was not
capable of registration for being generic.

Section 123(h) of the Intellectual Property Code prohibits the registration of a trademark that consists exclusively of
signs that are generic for the goods or services that they seek to identify. It is clear from the law itself, therefore, that
what is prohibited is not having a generic mark but having such generic mark being identifiable to the good or service.
In Asia Brewery, Inc., v. Court of Appeals,[15] the Court ruled that there was no infringement of San Miguel Brewery's
Pale Pilsen trademark because Pale Pilsen could not be appropriated. The Court explained:
The fact that the words pale pilsen are part of ABI's trademark does not constitute an infringement of SMC's
trademark: SAN MIGUEL PALE PILSEN, for "pale pilsen" are generic words descriptive of the color ("pale"), of a type
of beer ("pilsen"), which is a light bohemian beer with a strong hops flavor that originated in the City of Pilsen in
Czechoslovakia and became famous in the Middle Ages. (Webster's Third New International Dictionary of the English
Language, Unabridged Edited by Philip Babcock Gove. Springfield, Mass.: G & C Merriam Co., c) 1976, page 1716.)
"Pilsen" is a "primarily geographically descriptive word," (Sec. 4, subpar. [e] Republic Act No. 166, as inserted by
Sec. 2 of R.A. No. 638) hence, non-registerable and not appropriable by any beer manufacturer. The Trademark Law
provides:
"Sec. 4.... The owner of trade-mark, trade-name or service-mark used to distinguish his goods, business or services
from the goods, business or services of others shall have the right to register the same [on the principal register],
unless it:
xxx xxx xxx

"(e) Consists of a mark or trade-name which, when applied to or used in connection with the goods, business or
services of the applicant is merely descriptive or deceptively misdescriptive of them, or when applied to or used in
connection with the goods, business or services of the applicant is primarily geographically descriptive or deceptively
misdescriptive of them, or is primarily merely a surname." (Emphasis supplied.)"
The words "pale pilsen" may not be appropriated by SMC for its exclusive use even if they are part of its registered
trademark: SAN MIGUEL PALE PILSEN, any more than such descriptive words as "evaporated milk," "tomato
ketchup," "cheddar cheese," "com flakes" and "cooking oil" may be appropriated by any single manufacturer of these
food products, for no other reason than that he was the first to use them in his registered trademark. In Masso
Hermanos, S.A. vs. Director of Patents, 94 Phil. 136, 139 (1953), it was held that a dealer in shoes cannot register
"Leather Shoes" as his trademark because that would be merely descriptive and it would be unjust to deprive other
dealers in leather shoes of the right to use the same words with reference to their merchandise. No one may
appropriate generic or descriptive words. They belong to the public domain (Ong Ai Gui vs. Director of Patents, 96
Phil. 673, 676 [1955]).
"A word or a combination of words which is merely descriptive of an article of trade, or of its composition,
characteristics, or qualities, cannot be appropriated and protected as a trademark to the exclusion of its use by others
. . . inasmuch as all persons have an equal right to produce and vend similar articles, they also have the right to
describe them properly and to use any appropriate language or words for that purpose, and no person can
appropriate to himself exclusively any word or expression, properly descriptive of the article, its qualities, ingredients
or characteristics, and thus limit other persons in the use of language appropriate to the description of their
manufactures, the right to the use of such language being common to all. This rule excluding descriptive terms has
also been held to apply to trade-names. As to whether words employed fall within this prohibition, it is said that the
true test is not whether they are exhaustively descriptive of the article designated, but whether in themselves, and as
they are commonly used by those who understand their meaning, they are reasonably indicative and descriptive of
the thing intended. If they are thus descriptive, and not arbitrary, they cannot be appropriated from general use and
become the exclusive property of anyone. (52 Am. Jur. 542-543.)

". . . Others may use the same or similar descriptive word in connection with their own wares, provided they take
proper steps to prevent the public being deceived. (Richmond Remedies Co. vs. Dr. Miles Medical Co., 16 E. [2d]
598.)

". . . A descriptive word may be admittedly distinctive, especially if the user is the first creator of the article. It will,
however, be denied protection, not because it lacks distinctiveness, but rather because others are equally entitled to
its use. (2 Callman, Unfair Competition and Trademarks, pp. 869-870.)"
This, however, is not the situation herein. Although SAKURA refers to the Japanese flowering cherry[16] and is,
therefore, of a generic nature, such mark did not identify Kensonic's goods unlike the mark in Asia Brewery, Inc., v.
Court of Appeals. Kensonic's DVD or VCD players and other products could not be identified with cherry blossoms.
Hence, the mark can be appropriated.

Kensonic's prior use of the mark since 1994 made it the owner of the mark, and its ownership cannot anymore be
challenged at this stage of the proceedings. Seeking the review of Kensonic's ownership would entail the examination
of facts already settled by the lower tribunals. Uni-Line's challenge to the ownership of the SAKURA mark should stop
here because the Court cannot act on a factual matter in this appeal by petition for review on certiorari, which is
limited to the consideration of questions of law. Section 1, Rule 45 of the Rules of Court specifically so provides:
Section 1. Filing of petition with Supreme Court. - A party desiring to appeal by certiorari from a judgment or final
order or resolution of the Court of Appeals, the Sandiganbayan, the Court of Tax Appeals, the Regional Trial Court or
other courts whenever authorized by law, may file with the Supreme Court a verified petition for review on certiorari.
The petition may include an application for a writ of preliminary injunction or other provisional remedies and shall
raise only questions of law which must be distinctly set forth. The petitioner may seek the same provisional remedies
by verified motion filed in the same action or proceeding lat any time during its pendency.
The distinction between a question of law and a question of fact is well defined. According to Tongonan Holdings and
Development Corporation v. Escaño, Jr.:[17]
A question of law arises when there is doubt as to what the law is on a certain state of facts, while there is a question
of fact when the doubt arises as to the truth or falsity of the alleged facts. For a question to be one of law, the same
must not involve an examination of the probative value of the evidence presented by the litigants or any of them. The
resolution of the issue must rest solely on what the law provides on the given set of circumstances. Once it is clear
that the issue invites a review of the evidence presented, the question posed is one of fact. Thus, the test of whether
a question is one of law or of fact is not the appellation given to such question by the party raising the same; rather, it
is whether the appellate court can determine the issue raised without reviewing or evaluating the evidence, in which
case, it is a question of law; otherwise it is a question of fact.
It is timely to remind, too, that the Court is not a trier of facts. Hence, the factual findings of the quasi-judicial body like
the IPO, especially when affirmed by the CA, are binding on the Court.[18] Jurisprudence has laid down certain
exceptions to the rule of bindingness,[19] but, alas, Uni-Line did not discharge its burden to show how its urging for a
review of the factual findings came within any of the exceptions.

II.

Uni-Line's goods classified under Class 07 and Class 11 were not related to Kensonic's goods registered
under Class 09

The CA did not err in allowing the registration of Uni-Line's products falling under Class 07 and Class 11, for, indeed,
those products - as found by the lower tribunals were unrelated to the goods of Kensonic registered under Class 09.

Still, Kensonic contends that the goods of Uni-Line classified under Class 07 and Class 11 were covered by the
prohibition from registration for being within the normal potential expansion of Kensonic.

The contention is unwarranted.

The prohibition under Section 123 of the Intellectual Property Code extends to goods that are related to the
registered goods, not to goods that the registrant may produce in the future. To allow the expansion of coverage is to
prevent future registrants of goods from securing a trademark on the basis of mere possibilities and conjectures that
may or may not occur at all. Surely, the right to a trademark should not be made to depend on mere possibilities and
conjectures.

In Mighty Corporation v. E. & J. Gallo Winery,[20] the Court has identified the different factors by which to determine
whether or not goods are related to each other for purposes of registration:
Non-competing goods may be those which, though they are not in actual competition, are so related to each other
that it can reasonably be assumed that they originate from one manufacturer, in which case, confusion of business
can arise out of the use of similar marks. They may also be those which, being entirely unrelated, cannot be assumed
to have a common source; hence, there is no confusion of business, even though similar marks are used. Thus, there
is no trademark infringement if the public does not expect the plaintiff to make or sell the same class of goods as
those made or sold by the defendant.

In resolving whether goods are related, several factors come into play:

(a) the business (and its location) to which the goods belong

(b) the class of product to which the goods belong

(c) the product's quality, quantity, or size, including the nature of the package, wrapper or
container

(d) the nature and cost of the articles

(e) the descriptive properties, physical attributes or essential characteristics with reference to
their form, composition, texture or quality

(f) the purpose of the goods

(g) whether the article is bought for immediate consumption, that is, day-to-day household
items

(h) the fields of manufacture

(i) the conditions under which the article is usually purchased and

(j) the channels of trade through which the goods flow, how they are distributed, marketed,
displayed and sold. (Citations omitted)
An examination of the foregoing factors reveals that the goods of Uni-Line were not related to the goods of Kensonic
by virtue of their differences in class, the descriptive attributes, the purposes and the conditions of the goods.

In Taiwan Kolin Corporation, Ltd. v. Kolin Electronics, Co., Inc.,[21] the Court has opined that the mere fact that goods
belonged to the same class does not necessarily mean that they are related; and that the factors listed in Mighty
Corporation v. E. & J. Gallo Winery should be taken into consideration, to wit:
As mentioned, the classification of the products under the NCL is merely part and parcel of the factors to be
considered in ascertaining whether the goods are related. It is not sufficient to state that the goods involved herein
are electronic products under Class 9 in order to establish relatedness between the goods, for this only accounts for
one of many considerations enumerated in Mighty Corporation. xxx

Clearly then, it was erroneous for respondent to assume over the CA to conclude that all electronic products are
related and that the coverage of one electronic product necessarily precludes the registration of a similar; mark over
another. In this digital age wherein electronic products have not only diversified by leaps and bounds, and are geared
towards interoperability, it is difficult to assert readily, as respondent simplistically did, that all devices that require
plugging into sockets are necessarily related goods.

It bears to stress at this point that the list of products included in Class 9 can be sub-categorized into five (5)
classifications, namely: (1) apparatus and instruments for scientific or research purposes, (2) information technology
and audiovisual equipment, (3) apparatus and devices for controlling the distribution and use of electricity, (4) optical
apparatus and instruments, and (5) safety equipment. From this subclassification, it becomes apparent that
petitioner's products, i.e., televisions and DVD players, belong to audiovisual equipment, while that of respondent,
consisting of automatic voltage regulator, converter, recharger, stereo booster, AC-DC regulated power supply, step-
down transformer, and PA amplified AC-DC, generally fall under devices for controlling the distribution and use of
electricity.
Based on the foregoing pronouncement in Taiwan Kolin Corporation, Ltd. v. Kolin Electronics, Co., Inc., there are
other sub-classifications present even if the goods are classified under Class 09. For one, Kensonic's goods
belonged to the information technology and audiovisual equipment subclass, but Uni-Line's goods pertained to the
apparatus and devices for controlling the distribution of electricity sub-class. Also, the Class 09 goods of Kensonic
were final products but Uni-Line's Class 09 products were spare parts. In view of these distinctions, the Court agrees
with Uni-Line that its Class 09 goods were unrelated to the Class 09 goods of Kensonic.

WHEREFORE, the Court DENIES the petition for review on certiorari in G.R. No. 211820-21; PARTIALLY
GRANTS the petition for review on certiorari in G.R. No. 211834-35; REVERSES and SETS ASIDE the amended
decision promulgated on March 19, 2014; PARTIALLY REINSTATES the decision promulgated on July 30, 2013
insofar as it allowed the registration by Uni-Line Multi-Resources, Inc. under the SAKURA mark of its voltage
regulators, portable generators, switch breakers and fuses; and ORDERS Kensonic, Inc. to pay the costs of suit.

SO ORDERED.
G.R. No. 220558. February 17, 2021 ]
EMZEE FOODS, INC., PETITIONER, VS. ELARFOODS, INC., RESPONDENT.

DECISION
GAERLAN, J.:
A business is remembered and revered by its goodwill and reputation. Hence, for a business, its mark is not simply a
random, meaningless combination of letters, phrases or symbols. Rather these emblems embody the quality of the
goods and services offered by the entity. For these reasons, the law steps in to protect its intellectual property rights.

This resolves the Petition for Review on Certiorari under Rule 45 of the Rules of Court filed by Emzee Foods, Inc.
(petitioner), praying for the reversal of the March 27, 2015 Decision[1] and September 11, 2015 Resolution[2] of the
Court of Appeals (CA) in CA-GR. SP No. 133652. The CA affirmed the December 20, 2013 Decision[3] of the Director
General of the Intellectual Property Office (IPO), declaring petitioner liable for unfair competition and trademark
infringement.

Antecedents

Sometime in 1970, spouses Jose and Leonor Lontoc (spouses Lontoc) established a business of selling Filipino food
and roasted pigs, which they marketed under the name "ELARS Lechon."[4]

Desiring to leave a legacy, in 1989, the spouses Lontoc incorporated their food business. Thus, on May 19, 1989,
Elarfoods, Inc. (respondent) was granted a Certificate of Registration by the Securities and Exchange Commission
(SEC).[5]

Since then, the spouses Lontoc actively managed the respondent corporation. Over the years, respondent used
Elarfoods, Inc. as its business name and marketed its products, particularly, its roasted pigs as "ELAR'S LECHON
ON A BAMBOO TRAY." Eventually, it rose to notoriety as the "ELAR'S LECHON" brand.[6]

However, without respondent's knowledge and permission, petitioner sold and distributed roasted pigs using the
marks "ELARZ LECHON", "ELAR LECHON," "PIG DEVICE" and "ON A BAMBOO TRAY", thereby making it appear
that petitioner was a branch or franchisee of the respondent.

On September 25, 2001, respondent filed with the IPO an application for registration of the trademark "ELARS
LECHON." Thereafter, on October 1, 2001, respondent filed two more applications for the marks "ON A BAMBOO
TRAY" and "ROASTED PIG DEVICE" (collectively, subject marks).[7] The mark "ROASTED PIG DEVICE" is a design
or representation of a roasted pig on a bamboo stick placed on top of a bamboo tray.[8]

On October 2, 2001, respondent sent the petitioner a Cease and Desist Letter[9] urging the latter to stop using the
subject marks or any variations thereof. However, petitioner ignored the demand and continued selling its roasted
pigs under the marks "ELARZLECHON," "ELAR LECHON," "PIG DEVICE," and "ON A BAMBOO TRAY," thereby
causing confusion as to the source and origin of the products.[10]

Thereafter, respondent filed three separate complaints[11] for unfair competition and violation of intellectual property
rights against petitioner for the latter's use of the former's trademarks "ELARS LECHON" "ROASTED PIG DEVICE,"
and "ON A BAMBOO TRAY." Respondent claimed that petitioner unfairly rode on its fame, goodwill and reputation,
causing its sales and profits to be diverted to petitioner.[12]

On November 12, 2001, the Bureau of Legal Affairs (BLA) of the IPO ordered the consolidation of the cases.[13]

Petitioner filed an Answer, where it countered that the respondent is not the owner of the subject marks. Rather,
respondent is a mere alter ego or business conduit of the spouses Lontoc who have proprietary rights over the
marks. Petitioner related that the mark "Elar" stands for "L.R.," which are the initials of the spouses Lontoc-
Rodriguez's family names. In fact, since 1967, the spouses Lontoc have used "Elar" for their other corporations, such
as Elar Development (ELARDEV) for their livestock business; Casa Elar Incorporated (CASA ELAR) for their
restaurant business; and Elar Foods (Elarfoods) for their meat business. Petitioner further narrated that Jose Lontoc
(Jose) himself designed the logo which became the symbol and mark of "ELARS LECHON." The phrase "ON A
BAMBOO TRAY" was loosely used by Jose and through word of mouth, became associated with "ELARS LECHON".

On August 8, 2005, BLA Director Estrelita Beltran-Abelardo (Beltran-Abelardo) dismissed the complaint. She ruled
that the spouses Lontoc are the owners of the subject marks by prior commercial use. Said marks acquired popularity
through their consistent use in connection with the spouses Lontoc's lechon business, even prior to the respondent's
incorporation. Moreover, BLA Director Beltran-Abelardo opined that the use of the "ELAR" mark was not coined by
the spouses Lontoc for the sole benefit of respondent, but for the use of the Lontoc-Rodriguez clan in their
businesses.[14] At best, respondent merely acquired the usufruct of the subject trademarks. On this score, the real-
party-in-interest to file a suit against the petitioner is the Estate of the spouses Lontoc.[15] In the same vein, it is only
the Estate who may apply for registration and appropriate the subject trademarks for its exclusive use.[16] In the
absence of a valid transfer or assignment in favor of the respondent or the petitioner, any goodwill that may be
earned through the use of the trademark shall redound to the Estate's benefit.[17] Finally, BLA Director Beltran-
Abelardo concluded that her office has no jurisdiction to make a final determination on the matter considering that it is
not a probate court.[18]

Meanwhile, during the pendency of the proceedings before the BLA, particularly on February 10, 2005, April 28,
2006, and October 2, 2006, the IPO issued Certificates of Registration in favor of the respondent for the marks "ON A
BAMBOO TRAY,"[19] "ELARS LECHON"[20] and "ROASTED PIG DEVICE,"[21] respectively. Said Certificates are valid
for a period of 10 years from their respective dates of issuance.[22]

On September 17, 2005, respondent sought reconsideration of BLA Director Beltran-Abelardo's ruling, which was
denied in the latter's Resolution[23] dated December 21, 2009.

Hence, on February 10, 2010, respondent filed an appeal before the Office of the Director General.[24]

Ruling of the IPO Director General

In a Decision[25] dated December 20, 2013, IPO Director General Ricardo R. Blancaflor (Blancaflor) reversed the BLA.
He stated that there was no need for a written assignment of the subject trademarks because the spouses Lontoc
themselves, in their desire to leave a legacy, incorporated and registered respondent with the SEC. As a result, all
rights and interests of the spouses Lontoc, including the subject trademarks were transferred to respondent. In fact,
the spouses Lontoc actively managed respondent and represented to the public that they were its owners. Even
petitioner admitted that respondent is an alter ego of the spouses Lontoc, implying that the rights and interests of
respondent are identical and inseparable from those of the spouses Lontoc.

Likewise, Director General Blancaflor explained that the requirement of a written assignment of rights applies only if
the trademark is already registered, or has a pending application for registration. In this case, a written assignment
was not yet possible considering that the subject trademarks were not yet registered nor the subject of an application
for registration. Hence, Director General Blancaflor concluded that petitioner's use of the trademarks
"ELARZLECHON," "ELAR LECHON," "PIG DEVICE," and "ON A BAMBOO TRAY" constituted unfair competition
during the time that the marks were not yet registered, and trademark infringement, after their registration. He farther
expressed that the petitioner should have been made liable for the payment of damages and should have been
subject to injunction. Accordingly, he disposed of the case as follows:

WHEREFORE, in view of the foregoing, the herein Appeal is hereby GRANTED, and Decision No. 2005-02 dated
August 8, 2005, of the Director of the Bureau of Legal Affairs, together with Resolution No. 09-03 (D), dated
December 21, 2009, which affirmed the same, are hereby REVERSED.

Concerning the prayer for damages made by the Complainant- Appellant, we hereby award the following:

1. Moral damages in the amount of Five Hundred Thousand Pesos (PhP 500,000.00) in view of the injury
to its goodwill;
2. Exemplary damages in the amount of Four Hundred Thousand Pesos (PhP 400,000.00);
3. Attorney's fees in the amount of Five Hundred Thousand Pesos; and
4. Costs of litigation.
No actual damages can be awarded as there was no evidence adduced to prove the same.

Let a copy of this Decision as well as the records be furnished and returned to the Director of Bureau of Legal Affairs
for appropriate action. Further, let also the Director of the Bureau of Trademarks and the library of the
Documentation, Information and Technology Transfer Bureau be furnished a copy of this Decision for information,
guidance, and records purposes.

SO ORDERED.[26]
Dissatisfied with the ruling, petitioner filed with the CA a Petition for Review[27] under Rule 43 of the Rules of Court.

Ruling of the CA

On March 27, 2015, the CA affirmed the ruling of IPO Director General Blancaflor.[28] The CA noted that the IPO had
already issued the respondent Certificates of Registration for the subject trademarks. These Certificates of
Registration carry with them the operation of ownership and exclusive use of the subject trademarks.
[29]
Consequently, the CA found the petitioner liable for infringement. It applied the dominancy test and held that the
petitioner's use of the mark "ELARZ LECHON" or "ELAR LECHON" likely results in confusion. The marks both
feature the name "ELAR"; have a similar sound and pronunciation with the respondent's trademarks; and are likewise
used in the sale of lechon and related products. Thus, there exists a likelihood that the consumers will mistakenly
associate petitioner's lechon and business with those of respondent's.[30]

Moreover, the CA held petitioner liable for unfair competition. It explained that petitioner's use of the marks
"ELARZLECHON," "ELAR LECHON," "PIG DEVICE," and "ON A BAMBOO TRAY" on its packaging materials and
signages has clothed its goods with the general appearance of respondent's products.[31] Worse, petitioner did not
issue a notice to the buying public that "ELARZ LECHON" is not respondent's product. Hence, petitioner's intent to
deceive the public is clear.[32]

In view of the petitioner's acts, the CA affirmed the award of exemplary damages, attorney's fees and costs of
litigation in favor of the respondent. However, it deleted the award of moral damages holding that the respondent is
an artificial being, and thus cannot experience physical suffering and mental anguish.[33]

The dispositive portion of the CA ruling states:

ACCORDINGLY, the assailed Decision dated December 20, 2013 is AFFIRMED with MODIFICATION as follows:

1) The award of P400,000.00 exemplary damages and P500,000.00 attorney's fees and cost of litigation is
RETAINED subject to the justifications as heretofore stated.

2) The award of moral damages is DELETED.

SO ORDERED.[34]

Aggrieved, petitioner filed a Motion for Reconsideration, which was denied in the September 11, 2015 CA Resolution.
[35]

Undeterred, petitioner filed the instant Petition for Review on Certiorari[36] before this Court.

Issues

The main issues in the instant case revolve around the petitioner's liability for damages for violating the respondent's
intellectual property rights and the propriety of granting an injunction against the petitioner.

Petitioner maintains that the Estate of the spouses Lontoc is the rightful owner of the subject trademarks. Said
trademarks were created by the spouses Lontoc for the sole and exclusive use of the Lontoc-Rodriguez clan, and not
for the benefit of any of the corporations.[37] Petitioner further asserts that by virtue of succession, Manuel Enrique
Zalamea (Manuel Enrique), President of petitioner corporation, his brother, Manuel Jose Zalamea (Manuel Jose), and
the other heirs of the deceased spouses Lontoc are the co-owners of said trademarks.[38]

Moreover, petitioner contends that the respondent is not the real-party-in-interest to file a suit before the IPO.[39] There
was no valid assignment of the subject trademarks in favor of respondent. Without a valid assignment, any goodwill
that may be earned through the use of the trademarks shall redound to the Estate's benefit.[40]

Lastly, petitioner decries the award of exemplary damages and attorney's fees for lack of factual and legal basis. It
claims that it did not act in a wanton, fraudulent, oppressive or malevolent manner. Petitioner's officers, as heirs of
the deceased spouses, stand to inherit the right to use the marks created by their ancestors.[41] Thus, there is no
deliberate intent to engage in unfair competition.[42]

On the other hand, respondent counters that it is the legal owner of the subject trademarks having acquired a vested
legal right thereto pursuant to

Section 236 of Republic Act (R.A.) No. 8293,[43] in relation to Section 2 of R.A. No. 166.[44] Respondent explains that
after its incorporation, the spouses Lontoc tacitly transferred to it ownership of Elar's Lechon and the subject
trademarks in connection with the sale of its roasted pigs and other products.[45] Since then, respondent conducted its
business using the mark "ELARS LECHON" under the direct management and control of the spouses Lontoc. Over
the years, respondent has exclusively used the subject trademarks and has been patronized by customers.[46] In
addition, it has invested time and money in promoting and perfecting its roasted pigs and other products known as
"ELARS LECHON ON A BAMBOO TRAY" or popularly known by the public in Metro Manila as "ELARS LECHON."[47]

In addition, respondent avers that the IPO confirmed its ownership of the subject trademarks as proven by the
Certificates of Registration [48] This confirms that the spouses Lontoc transferred their previously unincorporated
business to respondent. Thus, the heirs of the former in their individual capacities are bereft of any right to use the
mark or any identical or similar mark sans authority from the respondent.[49]

Finally, respondent urges that petitioner is liable for exemplary damages.[50] Manuel Jose, one of the incorporators
and a stockholder of petitioner was respondent's former trusted employee. While working for respondent, he acquired
various confidential information relating to respondent's business operations. In complete bad faith, Manuel Jose and
Manuel Enrique incorporated petitioner, whose business is exactly the same as that of respondent's.[51] Manuel
Enrique organized "elarZ Corp.", opened a new restaurant on the same street where respondent holds business, and
solicits franchises of elarZ lechon under the pretense that it is the original "ELARS LECHON." He has been using
marks substantially similar to the subject trademarks owned by respondent.[52] These actions are fraudulent and
oppressive in nature, and thus, deserve the imposition of exemplary damages.[53] Furthermore, petitioner is liable to
pay attorney's fees and costs of litigation.[54]

Ruling of the Court

The petition is denied.

At the fore is a legal battle between two food corporations marketing and selling a Filipino staple - lechon.
Particularly, both parties are fighting over the right to exclusively use the marks "ELARS LECHON," "PIG DEVICE,"
and "ON A BAMBOO TRAY" in their respective businesses. On the one hand, respondent claims that it is the true
and lawful owner of the subject marks, while on the other hand, petitioner avers that the rightful owner of the said
marks are the spouses Lontoc (currently, the Estate), who had originally created the marks. For the Court to properly
determine liability for damages, it must first resolve the issue of ownership of the subject marks.

Notably, a mark pertains to "any visible sign capable of distinguishing the goods (trademark) or services (service
mark) of an enterprise and shall include a stamped or marked container of goods."[55] Particularly, a trademark is "any
distinctive word, name, symbol, emblem, sign, or device, or any combination thereof, adopted and used by a
manufacturer or merchant on his goods to identify and distinguish them from those manufactured, sold, or dealt by
others."[56] A trademark is an intellectual property that deserves protection under the law.[57]

On this score, the Intellectual Property Code (IP Code) states how a mark is obtained and, correlatively, enumerates
the rights of a trademark owner:

Section 122. How Marks are Acquired. - The rights in a mark shall be acquired through registration made validly in
accordance with the provisions of this law.

xxxx

Section 147. Rights Conferred. - 147.1. The owner of a registered mark shall have the exclusive right to prevent all
third parties not having the owner's consent from using in the course of trade identical or similar signs or containers
for goods or services which are identical or similar to those in respect of which the trademark is registered where
such use would result in a likelihood of confusion. In case of the use of an identical sign for identical goods or
services, a likelihood of confusion shall be presumed.

xxxx

Section 168. Unfair Competition, Rights, Regulation and Remedies. - 168.1. A person who has identified in the
mind of the public the goods he manufactures or deals in, his business or services from those of others, whether or
not a registered mark is employed, has a property right in the goodwill of the said goods, business or services so
identified, which will be protected in the same manner as other property rights.[58]
In the recent case of Zuneca Pharmaceutical, et al. v. Natrapharm, Inc.,[59] the Court exhaustively discussed the
manner of acquiring ownership of a particular trademark which, over the years, vacillated between registration and
actual use. The ponencia elaborately surveyed all the intellectual property laws passed in our country, beginning from
the Spanish Royal Decree of October 26, 1888, which required business entities to obtain a certificate before using a
particular trademark. This rule, however, changed in 1903, when Act No. 666 was enacted and required actual use of
the mark as a means of obtaining ownership thereof. Then, in 1947, R.A. No. 166 (Trademark Law) was passed
which strengthened the rule of actual use, while imposing non-abandonment of the mark as an additional prerequisite
for registration. Fast-forward to 1998, the IP Code was passed and the manner of acquiring ownership of a trademark
reverted to registration, subject to the rule that the first-to-file shall be prioritized to the exclusion of all other
applicants/users.[60]

Essentially, Zuneca[61] clarified that, as the rule now stands, the lawful owner of the mark shall be the person or entity
who first registers it in good faith:
Once the IP Code took effect, however, the general rule on ownership was changed and repealed. At present, as
expressed in the language of the provisions of the IP Code, prior use no longer determines the acquisition of
ownership of a mark in light of the adoption of the rule that ownership of a mark is acquired through registration made
validly in accordance with the provisions of the IP Code. Accordingly, the trademark provisions of the IP Code use the
term "owner" in relation to registrations. This fact is also apparent when comparing the provisions of the Trademark
Law, as amended, and the IP Code, x x x.[62]
It must be noted that respondent filed applications for the registration of the subject trademarks "ON A BAMBOO
TRAY," "ELARS LECHON" and "ROASTED PIG DEVICE."[63] Recognizing their ownership of the said marks, the IPO
granted the respondent Certificates of Registration on February 10, 2005,[64] April 28, 2006,[65] and October 2, 2006,
[66]
valid for a period of 10 years. Indeed, the registration of the marks gives rise to a presumption of the validity of
registration, the registrant's ownership of the marks, and the right to its exclusive use.[67] Petitioner failed to overcome
said presumption. Furthermore, according to the database of the IPO, the respondent's right to use the subject
trademarks has been renewed for another 10 years.[68] Thus, as of date, the respondent unequivocally enjoys the
exclusive right to use the subject trademarks.

It likewise bears stressing that even prior to the registration of the subject trademarks, the respondent has been
consistently using said marks since its incorporation in 1989. Hence, even under the law applicable at that time,
namely, Section 2-A of R.A. No. 166,[69] respondent's consistent use of the subject trademarks confirms its ownership
thereof.

Despite the overwhelming evidence in respondent's favor, petitioner staunchly insists that the owner of the subject
trademarks is the Estate of the spouses Lontoc.

This contention deserves scant consideration.

It cannot be gainsaid that respondent corporation is a creation of the spouses Lontoc themselves. In 1989, the
spouses Lontoc wanted to leave their legacy, and thus incorporated the respondent to ensure the continuation of their
lechon and food business. From that moment, the spouses Lontoc transferred to the respondent the ownership of
ELARS Lechon and the subject marks in connection with the sale of its roasted pigs and other products.[70] Moreover,
all throughout their lives, the spouses Lontoc actively managed respondent and consistently used the subject
trademarks in promoting the latter's goods. Certainly, the spouses Lontoc's overt acts of incorporating respondent,
actively managing it, and consistently representing to the public that ELARS Lechon is operating under the
respondent, conclusively prove that indeed the "ELARS LECHON" brand has been transferred to, and is owned by
respondent. As such, the respondent has the exclusive right to use the name ELARS LECHON to the exclusion of all
other parties, including the descendants of the spouses Lontoc.[71]

In fact, Jose, as then President and General Manager of respondent, eagerly promoted Elar's Lechon as the
respondent's business.[72] This was established through Jose's Letter dated October 7, 1996 under respondent's
letterhead, where he declared that "we are one of the biggest lechon producers in the country under our brand name
— "ELAR LECHON on a BAMBOO TRAY"[73] Indeed, Jose's unqualified representation that Elar's Lechon is the
business of respondent confirms that even without a formal assignment, exclusive ownership of the mark "ELARS
LECHON" and its adjunct trademarks have been vested on respondent. Actually, even the petitioner admitted that
respondent is an "alter ego of the spouses Lontoc,"[74] implying that the rights and interests of respondent are identical
and inseparable from those of the spouses Lontoc.

Similarly, respondent's prior adoption and continuous use of the subject trademarks since 1990 are bolstered by
documents consisting of various commercial sales invoices from November 1990 to February 1995.[75]

In addition, respondent invested time and money in promoting and advertising its food products and roasted pigs
"ELARS LECHON ON A BAMBOO TRAY" or popularly known by the public as "Elar's Lechon."[76] Certainly, these
cumulative acts that have been done for decades have resulted in respondent's notoriety to the public as the source
of roasted pigs bearing the subject trademarks.[77]

Interestingly, even the BLA ruled that the spouses Lontoc, by virtue of prior commercial use under Section 2-A of R.A.
No. 166 are the owners of the subject trademarks. However, it refused to recognize the transfer of ownership to the
respondent due to the absence of a written assignment in favor of the latter.

Notably, this lacuna was filled by IPO Director General Blancaflor who explained that the fact of the transfer may not
be disproven by the absence of a written assignment. A trademark, like any incorporeal right may be disposed of not
only by way of formal assignment.[78] More importantly, the subject trademarks were not yet registered when
respondent started doing business under the Elar's Lechon brand.[79] Neither was there a pending application for the
said trademarks. Besides, under Article 1624[80] of the Civil Code, in relation to Article 1475[81] of the same Code, the
assignment of incorporeal rights, like an unregistered mark, is perfected by mere consent without need of a written
contract. Thus, what matters is that from the time of respondent's incorporation until present, respondent has used
and exclusively appropriated the subject trademarks as its own.[82]

Having thus established the respondent's ownership of the subject trademarks, the next issue to be resolved is
whether or not petitioner is liable for damages for violating the respondent's intellectual property rights.

On this score, the Court finds that petitioner's use of the marks "ELARZ LECHON," "ELAR LECHON," "PIG DEVICE,"
and "ON A BAMBOO TRAY," which are substantially identical to the respondents' marks, constitute unfair
competition.

The IP Code defines unfair competition as:

Section 168. Unfair Competition, Rights, Regulation and Remedies. -

xxxx

168.2. Any person who shall employ deception or any other means contrary to good faith by which he shall pass off
the goods manufactured by him or in which he deals, or his business, or services for those of the one having
established such goodwill, or who shall commit any acts calculated to produce said result, shall be guilty of unfair
competition, and shall be subject to an action therefor.

168.3. In particular, and without in any way limiting the scope of protection against unfair competition, the following
shall be deemed guilty of unfair competition:

(a) Any person, who is selling his goods and gives them the general appearance of goods of another manufacturer or
dealer, either as to the goods themselves or in the wrapping of the packages in which they are contained, or the
devices or words thereon, or in any other feature of their appearance, which would be likely to influence purchasers
to believe that the goods offered are those of a manufacturer or dealer, other than the actual manufacturer or dealer,
or who otherwise clothes the goods with such appearance as shall deceive the public and defraud another of his
legitimate trade, or any subsequent vendor of such goods or any agent of any vendor engaged in selling such goods
with a like purpose;

(b) Any person who by any artifice, or device, or who employs any other means calculated to induce the false belief
that such person is offering the services of another who has identified such services in the mind of the public; or

xxxx

168.4. The remedies provided by Sections 156, 157 and 161 shall apply mutatis mutandis. (Sec. 29, R.A. No. 166a)
The Court agrees with the CA that petitioner is liable for unfair competition for the following reasons:

Here, petitioner's product is lechon which is also the product of respondent. Since petitioner uses "ELARZ LECHON",
"ELAR LECHON", "PIG DEVICE", and "ON A BAMBOO TRAY" on their packaging materials and signages in the
same manner like respondent uses "ELAR'S LECHON" mark on its lechon products, petitioner has obviously clothed
its product the general appearance of respondent's product itself. More, there is no notice to the buying public that
"ELARZ LECHON" is not respondent's product, albeit it is the latter that has the exclusive right to the trademark
"ELAR'S LECHON." There is indeed a clear intent to deceive the public on petitioner's part, x x x[83]
Remarkably, in UFC Philippines, Inc. v. Barrio Fiesta Manufacturing Corporation,[84] the Court enumerated the kinds
of confusion caused by similar marks, and the tests that aid in determining the likelihood of confusion:
There are two tests used in jurisprudence to determine likelihood of confusion, namely the dominancy test used by
the IPO, and the holistic test adopted by the Court of Appeals. In Skechers, U.S.A., Inc. v. Inter Pacific Industrial
Trading Corp., we held:

The essential element of infringement under R.A. No. 8293 is that the infringing mark is likely to cause confusion. In
determining similarity and likelihood of confusion, jurisprudence has developed tests - the Dominancy Test and the
Holistic or Totality Test. The Dominancy Test focuses on the similarity of the prevalent or dominant features of
the competing trademarks that might cause confusion, mistake, and deception in the mind of the purchasing
public. Duplication or imitation is not necessary; neither is it required that the mark sought to be registered suggests
an effort to imitate. Given more consideration are the aural and visual impressions created by the marks on
the buyers of goods, giving little weight to factors like prices, quality, sales outlets, and market segments.

xxxx

Relative to the question on confusion of marks and trade names, jurisprudence has noted two (2) types of
confusion, viz.: (1) confusion of goods (product confusion), where the ordinarily prudent purchaser would be induced
to purchase one product in the belief that he was purchasing the other; and (2) confusion of business (source or
origin confusion), where, although the goods of the parties are different, the product, the mark of which registration is
applied for by one party, is such as might reasonably be assumed to originate with the registrant of an earlier product,
and the public would then be deceived either into that belief or into the belief that there is some connection between
the two parties, though inexistent.[85] (Citations omitted)

In Wilton Dy and/or Philites Electronics & Lighting Products v. Koninklijke Philips Electronics. N. V.,[86] the Court used
the dominancy test to conclude that the competing marks bear an uncanny resemblance that may confuse the
consumers:
On one hand, the dominancy test focuses on "the similarity of the prevalent or dominant features of the competing
trademarks that might cause confusion, mistake, and deception in the mind of the purchasing public. Duplication or
imitation is not necessary; neither is it required that the mark sought to be registered suggests an effort to imitate.
Given more consideration are the aural and visual impressions created by the marks on the buyers of goods, giving
little weight to factors like prices, quality, sales outlets, and market segments.

xxxx

Applying the dominancy test to this case requires us to look only at the mark submitted by petitioner in its application,
while we give importance to the aural and visual impressions the mark is likely to create in the minds of the buyers.
We agree with the findings of the CA that the mark "PHILITES" bears an uncanny resemblance or confusing similarity
with respondent's mark "PHILIPS," to wit:

Applying the dominancy test in the instant case, it shows the uncanny resemblance or confusing similarity between
the trademark applied for by respondent with that of petitioner's registered trademark. An examination of the
trademarks shows that their dominant or prevalent feature is the five-letter "PHILI", "PHILIPS" for petitioner, and
"PHILITES" for respondent. The marks are confusingly similar with each other such that an ordinary purchaser can
conclude an association or relation between the marks. The consuming public does not have the luxury of time to
ruminate the phonetic sounds of the trademarks, to find out which one has a short or long vowel sound. At bottom,
the letters "PHILI" visually catch the attention of the consuming public and the use of respondent's trademark will
likely deceive or cause confusion. Most importantly, both trademarks are used in the sale of the same goods, which
are light bulbs.[87] (Citations omitted)
In the same vein, in McDonald's Corp. v. L.C. Big Mak Burger, Inc.,[88] the Court also applied the dominancy test in
determining the likelihood of confusion between the two competing marks:

This Court, however, has relied on the dominancy test rather than the holistic test. The dominancy test considers the
dominant features in the competing marks in determining whether they are confusingly similar. Under the dominancy
test, courts give greater weight to the similarity of the appearance of the product arising from the adoption of the
dominant features of the registered mark, disregarding minor differences. Courts will consider more the aural and
visual impressions created by the marks in the public mind, giving little weight to factors like prices, quality, sales
outlets and market segments.

xxxx

Applying the dominancy test, the Court finds that respondents' use of the "Big Mak" mark results in likelihood of
confusion. First, "Big Mak" sounds exactly the same as "Big Mac." Second, the first word in "Big Mak" is exactly the
same as the first word in "Big Mac." Third, the first two letters in "Mak" are the same as the first two letters in "Mac."
Fourth, the last letter in "Mak" while a "k" sounds the same as "c" when the word "Mak" is pronounced. Fifth, in
Filipino, the letter "k" replaces "c" in spelling, thus "Caloocan" is spelled "Kalookan."

In short, aurally the two marks are the same, with the first word of both marks phonetically the same, and the second
word of both marks also phonetically the same. Visually, the two marks have both two words and six letters, with the
first word of both marks having the same letters and the second word having the same first two letters. In spelling,
considering the Filipino language, even the last letters of both marks are the same.

Clearly, respondents have adopted in "Big Mak" not only the dominant but also almost all the features of
"Big Mac." Applied to the same food product of hamburgers, the two marks will likely result in confusion in the public
mind.[89] (Citations omitted)
Applying the dominancy test to the case at bar, it is very obvious that the petitioner's marks "ELARZ LECHON" and
"ELAR LECHON" bear an indubitable likeness with respondent's "ELARS LECHON." As can easily be seen, both
marks use the essential and dominant word "ELAR". The only difference between the petitioner's mark from that of
respondent's are the last letters Z and S, respectively. However, the letters Z and S sound similar when pronounced.
Thus, both marks are not only visually similar, but are phonetically and aurally similar as well. To top it all off, both
marks are used in selling lechon products. Verily, there exists a high likelihood that the consumers may conclude an
association or relation between the products. Likewise, the uncanny resemblance between the marks may even lead
purchasers to believe that the petitioner and respondent are the same entity.

In fine, petitioner's use of marks similar to those of the respondent's constitutes a violation of the latter's intellectual
property rights. It is high time for petitioner to desist from conveniently latching on to the good will and reputation built
by the respondent over the years. To fully protect the respondent's rights, it is imperative to order the petitioner to
cease and desist from using the former's marks. This remedy is recognized under Section 156.4[90] of the IP Code,
which grants the complainant the right to demand an injunction, upon proper showing of its entitlement thereto. A
similar redress was granted in the case of Asia Pacific Resources International Holdings, Ltd. v. Paperone, Inc.,
[91]
where the Court affirmed the orders of the BLA and the IPO Director General commanding the party guilty of unfair
competition to cease and desist from using the complainant's marks.[92]

Unfortunately, despite the IPO Director General's finding that the petitioner is liable for unfair competition, and thus,
"should have been subject to injunction,"[93] it failed to categorically order the latter to cease and desist from using the
respondent's marks. Similarly, the CA affirmed the petitioner's culpability for unfair competition, yet failed to issue an
order directing the latter to refrain from using the subject marks. Hence, to afford the respondent full relief, an
injunction must be issued against the petitioner.

Additionally, in view of the petitioner's unfair acts, the Court affirms the award of damages granted by the IPO
Director General and the CA in favor of the respondent. Likewise, as affirmed in In-N-Out Burger, Inc. v. Sehwani
Incorporated and/or Benita's Frites, Inc.,[94] exemplary damages may be imposed if the accountable party deliberately
engaged in unfair competition. This is to provide an example or correction for the public good, enhance the protection
accorded to intellectual property, and to prevent similar acts of unfair competition. Viewed in this light, the Court finds
that an award of P400,000.00 as exemplary damages is commensurate with the respondent's injury. The Court
further notes that the petitioner's officers acted in bad faith, considering that its president and incorporators were
former employees of respondent corporation. They clearly had knowledge that the subject trademarks belong to the
respondent, and have been consistently and continuously used by the latter since 1989.[95]

Finally, Article 2208(1) of the Civil Code allows the prevailing party to recover attorney's fees when exemplary
damages are awarded.[96] Moreover, the Court recognizes that respondent was compelled to litigate to protect its
rights over the subject marks. Thus, an award of P500,000.00 as attorney's fees and costs of litigation is justified.

WHEREFORE, premises considered, the petition is DENIED for lack of merit. Accordingly, the March 27, 2015
Decision and the September 11, 2015 Resolution of the Court of Appeals in CA-G.R. SP No. 133652 are AFFIRMED
with the modification that in addition to the payment of exemplary damages and attorney's fees, petitioner Emzee
Foods Inc. is hereby ORDERED to CEASE and DESIST from using "ELARZ LECHON," "ELAR LECHON," "PIG
DEVICE," and "ON A BAMBOO TRAY" on its products.

SO ORDERED.
G.R. No. 228165. February 09, 2021 ]
KOLIN ELECTRONICS CO., INC., PETITIONER, VS. KOLIN PHILIPPINES
INTERNATIONAL, INC., RESPONDENT.

DECISION
CAGUIOA, J.:[**]
This is a Petition for Review on Certiorari[1] (Petition) under Rule 45 of the Rules of Court, which seeks to reverse and
set aside the following dispositions of the Court of Appeals (CA) in CA-G.R. SP No. 131917:
1. Decision[2] dated April 29, 2016 reversing the ruling of the Director General of the Intellectual Property
Office (IPO-DG) in Appeal No. 14-09-64[3] (IPC No. 14-2007-00167), g1vmg due course to the trademark
 application of Kolin Philippines International, Inc. (KPII), and denying the opposition of Kolin Electronics
Co., Inc. (KECI); and

2. Resolution[4] dated November 4, 2016, denying KECI's motion for reconsideration.

Facts

Antecedent cases involving related parties

1. The KECI Ownership Case

On August 17, 1993, Kolin Electronics Industrial Supply (KEIS), owned by a certain Miguel Tan, filed with the Bureau
of Patents, Trademarks and Technology Transfer (BPTTT; now known as the Intellectual Property Office or IPO) an
application for registration of Trademark Application No. 87497 for KOLIN covering the following products under
Class 9: automatic voltage regulator, converter, recharger, stereo booster, AC-DC regulated power supply, step-down
transformer, and PA amplifier AC-DC.[5]

In a Deed of Assignment of Assets dated November 20, 1995, Miguel Tan assigned in favor of KECI all the assets.
and merchandise stocks of KEIS, including its pending application for registration of the KOLIN mark.[6] The
trademark has been continuously used in various products under the said classification, and the products are being
offered for sale at KECI's business establishments.[7]

On February 29, 1996, Taiwan Kolin Co., Ltd. (TKC) filed with the BPTTT Trademark Application No. 4-1996-
106310[8] for KOLIN initially covering the following goods: "color television, refrigerator, window-type air
conditioner, split-type air conditioner, electric fan, and water dispenser".[9]

During the pendency of its application, TKC filed a verified Notice of Opposition on July 22, 1998 against KECI's
trademark application for KOLIN. TKC claimed that it is the owner of Taiwan registrations for KOLIN and KOLIN
SOLID SERIES and that it has a pending application for KOLIN,[10] thus the grant of the KOLIN application
would cause TKC grave and irreparable damage to its business reputation and goodwill because KOLIN is
identical, if not confusingly similar, to TKC's marks. TKC further claimed that if KECI's application
for KOLIN would be granted, this would likely mislead the public as to the nature, quality, and characteristics of its
goods or products bearing the "KOLIN" trademark.[11]

On December 27, 2002, Director Estrellita Beltran-Abelardo of the Intellectual Property Office Bureau of Legal Affairs
(IPO-BLA) rendered Decision No. 2002-46[12] (Inter Partes Case No. 14-1998-00050) denying TKC's opposition and
giving due course to KECI's trademark application for KOLIN.[13] Premised on the factual finding that the subject
marks are "the same or almost identical,"[14] the IPO-BLA then opted to focus on the discussion of the prior adopter
and user of the mark.[15] The IPO-BLA examined the evidence presented by the parties and concluded that KECI "is
the prior adopter and user of the mark 'KOLIN' in the Philippines, having been able to prove the date of first use of its
mark in the year 1989, which is ahead of [TKC's] use in the Philippines x x x in the year 1996."[16] Thus, TKC's
opposition was denied and KECI's trademark application for KOLIN was given due course.

TKC appealed the decision to the IPO-DG, which, in turn, issued a Decision[17] on November 6, 2003 sustaining the
ruling of the IPO-BLA.[18] The IPO eventually issued a Certificate of Registration for KOLIN in favor of KECI.[19] In
the November 29, 2004 issue of the Philippine Daily Inquirer, KECI, through counsel, filed a notice informing the
public of the issuance of the certificate in its favor, and claimed exclusive right of usage over the KOLIN mark. [20]

On December 10, 2004, TKC filed a petition for review with the CA with a prayer for preliminary injunction and/or the
issuance of a temporary restraining order docketed as CA-G.R. SP No. 80641, urging the CA to enjoin KECI from
asserting exclusive rights to use the KOLIN mark.[21]

On July 31, 2006, the CA issued a Decision[22] against TKC and in favor of KECI. The CA clarified that the Trademark
Law[23] was applicable since it was still in effect at the time of the filing and during the pendency of the trademark
applications of both parties.[24] Accordingly, the CA held that there must be actual use thereof in commerce to acquire
ownership of a mark.[25] The CA found as undisputed that KEIS, the predecessor-in-interest of KECI, had been using
the KOLIN mark in the Philippines since February 17, 1989, prior to the filing of the trademark application
for KOLIN in 1993.[26] While TKC claimed prior use of the mark in foreign jurisdictions[27] as early as 1986,[28] the
CA agreed with the IPO-BLA and IPO-DG that the concept of "actual use" under the Trademark Law refers to use in
the Philippines, and not abroad.[29] Further, the assignment of rights involving the KOLIN mark to KECI was not
raised as an issue in the case.[30] On the issue of priority being claimed by TKC, the CA agreed with the decision of
IPO-DG that, whether under the Trademark Law or the Intellectual Property Code[31] (IP Code), TKC's "claim of x x x
priority right is unavailing."[32] Accordingly, the CA dismissed TKC's petition for lack of merit and affirmed the IPO-
DG's decision.[33]

TKC initially appealed the CA decision by filing with the Court a motion for extension to file a petition for review.
[34]
However, on September 6, 2007, TKC filed a Manifestation withdrawing its motion for extension because "[TKC
was] no longer interested in pursuing an appeal."[35] Accordingly, on September 26, 2007, a Resolution was issued by
the Court considering the case "CLOSED and TERMINATED." In an Entry of Judgment, the Resolution was
considered final and executory on November 16, 2007[36] (the KECI ownership case).

Thus, by virtue of the KECI ownership case, KECI is the adjudicated owner of the KOLIN mark under the
Trademark Law as against TKC.

2. The Taiwan Kolin case

However, in another case that went up to the Court, the registration of another KOLIN mark not owned by KECI was
allowed. In G.R. No. 209843 entitled Taiwan Kolin Corporation, Ltd. v. Kolin Electronics Co., Inc.[37] (Taiwan Kolin
case), promulgated on March 25, 2015, the Court gave due course to TKC's Trademark Application for KOLIN.

To recall, before filing an opposition case[38] against KECI's application for KOLIN, TKC had filed on February 29,
1996 Trademark Application No. 4-1996-106310 for KOLIN initially covering the following goods: "color television,
refrigerator, window-type air conditioner, split-type air conditioner, electric fan, and water dispenser."

On February 10, 1999, Paper No.5 was issued by the trademark examiner-in-charge stating that the goods
enumerated in TKC's application fall under Classes 9, 11, and 21 of the Nice Classification (NCL), thus, TKC was
required to elect one class of goods for its application for KOLIN.[39] However, the application was considered
abandoned as of April 18, 1999 because TKC failed to respond to Paper No. 5.[40] On September 14, 1999, TKC filed
a petition to revive the application stating, among other things, that in response to Paper No. 5, it was electing Class
9 for its application.[41] Further, TKC requested the inclusion of the following goods in its application: "cassette
recorder, VCD, whoofer (sic), amplifiers, camcorders and other audio/video electronic equipment, flat iron, vacuum
cleaners, cordless handsets, videophones, facsimile machines, teleprinters, cellular phones, automatic goods
vending machines and other electronic equipment belonging to class 9."[42]

In an Order dated March 14, 2001, the Bureau of Trademarks granted TKC's petition.[43] Consequently, Trademark
Application No. 4-1996-106310 was published in the IPO Electronic Gazette for Trademarks on May 16, 2006.[44] The
"television sets" was, however, not included in the enumeration of goods in the published Trademark Application.[45]

KECI filed an opposition against TKC's application with the IPO BLA on July 13, 2006[46] based on the fact that it is
the registered owner of the KOLIN[47] mark, which it claimed was confusingly similar to TKC's application
for KOLIN. The case was docketed as Inter Partes Case No. 14-2006-00096.

On November 7, 2006, TKC filed an Answer to the Opposition, claiming, among others, that its Trademark
Application No. 4-1996-106310 "includes television sets and that this trademark application later became Trademark
Application No. 4-2002-011002 filed on [December 27, 2002] when it was re-filed/revived after the handling lawyer
delayed the submission of requirements for the first application."[48]

The IPO-BLA rendered Decision No. 2007-118[49] dated August 16, 2007 sustaining KECI's opposition case and
rejecting TKC's application for KOLIN.

On March 27, 2009, TKC filed an Appeal Memorandum with the IPO DG, claiming that the IPO-BLA erred in denying
its application without any allowance for use limitation or restriction on televisions and DVD players.[50]
Noting that TKC only wanted its KOLIN application to be given due course subject to the use limitation or
restriction for television and DVD player,[51] the IPO-DG issued a Decision[52] on November 23, 2011 granting TKC's
appeal and allowing the registration of TKC's mark with a limitation/restriction for the goods "television and DVD
player".[53]

Aggrieved, KECI appealed to the CA.

On April 30, 2013, the CA issued a Decision[54] in CA-G.R. SP No. 122565 reversing and setting aside the IPO-DG's
decision and reinstating the IPO-BLA decision.[55] It ruled in favor of KECI based on the following grounds: (a) the
"KOLIN" mark sought to be registered by TKC is confusingly similar to KECI's "KOLIN" registration since "[t]he only
difference is [KECI's] mark is italicized and colored black while that of [TKC] is in pantone red color;"[56] (b) there are
no other designs, special shape or easily identifiable earmarks that would differentiate the products of both competing
companies;[57] and (c) the intertwined use of television sets with amplifier, booster and voltage regulator bolstered the
fact that televisions can be considered as within the normal expansion of KECI, and is thereby deemed covered by its
trademark as explicitly protected under Section 138 of the IP Code;[58] and (d) the denial of TKC's application would
prevent the likelihood of confusion resulting from the use of an identical mark to closely related goods.[59] TKC moved
to reconsider the decision, but this was denied by the CA.

TKC then filed an appeal to the Court.

It is important to highlight that there were three (3) marks involved in the Taiwan Kolin case (1) KECI's
trademark registration No. 4-1993-087497; (2) TKC's trademark application No. 4-1996-106310, which was opposed
by KECI; and (3) TKC's trademark application No. 4-2002-011002, which was allegedly the "revived" version of TKC's
application.

For ease of reference, the subject marks are included in the following table:
TKC's opposed
TKC's "revived"
KECI's mark trademark
application
application
Marks KOLIN[60] KOLIN[61] (image)[62]
Application No. 4-1993-087497 4-1996-106310 4-2002-011002
Filing Date August 17, 1993 February 29, 1996 December 27, 2002
Current Status Registered Registered Refused for non-filing
of DAU/DNU
Class Covered 9 9 9
Goods Covered Automatic Voltage Television and DVD Television Sets,
Regulator, Converter, player Audio/Video
Recharger, Stereo Electronic Equipment
Booster, AC-DC and Similar Appliances
Regulated Power
Supply, Step-Down
Transformer, PA
Amplified AC-DC
To clarify, while Trademark Application No. 4-1996-106310 was indeed revived,[63] it was not through another
separate application, contrary to TKC's statement.[64]

Keeping this in mind, the Taiwan Kolin case ruled in favor of TKC.

The Court's Third Division stated that identical marks may be registered for products from the same classification,
citing the discussion in Mighty Corporation v. E. & J. Gallo Winery[65] (Mighty Corporation).[66] It also held "that
emphasis should be on the similarity of the products involved and not on the arbitrary classification or general
description of their properties or characteristics. The mere fact that one person has adopted and used a trademark on
his goods would not, without more, prevent the adoption and use of the same trademark by others on unrelated
articles of a different kind."[67]

The Court's Third Division also stated that the CA's approach and reasoning "fail[ed] to persuade" and ruled that the
products covered by TKC's application and KECI's registration are unrelated.[68] In saying that the CA decision was
wrong, the Court's Third Division only cited and gave credence to the following assertions by TKC to establish that
the goods are unrelated:
a. TKC's goods are classified as home appliances as opposed to KECI's goods, which are power supply and audio
equipment accessories;

b. TKC's television sets and DVD players perform functions and purposes distinct from KECI's power supply and
audio equipment; and

c. TKC sells and distributes its various home appliance products on wholesale and to accredited dealers, whereas
KECI's goods are sold and flow through electrical and hardware stores.[69]
The Court's Third Division said that the list of products under Class 9 can be sub-categorized into five different
classifications and that the products covered by TKC's and KECI's marks fall under different sub-categories. It then
made a side-by-side comparison of the marks to state that the ordinary intelligent buyer is not likely to be confused.
For reference, the side-by-side comparison used in the case is shown below:

(image supposed to be here)

Further, it stated that confusion is not likely because the products involved (i.e., "various kinds of electronic products,"
according to the Taiwan Kolin case) are more expensive than "ordinary consumable household items", so consumers
will be more careful in purchasing these products.[70] It also cited the case of Emerald Garment Manufacturing
Corporation v. Court of Appeals[71] (Emerald Garment) which defined an "ordinary intelligent buyer" as follows:
The definition laid down in Dy Buncio v. Tan Tiao Bok is better suited to the present case. There, the "ordinary
purchaser" was defined as one "accustomed to buy, and therefore to some extent familiar with, the goods in question.
The test of fraudulent simulation is to be found in the likelihood of the deception of some persons in some measure
acquainted with an established design and desirous of purchasing the commodity with which that design has been
associated. The test is not found in the deception, or the possibility of deception, of the person who knows nothing
about the design which has been counterfeited, and who must be indifferent between that and the other. The
simulation, in order to be objectionable, must be such as appears likely to mislead the ordinary intelligent buyer who
has a need to supply and is familiar with the article that he seeks to purchase".[72] (Italics omitted)
Thus, the Court's Third Division concluded that KECI's trademark registration not only covers unrelated goods but is
also incapable of deceiving the ordinary buyer in relation to TKC's application.[73] Accordingly, TKC's petition was
granted, the CA decision was reversed and set aside, and the IPODG Decision, which gave due course to TKC's
Trademark Application No. 4-1996-106310 for KOLIN, was reinstated.

Facts of the present case

On September 11, 2006[74] - more than a month after the promulgation of the KECI ownership case - KPII, an affiliate
of TKC,[75] filed Trademark Application No. 4-2006-010021 for the kolin mark under Class 9 covering "Televisions and
DVD players".

On June 12, 2007, KECI filed an opposition against KPII's Trademark Application No. 4-2006-010021 based on,
among others, the fact that it is the registered owner of the KOLIN mark and that the registration of
KPII's kolin mark will cause confusion among consumers.[76]

In its defense, KPII claimed that its application for kolin cannot be denied on the basis of the ruling in the KECI
ownership case because it was not a party to said case and the KECI ownership case is not res judicata to the instant
case.[77] Besides, KPII asserted that the KECI ownership case specifically clarified that KECI's ownership over the
mark is limited only in connection with goods specified in KECI's certificate of registration and those related thereto.
[78]
KPII insisted that "Televisions and DVD players" are not related to the goods covered by KECI's registered mark.
[79]

For ease of reference, the marks involved in the present dispute (subject marks) and their related information are
included in the table below:
Parties KECI KPII
 Marks KOLIN[80] kolin[81]
Application No. 4-1993-087497 4-2006-010021
Status Registered Trademark Application subject
of opposition by KECI
Classes Covered 9 9
Goods Covered Automatic Voltage Regulator, Televisions, DVD Players
Converter, Recharger, Stereo
Booster, AC-DC Regulated Power
Supply, Step-Down Transformer,
PA Amplified AC-DC
IPO-BLA Decision

In a Decision[82] on IPC No. 14-2007-00167 dated September 9, 2009, the IPO-BLA sustained KECI's opposition. One
of the reasons why KPII's Trademark Application No. 4-2006-010021 for kolin was rejected was the fact that buyers
would be confused as to the origin of the products being offered by KECI and KPII.[83] Significantly, the IPO-BLA also
noted that KECI had received several customer e-mails complaining against or seeking information about the
products of KPII.[84]

Further, the IPO-BLA found that KPII is an instrumentality of TKC, as seen in the excerpt below:
An exhaustive scrutiny of the records of the case convince[s] this Bureau to concur with the position of [KECI] that
indeed, [KPII] is an instrumentality of [TKC]. [KECI] presented substantial evidence that [KPII] is effectively
under the management, supervision and control of [TKC] manifested through the assignment of five (5)
persons to the financial and plant operations x x x; [TKC's] admission of its direct participation in the
management, supervision and control of [KPII]; [TKC's] majority ownership of stocks in [KPII] x x x; and the
maintenance of one website of both companies and the admission to the same x x x. [85] (Emphasis supplied)
Accordingly, the IPO-BLA rejected KPII's application for kolin. The dispositive portion of the IPO-BLA Decision reads:
WHEREFORE, premises considered the Notice of Opposition filed by [KECI], is as it is hereby SUSTAINED.
Accordingly, Application Serial No. 4-2006-010021 filed by respondent-applicant, [KPII] on 27 December 2002 for the
mark [kolin] under Class 09 for televisions and DVD players, is as it is hereby, REJECTED.

Let the file wrapper of [kolin], subject matter of this case be forwarded to the Bureau of Trademarks for appropriate
action in accordance with this decision.

SO ORDERED.[86]
Aggrieved, KPII appealed the case to the IPO-DG.

IPO-DG Decision

On September 12, 2013, the IPO-DG issued a Decision[87] on Appeal No. 14-09-64 in IPC No. 14-2007-00167
dismissing KPII's appeal. It is important to stress that, at this juncture, the Taiwan Kolin case had not yet been
promulgated. At that time, the case was still pending with the Court. The CA decision (CA-G.R. SP No. 122565) that
was promulgated on April 30, 2013 and where the CA ruled in favor of KECI, was the prevailing judgment between
KECI and TKC.

The IPO-DG stated that "with the decision of the [CA in CA-G.R. SP No. 122565] that [TKC's] television sets and
DVD players are related to [KECI's] goods covered by the latter's certificate of registration for KOLIN, this Office rules
in favor of [KECI]."[88]

Accordingly, the IPO-DG dismissed KPII's appeal. KPII then filed an appeal to the CA, docketed therein as CA-G.R.
SP No. 131917.

CA Decision (CA-G.R. SP No.131917)

After the promulgation of the Taiwan Kolin case on March 25, 2015, the CA issued in CA-G.R. SP No. 131917 a
Decision[89] dated April 29, 2016 granting KPII's appeal.
Faced with the issue of whether KPII is entitled to the registration of the kolin mark covering television and DVD
players, the CA relied heavily on, and quoted the reasoning in, the Taiwan Kolin case.[90] Accordingly, the CA ruled
that KPII may register its mark for television sets and DVD players and the doctrine of res judicata forbids it from
arriving at a contrary conclusion.[91] The dispositive portion of the CA decision reads:
WHEREFORE, premises considered, the petition is hereby GRANTED. The Decision dated September 12, 2013,
issued by the [IPO DG], in Appeal Case No. 14-09-64 (IPC No. 14-2007-00167), is REVERSED and SET ASIDE, and
a new one is entered giving due course to [KPII's] Trademark Application No. 04-2006-010021.

Let a copy of this Decision as well as the trademark application and records be furnished and returned to the Director
of the [IPO-BLA] for appropriate action. Further, let the Director of the Bureau of Trademarks and the library of the
Documentation, Information, and Technology Transfer Bureau be furnished a copy of this Decision for information,
guidance, and records purposes.

SO ORDERED.[92]
Thus, KECI filed the instant Rule 45 Petition, raising the following arguments: (1) the ruling in the Taiwan Kolin
case is not applicable in the present case; and (2) the registration of KPII's kolin mark is contrary to the provisions of
the IP Code.

In a Comment[93] dated June 5, 2017, KPII argued that the CA had correctly applied the principle of res judicata.

In the Reply[94] dated November 16, 2017, KECI insisted that the ruling in the Taiwan Kolin case cannot be made to
apply in this case. Further, in arguing that the CA decision should be reversed, KECI emphasized the confusing
similarity between the subject marks.

Issue

The main issue in this case is whether KPII should be allowed to register its kolin mark.

The Court's Ruling

The Petition is granted. KPII is not allowed to register its kolin mark for "Televisions and DVD players."

I.

RES JUDICATA DOES NOT APPLY

Citing the Taiwan Kolin case, the CA stated that the doctrine of res judicata is applicable and "forbids [it] from arriving
at a contrary conclusion."[95] It stated that all the requisites of res judicata are fulfilled in the instant case, viz.:
All of these requisites [of res judicata] are fulfilled in the instant case. While KPII may not be involved in the [Taiwan
Kolin case], it must be noted that KPII is an affiliate company of [TKC], as admitted by KECI An absolute identity of
the parties is not required for res judicata to apply, for as long as there exists an identity or community of interest.

It may be claimed that [TKC] is now the owner of the mark KOLIN for television and DVD players by virtue of the
Supreme Court decision in the [Taiwan Kolin case], thereby preventing registration in the name of KPII. Still, we again
emphasize that they are affiliated companies and [TKC] has authorized KPII to adopt and use the mark "KOLIN" in
the Philippines and to register the mark in connection with its business dealings. More importantly, however, it
appears that the marks applied for by [TKC] and KPII are not identical. x x x Thus, since there is no identity of marks
so as to prevent registration, KPII may validly register its mark.[96]
A. Res judicata in the concept of bar by prior judgment

The Court disagrees with the conclusion of the CA because all the elements of res judicata are not present.

The following excerpts in Monterona v. Coca-Cola Bottlers Philippines, Inc.[97] are instructive:
There is "bar by prior judgment" when, as between the first case where the judgment was rendered and the second
case that is sought to be barred, there is identity of parties, subject matter, and causes of action. In this instance, the
judgment in the first case constitutes an absolute bar to the second action. Otherwise put, the judgment or decree of
the court of competent jurisdiction on the merits concludes the litigation between the parties, as well as their privies,
and constitutes a bar to a new action or suit involving the same cause of action before the same or any other tribunal.

xxxx
The elements of res judicata are: (1) the judgment sought to bar the new action must be final; (2) the decision must
have been rendered by a court having jurisdiction over the subject matter and the parties; (3) the disposition of the
case must be a judgment on the merits; and (4) there must be as between the first and second actions, identity of
parties, subject matter, and causes of action. x x x Should identity of parties, subject matter, and causes of action be
shown in the two cases, then res judicata in its aspect as a "bar by prior judgment" would apply. x x x[98]
Based on the facts, the subject matter in this case and the Taiwan Kolin case are different. A subject matter is the
item with respect to which the controversy has arisen, or concerning which the wrong has been done, and it is
ordinarily the right, the thing, or the contract under dispute.[99] In this case, the item to which the controversy has
arisen or the thing under dispute is KPII's kolin mark, while in the Taiwan Kolin case, the subject matter is
TKC's KOLIN mark.

The cause of action in the Taiwan Kolin case is also different from the cause of action in the case at bar. Rule 2,
Section 2 of the Rules of Court defines a cause of action as an act or omission by which a party violates the right of
another. In the Taiwan Kolin case, the cause of action was TKC's act of filing Trademark Application No. 4-1996-
106310 for KOLIN, which allegedly violated KECI's rights because confusion would be likely among consumers if
TKC's trademark application were to be given due course. In contrast, in the case at bar, the cause of action is KPII's
act of filing Trademark Application No. 4-2006-010021 for kolin.

Thus, there is no bar by prior judgment in this case.

B. Res judicata in the concept of conclusiveness of judgment

Neither can res judicata in the concept of conclusiveness of judgment operate to prevent the Court from determining
the registrability of KPII's trademark application.

Jurisprudence describes how this principle is applied below:

Section 49(c) of Rule 39 enumerates the concept of conclusiveness of judgment. This is the second branch,
otherwise known as collateral estoppel or estoppel by verdict. This applies where, between the first case wherein
judgment is rendered and the second case wherein such judgment is involved, there is no identity of causes of action.
As explained by this Court:
It has been held that in order that a judgment in one action can be conclusive as to a particular matter in another
action between the same parties or their privies, it is essential that the issues be identical. If a particular point or
question is in issue in the second action, and the judgment will depend on the determination of that particular point or
question, a former judgment between the same parties will be final and conclusive in the second if that same point or
question was in issue and adjudicated in the first suit; but the adjudication of an issue in the first case is not
conclusive of an entirely different and distinct issue arising in the second. In order that this rule may be applied, it
must clearly and positively appear, either from the record itself or by the aid of competent extrinsic evidence that the
precise point or question in issue in the second suit was involved and decided in the first. And in determining whether
a given question was an issue in the prior action, it is proper to look behind the judgment to ascertain whether the
evidence necessary to sustain a judgment in the second action would have authorized a judgment for the same party
in the first action.[100]
To emphasize, in the Taiwan Kolin case, the Court only ruled that TKC's Trademark Application No. 4-1996-106310
for KOLIN should be given due course.

What is involved in this case now before the Court is a new trademark application by KPII which means that it is
going through an entirely new process of determining registrability. There is nothing under the law which mandates
that registered trademark owners and/or their privies may automatically register all similar marks, despite allegations
of "damage"[101] by opposers.

Since new trademark applications are attempts to claim new exclusive rights, there will necessarily be new nuances
of "damage", even if the same parties are involved, and the Court should carefully consider these nuances in
deciding to give due course to the application. There are new issues on "damage" to KECI here, not decided in the
Taiwan Kolin case, which affect the registrability of KPII's application for kolin and which must be resolved by the
Court.

The registration of KPII's kolin will create new rights which would change the status quo. Thus, the opposed
trademark application before the Court presents the following new issues:

a) KPII's new application for kolin essentially amounts to seeking exclusivity[102] over a
stylized version of the "KOLIN" word as against other parties, including KECI, for a range
of goods/services.[103] This issue was not considered in the Taiwan Kolin case because the
 Court only essentially ruled therein that the registration of KOLIN will not cause damage
to KECL Thus, the relevant questions are these: should KPII be given a new right to
assert exclusivity over the kolin stylized mark, as against KECI, for a range of
goods/services? Will KPII's exclusive appropriation of a specific stylized
version (kolin) cause "damage" to KECI who, as it stands, has an existing right to use
any and all stylized versions of "KOLIN" for a range of goods/services (i.e., goods
covered by its registration, related goods/services, and goods/services falling within the
normal expansion of its business)?

b) As mentioned, KECI is the owner of the mark under the Trademark Law based on the KECI
ownership case. Section 236[104] of the IP Code mandates that nothing in the IP Code -
which logically includes marks registered under the IP Code-can adversely affect the rights
on enforcement of marks acquired in good faith prior to the effective date of the law. In this
regard, does KPII's application under the IP Code for exclusive appropriation of a
stylized KOLIN (kolin) for a range of goods/services adversely affect KECI's rights
under Section 236 of the IP Code in such a way that it amounts to "damage" to KECI?
Will KPII's registration adversely affect the rights on KECI's enforcement of its
KOLIN mark established under the KECI ownership case?
The Court is therefore called upon to resolve the question of whether KPII deserves to exclusively appropriate a
stylized version of the KOLIN word mark for a range of goods/services, considering all aspects of "damage" to KECI.

Because this involves a new trademark application and there are new issues arising here which were not decided in
the Taiwan Kolin case, the principle of res judicata in the concept of conclusiveness of judgment does not apply.

Senior Associate Justice Estela M. Perlas-Bernabe also raises a compelling and well-reasoned point on why the
principle of conclusiveness of judgment does not apply here. As expertly detailed in her Concurring Opinion, the
Court's Third Division in the Taiwan Kolin case could have only allowed the registration of TKC's KOLIN as a
mark with a specific stylization, and not a word mark.[105]

Indeed, a perusal of the marks involved in the Taiwan Kolin case would confirm that TKC sought to protect a specific
style of lettering in its trademark application, thereby precluding the possibility that the registration granted in
the Taiwan Kolin case belongs in the category of word marks:[106]
TKC's opposed Trademark Application No. TKC's Trademark Application No. 4-2002-
4-1996-106310, which was granted 011002, the alleged "revived version" in
registration in the Taiwan Kolin case the Taiwan Kolin case
KOLIN[107] (image)[108]
The two marks overlayed
(image)
Thus, even if the CA had found that "[TKC] had authorized KPII to adopt and use [its] mark "KOLIN" in the Philippines
and to register the mark in connection with its business dealings,"[109] the only consequence of TKC's authorization is
that KPII was given the right to use the exact mark allowed to be registered in the Taiwan Kolin case, not a blanket
authority to use-or register, for that matter - any and all figurative or stylized versions of the word "KOLIN". The Court
adopts Senior Associate Justice Perlas-Bernabe's insightful disquisition on this point, viz.:
x x x [I]t should be discerned that the CA's application of res judicata in the concept of conclusiveness of judgment
failed to take into account the nature of TKC's KOLIN mark as a mere design mark, which attribution should
consequently limit the legal effects of the [Taiwan Kolin case's] final judgment. x x x TKC having been adjudged as
the owner of a mere design mark - could have only assigned to KPII the right to adopt and use its mark under the
specific stylization and design of KOLIN. x x x[110]
Consequently, the principle of conclusiveness of judgment cannot apply here because the issue involving KPII's use
of another figurative or stylized version of "KOLIN" ("kolin") - or the use of any other figurative or stylized versions of
the word "KOLIN" - was not ruled upon in the Taiwan Kolin case.

In light of the foregoing, the Court must therefore determine whether KPII deserves to register its trademark
application for kolin, a stylized version of the word "KOLIN", despite KECI's opposition.

II.

KPII'S TRADEMARK APPLICATION IS NOT REGISTRABLE BECAUSE IT WILL CAUSE DAMAGE TO KECI

In its Petition,[111] KECI squarely raises the issue of likelihood of confusion, arguing that KPII's trademark should not
be registered based on, among others, Section 123.1(d) of the IP Code, which reads:
SECTION 123. Registrability. - 123.1. A mark cannot be registered if it:

xxxx

(d) Is identical with a registered mark belonging to a different proprietor or a mark with an
earlier filing or priority date, in respect of:

(i) The same goods or services, or

(ii) Closely related goods or services, or

(iii) If it nearly resembles such a mark as to be likely to deceive or cause confusion;

xxxx
In determining likelihood of confusion - which can manifest in the form of "confusion of goods" and/or "confusion of
business"[112] - several factors may be taken into account, such as:

a) the strength of plaintiffs mark;

b) the degree of similarity between the plaintiffs and the defendant's marks;

c) the proximity of the products or services;

d) the likelihood that the plaintiff will bridge the gap;

e) evidence of actual confusion;

f) the defendant's good faith in adopting the mark;

g) the quality of defendant's product or service; and/or

h) the sophistication of the buyers.[113]

These criteria may be collectively referred to as the multifactor test. Out of these criteria, there are two which are
uniformly deemed significant under the Trademark Law[114] and the IP Code:[115] the resemblance of marks (the degree
of similarity between the plaintiffs and the defendant's marks) and the relatedness of goods or services (the proximity
of products or services). Nevertheless, the other factors also contribute to the finding of likelihood of confusion, as will
be discussed.

A. Resemblance of marks

The marks involved in this dispute are KECI's KOLIN and KPII's kolin. In assessing the resemblance of marks to
determine the existence of likelihood of confusion, there are two tests prescribed by jurisprudence, viz.:
Jurisprudence has developed two tests in determining similarity and likelihood of confusion in trademark
resemblance:
(a) the Dominancy Test applied in Asia Brewery, Inc. vs. Court of Appeals and other cases, and

(b) the Holistic or Totality Test used in Del Monte Corporation vs. Court of Appeals and its preceding cases.
The Dominancy Test focuses on the similarity of the prevalent features of the competing trademarks which might
cause confusion or deception, and thus infringement. If the competing trademark contains the main, essential or
dominant features of another, and confusion or deception is likely to result, infringement takes place. Duplication or
imitation is not necessary; nor is it necessary that the infringing label should suggest an effort to imitate. The question
is whether the use of the marks involved is likely to cause confusion or mistake in the mind of the public or deceive
purchasers.

On the other hand, the Holistic Test requires that the entirety of the marks in question be considered in resolving
confusing similarity. Comparison of words is not the only determining factor. The trademarks in their entirety as they
appear in their respective labels or hang tags must also be considered in relation to the goods to which they are
attached. The discerning eye of the observer must focus not only on the predominant words but also on the other
features appearing in both labels in order that he may draw his conclusion whether one is confusingly similar to the
other.[116] (Emphasis supplied)
Unfortunately, jurisprudence has not been consistent in saying what test should be used under what circumstances
such that either or both tests may viably be employed by the IPO or the courts in finding resemblance between
marks. As expertly outlined by Associate Justice Marvic M.V.F. Leonen, there are contradictory lines of jurisprudence
advocating the use of the Dominancy Test alone,[117] the Holistic Test alone,[118] or both tests.[119] There is also at least
one case where the Court did not use either test.[120]

Needless to say, the current state of jurisprudence in deciding the resemblance of marks is unclear. Out of the two
tests, however, only the Dominancy Test has been incorporated in the IP Code. This was discussed in McDonald's
Corporation v. L.C. Big Mak Burger, Inc.,[121] where the Court also observed its own reliance on the dominancy test,
thus:
This Court, however, has relied on the dominancy test rather than the holistic test. The dominancy test
considers the dominant features in the competing marks in determining whether they are confusingly similar. Under
the dominancy test, courts give greater weight to the similarity of the appearance of the product arising from
the adoption of the dominant features of the registered mark, disregarding minor differences. Courts will
consider more the aural and visual impressions created by the marks in the public mind, giving little weight
to factors like prices, quality, sales outlets and market segments.

xxxx

The test of dominancy is now explicitly incorporated into law in Section 155.1 of the Intellectual Property
Code which defines infringement as the "colorable imitation of a registered mark x x x or a dominant feature
thereof."[122] (Emphasis supplied; italics omitted)
More than an indicator of a mere preference for the Dominancy Test, it appears that the legislative intent in explicitly
adopting the Dominancy Test was to abandon the Holistic Test altogether, as can be seen in the legislative
deliberations:
Trademarks

Part III of the Code is the new law on trademarks.

xxxx

To resolve the conflicting doctrines regarding what constitutes colorable imitation of a registered mark, the
Code adopts the Dominancy Test so that any person who uses in commerce any colorable imitation of [a]
registered mark or a dominant feature thereof shall be liable for damages for infringement.

xxxx

Policy Issues

We have summarized the basic features of the proposed Intellectual Property Code. Let me now try to identify
provisions of the Code that may be the focus of policy debates.

Without being exclusive, they are the following:

xxxx

Trademarks

xxxx

8. The committee notes the varying decisions of the Supreme Court regarding colorable imitation of a registered
mark. There are decisions which espouse the Dominancy Test, while there are others which use the Holistic
Test. We, therefore, recommend the adoption of the Dominancy Test to resolve once and for all the debate.
[123]
(Emphasis supplied)
Considering the adoption of the Dominancy Test and the abandonment of the Holistic Test, as confirmed by the
provisions of the IP Code and the legislative deliberations, the Court hereby makes it crystal clear that the use of
the Holistic Test in determining the resemblance of marks has been abandoned.

The inapplicability of the Taiwan Kolin case in the case at bar is thus evident. As correctly pointed out by Associate
Justice Leonen,[124] the Taiwan Kolin case used the Holistic Test in evaluating trademark resemblance. This is
improper precedent because the Dominancy Test is what is prescribed under the law.

Using the Dominancy Test, the Court should now determine the resemblance between KOLIN and kolin in terms
of the similarity of the dominant features used. This is consistent with the basic rule in determining resemblance of
marks, which requires that the appearance, sound, meaning, and overall impressions generated by the marks shall
be considered.[125]

In Societe Des Produits Nestle, S.A. v. Dy, Jr.,[126] the Court stated that the marks are confusingly similar based on
the Dominancy Test because the mark "NANNY" "contains the prevalent feature 'NAN'" and because the marks are
aurally similar, thus:
Applying the dominancy test in the present case, the Court finds that "NANNY" is confusingly similar to "NAN." "NAN"
is the prevalent feature of Nestle's line of infant powdered milk products. It is written in bold letters and used in all
products. The line consists of PRE-NAN, NANH.A., NAN-1, and NAN-2. Clearly, "NANNY" contains the prevalent
feature "NAN." The first three letters of "NANNY" are exactly the same as the letters of "NAN." When "NAN"
and "NANNY" are pronounced, the aural effect is confusingly similar.[127] (Emphasis supplied)
Applying the Dominancy Test here, KPII's kolin mark resembles KECI's KOLIN mark because the word "KOLIN"
is the prevalent feature of both marks. Phonetically or aurally, the marks are exactly the same. Surely, the manner of
pronouncing the word "KOLIN" does not change just because KPII's mark is in lowercase and contains an italicized
orange letter "i". In terms of connotation and overall impression, there seems to be no difference between the two
marks.
Another consideration is the type of marks used. Logically, this may affect the determination of resemblance of the
marks in terms of their visual, aural, or connotative aspects, which are key areas to consider in using the Dominancy
Test.

As summarized in the IPO website,[128] the types of marks allowed to be registered in the Philippines are the following:
"word mark," "figurative mark," "figurative mark with words," "3D mark," and "stamped or marked containers of
goods." Notably, the IP Code and the current Trademark Regulations do not define these terms and how they impact
the finding of resemblance between marks. However, IPOPHL Memorandum Circular No. 17-010, Rules and
Regulations on Trademarks, Service Marks, Trade names and Marked or Stamped Containers makes an explicit
reference to "word marks," as follows:
RULE 402. Reproduction of the Mark. - x x x

In the case of word marks or if no special characteristics have to be shown, such as design, style of lettering, color,
diacritical marks, or unusual forms of punctuation, the mark must be represented in standard characters. The
specification of the mark to be reproduced will be indicated in the application form and/or published on the website.

xxxx
That word marks protect the word itself stands to reason. Since there are no special characteristics to be shown in
the reproduction of the mark in the application, the word itself is the subject of protection. This understanding of the
protection given to word marks is also consistent with trademark jurisprudence in the United States, where most of
our intellectual property laws were patterned from.[129]

The case of Cunningham v. Laser Golf Corp.[130] (Cunningham) may be considered relevant in this jurisdiction.
In Cunningham, Laser Golf, the prior user and registrant of the "LASER" mark for golf clubs and golf balls, filed a
cancellation case against Cunningham's registration for "LASERSWING" for golf clubs. Since Cunningham's
"LASERSWING" registration was cancelled, he sought before the court a review of the decision cancelling his
registration. One of Cunningham's arguments was that the appearance of his mark in commerce is distinguishable
from the mark of Laser Golf in the sense that he uses "particular colors and a particular font", "specific arrangements
of lower and upper case", "colored whoosh stripes", and a "juxtaposition of the main brand name". In ruling that this
was not enough to avoid confusion, the U.S. court pertinently stated:
However, Cunningham's argument is inapposite to our review of this cancellation proceeding. The record shows
that the registration for the LASERSWING mark contains a "typed drawing." ...Registrations with typed
drawings are not limited to any particular rendition of the mark and, in particular, are not limited to the mark
as it is used in commerce. See Vornado, Inc. v. Breuer Elec. Mfg. Co., C.C.P.A. 858, 390 F.2d 724, 727, 156
USPQ 340, 342 (1968) (stating that because the registration for the senior mark, upon which the opposition was
based, disclosed only the word, "the [advertising] display of the mark in a particular style is of no material
significance since the display may be changed at any time as may be dictated by the fancy of the applicant
or the owner of the mark"); Phillips Petroleum Co. v. C.J. Webb, Inc., 58 C.C.P.A. 1255, 442 F.2d 1376, 1378, 170
USPQ 35, 36 (1971) ("The drawing in the [opposed] application shows the mark typed in capital letters, and x
x x this means that [the] application is not limited to the mark depicted in any special form."); Kimberly-Clark
Corp. v. H Douglas Enters., Ltd., 774 F.2d 1144, 1147, 227 USPQ 541, 543 (Fed.Cir.1985) (stating that trade dress
associated with the mark of the opposed registration was irrelevant in distinguishing the mark because "such dress
might well be changed at any time; only the word mark itself is to be registered"). Therefore, it is irrelevant
that Cunningham has a particular display for his mark in commerce, and the Board was correct to ignore
those features.[131] (Emphasis and underscoring ours)
Using the persuasive logic in Cunningham together with the Dominancy Test, there is no doubt that the minor
differences between kolin and KOLIN mark should be completely disregarded. The fact that KPII's trademark
application possesses special characteristics (e.g., the italicized orange letter "i") not present in
KECI's KOLIN word mark makes no difference in terms of appearance, sound, connotation, or overall impression
because the "KOLIN" word itself is the subject of KECI's registration.

B. Relatedness of Goods/Services

The goods involved in the case at bar are as follows:

KECI's KOLIN KPII's kolin

Automatic Voltage Regulator, Converter, Televisions, DVD Players
Recharger, Stereo Booster, AC-DC Regulated
Power Supply, Step-Down Transformer, PA
 Amplified AC-DC.
In assessing relatedness of goods/services to determine likelihood of confusion, Mighty Corporation provides a list of
factors that should be considered, viz.:
Non-competing goods may be those which, though they are not in actual competition, are so related to each other
that it can reasonably be assumed that they originate from one manufacturer, in which case, confusion of business
can arise out of the use of similar marks. They may also be those which, being entirely unrelated, cannot be assumed
to have a common source; hence, there is no confusion of business, even though similar marks are used. Thus, there
is no trademark infringement if the public does not expect the plaintiff to make or sell the same class of goods as
those made or sold by the defendant.

In resolving whether goods are related, several factors come into play:

(a) the business (and its location) to which the goods belong

(b) the class of product to which the goods belong

(c) the product's quality, quantity, or size, including the nature of the package, wrapper or
container

(d) the nature and cost of the articles

(e) the descriptive properties, physical attributes or essential characteristics with reference to
their form, composition, texture or quality

(f) the purpose of the goods

(g) whether the article is bought for immediate consumption, that is, day-to-day household
items

(h) the fields of manufacture

(i) the conditions under which the article is usually purchased and

j) the channels of trade through which the goods flow, how they are distributed, marketed,
displayed and sold.
The wisdom of this approach is its recognition that each trademark infringement case presents its own unique set of
facts. No single factor is preeminent, nor can the presence or absence of one determine, without analysis of the
others, the outcome of an infringement suit. Rather, the court is required to sift the evidence relevant to each of the
criteria. This requires that the entire panoply of elements constituting the relevant factual landscape be
comprehensively examined. It is a weighing and balancing process. With reference to this ultimate question, and
from a balancing of the determinations reached on all of the factors, a conclusion is reached whether the parties have
a right to the relief sought.[132] (Emphasis supplied)
Indeed, a comprehensive examination of all these factors is needed to ensure that pronouncements on legal
relatedness are not based on skewed factual premises, especially since relatedness of goods/services significantly
impacts the finding of likelihood of confusion as mentioned above.

Too, because of the importance of relatedness of goods/services in deciding controversies involving the issue of
likelihood of confusion of marks, the Court en banc takes a closer look at one factor inconsistent with our laws and
creates problems with making precedents on legal relatedness.

As astutely explained by Chief Justice Diosdado M. Peralta,[133] the NCL serves purely administrative purposes -
merely a way for trademark offices worldwide to organize the thousands of applications that are filed - and the
classification of products/services should not have been included as one of the factors in determining relatedness
because there was no legal basis for its inclusion. In fact, it even contradicts specific provisions of the Trademark
Law[134] and the IP Code.[135] The use of classification of products/services in determining relatedness also conflicts
with a provision of the 2020 Revised Rules of Procedure for Intellectual Property Rights Cases,[136] viz.:
SECTION 6. Likelihood of Confusion; Determination of Related Goods or Services. - Goods or services may not be
considered as being similar or dissimilar to each other on the ground that, in any registration or publication by the
Office, they appear in the same or different classes of the Nice Classification.
Allowing this factor to remain as a criterion in determining legal relatedness would not be merely inconsequential. In
fact, it may even create problems in jurisprudential precedents on legal relatedness due to the principle of stare
decisis.

The Classes in the NCL undergo several changes each year. To illustrate, the Alphabetical List of Goods in Class 9
underwent several changes in 2017,[137] 2018,[138] 2019,[139] and 2020.[140] Significantly, "socks, electrically heated" was
changed from being a Class 9 product to a Class 11 product in 2017, showing that the classification of the specific
goods per class is still subject to change. Surely, jurisprudential pronouncements regarding the nature of certain
goods/services and their legal relatedness/non relatedness to each other-which pronouncements would, in turn,
effectively affect substantive rights over marks and affect future cases involving the same goods or services-should
not be made to depend on a constantly changing list.

Considering the foregoing discussion, the Court hereby abandons the use of product or service classification as
a factor in determining relatedness or non-relatedness.

In this light, the inapplicability of the Taiwan Kolin case as precedent in the instant controversy becomes all the more
apparent because it did not comprehensively consider all the jurisprudential factors in determining relatedness and it
included an inapposite discussion on subcategories in the NCL as an additional rationale for its conclusion on non-
relatedness.

Based on the evidence on record and reasonable inferences in accord with common experience, the factors to
determine relatedness in Mighty Corporation yields the conclusion that the goods covered
by KOLIN and kolin are related, as seen in the following table:
(d) the nature and cost of the articles Goods covered by KOLIN and kolin are
electronic m nature, relatively expensive, and
rarely bought. It will likely take several years
before consumers would make repeat purchases
of the goods involved.
(e) the descriptive properties, physical Considering that they are electronic goods,
attributes or essential characteristics with goods covered by KOLIN and kolin are likely
reference to their form, composition, texture made of metal. It is also likely that such goods
or quality cannot be easily carried around and are usually
brought back to the consumer's place after
being bought.
(f) the purpose of the goods The audiovisual goods covered
by kolin (Television and DVD players)
and KOLIN (stereo booster) marks can be

(g) whether the article is bought for
immediate consumption, that is, day-to-day
household items
(i) the conditions under which the article is
usually purchased, and
(j) the channels of trade through which the
goods flow, how they are distributed,
marketed, displayed and sold.
Clearly, the goods covered by KOLIN and kolin are related, and this legal relatedness significantly impacts a
finding of likelihood of confusion.
used for entertainment purposes.
Goods covered by KOLIN and kolin are not
bought for immediate consumption.
Because they are relatively expensive and they
last for a long time, goods covered
by KOLIN and kolin are rarely bought. They
are non-essential goods.
The goods covered
by KOLIN and kolin marks will likely be
offered in "the same channels of trade such as
department stores or appliance stores".[141]

In addition to the factors in Mighty Corporation, another ground for finding relatedness of goods/services is their
complementarity.

The reasoning used in the case of Hewlett-Packard Development Company, L.P. v. Vudu, Inc.[142] is also logical and
persuasive. In said case, the opposer Hewlett-Packard registered its "VOODOO" mark for, inter alia, "personal and
gaming computers" under Class 9. Meanwhile, Vudu, Inc. sought to register its "VUDU" mark for, inter alia, "computer
software for use in computers for the transmission, storage and playback of audio and video content" also under
Class 9. The tribunal therein pointed out that "the goods of the parties may be used together for the same purposes,
may be found in the same channels of trade, and may appeal to the same purchasers. x x x [B]y their descriptions,
[VUDU's] particular type of software for computers and [Hewlett-Packard's] personal and gaming computers
are complementary goods", thus, it granted Hewlett-Packard's opposition of the "VUDU" mark based on the finding
that the goods under Class 9 covered by the marks are related and confusion is likely.[143]

Applying this reasoning to the herein dispute, it is clear that the goods covered by KECI's KOLIN are
complementary to the goods covered by KPII's kolin and could thus be considered as related. This increases the
likelihood that consumers will at least think that the goods come from the same source. In other words, confusion of
business will likely arise.

C. Actual Confusion

The IPO-BLA stated that there is already actual confusion among consumers regarding the goods of KECI and KPII:
More so, [KECPs] evidence consisting of various e-mails x x x it received from public consumers reflecting their
complaints, concerns, and other information about [KPII's] goods as televisions, air-conditioning units and DVD
players, are obvious showing of actual confusion of goods as well as confusion as to origin or source [of] goods.
These reveal factual confusion of the buying public between the marks in controversy.[144]
The presence of actual confusion is not an insignificant circumstance. Indeed, the evidence of actual confusion is
often considered the most persuasive evidence of likelihood of confusion because past confusion is frequently a
strong indicator of future confusion.[145]

It is the Court's considered view that evidence of actual confusion should be considered as strong evidence of
likelihood of confusion, especially when there are concurrent findings of resemblance of marks and/or relatedness of
the goods/services. If "likelihood of confusion" is already abhorred by the infringement provisions[146] of the law and
the evidence of likelihood of confusion already creates basis to prevent another's use of its mark, it should logically
follow that actual confusion should be given more weight because confusion among consumers is not only
speculated but has actually transpired.

Parenthetically, the presence of this criterion in ascertaining the existence of likelihood of confusion in the multifactor
test is yet another reason why the Taiwan Kolin case should not be held as a binding precedent here. In the Taiwan
Kolin case, while there was evidence of actual confusion presented in the IPO-BLA,[147] this was ultimately not
considered in resolving the issue of likelihood of confusion.
D. Normal Potential Expansion of Business

The factor involving the "likelihood that the plaintiff will bridge the gap" pertains to the possibility that the plaintiff will
expand its product offerings to cover the product areas of the defendant.[148]

In the case of Dermaline, Inc. v. Myra Pharmaceuticals, Inc.,[149] the Court already acknowledged "that the registered
trademark owner enjoys protection in product and market areas that are the normal potential expansion of his
business."[150] As well, Societe Des Produits Nestle, S.A. v. Dy, Jr.[151] describes the scope of protection given to
registrants as follows:
The scope of protection afforded to registered trademark owners is not limited to protection from infringers
with identical goods. The scope of protection extends to protection from infringers with related goods, and
to market areas that are the normal expansion of business of the registered trademark owners. x x
x[152] (Emphasis supplied)
As stated above, the goods covered by KOLIN and kolin are related. Therefore, it is likely that the goods covered
by kolin falls within the normal potential expansion of business of KECI.

E. Sophistication of the buyers

As stated in Philip Morris, Inc. v. Fortune Tobacco Corporation,[153] "the general impression of the ordinary
purchaser, buying under the normally prevalent conditions in trade and giving the attention such purchasers
usually give in buying that class of goods, is the touchstone."[154]

The goods covered by KOLIN and kolin are not inexpensive goods and consumers may pay more attention in
buying these goods. However, this does not eliminate the possibility of confusion, especially since most consumers
likely do not frequently purchase Automatic Voltage Regulators, stereo boosters, TV sets, DVD players, etc. Unless
they have jobs or hobbies that allow them to frequently purchase these electronic products, it is not farfetched to
suppose that they may only encounter the marks in the marketplace itself once they are about to buy said goods
once every five years or so.

Consequently, while consumers may concededly be familiar with these goods to some extent, such familiarity will
likely not be an intimate knowledge thereof associated with the frequent and repeated purchase of said goods.

It is not difficult to imagine that ordinary purchasers looking to buy a home entertainment set for their homes would
likely not know that the "XYZ" - branded stereo boosters and the "XYZ" - branded televisions they encounter in the
store are offered by different companies. If the consumer happens to like the "XYZ" brand for the stereo boosters
after seeing it for the first time, said consumer will most likely associate it with the "XYZ" brand for television set and
vice versa, especially since these goods are complementary to each other.

Even if sophisticated consumers are making a repeat purchase years after they first bought a "KOLIN" product,
confusion is still possible because of the degree of similarity of the subject marks. As mentioned above,
KECI's KOLIN mark is a word mark. Stated simply, the goodwill over the products will likely be associated with
the "KOLIN" word among consumers' minds, regardless of their sophistication. Thus, these consumers who prefer
KECI's products will likely go into stores asking and looking for the "KOLIN" brand, regardless of its stylization or
additional figurative features. If they happen to see KPII's "KOLIN" - branded products, they may not readily know that
the products come from another source and mistakenly purchase those products thinking that these products are
from KECL Any perceived visual differences between KECI's and KPII's "KOLIN" mark will likely be disregarded,
especially considering that it is not unusual for companies to rebrand and overhaul their "brand image", including their
logos, every so often.

Ultimately, there is no need to speculate and imagine how an average consumer would think and act in this
hypothetical situation because, as discussed, there is actual proof of confusion among consumers between
the KOLIN and kolin goods.[155] It is clear that consumers have actually associated KPII's "KOLIN" -
branded products with KECI's business. To be sure, that consumers have complained about KPII's products and
associated the quality of such products with KECI's business shows that the concurrent use of "KOLIN" by KPII had
already unfairly smeared KECI's goodwill and reputation over its products.

F. Strength of the Mark

The factor on "strength of plaintiffs mark" pertains to the degree of distinctiveness of marks,[156] which can be divided
into five categories[157] enumerated in decreasing order of strength below:
1) Coined or fanciful marks - invented words or signs that have no real meaning (e.g., Google,
Kodak). These marks are the strongest and have the greatest chance of being registered.

2) Arbitrary marks[158] - words that have a meaning but have no logical relation to a product
(e.g., SUNNY as a mark covering mobile phones, APPLE in relation to computers/phones).

3) Suggestive marks[159] - marks that hint at the nature, quality or attributes of the product,
without describing these attributes (e.g., SUNNY for lamps, which would hint that the
product will bring light to homes). If not considered as bordering on descriptive, this may be
allowed.

4) Descriptive marks[160] - describe the feature of the product such as quality, type, efficacy,
use, shape, etc. The registration of descriptive marks is generally not allowed under the IP
Code.[161]

5) Generic marks[162] - words or signs that name the species or object to which they apply (e.g.,
CHAIR in relation to chairs). They are not eligible for protection as marks under the IP
Code.[163]

KECI's KOLIN mark is a fanciful or coined mark. Considering that it is highly distinctive, confusion would be likely
if someone else were to be allowed to concurrently use such mark in commerce.

G. Bad Faith

The discussion of bad faith in the case of Zuneca Pharmaceutical v. Natrapharm, Inc.[164] is instructive:
The concepts of bad faith and fraud were defined in MustangBekleidungswerke GmbH + Co. KG v. Hung Chiu Ming,
a case decided by the Office of the Director General of the IPO under the Trademark Law, as amended, viz.:
What constitutes fraud or bad faith in trademark registration? Bad faith means that the applicant or registrant has
knowledge of prior creation, use and/or registration by another of an identical or similar trademark. In other words, it
is copying and using somebody else's trademark. Fraud, on the other hand, may be committed by making false
claims in connection with the trademark application and registration, particularly on the issues of origin, ownership,
and use of the trademark in question among other things.
The concept of 'fraud contemplated above is not a mere inaccurate claim as to the origin, ownership, and use of the
trademark. In civil law, the concept of fraud has been defined as the deliberate intention to cause damage or
prejudice. The same principle applies in the context of trademark registrations: fraud is intentionally making false
claims to take advantage of another's goodwill thereby causing damage or prejudice to another. Indeed, the
concepts of bad faith and fraud go hand-in-hand in this context. There is no distinction between the concepts of bad
faith and fraud in trademark registrations because the existence of one necessarily presupposes the existence of the
other.[165] (Emphasis supplied)
To recall, the KECI ownership case, promulgated on July 31, 2006, ruled that KECI is the owner of
the KOLIN mark under the Trademark Law, despite TKC's opposition that confusion is likely because it had
foreign registrations for "KOLIN" and a local trademark application for KOLIN. Thereafter, KPII (TKC's affiliate)
filed a trademark application for kolin covering the same goods.

While KECI had squarely alleged the issue of KPII's bad faith,[166] there was no explicit finding of bad faith on the part
of KPII in the decisions of the IPO-BLA, IPO-DG, and the CA. After an examination of the records, however, the Court
finds that circumstances in this case would lead a reasonable mind to conclude that KPII knew about
KECI's KOLIN registration when it made a trademark application for kolin.

First, there was a factual finding by the IPO-BLA that KPII is an instrumentality of TKC and TKC directly participates
in the management, supervision, and control of KPII, viz:
An exhaustive scrutiny of the records of the case convince[s] this Bureau to concur with the position of [KECI] that
indeed, [KPII] is an instrumentality of [TKC]. [KECI] presented substantial evidence that [KPII] is effectively under the
management, supervision and control of [TKC] manifested through the assignment of five (5) persons to the financial
and plant operations x x x; [TKC's] admission of its direct participation in the management, supervision and
control of [KPII] x x x; [TKC's] majority ownership of stocks in [KPII] x x x; and the maintenance of one website of
both companies and the admission to the same x x x.[167] (Emphasis supplied)
Second, as found by the CA,[168] KPII was authorized by TKC to use the "KOLIN" mark.

Third, KPII filed a trademark application for kolin barely two months after KECI was declared as the owner of
the KOLIN mark.

Fourth, KECI and KPII may be considered as being in the same line of business and it would have been highly
improbable that KPII did not know an existing KOLIN mark owned by KECI, especially since it is an affiliate of
TKC. Notably, in the case of Birkenstock Orthopaedie GmbH and Co. KG v. Phil. Shoe Expo Marketing Corp.,[169] the
Court agreed with the IPO's finding that the party was in bad faith because it was in the same line of business and it
was highly improbable for it to not know of the existence of BIRKENSTOCK before it appropriated and registered this
"highly distinct" mark.[170]

Thus, there exists relevant evidence and factual findings that a reasonable mind might accept as adequate to support
the conclusion that KPII was in bad faith.

To summarize the above discussion: (1) there is resemblance between KECI's KOLIN and KPII's kolin marks; (2)
the goods covered by KECI's KOLIN are related to the goods covered by KPII's kolin; (3) there is evidence of
actual confusion between the two marks; (4) the goods covered by KPII's kolin fall within the normal potential
expansion of business of KECI; (5) sophistication of buyers is not enough to eliminate confusion; (6) KPII's adoption
of KECI's coined and fanciful mark would greatly contribute to likelihood of confusion; and (7) KPII applied for kolin in
bad faith. Thus, KPII's application for kolin should be denied because it would cause likelihood of confusion and
KECI's rights would be damaged.

***

It must also be stressed that KECI was already declared as the owner of the KOLIN mark under the Trademark
Law. Section 236[171] of the IP Code states that nothing in the IP Code - which, as mentioned, logically includes
registrations made pursuant thereto - shall adversely affect the rights of the enforcement of marks acquired in good
faith prior to the effective date of said law.

As seen above, the existence of likelihood of confusion is already considered as damage that would be sufficient to
sustain the opposition and rejection of KPII's trademark application. More than that, however, the Court is likewise
cognizant that, by granting this registration, KPII would acquire exclusive rights over the stylized version of KOLIN
("kolin") for a range of goods/services,[172] i.e., covered goods, related goods/services, goods/services falling within
the normal potential expansion of KPII's business. Owing to the peculiar circumstances of this case, this will
effectively amount to a curtailment of KECI's right to freely use and enforce the KOLIN word mark, or any stylized
version thereof, for its own range of goods/services, especially against KPII, regardless of the existence of actual
confusion. Thus, based on Section 122[173] vis-a-vis Section 236[174] of the IP Code, the Court cannot give due course
to KPII's trademark application for "kolin".

WHEREFORE, premises considered, the instant Petition is GRANTED. The assailed Decision dated April 29, 2016
and Resolution dated November 4, 2016 of the Court of Appeals in CA-G.R. SP No. 131917
are REVERSED and SET ASIDE. Accordingly, the Decision of the Office of the Director General of the Intellectual
Property Office in IPC No. 14-2007-00167 is REINSTATED and AFFIRMED.

Consequently, the Trademark Application Serial No. 4-2006-010021 for kolin filed by respondent Kolin Philippines
International, Inc. under Class 9 for "Television and DVD players" is REJECTED.

SO ORDERED.

Peralta, C. J., Gesmundo, Hernando, Carandang, Lazaro-Javier, Inting, Zalameda, Delos Santos, Gaerlan, Rosario,
and J. Lopez, JJ., concur.
Perlas-Bernabe, J., Please see separate concurring opinion.
Leonen, J., I concur. See separate opinion.
M. Lopez, J., Please see separate opinion.

G.R. No. 219744, March 01, 2021 ]

LEVI STRAUSS & CO., PETITIONER, VS. ANTONIO SEVILLA AND ANTONIO L. GUEVARRA,
RESPONDENTS.

DECISION

PERLAS-BERNABE, J.:

Assailed in the instant petition for review on certiorari1 are the Decision2 dated September 26, 2014
and the Resolution3 dated July 28, 2015 of the Court of Appeals (CA) in CA-G.R. SP No. 126316,
which dismissed the petition for review4 filed by petitioner Levi Strauss & Co. (petitioner) before it on
the grounds of mootness and res judicata; and essentially, affirmed the Decision5 dated January 29,
2009 of the Intellectual Property Office (IPO) Bureau of Legal Affairs (IPO-BLA) and the
Decision6 dated August 13, 2012 of the IPO Director General (IPO-DG) dismissing petitioner's
Petition for Cancellation7 of the trademark LIVE'S with Registration No. 53918 under the names of
respondents Antonio Sevilla (Sevilla) and Antonio L. Guevarra (Guevarra; collectively, respondents).

The Facts

Petitioner, a foreign corporation, is the owner of the word mark "LEVI'S" since 1946, and has
extensively and continuously used the same on goods covered by Class 25 of the Nice Classification
(NCL). In 1972, petitioner granted Levi Strauss Phils., Inc. (LSPI) a non-exclusive license to use its
registered trademarks for the manufacture and sale of said goods in the Philippines. On the other
hand, Sevilla was the original registrant of the mark LIVE'S also covering goods under Class 25 of
the NCL. Later on, Sevilla assigned his rights over the LIVE'S mark to Guevarra a.k.a. Tony Lim,
doing business under the name and style Vogue Traders Clothing Company.8

In 1995, LSPI commissioned a consumer survey codenamed "Project Cherokee 5" in order to
determine if the general public had mistook marks used by other entities (such as respondents'
LIVE'S mark) for that of petitioner's marks. The Final Report on Project Cherokee 59 confirmed that
the public indeed strongly identified petitioner's "LEVI'S" mark with that of respondents' LIVE'S mark,
further revealing that 86% of the survey participants associated the "LIVE'S" mark with "LEVI'S;" and
90% of said survey participants read the stylized "LIVE'S" mark, i.e., LIVE'S , as "LEVI'S."10

Thus, on December 13, 1995, petitioner filed before the then-Bureau of Patents, Trademarks, and
Technology Transfer (BPTTT, now the IPO) a Petition for Cancellation11 of the trademark LIVE'S
with Registration No. 53918 under the names of respondents, essentially on the ground that LIVE'S
is confusingly similar with petitioner's "LEVI'S" mark.12

In his Answer, Guevarra rejected the idea that its LIVE'S mark is confusingly similar with petitioner's
"LEVI'S" mark, claiming that the probability of confusion arising from the alleged similarity of the two
(2) marks is negligible due to the attention given by the purchasers to the goods they are
purchasing; and besides, there are sufficient differences in the price, hand tags, and other markings
of the products.13 For his part, Sevilla maintained that: (a) the two (2) marks are sufficiently
distinguishable from each other because of the differences in spelling and pronunciation, and
because the target market of the products are mature and educated purchasers who closely
scrutinize the products; (b) the presentation and trade dress of products covered by the two (2)
marks are different, and the fact that the BPTTT approved the registration of the LIVE'S mark
despite the existence of petitioner's "LEVI'S" mark proves that there was no colorable imitation; and
(c) the LIVE'S mark had long been in use before petitioner challenged the same, thus, respondents'
rights over the LIVE'S mark had already been vested on them.14

The IPO-BLA Ruling

In a Decision15 dated January 29, 2009, the IPO-BLA denied the petition for cancellation, and
consequently' declared respondents' LIVE'S mark to be valid and subsisting.16

The IPO-BLA found that there was no confusing similarity between petitioner's "LEVI'S" mark and
respondents' LIVE'S mark because they have different pronunciations, spellings, meanings, designs,
prices, and trade channels. The IPO-BLA also took note of the case of Levi Strauss (Phils.) Inc. v.
Lim (G.R. No. 162311),17 wherein the Court purportedly held that there is no likelihood of confusion
between the aforementioned marks, notwithstanding the results of Project Cherokee 5.18

Aggrieved, petitioner appealed to the IPO-DG.

The IPO-DG Ruling

In a Decision19 dated August 13, 2012, the IPO-DG upheld the IPO BLA ruling. Mainly citing G.R.
No. 162311, the IPO-DG opined that it could not sustain petitioner's contention that its "LEVI'S" mark
and respondents' LIVE'S mark are confusingly similar with one another.20

Undaunted, petitioner filed a petition for review21 under Rule 43 of the Rules of Court before the CA.

The CA Ruling

In a Decision22 dated September 26, 2014 the CA dismissed the petition. It held that the case has
been rendered moot and academic by the fact that respondents had already assigned their rights
and interests over the LIVE'S mark to a certain Dale Sy on July 31, 2012. Furthermore, the CA also
took note of G.R. No. 162311 which it opined to be res judicata to this case.23

Petitioner moved for reconsideration but the same was denied in a Resolution24 dated July 28,
2015; hence, this petition.25

The Issue Before the Court

The issues before the Court are as follows: (a) whether or not the CA correctly ruled that the case
had already been rendered moot and academic and G.R. No. 162311 is res judicata to this case;
and (b) whether or not the petition for cancellation should be granted on the ground of confusing
similarity between petitioner's "LEVI'S" mark and respondents' LIVE'S mark.

The Court's Ruling

The petition is meritorious.

I.

At the outset, it is well to reiterate that the CA did not resolve the issue of confusing similarity
between petitioner's and respondents' marks. Rather, it dismissed the petition on two (2) grounds,
namely, mootness and res judicata.
The CA erred in this regard.

The case has not been rendered moot and academic.

It is settled that "[a] case or issue is considered moot and academic when it ceases to present a
justiciable controversy by virtue of supervening events, so that an adjudication of the case or a
declaration on the issue would be of no practical value or use. In such instance, there is no actual
substantial relief which a petitioner would be entitled to, and which would be negated by the
dismissal of the petition. Courts generally decline jurisdiction over such case or dismiss it on the
ground of mootness. This is because the judgment will not serve any useful purpose or have any
practical legal effect because, in the nature of things, it cannot be enforced."26

In this case, while a cursory search on the IPO's online trademark database confirms that
Registration No. 53918 for the LIVE'S mark had indeed been assigned to a certain Dale Sy, it is
important to point out that such registration remains valid and subsisting – as in fact, it will only
expire on November 16, 2022.27 Furthermore, it must be noted that the assignment only occurred
on July 31, 2012, or during the pendency of the instant cancellation case filed by petitioner; and
hence, will not affect the resolution thereof. As a transferee pendente lite, Dale Sy will be bound by
the resolution of this case. The Court's ruling in Sunfire Trading, Inc. v. Guy28 is instructive on this
matter, to wit:

As a transferee pendente lite, the Court agrees with the CA that petitioner need not be a party to the
main case. Rule 3, Section 19 of the 1997 Rules of Civil Procedure, provides:

SEC. 19. Transfer of interest. — In case of any transfer of interest, the action may be continued by
or against the original party, unless the court upon motion directs the person to whom the interest is
transferred to be substituted in the action or joined with the original party.

The above provision gives the trial court discretion to allow or disallow the substitution or joinder by
the transferee. Discretion is permitted because, in general, the transferee's interest is deemed by
law as adequately represented and protected by the participation of his transferors in the case.
There may be no need for the transferee pendente lite to be substituted or joined in the case
because, in legal contemplation, he is not really denied protection as his interest is one and the
same as his transferors, who are already parties to the case.

We held that a transferee stands exactly in the shoes of his predecessor-in-interest, bound by the
proceedings and judgment in the case before the rights were assigned to him. It is not legally
tenable for a transferee pendente lite to still intervene. Essentially, the law already considers the
transferee joined or substituted in the pending action, commencing at the exact moment when the
transfer of interest is perfected between the original party-transferor and the transferee pendente
lite.29 (Emphasis and underscoring supplied)

As such, the Court rules that this case has not been rendered moot and academic by the
assignment of Registration No. 53918 for the LIVE'S mark to Dale Sy.

G.R. No. 162311 is not res judicata to the instant case.

Res judicata means 'a matter adjudged; a thing judicially acted upon or decided; a thing or matter
settled by judgment.' It lays the rule that an existing final judgment or decree rendered on the merits,
without fraud or collusion, by a court of competent jurisdiction, upon any matter within its jurisdiction,
is conclusive of the rights of the parties or their privies, in all other actions or suits in the same or any
other judicial tribunal of concurrent jurisdiction on the points and matters in issue in the first
suit.30 Thus, for res judicata to apply – whether the same is in the concept of bar by prior judgment
or by conclusiveness of judgment31 – it is imperative that, inter alia, the disposition of the case must
be a judgment on the merits rendered by a court of competent jurisdiction.32

At this juncture, it is important for the Court to point out that G.R. No. 162311 was not a criminal
case that was decided on the merits by a court of competent jurisdiction. Rather, the case emanated
from mere preliminary investigation proceedings which was elevated to the regular courts on the
issue of whether or not the Department of Justice (DOJ) committed grave abuse of discretion when it
found no probable cause to indict therein respondent for unfair competition. In Imingan v. The Office
of the Honorable Ombudsman,33 the Court reiterated the rule that results of preliminary
investigations cannot rise to the level of final and executory judgments of regular courts; and hence,
are not proper subjects of res judicata, to wit:

Jurisprudence has long settled that preliminary investigation does not form part of trial. Investigation
for the purpose of determining whether an actual charge shall subsequently be filed against the
person subject of the investigation is a purely administrative, rather than a judicial or quasi-judicial,
function. It is not an exercise in adjudication: no ruling is made on the rights and obligations of the
⚖ - ℒαɯρhi ৷

parties, but merely evidentiary appraisal to determine if it is worth going into actual adjudication.

The dismissal of a complaint on preliminary investigation by a prosecutor "cannot be considered a

valid and final judgment." As there is no former final judgment or order on the merits rendered by the
court having jurisdiction over both the subject matter and the parties, there could not have been res
judicata x x x.34 (Emphases and underscoring supplied).

Furthermore, in Encinas v. Agustin, Jr.,35 the Court further expounded that res judicata applies only
to judicial or quasi-judicial proceedings. In this regard, while there is case law stating that a
prosecutor conducting a preliminary investigation performs a quasi-judicial function,36 the Court, in
Bautista v. CA,37 clarified that "this statement holds true only in the sense that, like quasi-judicial
bodies, the prosecutor is an office in the executive department exercising powers akin to those of a
court;"38 and the similarity ends there. It further expounded that unlike proceedings in quasi-judicial
agencies whose awards determine the rights of the parties, and hence, their decisions have the
same effect as judgments of a court, a preliminary investigation, which is merely inquisitorial, does
not determine the guilt or innocence of the accused. It is not a trial on the merits and its purpose is
only to determine whether a crime has been committed and whether there is probable cause to
believe that the accused is guilty thereof. While it is the prosecutor that makes such determination,
he cannot be said to be exercising a quasi-judicial function, as it is the courts that ultimately pass
judgment on the accused.39 In Manila Electric Company v. Atilano,40 the Court further delineated
the differences between a quasi-judicial proceeding and a preliminary investigation, to wit:

A quasi-judicial agency performs adjudicatory functions when its awards determine the rights of
parties, and its decisions have the same effect as a judgment of a court. "[This] is not the case when
a public prosecutor conducts a preliminary investigation to determine probable cause to file an
information against a person charged with a criminal offense, or when the Secretary of Justice
[reviews] the former's order[s] or resolutions" on determination of probable cause.

In Odchigue-Bondoc [v. Tan Tiong Bio], we ruled that when the public prosecutor conducts
preliminary investigation, he thereby exercises investigative or inquisitorial powers. Investigative or
inquisitorial powers include the powers of an administrative body to inspect the records and
premises, and investigate the activities of persons or entities coming under his jurisdiction, or to
secure, or to require the disclosure of information by means of accounts, records, reports,
statements, testimony of witnesses, and production of documents. This power is distinguished from
judicial adjudication which signifies the exercise of power and authority to adjudicate upon the rights
and obligations of concerned parties. Indeed, it is the exercise of investigatory powers which sets a
public prosecutor apart from the court.

The public prosecutor exercises investigative powers in the conduct of preliminary investigation to
determine whether, based on the evidence presented to him, he should take further action by filing a
criminal complaint in court. In doing so, he does not adjudicate upon the rights, obligations or
liabilities of the parties before him. Since the power exercised by the public prosecutor in this
instance is merely investigative or inquisitorial, it is subject to a different standard in terms of stating
the facts and the law in its determinations. x x x41 (Emphases and underscoring supplied)

In this case, while the Court in G.R. No. 162311 may have indeed included statements which appear
to have resolved the issue of confusing similarity between the "LEVI'S" and LIVE'S marks, it must
nevertheless be pointed out that such statements were only made relative to the findings of the DOJ
which led to the dismissal of the criminal complaint therein – which, at that point, were only
preliminary and not supposed to be treated as a judgment on the merits. In fact, it is settled that a
prosecutor's dismissal of a criminal complaint during preliminary investigation does not give rise
to res judicata vis-à-vis subsequent civil and quasi-judicial proceedings, neither does it engender
double jeopardy should the alleged perpetrator's criminal liability still be subsequently pursued.42 To
the Court, the same rule applies even if the propriety of the dismissal of the criminal complaint is
elevated, and thereafter, upheld by the Court, as in G.R. No. 162311.

Moreover, it is well to point out that in G.R. No. 162311, the Court avoided nullifying the executive
determination of probable cause because the DOJ 's finding – particularly, that there was insufficient
evidence to prove all the elements of the crime of unfair competition – was not made with grave
abuse of discretion. Significantly, while the Court noted that the DOJ might have committed an error
in the exercise of its discretion in determining that there is insufficient evidence to support the finding
of probable cause against respondent therein, the same did not amount to grave abuse of discretion
that would warrant the grant of the special civil action of certiorari, viz.:

The determination of probable cause is part of the discretion granted to the investigating prosecutor
and ultimately, the Secretary of Justice. Courts are not empowered to substitute their own judgment
for that of the executive branch.

The court's duty in an appropriate case is confined to a determination of whether the assailed
executive or judicial determination of probable cause was done without or in excess of jurisdiction or
with grave abuse of discretion amounting to want of jurisdiction. For grave abuse of discretion to
prosper as a ground for certiorari, it must be demonstrated that the lower court or tribunal has
exercised its power in an arbitrary and despotic manner, by reason of passion or personal hostility,
and it must be patent and gross as would amount to an evasion or to a unilateral refusal to perform
the duty enjoined or to act in contemplation of law.

In the case at bar, no grave abuse of discretion on the part of the DOJ was shown. Petitioner merely
harps on the error committed by the DOJ and the CA in arriving at their factual finding that there is
no confusing similarity between petitioner's and respondent's products. While it is possible that the
investigating prosecutor and Secretaries Guingona and Cuevas erroneously exercised their
discretion when they found that unfair competition was not committed, this by itself does not render
their acts amenable to correction and annulment by the extraordinary remedy of certiorari. There
must be a showing of grave abuse of discretion amounting to lack or excess of
jurisdiction.43 (Emphases in the original)
Finally, it is well to reiterate that in G.R. No. 162311, the DOJ's finding of lack of probable cause
appears to have been grounded on mere insufficiency of evidence. Verily, a finding of lack of
probable cause based on insufficiency of evidence presented does not per se operate as a
conclusive determination on the confusing similarity between petitioner's and respondents' marks. At
this point, it should be emphasized that the threshold of evidence required in a preliminary
investigation, i.e., probable cause, is different from judicial/quasi-judicial cases which require a
higher threshold, depending on the nature of the action concerned. In this regard, it is well to clarify
that the failure of satisfying the evidentiary threshold of probable cause in a preliminary investigation
proceeding (such as in G.R. No. 162311) does not necessarily and automatically mean that a higher
evidentiary threshold will not be met in a case essentially involving the same facts (such as the
instant trademark cancellation case). Again, the purpose of a preliminary investigation proceeding is
only to determine whether there exists a well-grounded belief that an offense has been committed,
and that the accused is probably guilty thereof, and hence, must stand trial therefor; whereas the
purpose of a trademark cancellation case is to determine whether or not the questioned trademark
must be cancelled in accordance with the law.

Given the foregoing discussions, G.R. No. 162311 is not res judicata to the instant case; and hence,
the Court is free to make a determination of whether or not petitioner's and respondents' marks are
confusingly similar with one another independently from, and without reference to G.R. No. 162311.

In sum, the CA clearly erred in dismissing the petition for review before it on the grounds of
mootness and res judicata. In such an instance, court procedure dictates that the case be remanded
to the CA for a resolution on the merits. However, when there is already enough basis on which a
proper evaluation of the merits may be had, as in this case, the Court may dispense with the time
consuming procedure of remand in order to prevent further delays in the disposition of the case and
to better serve the ends of justice.44 In view of the foregoing – and further considering that petitioner
seeks for the resolution of the case on the merits45 – it is only proper that the Court render an
exhaustive resolution of this case.

II.

The Rules of Procedure for Intellectual Property Rights Cases46 instructs that "[i]n determining
whether one trademark is confusingly similar to or is a colorable imitation of another, the court must
consider the general impression of the ordinary purchaser, buying under the normally prevalent
conditions in trade, and giving the attention such purchasers usually give in buying that class of
goods. Visual, aural, connotative comparisons and overall impressions engendered by the marks in
controversy as they are encountered in the realities of the marketplace must be taken into account.
Where there are both similarities and differences in the marks, these must be weighed against one
another to determine which predominates."47

In this regard, jurisprudence has developed two (2) tests to aid the Court in ascertaining the
existence of similarity and likelihood of confusion, namely, the Dominancy Test, and the Holistic or
Totality Test. In Dy v. CA,48 the Court differentiated these tests as follows:

On one hand, the dominancy test focuses on "the similarity of the prevalent or dominant features of
the competing trademarks that might cause confusion, mistake, and deception in the mind of the
purchasing public. Duplication or imitation is not necessary; neither is it required that the mark
sought to be registered suggests an effort to imitate. Given more consideration are the aural and
visual impressions created by the marks on the buyers of goods, giving little weight to factors like
prices, quality, sales outlets, and market segments."
On the other hand, the holistic or totality test necessitates a "consideration of the entirety of the
marks as applied to the products, including the labels and packaging, in determining confusing
similarity. The discerning eye of the observer must focus not only on the predominant words, but
also on the other features appearing on both labels so that the observer may draw conclusion on
whether one is confusingly similar to the other."49

Notably, earlier case law does not give an explicit preference as to which of the two (2) tests should
be used and under what circumstances would impel the use of one test over the other. Expectedly,
this resulted in contradictory lines of jurisprudence advocating the Dominancy Test alone, the
Holistic Test alone, or both.50 However, this matter was definitively settled in the recent En Banc
ruling in Kolin Electronics Co., Inc. v. Kolin Philippines International, Inc.,51 wherein the Court made
it "crystal clear that the Holistic Test in determining trademark resemblance has been abandoned."
In so ruling, the Court En Banc ratiocinated that the incorporation of the Dominancy Test in Section
15552 of Republic Act No. 8293, otherwise known as the "Intellectual Property Code of the
Philippines," shows the legislative intent in adopting the same, and consequently, abandoning the
Holistic Test altogether.53

In light of the foregoing, it is submitted that the Dominancy Test must be used in determining the
existence of confusing similarity between the "LEVI'S" and LIVE'S marks. Again, this test relies not
only on the visual but also on the aural and connotative comparisons and overall impressions
between the two trademarks.54

A cursory search of the IPO's online trademark database would show that petitioner is the registered
owner of more or less 17 subsisting "LEVI'S" marks, both comprising of word marks55 and stylized
marks;56 whereas respondent is the registered owner of a singular LIVE'S stylized mark. For easy
"reference, some of petitioner's "LEVI'S" marks and respondents' LIVE'S mark are reproduced
below:

(see image, p. 12)

As may be seen in the above figures, the dominant feature of petitioner's "LEVI'S" marks is the word
"levi's" composed of five (5) letters, namely "L", "E", "V", "I", and "S" with an apostrophe separating
the fourth and fifth letters. Notably, for petitioner's stylized marks, the letter "E" is in lowercase format
with the rest in uppercase format. On the other hand, the dominant feature of respondents' LIVE'S
stylized mark is the word "live's" also composed of the same five (5) letters; and its only difference
with petitioner's marks is that the positioning of the letters "E" and "I" are interchanged. Furthermore,
respondents' mark also depicts the letter "E" in lowercase format with the rest in uppercase format.

From the foregoing, it is thus readily apparent that although petitioner's and respondents' marks are
neither spelled identically nor pronounced in the same way, nor possess the same meaning, they
both begin with the same letter and are in the possessive form as denoted by the apostrophe before
the letter "S" at the end, with only the second and fourth letters re-arranged. Simply put,
ᇈ WᑭHIL

respondents’ LIVE'S mark is but a mere anagram of petitioner's "LEVI'S" marks. It would not be
farfetched to imagine that a buyer, when confronted with such striking similarity would be led to
confuse one over the other. Thus, by simply applying the Dominancy Test, it can already be
concluded that there is a likelihood of confusion between petitioner's "LEVI'S" marks and
respondents' LIVE'S mark.

Furthermore – and even by using the now-abandoned Holistic Test – this likelihood of confusion
tends to be more highlighted by the undisputed fact that petitioner's and respondents' products are
competing goods, and that their marks as used in actual product labels are very much similar with
one another, to wit:
(see image, p. 13)

From the color scheme, border used, fringe banners, to even some of the textual additives
surrounding the mark, there are definite similarities that give both trademarks the same look and
feel. In fact, the use of the number design "105" as juxtaposed to "LEVI'S"'s own "501" supports the
view that respondents' LIVE’S mark is a mere colorable imitation of petitioner's "LEVI'S" marks.

To be sure, case law defines the term colorable imitation as "such a close or ingenious imitation as
to be calculated to deceive ordinary purchasers, or such resemblance of the infringing mark to the
original as to deceive an ordinary purchaser giving such attention as a purchaser usually gives, and
to cause him to purchase the one supposing it to be the other."57 It does not mean such similitude
as amounts to identity; nor does it require that all the details be literally copied.58 "Colorable
imitation refers to such similarity in form, content, words, sound, meaning, special arrangement, or
general appearance of the trademark or tradename with that of the other mark or tradename in their
over-all presentation or in their essential, substantive and distinctive parts as would likely mislead or
confuse persons in the ordinary course of purchasing the genuine article."59

Here, there is evidence on record showing that there were already numerous instances of actual
confusion between petitioner's and respondents' goods brought about by the similarity of their
marks, labels, and products. As may be gleaned from the Final Report on Project Cherokee
5,60 86% of the survey participants associated the "LIVE'S" mark with "LEVI'S;" and 90% of same
participants read the stylized "LIVE'S" mark, i.e., LIVE'S, as "LEVI'S."

In fine, respondents' stylized LIVE'S mark under Trademark Registration No. 53918 is confusingly
similar with petitioner's "LEVI'S" marks; and hence, must be ordered cancelled.

WHEREFORE, the petition is GRANTED. The Decision dated September 26, 2014 and the
Resolution dated July 28, 2015 of the Court of Appeals in CA-G.R. SP No. 126316
are REVERSED and SET ASIDE. Trademark Registration No. 53918 for the mark LIVE'S is hereby
CANCELLED.

SO ORDERED.

[ G.R. No. 221347. December 01, 2021 ]

KOLIN ELECTRONICS CO., INC., PETITIONER, VS. TAIWAN KOLIN CORP. LTD.,
RESPONDENT.

[G.R. Nos. 221360-61]

TAIWAN KOLIN CORP. LTD., REPRESENTED BY KOLIN PHILIPPINES INTERNATIONAL, INC.,

PETITIONER, VS. KOLIN ELECTRONICS CO., INC., RESPONDENT.

DECISION

HERNANDO, J.:

The purpose a trademark is to point out distinctly the origin or ownership of the goods or services to
which it is affixed; to secure to him, who has been instrumental in bringing into the market a superior
article of merchandise, the fruit of his industry and skill; to assure the public that they are procuring
the genuine article; to prevent fraud and imposition; and to protect the manufacturer against
substitution and sale of an inferior and different article as his product.1 In today's internet-wired
market where the online sale and purchase of goods and services is commonplace, domain names
not only serve to identify an address on the internet which leads to a website,2 but also perform the
function of trademarks in the traditional modes of business.3

Consumers have come to rely on domain names to identify the desired source of a product or
service so they can obtain information to help them decide whether to purchase the product or
service.4 Thus, the public frequently expects that a website consisting of or encompassing a
trademark used in the physical world is sponsored by or associated with the owner of that
trademark, and readily use domain names as a means of finding goods and services online.5

To protect the goodwill and reputation of their business in the online sphere, proprietors of goods
and services have opted to register their domain names as trademarks and to secure protection
accorded to trademark owners under Republic Act No. (RA) 8293, or the Intellectual Property Code
of the Philippines (IP Code).6 It is thus inevitable that trademark principles will find application to
domain names submitted for registration with the Intellectual Property Office (IPO),7 such as the
cases before Us.

The two Petitions for Review on Certiorari8 before Us challenge the January 27, 2015 Decision9 and
November 4, 2015 Resolution10 of the Court of Appeals (CA) in CA-G.R. SP No. 122566 and CA-
G.R. SP No. 122574. The CA upheld the IPO's denial of Taiwan Kolin Corporation Ltd.'s (Taiwan
Kolin) Opposition11 to Kolin Electronics Co., Inc.'s (KECI) Application12 for trademark registration of
its domain name "www.kolin.ph".

KECI is a domestic corporation engaged in the manufacture, assembly, and marketing of various
electronic products since 1989 and is the registered owner of the "KOLIN" trademark for goods and
services under Classes 9 and 3513 of the International Classification of Goods and Services for the
Purposes of Registrations of Marks (Nice Classification) under Certificate of Registration Nos. 4-
1993-08749714 and 4-2007-005421.15

Taiwan Kolin, represented herein by Kolin Philippines International Inc. (KPII), is a corporation duly
organized and existing under the laws of Taiwan and engaged in the home appliance business,
particularly in the manufacture, sale and distribution of television sets, air conditioners, washing
machines, showcase refrigerators, rice cookers and other similar appliances and electrical
products.16 Taiwan Kolin has been using the KOLIN trademark for its home appliances since
1976.17 Since 1996, Taiwan Kolin's products under the KOLIN brand have been made available in
the Philippines.18 Taiwan Kolin is the registered owner of the trademark KOLIN for several goods
and services, including registrations under Classes 11 and 21 of the Nice Classification.19

Previous Cases involving the "KOLIN" Mark:

To provide context to the present dispute, an overview of previous cases involving the "KOLIN'' mark
is in order.

On August 7, 1993, KECI filed an Application20 with the then Bureau of Patents, Trademarks and
Technology Transfer (BPTTT) for the registration of the "KOLIN" mark covering electronic products
under Class 9 of the Nice Classification, which Taiwan Kolin opposed.21 The Bureau of Legal Affairs
(BLA) denied22 Taiwan Kolin's opposition, prompting the latter to appeal23 the BLA's decision to the
Court of Appeals (CA). In its July 31, 2006 Decision,24 the CA in CA-G.R. SP No. 80641 ruled that
KECI's predecessor-in-interest and assignor has been actually using the "KOLIN" mark in business
in the Philippines as early as February 17, 1989, prior to its filing for registration of the said mark in
1993.25 On this score, the prevailing trademark law at the time, RA 166, considers prior use in the
Philippines as the basis for priority right or registration right of a trademark or service mark. Thus,
the CA upheld KECI's registration of the "KOLIN" mark, vesting KECI with the exclusive right to use
the same for automatic voltage regulators, converters, rechargers, stereo booster, AC-DC regulated
power supply, step-down transformer, PA ampilifier AC-DC, and related goods thereto.26 The CA's
July 31, 2006 Decision became final and executory on November 16, 2007.27

In 2015, the Court's Third Division promulgated its Decision in Taiwan Kolin Corporation Ltd. v. Kolin
Electronics Co., Inc. (2015 Kolin case).28 In the said case, the Court allowed the registration of the
"KOLIN" mark for television sets and DVD players in favor of Taiwan Kolin, over KECI's objections
that the mark which Taiwan Kolin seeks to register for the said goods is identical, if not confusingly
similar, with KECI's "KOLIN" mark registered on November 23, 2003, covering the following products
under Class 9 of the Nice Classification: automatic voltage regulator, converter, recharger, stereo
booster, AC-DC regulated power supply, step-down transformer, and PA amplified AC-DC. In giving
due course to Taiwan Kolin's application, the Court opined that the products covered by Taiwan
Kolin's trademark application and KECI's registration under Class 9 are not related, and that there is
no likelihood of confusion that would deceive the ordinary intelligent buyer between the two.29

In 2021, the Court En Banc promulgated its Decision in Kolin Electronics Co., Inc. v. Kolin
Philippines International, Inc. (2021 Kolin case)30 which denied the registration of KPII for television
sets and DVD players under Class 9 of the Nice Classification. In so ruling, the Court en banc held
that there is a resemblance between KECI's and KPII's marks, the goods covered by KECI's
registration under Class 9 are related to the goods covered by KPII's, there is evidence of actual
confusion between the two marks, and the goods covered by KPII's fall within the normal potential
expansion of business of KECI. After the Court abandoned the use of product or service
classification as a factor in determining relatedness or non-relatedness, it stressed that the 2015
Kolin case does not apply as a precedent in the controversy in the 2021 Kolin case since the former
did not comprehensively consider all the jurisprudential factors in determining relatedness and it
included an inapposite discussion on subcategories in the Nice Classification as an additional basis
for its conclusion on non-relatedness. In the 2021 Kolin case, the Court also highlighted that KECI
was already declared as the owner of the KOLIN mark under the Trademark Law, and noted that the
2015 Kolin case merely gave KPII, as an instrumentality of Taiwan Kolin, the right to use the exact
mark allowed to be registered in the 2015 Kolin case, i.e., the KOLIN design mark, not a blanket
authority to use or register any and all figurative or stylized versions of the word "KOLIN".31

The Antecedents:

On May 29, 2007, KECI filed a trademark application for registration of the "KOLIN" mark under
Class 35 of the Nice Classification for use in the business of manufacturing, assembling, importing,
and selling electronic equipment or apparatus. Taiwan Kolin and KPII did not oppose the said
registration, and the mark was registered on December 22, 2008.32

On August 16, 2007, KECI filed Trademark Application No. 20-2007-00000933 for the mark
"www.kolin.ph" under Class 35 for use in the business of manufacturing, assembling, importing, and
selling electronic equipment or apparatus. The application was published in the IPO e-Gazette on
January 11, 2008, and Taiwan Kolin was given four months or until May 10, 2008 to file an
opposition thereto.34

On May 12, 2008, Taiwan Kolin filed an Opposition35 to the said application on the following
grounds that: 1) the application violates Section 123.1(d) of the IP Code which proscribes the
registration of a mark identical with a registered mark belonging to a different proprietor with an
earlier filing or priority date; 2) the registration of "www.kolin.ph" will cause grave and irreparable
injury to Taiwan Kolin's goodwill, reputation, and business using the KOLIN brand; 3) that the
trademark application violates the rule in the Implementing Rules and Regulations (IRR) of the IP
Code requiring a specific description of goods, business or services; and 4) that "www.kolin.ph" does
not function as a mark.36 Notably, the documents attached to Taiwan Kolin's Opposition marked as
"A" to "T" were all photocopies.37

Ruling of the Bureau of Legal Affairs (BLA):

In its July 16, 2008 Order,38 the BLA dismissed Taiwan Kolin 's Opposition for failure to comply with
the provisions of Sections 7.1 and 7.3. of Office Order No. 79, series of 2005, which amended
the Regulations on Inter Partes Proceedings (Inter Partes Regulations) and required the attachment
of originals or, in the case of public documents, certified true copies of the attached
documents.39 The dispositive portion of the BLA ruling reads:

WHEREFORE, for failure of the Opposer to comply with the provisions of Sections 7.1 and 7.3 of
Office Order No. 79, series of 2005, this case is, as it is hereby MOTU
PROPRIO DISMISSED. Accordingly, Application No. 20-2007-000009 filed on August 16, 2007 by
KOLIN ELECTRONICS CO., INC., for the registration of the trademark "WWW.KOLIN.PH" for "Class
35" as it is, hereby GIVEN DUE COURSE.

Let the filewrapper subject matter of the above-captioned case be forwarded to the Bureau of
Trademarks (BOT) for appropriate action in accordance with this Order with a copy thereof to be
furnished the Publication Division for information and to update its records.

SO ORDERED.40

Taiwan Kolin moved for reconsideration41 of the BLA's July 16, 2008 Order, attaching thereto most
of the originals and/or certified true copies of its documentary exhibits and alleging that its
subsequent submission constitutes substantial compliance.42 The BLA denied the motion in its April
23, 2009 Resolution.43

Thus, Taiwan Kolin filed an appeal44 with the IPO Director-General,45 reiterating its arguments in
opposing the registration of "www.kolin.ph". Moreover, it alleged that it was unable to attach the
original copies of the documentary exhibits since it was set to simultaneously file two separate
verified oppositions which use common documentary exhibits, and it deemed it prudent to first retain
the original copies of the documentary exhibits and in the meantime attach to the verified oppositions
the photocopies of these exhibits, with the end in view of presenting the original copies in the course
of its proceedings. Moreover, Taiwan Kolin asserted that the Inter Partes Regulations allow the
submission of the original copies of the documentary exhibits even after the filing of the opposition,
and that the submission of the original copies of its documentary exhibits on motion for
reconsideration should be allowed.46

Ruling of the IPO Director General:

The IPO Director General denied Taiwan Kolin's appeal in a Decision47 dated November 23, 2011,
the dispositive portion of which reads:

WHEREFORE, premises considered, the instant appeal is hereby DISMISSED. Let a copy of this
Decision and the records be furnished and returned to the Director of the Bureau of Legal Affairs for
appropriate action. Further, let also the Director of the Bureau of Trademarks and library of the
Documentation, Information and Technology Transfer Bureau be furnished a copy of this Decision
for information, guidance, and records purposes.
SO ORDERED.48

In so ruling, the IPO Director General opined that the BLA correctly dismissed Taiwan Kolin's
Opposition in view of its failure to attach the original documents, as required under the Inter
Partes Regulations. The Director General stressed that the Inter Partes Regulations must be
followed since these are indispensable to the prevention of needless delays and the orderly and
speedy discharge of business, and may be relaxed only for the most persuasive of reasons, such as
to relieve a litigant of an injustice not commensurate with the degree of his thoughtlessness in not
complying with the procedure described.49

The IPO Director General likewise observed that even if Taiwan Kolin's Opposition was allowed, the
appeal was still not meritorious. Noting that the case involves the ownership of "KOLIN" which is the
main feature of KECI's trademark application, the IPO Director General emphasized that KECI is
already the registered owner of the "KOLIN" mark in Class 35 for the business of manufacturing,
importing, assembling, or selling electronic equipment or apparatus which breezed through
registration without Taiwan Kolin or any of its subsidiaries opposing the same. Thus, Taiwan Kolin is
estopped from assailing KECI's rights that come with the registration of KECI's "KOLIN" mark in
Class 35. Citing Section 138 of the IP Code, the IPO Director General stressed that part of KECI's
rights as the registered owner of the "KOLIN" mark in Class 35 necessarily includes the registration
of the said mark as a domain name in Class 35, and that KECI has already prevailed against Taiwan
Kolin's application or the registration of its mark under the same class.50

While the IPO Director General acknowledged Taiwan Kolin's own trademark applications and
registrations for the "KOLIN" mark, he opined that the said applications and registrations refer to
goods and services that are not related to KECI's trademark application for "www.kolin.ph". Thus,
the IPO Director General clarified that the registration of "www.kolin.ph" in favor of KECI is limited to
the services covered by KECI's trademark application, which is for use on the business of
manufacturing, importing, assembling or selling electronic equipment or apparatus falling under
Class 35 of the Nice Classification.51

Ruling of the Court of Appeals:

In its January 27, 2015 Decision,52 the CA affirmed the findings of the IPO Director General.
The fallo of the CA's January 27, 2015 Decision reads:

WHEREFORE, both Petitions for Review under Rule 43 are DENIED. The Decision dated November
23, 2011, issued by Ricardo R. Blancaflor, Director General of the Intellectual Property Office (IPO),
in Appeal No. 14-09-40, entitled, Taiwan Kolin Corp., Ltd. represented by herein Kolin Philippines
International, Inc. vs. Kolin Electronics Co., Inc., is hereby AFFIRMED.

SO ORDERED.53

In so ruling, the CA reiterated that the Inter Partes Regulations require the submission of the
originals or certified true copies of the supporting documents upon the filing of the Opposition. It
observed that Taiwan Kolin's subsequent submission of most of the originals and/or certified true
copies of its documentary exhibits in its motion for reconsideration with the BLA does not constitute
substantial compliance with the Inter Partes Regulations. Moreover, the circumstances do not
warrant the relaxation of the Inter Partes Regulations in favor of Taiwan Kolin.54

Anent the issue on overbreadth, the appellate court accorded credence to the BLA's expertise when
it examined KECI's application and allowed the use of the domain name. The CA noted that KECI
has the right to use the "KOLIN" mark under Class 35 by virtue of the Certificate of Registration
issued to it on December 22, 2008, which constitutes prima facie evidence of the validity of the
registration, the registrant's ownership of the mark, and the registrant's exclusive right to use the
same. Moreover, the CA pointed out that contrary to Taiwan Kolin's assertions, its "KOLIN" mark is
not an internationally well known mark that would prevent KECI's registration of the domain name,
"www.kolin.ph".55

On KECI's appeal regarding the IPO Director General's pronouncement that Taiwan Kolin's
trademark for the KOLIN mark refers to goods or services not related to KECI's services covered by
the Class 35 application and that the registration of "www.kolin.ph" is limited to the services covered
by KECI's trademark application under Class 35, the CA stressed that the subject matter of the IPO
Director General's Decision pertained only to KECI's Class 35 application in relation to the use of
"www.kolin.ph" and did not involve any other kinds of registrations and applications. The CA likewise
opined that KECI's right to use "www.kolin.ph" springs forth from its having been granted a certificate
of registration for Class 35. Moreover, KECI's apprehension against the IPO Director General's
pronouncement is more apparent than real, as KECI should give due deference to Taiwan Kolin's
right over the "KOLIN" mark for Classes 11 and 21.

The CA emphasized that administrative agencies such as the IPO, by reason of their special
knowledge and expertise over matters falling under their jurisdiction, are in a better position to pass
judgment on the issue of KECI's usage of "www.kolin.ph" which is limited to services covered by its
trademark application and falling under Class 35 of the Nice Classification. Thus, its findings of fact
in this regard are generally accorded great respect if not finality, as long as they are supported by
substantial evidence.56

Both parties moved for reconsideration57 but were denied by the appellate court in its November 4,
2015 Resolution.58 Hence, these Petitions.59

G.R. No. 221347 (Kolin Electronics Co., Inc. v. Taiwan Kolin Corporation Ltd.):

KECI assails the pronouncement of the IPO Director General that: (a) Taiwan Kolin's applications
and registrations for the "KOLIN" mark referred to goods and services that are not related to KECI's
trademark application for "www.kolin.ph"; and that (a) the registration of "www.kolin.ph" in favor of
KECI is limited to the services covered by KECI's trademark application, which is for use on the
business of manufacturing, importing, assembling or selling electronic equipment or apparatus falling
under Class 35 of the Nice Classification. According to KECI, the said erroneous pronouncement
may have far-reaching consequences considering that the registration of "www.kolin.ph" in KECI's
favor is not limited to the services covered by KECI's Class 35 application, but also includes goods
and services similar to those in respect of which the trademark is registered whose use would result
in a likelihood of confusion, as well as product and market areas that are the normal potential
expansion of its business.60 Moreover, KECI maintains that it is the first and prior user and
registered owner of the "KOLIN" mark and the holder of a Class 35 Registration of the "KOLIN"
mark; thus, as all goods and services under a particular class are related, the same class
registration of another mark containing KOLIN as a dominant element should be granted in KECI's
favor.61

In its Comment,62 Taiwan Kolin asserts that the CA correctly limited KECI's registration to services
covered by its trademark application under Class 35. Taiwan Kolin opines that KECI cannot validly
raise questions of fact in the instant petition and assail the manner by which evidence has been
evaluated by the IPO Director General and the CA. Moreover, Taiwan Kolin contends that the
registration of "www.kolin.ph" in favor of KECI, whether limited to services covered under its Class
35 trademark application or otherwise, should not be allowed due to the fact that the same is
identical with the mark "KOLIN" belonging to Taiwan Kolin, which have earlier filing or priority dates.
Assuming that KECI is entitled to said registration, Taiwan Kolin asserts that the registration is
limited for use in the business of manufacturing, importing, assembling, or selling electronic
equipment or apparatus. In particular, Taiwan Kolin stressed that the Court's ruling in Dermaline, Inc.
v. Myra Pharmaceuticals, Inc.63 (Dermaline) did not contemplate a scenario whereby such
expansion of business of a trademark applicant would encroach upon goods and services which are
the subject of trademark applications and registrations which are filed or obtained earlier.64

G.R. Nos. 221360-61 (Taiwan Kolin Corporation, Ltd., represented by Kolin Philippines International,
Inc. v. Kolin Electronics Co., Inc.)

Taiwan Kolin maintains that the Inter Partes Regulations do not require the submission of original or
certified true copies of the documentary exhibits together with the opposition, or prohibit an oppositor
from subsequently complying with the requirement on the submission of the original supporting
documents to the opposition after the filing of the same. It asserts that Section 7.1 of the Inter
Partes Regulations merely requires that the opposition be "in due form," which means being
compliant with the following provisions of the Inter Partes Regulations, to the exclusion of the other
provisions: (a) Rule 3, Section 3; (b) Rule 4, Section 2; (c) Rule 5, Section 3; (d) Rule 6, Section 9;
(e) Rule 7, Sections 3 and 5; and (f) Rule 8, Sections 3 and 4. Taiwan Kolin insists that to construe
otherwise would be tantamount to adding another ground for dismissal after the Inter
Partes Regulations have expressly confined its terms to those expressly mentioned, and failed to
consider that certified or original supporting documents may be submitted at a later time.65

Taiwan Kolin likewise asserts that its failure to attach the originals and certified true copies of its
supporting documents in its Opposition was due to justifiable reasons. Hence, its subsequent
submission should be allowed by the BLA and the IPO Director General considering the BLA is
empowered to relax the application of procedural rules and encouraged to give way to technicalities
in order to serve the substantive ends of justice. It maintains that the instant case and another
pending case had common documentary exhibits; thus, Taiwan Kolin found it more prudent to
initially attach mere photocopies to its Opposition in both cases and to present the originals for
comparison during the preliminary conference in each case. Moreover, Taiwan Kolin submits that
some exhibits were not attached since they were in Taiwan. In any event, Taiwan Kolin asserts that
any defect caused by attachment of the photocopies in the Opposition was cured by the subsequent
submission of the originals and/or certified true copies in its Motion for Reconsideration.66

Taiwan Kolin further avers that KECI's application for registration of "www.kolin.ph" suffers from
overbreadth and generality since it is broad enough to cover line of goods covered by Taiwan Kolin's
trademark applications under Classes 9 and 11, in violation of Rule 417 of the IRR of the IP Code,
which proscribes the use of broad terms in identifying the goods, business, and
services.67 Moreover, Taiwan Kolin maintains that KECI is not the first and prior user and registered
owner of the "KOLIN" mark. It argues that Taiwan Kolin's application for registration of the "KOLIN"
mark under Class 9 and KPII's application for goods falling under Class 35 precede the application
sought by KECI for "www.kolin.ph"; thus, KECI is not entitled to the registration of "www.kolin.ph" in
its favor, whether or not the same be limited to the services covered by its Class 35 Trademark
Application.68 In addition, it asserts that the registration of "www.kolin.ph" is barred under Section
123.1(E) of the IP Code.69

On the other hand, KECI argues that the CA did not err in upholding the rulings of both the BLA and
IPO Director General which dismissed Taiwan Kolin's Opposition. KECI claims that findings of the
BLA and the IPO Director General on the facts and the proper interpretation of its own procedural
rules should be accorded great respect, if not finality, by the courts. Moreover, KECI avers that
the Inter Partes Regulations clearly require the submission of original or certified true copies of the
attachments to the Opposition and that Taiwan Kolin is merely attempting to vindicate itself by
wrongly insisting that Section 7.1. of the Inter Partes Regulations does not require that the original or
certified true copies of documentary evidence be attached to the verified Opposition. Moreover,
KECI maintains that its application for the mark "www.kolin.ph" is neither overbroad nor violative of
the trademark rule. KECI highlights that it is the first and prior user and registered owner of the
"KOLIN" mark and a holder of a Class 35 registration. Thus, KECI's same class application for
another mark with KOLIN as a dominant element must perforce be in favor of KECI.70

Issues:

The Court is called upon to resolve the following issues:

1. Whether Taiwan Kolin's failure to submit the original supporting documents in its
Opposition against KECI's application for registration of "www.kolin.ph" warranted the
outright dismissal of its Opposition;

2. Whether KECI has the right to register and use the mark "www.kolin.ph" consistent with its
exclusive right to use the "KOLIN" mark in relation to the goods/services covered by Class
35; and

3. Whether the IPO Director General erred in ruling that (a) Taiwan Kolin's applications and
registrations for the "KOLIN mark" refer to goods and services that are not related to KECI's
trademark application for "www.kolin.ph"; and that (b) the registration of "www.kolin.ph" in
favor of KECI is limited to the services covered by KECI's trademark application.71

Our Ruling

The Petitions are denied for lack of merit.

Taiwan Kolin's opposition

was properly dismissed by
the BLA. While the Inter
Partes Regulations may be
relaxed for meritorious
cases and for compelling
reasons, the relaxation of
the rules is not warranted in
the case at bench.

Sections 7.1 and 7.3 of the Inter Partes Regulations are clear - the submission of documents and
other requirements attached to the petition and opposition shall be filed with the Bureau in their
original or, in the case of public documents, certified copies thereof. Otherwise, the petition or
opposition shall be dismissed outright, to wit:

Section 7.1. The petition or opposition, together with the affidavits of witnesses and originals of the
documents and other requirements, shall be filed with the Bureau, provided, that in case of public
documents, certified copies shall be allowed in lieu of originals. The Bureau shall check if the petition
or opposition is in due form as provided in the Regulations particularly Rule 3, Section 3; Rule 4,
Section 2; Rule 5, Section 3; Rule 6, Section 9; Rule 7, Sections 3 and 5; Rule 8, Sections 3 and 4.
For petition for cancellation of layout design (topography of integrated circuits), Rule 3, Section 3
applies as to the form and requirements. The affidavits, documents and other evidence shall be
marked consecutively as "Exhibits" beginning with the letter "A".
xxxx

Section 7.3. If the petition or opposition is in the required form and complies with the requirements
including the certification of non-forum shopping, the Bureau shall docket the same by assigning the
Inter Partes Case Number. Otherwise, the case shall be dismissed outright without prejudice. A
second dismissal of this nature shall be with prejudice. (Emphasis supplied)

It is undisputed that Taiwan Kolin failed to attach the originals or certified true copies of the
supporting documents to its Opposition, which is required by the Inter Partes Regulations. The BLA
was therefore correct in dismissing the opposition outright.

Taiwan Kolin maintains that the Inter Partes Regulations do not require original or certified true
copies of the documentary exhibits to be filed together with the Notice of Opposition. It insists that
the Inter Partes Regulations merely require that the Opposition be in due form to prevent its
dismissal. It avers the Opposition is in due form if it complies with Section 7.1 - specifically Rule 3,
Section 3; Rule 4, Section 2; Rule 5, Section 3; Rule 6, Section 9; Rule 7, Sections 3 and 5; Rule 8,
Sections 3 and 4.

These assertions and truncated construction of the rules are misplaced, considering the clear
language of the Inter Partes Regulations. The express enumeration of the said provisions do not
relegate against the requirement under Section 7.1. to submit originals or certified true copies of the
documentary exhibits. Non-compliance with the requirements under the said Section will result in
outright dismissal of the case.

Taiwan Kolin also cites Section 8.3 of the Inter Partes Regulations which allows documentary
exhibits to be submitted even after the Notice of Opposition has been filed, to bolster its claim that
the originals or certified true copies of the supporting documents need not be filed with the Notice of
Opposition.72 This allegation is misleading and fails to interpret the Inter Partes Regulations in its
entirety. It discounts the requirement under Section 7.1 that the Notice of Opposition must first be in
due form. Read in its entirety, the Inter Partes Regulations only allow the submission of additional
original documentary exhibits if the original or certified true copies of the exhibits were initially filed
with the Notice of Opposition.

Moreover, the Court has consistently accorded great respect to the interpretation by administrative
agencies of their own rules unless there is an error of law, abuse of power, lack of jurisdiction or
grave abuse of discretion clearly conflicting with the letter and spirit of the law.73 The Inter
Partes Regulations were drafted by the IPO Director General pursuant to his authority under the IP
Code.74 The BLA and IPO Director General's interpretation, that Taiwan Kolin's failure to attach
originals or certified true copies of the supporting documents warrants the outright dismissal of the
Opposition under the Inter Partes Regulations, should thus be accorded due respect.

It is true that administrative or quasi-judicial bodies like the IPO's BLA are not bound by the technical
rules of procedure in the adjudication of cases.75 The BLA is not bound by strict technical rules of
procedure and evidence but may adopt, in the absence of any applicable rule in the Inter
Partes Regulations, such mode of proceedings consistent with the requirements of fair play and
conducive to the just speedy and inexpensive disposition of cases, and which will give the BLA the
greatest possibility to focus on the contentious issues before it.76

However, it is equally true that the relaxation of procedural rules cannot be made without any valid
reasons proffered for or underpinning it77 Procedural rules are designed to facilitate the adjudication
of cases, and are not to be belittled or dismissed simply because their non-observance may have
resulted in prejudice to a party's substantive rights.78 Like all rules, they are required to be followed
except only for the most persuasive of reasons when they may be relaxed to relieve a litigant of an
injustice not commensurate with the degree of his thoughtlessness in not complying with the
procedure prescribed.79 To merit liberality, petitioners must show reasonable cause justifying their
noncompliance with the rules and must convince the Court that the outright dismissal of the petition
would defeat the administration of substantive justice,80 which petitioners in this case failed to do. In
this respect, We adopt the appellate court's detailed observations and conclusion that Taiwan Kolin
failed to give any justifiable cause or compelling reason warranting the relaxation of the Inter
Partes Regulations:

First, TKCL's claim that its non-compliance with the Regulations[] was due to the fact that it had two
Opposition cases and was confused as to which case the original documents should be submitted
to, can hardly be considered a justifiable and compelling reason. If the Opposition against Class 35
TM Application (MNO 2008-065) for the use of "www.kolin.ph," were that important, TKCL should
have at least submitted with the BLA-IPO even just a signed original or certified true copy of the
documents in its Opposition. TKCL could have indicated in the other Opposition case, MNO 2008-
064, that the originals were submitted in Opposition case, MNO 2008-065, and thereafter made a
reservation for its belated filing. But it neglected to do so.

Second, TKCL's admission that it made a reasonable attempt in complying with the Regulations, and
failed only in "adequately informing this Honorable Office of the availability of original exhibits...,"
clearly reveals that the documents in original form were already at its disposal. Yet, it never bothered
to attach the same to its Opposition, and held on to its erroneous interpretation of the Regulations.

Third, TKCL's claim that it had difficulty in securing the "original copies of its documentary exhibits"
since the same were kept in its principal address located in Taipei, Taiwan and that it failed "through
inadvertence...to indicate in both verified oppositions that 'original copies are available for immediate
submission or comparison at the proper time,'" are all but weak excuses. To be sure, records show
that despite being given ample time of 120 days reckoned from the time of the subject mark's
publication to file its Opposition, TKCL still failed to exert diligent efforts to obtain the original
documents. Worse, it never attempted to secure even just certified true copies of said documents.
This attitude cannot in any way justify the relaxation of the Regulations.81 (Emphasis supplied)

Indeed, the relaxation of procedural rules in the interest of justice was never intended to be a license
for erring litigants to violate the rules with impunity. It applies only to proper cases of demonstrable
merit and under justifiable causes and circumstances, none of which are present in this case.82

The Court is aware of the amendment of the Inter Partes Regulations in 2014 to allow the
attachment of photocopies of the affidavits and documentary evidence, in lieu of originals and
certified true copies, subject to the presentation of the affidavits and/or certified true copies during
the preliminary conference or through the appropriate motion.83 Nevertheless, considering Taiwan
Kolin's blatant disregard of the rules, we maintain that the CA did not err in upholding the BLA and
IPO Director General's dismissal of Taiwan Kolin's Opposition. Absent any plausible explanation for
its non-compliance or compelling reason warranting the relaxation of the rules, a party's plain
violation of the rules will not be countenanced.

In any event, even assuming that Taiwan Kolin's Opposition should not be dismissed outright on
technical grounds, we find that KECI is entitled to registration of "www.kolin.ph" under Class 35 of
the Nice Classification.

KECI has the right to

register and use the mark
"www.kolin.ph".
At the outset, and as reiterated in the 2021 Kolin case, we stress that KECI was already declared the
first and prior user of the "KOLIN" mark in the Philippines and thus the owner of the "KOLIN" mark
under RA 166, in a final and executory decision rendered by the CA.84 In connection thereto,
Section 236 of the IP Code states that nothing in the IP Code shall impair the rights of the
enforcement of marks acquired in good faith prior to the effective date of said law.85

Moreover, it is settled that a certificate of registration of a mark is prima facie evidence of the validity
of the registration, the registrant's ownership of the mark, and of the registrant's exclusive right to
use the same in connection with the goods or services and those that are related thereto specified in
the certificate.86 The said presumption may be challenged and rebutted when an adverse party, in
the appropriate action, can show that the certificate of registration is not reflective of ownership of
the holder, such as when: (1) the first registrant has acquired ownership of the mark through
registration but subsequently lost the same due to non-use or abandonment (e.g., failure to file the
Declaration of Actual Use); (2) the registration was done in bad faith; (3) the mark itself becomes
generic; (4) the mark was registered contrary to the IP Code (e.g., when a generic mark was
successfully registered for some reason); or (5) the registered mark is being used by, or with the
permission of, the registrant so as to misrepresent the source of the goods or services on or in
connection with which the mark is used.87

In connection thereto, it is beyond cavil that KECI, having been issued Certificate of Registration No.
4-2007-005421, is the registered owner of the "KOLIN" mark under Class 35, specifically for "the
business of manufacturing, importing, assembling, or selling electronic equipment or apparatus".
Significantly, the list of services in the said certificate is identical to the list of services of KECI's
application for "www.kolin.ph".88 This certificate of registration vests KECI the exclusive right to use
the "KOLIN" mark in relation to the services covered by the registration. Unless and until the said
registration of KECI is nullified or cancelled through the proper proceeding, the rights emanating
from the said registration should be respected.

Does KECI's right to exclusively use the "KOLIN" mark under Class 35 necessarily include the right
to register its domain name containing KOLIN as the dominant feature?

We rule in the affirmative.

Having been granted the right to exclusively use the "KOLIN" mark for the business of
manufacturing, importing, assembling, or selling electronic equipment or apparatus, KECI's
application for registration of its domain name containing the "KOLIN" mark for the same goods and
services as its Class 35 registration for "KOLIN" is merely an exercise of its right under its Class 35
registration. In today's internet-wired market, selling electronic equipment or apparatus will ideally
involve the registration of a domain name to establish an online presence. Information on the
products sold by an enterprise must necessarily be provided in all avenues, whether through print,
media, or online. As early as the 1999 case of Mirpuri v. Court of Appeals,89 this Court recognized
that advertising on the internet and cybershopping are turning the internet into a commercial
marketplace, thus:

The Internet is a decentralized computer network linked together through routers and
communications protocols that enable anyone connected to it to communicate with others likewise
connected, regardless of physical location. Users of the Internet have a wide variety of
communication methods available to them and a tremendous wealth of information that they may
access. The growing popularity of the Net has been driven in large part by the World Wide Web, i.e.,
a system that facilitates use of the Net by sorting through the great mass of information available on
it. Advertising on the Net and cybershopping are turning the Internet into a commercial
marketplace.90
In W Land Holding, Inc. v. Starwood Hotels and Resorts Worldwide, Inc.,91 the Court, cognizant of
the increasingly prominent role of the internet in modem commerce, held that the use of a registered
mark representing the owners goods or services by means of an interactive website may constitute
proof of actual use that is sufficient to maintain the registration of the same, viz:

Cognizant of this current state of affairs, the Court therefore agrees with the IPO DG, as affirmed by
the CA, that the use of a registered mark representing the owner's goods or services by means of an
interactive website may constitute proof of actual use that is sufficient to maintain the registration of
the same. Since the internet has turned the world into one vast marketplace, the owner of a
registered mark is clearly entitled to generate and further strengthen his commercial goodwill by
actively marketing and commercially transacting his wares or services throughout multiple platforms
on the internet. The facilities and avenues present in the internet are, in fact, more prominent
nowadays as they conveniently cater to the modern-day consumer who desires to procure goods or
services at any place and at any time, through the simple click of a mouse, or the tap of a screen.
Multitudinous commercial transactions are accessed, brokered, and consummated everyday over
websites. These websites carry the mark which represents the goods or services sought to be
transacted. For the owner, he intentionally exhibits his mark to attract the customers' interest in his
goods or services. The mark displayed over the website no less serves its functions of indicating the
goods or services' origin and symbolizing the owner's goodwill than a mark displayed in the physical
market. Therefore, there is no less premium to recognize actual use of marks through websites than
their actual use through traditional means. Indeed, as our world evolves, so too should our
appreciation of the law. Legal interpretation — as it largely affects the lives of people in the here and
now — never happens in a vacuum. As such, it should not be stagnant but dynamic; it should not be
ensnared in the obsolete but rather, sensitive to surrounding social realities.92 (Emphasis and
underscoring supplied)

The industry for electronic equipment is no stranger to this phenomenon. Indeed, consumers
nowadays can readily access information on electronic equipment and apparatus and easily and
conveniently purchase electronic equipment online through the simple click of a mouse or the tap of
a screen. An enterprise which seeks to establish its presence in the online marketplace and sell its
products therein may do so by developing its own website, which has a corresponding domain name
- an identifier analogous to a telephone number or street address.93 In turn, the modern day
consumer frequently expects that a website consisting of or encompassing a trademark used in the
physical market is sponsored by or associated with the owner of that trademark, and readily use
domain names as an indicator of the source or origin of the goods, i.e., a means of finding goods
and services from a preferred source.94

In recognition thereof, courts in the United States have held that the use of a trademark of another
company or person within the domain name of a web address can constitute a trademark
violation.95 To protect the goodwill and reputation of their business and products in the online
sphere, it is but logical for companies to register their trademarks in the form of domain names under
the IP Code.

In fine, the owner of a registered trademark, absent any legal obstacle or compelling reason to the
contrary, should be allowed to register, in its favor, a domain name containing its registered
trademark as a dominant feature. KECI's application to register and use the mark "www.kolin.ph",
presumably as its domain name and platform to sell its products in the internet, is merely in exercise
of and consistent with its exclusive right to use "KOLIN" on the business of manufacturing, importing,
assembling or selling electronic equipment or apparatus. KECI's exclusive right to use the "KOLIN"
mark for the business of manufacturing, importing, assembling, or selling electronic equipment or
apparatus is entitled to protection, whether such use is exercised online or through a physical market
– and whether the mark is printed on product packaging or included in the domain name of its
website. Indeed, to preclude KECI from safeguarding its right to protect the name of its domain
name containing its registered mark would unduly limit the scope of selling and antiquate the
concept in relation to the current times.

Considering that KECI's registration. of "www.kolin.ph" is proper pursuant to KECI's existing

registration of "KOLIN" under Class 35, we need not belabor the issue raised by Taiwan Kolin as
regards the likelihood of confusion of "www.kolin.ph" with Taiwan Kolin's existing registrations in
other classifications.

Moreover, contrary to Taiwan Kolin's contention that KECI's application is violative of Rule 417 of the
IRR of the IP Code,96 We find the description of the goods and services with sufficient particularity.
On this point, the Trademark Manual of Examining Procedure (TMEP) of the United States Patent
and Trademarks Office (USPTO) is instructive on the purpose behind providing a specific description
of goods and services. Section 1402.1 provides that an applicant must identify the goods and
services specifically to provide public notice, and to enable the USPTO - the agency vested with
jurisdiction in the United States to examine applications for registration of marks - to classify the
goods and services properly and to reach informed judgments concerning likelihood of confusion:

The applicant must identify the goods and services specifically to provide public notice and to enable
the USPTO to classify the goods and services properly and to reach informed judgments concerning
likelihood of confusion under 15 U.S.C. §1052(d) x x x USPTO has discretion to require the degree
of particularity deemed necessary to clearly identify the goods and/or services covered by the mark.
In re Omega SA, 494 F.3d 1362, 83 USPQ2d 1541 (Fed. Cir. 2007).97 (Emphasis supplied)

In this respect, We find the description of the services in KECI's application, i.e., for use on the
business of manufacturing, importing, assembling or selling electronic equipment or apparatus,98 of
sufficient particularity to accomplish the aforestated objectives. It is worthy to highlight that the
Bureau of Trademarks found the description of services in KECI's application to be
sufficient,99 since the application was published in the e-Gazette on January 11, 2007. The
publication of a trademark application in the IPO e-Gazette means that the trademark application
has undergone stringent examination by the examiner-in-charge who assessed the applicant entitled
to have its mark registered.100 Neither did the BLA nor the IPO Director General find anything
objectionable on the description of the services in the application. The Bureau of Trademarks, as the
office tasked by law to examine applications for the registration of marks, issuance of the certificates
of registration, and to decide oppositions to the application for registration of marks,101 it is clearly
equipped with the necessary expertise to examine the trademark application. As such, its findings on
the sufficiency of the description of goods and services in the application should be accorded
respect.

While the protection

afforded to a registered
trademark extends to market
areas that are the normal
potential expansion of its
business, such protection
must not infringe on the
rights of another trademark
owner with a registered
mark in its favor.

In G.R. No. 221347, KECI assails the pronouncement of the IPO Director General that the trademark
applications (now registrations) of Taiwan Kolin for the mark KOLIN under Classes 11 and 21 refer
to goods not related to KECI's services covered by the subject application before Us. According to
KECI, the said erroneous pronouncement may have far-reaching consequences considering that the
registration of "www.kolin.ph" in KECI's favor is not limited to the services covered by KECI's Class
35 application, but also goods and services similar to those in respect of which the trademark is
registered, where such use would result in a likelihood of confusion, as well as product and market
areas that are the normal potential expansion of his business.102

For ease of reference, details of the parties' registered marks relevant to the case at bench and their
important details may be viewed in the table below:

KECI's Subject KECI's related Taiwan Kolin's Taiwan Kolin's

Application registration103 Registration for registration
water under Class
dispensers104 11105
Marks www.kolin.ph KOLIN KOLIN KOLIN
Application 4-2007-100009 4-2007-005421 4-2002-011004 4-2002-011001
No.
Filing Date August 16, 2007 May 29, 2007 December 27, December 27,
2002 2002
Current Pending Registered Removed from Registered
Status register for non-
filing of 5th DAU
(re-registered
under TM
application
4/2014/8596 filed
on July 10, 2014)
Class 35 35, 40 21 11
Covered
Goods or Services: Services: Goods: Goods:
Services Business of Business of Water dispensers Airconditioners,
Covered manufacturing, manufacturing, refrigerators,
importing, importing, electric fans,
assembling or assembling or window type
selling electronic selling electronic airconditioners,
equipment or equipment or package type
apparatus apparatus airconditioners,
ceiling mounted
airconditioners,
split type
airconditioners,
dehumidifier,
washing
machines,
refrigerators,
show case
refrigerators,
chest type
 freezers, upright
freezers,
beverage
coolers, water
chillers,
household
electric fans,
industrial electric
fans, rice cooker,
stew cooker,
microwave
ovens, gas
stoves, gas
range, dish dryer,
oven toaster,
dishwashing
machine, bottle
sterilizer, electric
air pot, water
heater, grillers
and roasters,
coffee and tea
makers, turbo
broiler,
juicemaker,
blender, and
other electrical
appliances

KECI's rights from its existing trademark registrations for "KOLIN" do extend to product and market
areas that are the normal potential expansion of its business, and goods and services and those in
respect of which the trademark is registered where such use would result in a likelihood of
confusion. Section 147 of the IP Code provides that the owner of a registered mark shall have the
exclusive right to prevent all third parties not having the owner's consent from using in the course of
trade identical or similar signs for goods or services which are identical or similar to those in respect
of which the trademark is registered, where such would result in a likelihood of confusion.106

In Dermaline, we held that the registered trademark owner also enjoys protection in product and
market areas that are the normal potential expansion of his business.107 In McDonald's Corporation
v. L.C. Big Mak Burger, Inc.108 (Big Mak), we explained:

Modern law recognizes that the protection to which the owner of a trademark is entitled is not limited
to guarding his goods or business from actual market competition with identical or similar products of
the parties, but extends to all cases in which the use by a junior appropriator of a trademark or trade-
name is likely to lead to a confusion of source, as where prospective purchasers would be misled
into thinking that the complaining party has extended his business into the field (see 148 ALR 56, et
seq.; 53 Am. Jur. 576) or is in any way connected with the activities of the infringer; or when it
forestalls the normal potential expansion of his business (v. 148 ALR 77, 84; 52 Am. Jur. 576,
577).109

The abovestated principles in Dermaline and Big Mak remain to be good law. Nevertheless, the said
rulings did not contemplate the exceptional situation where there may be existing marks owned by
another proprietor that could potentially be infringed should the registered trademark owner be
afforded blanket protection in product and market areas that are the normal potential expansion of its
business. In such a case, and prior to the cancellation in the proper proceeding of any of the
concerned registrations, We so hold that the protection afforded to a trademark with regard to goods
and services in market areas that are the normal potential expansion of the trademark owner's
business must not infringe on the rights of another trademark owner with a registered mark in its
favor.

This Court is not unmindful of KECI's concerns on the relatedness of the services of KECI under
Class 35 and Taiwan Kolin's goods under Classes 11 and 21, and the possibility of confusion of
business between its and Taiwan Kolin's marks. Suffice it to state that some of its concerns may be
addressed by the 2021 Kolin case in conjunction with Senior Associate Justice Estela M. Perlas-
Bemabe's eloquent Concurring Opinion therein, which sought to reconcile KECI and Taiwan Kolin's
respective rights over the "KOLIN" mark by clarifying that Taiwan Kolin's rights are limited to the
stylization and design of KOLIN which is a design mark, in contrast to KECI who has exclusive
protection over the words, letters, or numbers themselves of KOLIN in the same type of goods and
services over which it has registration.110

It is worth stressing that the crux of the controversy before us – and the subject matter of the CA and
the lower tribunals' decisions - is KECI's application to register "www.kolin.ph" as a service mark
under Class 35; it does not involve the validity of other existing registrations. To our mind, the proper
remedy for KECI's concern that it will be damaged by Taiwan Kolin's existing registrations in Classes
11 and 21 is to file a petition to cancel the latter's registrations with the BLA, or to raise the matter
before any pending case filed by Taiwan Kolin to enforce its rights under the said registrations under
Section 151 of the IP Code.111

In the meantime, just as KECI's registration for KOLIN under Class 35 was successfully registered
and is presumed valid unless otherwise shown in an appropriate action, Taiwan Kolin's registrations
in Classes 11 and 21 remain valid and subsisting for as long as they have not been cancelled by the
IPO or the courts in the proper action. These registrations remain to be prima facie evidence of
Taiwan Kolin's ownership of the design mark KOLIN, and of the registrant's exclusive right to use the
specific stylization and design of the said mark in connection with the goods, business or services
specified in the certificate. Said right remains enforceable during the certificates' effectivity and prior
to their cancellation.112

WHEREFORE, the Petitions in G.R. No. 221347 and G.R. Nos. 221360-61 are DENIED for lack of
merit. The January 27, 2015 Decision and November 4, 2015 Resolution of the Court of Appeals in
CA-G.R. SP No. 122566 and CA-G.R. SP No. 122574 are AFFIRMED.

SO ORDERED.

Perlas-Bernabe, S.A.J., (Chairperson), and Zalameda,* J., concur.

Gaerlan and Dimaampao, JJ., on official leave.

March 04, 2019

G.R. No. 201116

PHILAM INSURANCE CO., INC., now CHARTIS PHILIPPINES INSURANCE, INC., Petitioner vs.
PARC CHATEAU CONDOMINIUM UNIT OWNERS ASSOCIATION INC., and/or EDUARDO B.
COLET, Respondents

DECISION

REYES, J. JR., J.:

The Facts

On October 7, 2003, petitioner Philam Insurance Co., Inc. (Philam) [now Chartis Philippines
Insurance, Inc.] submitted a proposal to respondent Parc Chateau Condominium Unit Owners
Association, Inc. (Parc Association) to cover fire and comprehensive general liability insurance of its
condominium building, Parc Chateau Condominium. 1

Respondent Eduardo B. Colet (Colet), as Parc Association's president, informed Philam, through a
letter dated November 24, 2003, that Parc Association's board of directors selected it, among
various insurance companies, to provide the insurance requirements of the condominium. 2

After Philam appraised the condominium, it issued Fire and Lightning Insurance Policy No.
0601502995 for ₱900 million and Comprehensive General Liability Insurance Policy No.
0301003155 for ₱1 Million, both covering the period from November 30, 2003 to November 30,
2004. The parties negotiated for a 90-day payment term of the insurance premium, worth
₱791,427.50 including taxes. This payment term was embodied in a Jumbo Risk Provision, which
further provided that the premium installment payments were due on November 30, 2003, December
30, 2003, and January 30, 2004. The Jumbo Risk Provision also stated that if any of the scheduled
payments are not received in full on or before said dates, the insurance shall be deemed to have
ceased at 4 p.m. of such date, and the policy shall automatically become void and ineffective. 3

Parc Association's board of directors found the terms unacceptable and did not pursue the
transaction. Parc Association verbally informed Philam, through its insurance agent, of the board's
decision. Since no premiums were paid, Philam made oral and written demands upon Parc
Association, who refused to do so alleging that the insurance agent had been informed of its
decision not to take up the insurance coverage. Philam sent demand letters with statement of
account claiming ₱363,215.21 unpaid premium based on Short Scale Rate Period. Philam also
cancelled the policies.
4

On June 3, 2005, Philam filed a complaint against Parc Association and Colet for recovery of
₱363,215.21 unpaid premium, plus attorney's fees and costs of suit in the Metropolitan Trial Court
(MeTC) of Makati, Branch 65. 5

The Metropolitan Trial Court's Decision

On October 30, 2007, the MeTC dismissed the case. The MeTC determined that since Philam
admitted that Parc Association did not pay its premium, one of the elements of an insurance contract
was lacking, that is, the insured must pay a premium. The MeTC explained that payment of premium
is a condition precedent for the effectivity of an insurance contract. Non-payment of premium
prevents an insurance contract from becoming binding even if there was an acceptance of the
application or issuance of a policy, unless payment of premium was waived. With one of the
elements missing, there is no insurance contract to speak of and Philam has no right to recover from
defendant Parc Association. 6
 The Regional Trial Court's Decision

Philam appealed to the Regional Trial Court (RTC) of Makati, Branch 137, which partly affirmed the
MeTC decision, except as to attorney's fees, in its June 3, 2008 Decision. The RTC pronounced that
there was no valid insurance contract between the parties because of non-payment of premium, and
there was no express waiver of full payment of premiums. 7

The RTC did not accept Philam's argument that the Jumbo Risk Provision is an implied waiver of
premium payment. The RTC elucidated that the Jumbo Risk Provision specifically requires full
payment of premium within the given period, and in case of default, the policy automatically
becomes void and ineffective. 8

Philam averred that Parc Association's newsletter and treasurer's report confirmed that there was a
perfected insurance contract. The RTC held that Parc Association's newsletter and treasurer's
report, informing the condominium unit owners that the building was insured, is not proof of a
perfected insurance contract. The newsletter stated that negotiations were ongoing to try to lower
the insurance premium per square meter, while the treasurer's report did not categorically mention
that there was a perfected and effective insurance contract. Hence, the RTC affirmed in part the
MeTC decision. 9

Philam moved for reconsideration, which the RTC denied in a Resolution dated September 17,
2009.10

The Court of Appeals' Decision

Unconvinced, Philam elevated the case before the Court of Appeals (CA) through a petition for
review under Rule 42 of the Rules of Court, as amended. 11

On July 29, 2011, the CA rendered a Decision denying Philam's petition and affirming the June 3,
12

2008 RTC Decision and September 17, 2009 Resolution. The CA discussed that based on Section
77 of Presidential Decree 612 or the Insurance Code of the Philippines, the general rule is that no
insurance contract issued by an insurance company is valid and binding unless and until the
premium has been paid. Although there are exceptions laid down in UCPB General Insurance Co.,
Inc. v. Masagana Telamart, Inc., the CA determined that none of these exceptions were applicable
13

to the case at hand.14

The first exception is in Section 77 of the Insurance Code, that is, "in the case of a life or an
industrial life policy whenever the grace period provision applies." This exception does not apply to
this case because the policies involved here are fire and comprehensive general liability insurance. 15

The second exception is in Section 78 of the Insurance Code, which states that "an acknowledgment
in a policy or contract of insurance or the receipt of premium is conclusive evidence of its payment,
so far as to make the policy binding, notwithstanding any stipulation therein that it shall not be
binding until the premium is actually paid." 16

The exception in Section 78 is inapplicable in this case, because there was no acknowledgment of
receipt of premium in the policy or insurance contract, and in fact, no premium was ever paid. 17

The third exception is taken from the case of Makati Tuscany Condominium Corporation v. Court of
Appeals, wherein the Court ruled that the general rule in Section 77 may not apply if the parties
18

agreed to the payment of premium in installment and partial payment has been made at the time of
loss. Here, the parties agreed to a payment by installment, but no actual payment was made. Thus,
the third exception has no application in this case. 19

The Makati Tuscany case also provided the fourth exception, that is, if the insurer has granted the
insured a credit term for the payment of the premium, then the general rule may not apply. Philam
20

argues that the 90-day payment term is a credit extension. However, the CA emphasized that the
Jumbo Risk Provision is clear that failure to pay each installment on the due date automatically voids
the insurance policy. Here, Parc Association did not pay any premium, which resulted in a void
insurance policy. Hence, the fourth exception finds no application.21

The fifth and last exception, taken from the UCPB case, is estoppel in instances when the insurer
had consistently granted a credit term for the payment of premium despite full awareness of Section
77. The insurer cannot deny recovery by the insured by citing the general rule in Section 77,
because the insured had relied in good faith on the credit term granted. 22

The CA held that the factual circumstances of the UCPB case differ from this case. In the UCPB
case, the insurer granted a credit extension for several years and the insured relied in good faith on
such practice. Here, the fire and lightning insurance policy and comprehensive general insurance
policy were the only policies issued by Philam, and there were no other policy/ies issued to Parc
Association in the past granting credit extension. Thus, the last exception is inapplicable.
23

After establishing that none of the exceptions are applicable, the CA concluded that the general rule
applies, that is, no insurance contract or policy is valid and binding unless and until the premium has
been paid. Since Parc Association did not pay any premium, then there was no insurance contract to
speak of.24

Moreover, the CA pointed out that the Jumbo Risk Provision clearly stated that failure to pay in full
any of the scheduled installments on or before the due date, shall render the insurance policy void
and ineffective as of 4 p.m. of such date. Parc Association's failure to pay on the first due date,
November 30, 2003, resulted in a void and ineffective policy as of 4 p.m. of November 30, 2003. As
a consequence, Philam cannot collect ₱3 63,215.21 unpaid premiums of void insurance policies. 25

Philam moved for reconsideration, which the CA denied in its March 14, 2012
Resolution. Undeterred, Philam filed a Petition for Review on Certiorari under Rule 45 of the Rules
26 27

of Court, as amended, before the Court.

The Issues Presented

In its petition, Philam assigned the following errors:

THE COURT OF APPEALS GROSSLY ERRED IN NOT FINDING THAT RESPONDENTS'

REQUEST FOR TERMS OF PAYMENT OF PREMIUM AFTER THE POLICIES WERE ISSUED
AND PETITIONER'S GRANT OF SAID REQUEST CONSTITUTE THE INTENTION OF THE
PARTIES TO BE BOUND BY THE INSURANCE CONTRACT.

II.
THE APPELLATE COURT GROSSLY ERRED IN RULING THAT THE FOURTH EXCEPTION
PROVIDED FOR UNDER SECTION 77 OF THE INSURANCE CODE OF THE PHILIPPINES DOES
NOT APPLY IN THE INSTANT CASE.

III.

THE COURT OF APPEALS GRIEVOUSLY ERRED IN NOT FINDING THAT THE NEGOTIATIONS
WHICH THE PARTIES HAD WERE WITH RESPECT TO THE TERMS OF PAYMENT OF
PREMIUM ALREADY AGREED UPON AND NOT ON THE REDUCTION OF THE AMOUNT
THEREOF AS TO NEGATE THE EXISTENCE OF A PERFECTED CONTRACT OF INSURANCE
BETWEEN THEM. 28

In its Comment, Parc Association alleged that Philam did not raise new issues before the Court,
29

and the issues presented had been resolved by the MeTC and RTC. Parc Association averred that
30

Philam's proposal was accepted for consideration of the board of directors, who later disapproved
the terms and conditions. As such, there was no meeting of the minds of the parties, and there was
no insurance contract initiated. 31

Parc Association further argued that non-payment of premium means no juridical tie was created
between the insured and the insurer, and the insured was not exposed to the insurable risk for lack
of consideration. Parc Association asserted that it would be unjust to allow Philam to recover
premiums on an insurance contract that was never effective and despite not having been exposed to
any risk at all. 32

In its Reply, Philam insisted that there was a perfected insurance contract, and Parc Association's
33

request for terms of payment indicate its intention to be bound by the insurance contract. 34

In sum, the sole issue to be resolved is whether or not the CA committed a reversible error in
affirming the RTC decision and ruling that Philam has no right to recover the unpaid premium based
on void and ineffective insurance policies.

The Court's Ruling

The petition is denied.

Rule 45 of the Rules of Court, as amended, states that only questions of law shall be raised in a
petition for review on certiorari. While the rule has exceptions, they are irrelevant in this case, as
Philam did not properly plead and substantiate the applicability of the exceptions. Thus, the Court
applies the general rule. 35

In resolving whether the CA was correct in affirming the RTC decision, the Court considered the
following simplified alleged errors as presented by Philam:

1. Whether or not respondents' request for terms of payment of premium after the policies were
issued and the grant of said request by petitioner constitute the parties' intention to be bound by the
insurance contract;

2. Whether or not the fourth exception provided for under Section 77 of the Insurance Code of the
Philippines applies in the instant case; and
3. Whether or not the negotiations which the parties had were with respect to the terms of payment
of premium already agreed upon by the parties and not on the lowering of the amount of premium as
to negate the existence of a perfected contract of insurance. 36

The first and third alleged errors refer to the request for the terms of payment. Does Parc
Association's request and Philam's subsequent grant of the request constitute their intention to be
bound by the insurance contract? Does the negotiation refer to the terms of payment or to the
lowering of the premium?

In arriving at the answers to the questions, the Court has to determine the intention of the parties. In
doing so, the Court has to read the transcript of stenographic notes of the witnesses, and review the
language or tenor of some of the documentary evidence, such as: Philam's proposal on October 7,
2003, Colet's acceptance letter dated November 24, 2003, the Jumbo Risk Provision, and the written
communications between Philam and Parc Association.

In short, the Court has to re-evaluate the evidence on record. Evaluation of evidence is an indication
that the question or issue posed before the Court is a question of fact or a factual issue.

In Century Iron Works, Inc. v. Biñas the Court differentiated between question of law and question
37

of fact.

A question of law arises when there is doubt as to what the law is on a certain state of facts, while
there is a question of fact when the doubt arises as to the truth or falsity of the alleged facts. For a
question to be one of law, the question must not involve an examination of the probative value of the
evidence presented by the litigants or any of them. The resolution of the issue must rest solely on
what the law provides on the given set of circumstances. Once it is clear that the issue invites a
review of the evidence presented, the question posed is one of fact. (Citation omitted)

Thus, the test of whether a question is one of law or of fact is not the appellation given to such
question by the party raising the same; rather, it is whether the appellate court can determine the
issue raised without reviewing or evaluating the evidence, in which case, it is a question of law;
otherwise it is a question of fact. (Citation omitted)
38

Applying the test to this case, it is without a doubt that the questions/issues presented before the
Court are factual in nature, which are not proper subjects of a petition for review on certiorari under
Rule 45 of the Rules of Court, as amended. It has been repeatedly pronounced that the Court is not
a trier of facts. Evaluation of evidence is the function of the trial court.

As for the second alleged error, Philam avers that this case falls under the fourth exception as
explained in the Makati Tuscany case. The Makati Tuscany case provides that if the insurer has
granted the insured a credit term for the payment of the premium, it is an exception to the general
rule that premium must first be paid before the effectivity of an insurance contract. Philam argues
that the 90-day payment term is a credit extension and should be considered as an exception to the
general rule.

However, the CA correctly determined that the Jumbo Risk Provision clearly indicates that failure to
pay in full any of the scheduled installments on or before the due date shall render the insurance
policy void and ineffective as of 4 p.m. of such date. Parc Association's failure to pay on the first due
date (November 30, 2003), resulted in a void and ineffective policy as of 4 p.m. of November 30,
2003. Hence, there is no credit extension to consider as the Jumbo Risk Provision itself expressly
cuts off the inception of the insurance policy in case of default.
The Court resolves to deny the petition after finding that the CA did not commit any reversible error
in the assailed decision and resolution. The CA had exhaustively explained the law and
jurisprudence, which are the bases of its decision and resolution. Both trial courts and the appellate
court are consistent in its findings of fact that there is no perfected insurance contract, because of
the absence of one of the elements, that is, payment of premium. As a consequence, Philam cannot
collect P363,215.21 unpaid premiums of void insurance policies.

WHEREFORE, premises considered, the petition is DENIED. The Court of Appeals Decision dated
July 29, 2011 and Resolution dated March 14, 2012 in CA-G.R. SP No. 110980 are AFFIRMED.

SO ORDERED.

Carpio, Senior Associate Justice, (Chairperson), Caguioa, and Hernando, JJ., concur. *

Perlas-Bernabe, J., on wellness leave.

G.R. No. 207526. October 03, 2018 ]

THE INSULAR ASSURANCE CO., LTD., PETITIONER, V. THE HEIRS OF JOSE H.
ALVAREZ, RESPONDENTS.

[G.R. No. 210156, October 3, 2018]

UNION BANK OF THE PHILIPPINES, PETITIONER, V. HEIRS OF JOSE H.

ALVAREZ, RESPONDENTS.

DECISION
LEONEN, J.:
The Insurance Code dispenses with proof of fraudulent intent in cases of rescission due to concealment, but not so in
cases of rescission due to false representations. When an abundance of available documentary evidence can be
referenced to demonstrate a design to defraud, presenting a singular document with an erroneous entry does not
qualify as clear and convincing proof of fraudulent intent. Neither does belatedly invoking just one other document,
which was not even authored by the alleged miscreant.
This resolves the consolidated Petitions for Review on Certiorari, under Rule 45 of the 1997 Rules of Civil Procedure.
The first, docketed as G.R. No. 207526,[1] was brought by The Insular Life Assurance Co., Ltd. (Insular Life). The
second, docketed as G.R. No. 210156,[2] was brought by Union Bank of the Philippines (UnionBank). These
consolidated petitions seek the reversal of the assailed Court of Appeals May 21, 2013 Decision[3] and November 6,
2013 Resolution[4] in CA-G.R. CV No. 91820.
The assailed Court of Appeals May 21, 2013 Decision denied Insular Life's and UnionBank's separate appeals and
affirmed the January 29, 2007 Decision[5] of Branch 148, Regional Trial Court, Makati City. The Regional Trial Court
ruled in favor of Jose H. Alvarez's (Alvarez) heirs[6] (the Heirs of Alvarez) in their action for specific performance
against Insular Life and UnionBank. It ordered compliance with the insurance undertaking on the Group Mortgage
Redemption Insurance covering a loan obtained by Alvarez from UnionBank by applying its proceeds as payment for
that loan. It also nullified the extrajudicial foreclosure ensuing from the non-payment of Alvarez's loan, and required
UnionBank to reconvey title and ownership over the foreclosed property to Alvarez's estate. Lastly, it ordered Insular
Life's and UnionBank's payment of attorney's fees and costs of suit.[7]
The assailed Court of Appeals November 6, 2013 Resolution denied UnionBank's Motion for Reconsideration.[8]
Alvarez and his wife, Adelina, owned a residential lot with improvements covered by Transfer Certificate of Title
(TCT) No. C-315023 and registered in the Caloocan City Registry of Deeds.[9]
On June 18, 1997, Alvarez applied for and was granted a housing loan by UnionBank in the amount of P648,000.00.
This loan was secured by a promissory note,[10] a real estate mortgage over the lot,[11] and a mortgage redemption
insurance taken on the life of Alvarez with UnionBank as beneficiary. Alvarez was among the mortgagors included in
the list of qualified debtors covered by the Group Mortgage Redemption Insurance that UnionBank had with Insular
Life.[12]
Alvarez passed away on April 17, 1998.[13] In May 1998, UnionBank filed with Insular Life a death claim under
Alvarez's name pursuant to the Group Mortgage Redemption Insurance. In line with Insular Life's standard
procedures, UnionBank was required to submit documents to support the claim. These included: (1) Alvarez's birth,
marriage, and death certificates; (2) the attending physician's statement; (3) the claimant's statement; and (4)
Alvarez's statement of account.[14]
Insular Life denied the claim after determining that Alvarez was not eligible for coverage as he was supposedly more
than 60 years old at the time of his loan's approval.[15]
With the claim's denial, the monthly amortizations of the loan stood unpaid. UnionBank sent the Heirs of Alvarez a
demand letter,[16] giving them 10 days to vacate the lot. Subsequently, on October 4, 1999, the lot was foreclosed and
sold at a public auction with UnionBank as the highest bidder.[17]
On February 14, 2001, the Heirs of Alvarez filed a Complaint[18] for Declaration of Nullity of Contract and Damages
against UnionBank, a certain Alfonso P. Miranda (Miranda), who supposedly benefitted from the loan, and the insurer
which was identified only as John Doe.[19] The Heirs of Alvarez denied knowledge of any loan obtained by Alvarez.[20]
The Heirs of Alvarez claimed that after Alvarez's death, they came upon a document captioned "Letter of
Undertaking," which appeared to have been sent by UnionBank to Miranda. In this document, UnionBank bound itself
to deliver to Miranda P466,000.00 of the approved P648,000.00 housing loan, provided that Miranda would deliver to
it TCT No. C-315023, "free from any liens and/or encumbrances."[21]
The Complaint was later amended and converted into one for specific performance[22] to include a demand against
Insular Life to fulfill its obligation as an insurer under the Group Mortgage Redemption Insurance.[23]
In its defense, UnionBank asserted that the Heirs of Alvarez could not feign ignorance over the existence of the loan
and mortgage considering the Special Power of Attorney[24] executed by Adelina in favor of her late husband, which
authorized him to apply for a housing loan with UnionBank.[25]
For its part, Insular Life maintained that based on the documents submitted by UnionBank, Alvarez was no longer
eligible under the Group Mortgage Redemption Insurance since he was more than 60 years old when his loan was
approved.[26]
In its January 29, 2007 Decision,[27] the Regional Trial Court ruled in favor of the Heirs of Alvarez. It found no
indication that Alvarez had any fraudulent intent when he gave UnionBank information about his age and date of
birth. It explained that UnionBank initiated and negotiated the Group Mortgage Redemption Insurance with Insular
Life, and that "ordinary customers will not know about [insurance policies such as this] unless it is brought to their
knowledge by the bank."[28] It noted that if UnionBank's personnel were mindful of their duties and if Alvarez appeared
to be disqualified for the insurance, they should have immediately informed him of his disqualification. It emphasized
that in evaluating Alvarez's worthiness for the loan, UnionBank had been in possession of materials sufficient to
inform itself of Alvarez's personal circumstances. It added that if Insular Life had any doubt on the information that
UnionBank had provided, it should have inquired further instead of relying solely on the information readily available
to it and immediately refusing to pay.[29]
The dispositive portion of the Regional Trial Court's January 29, 2007 Decision read:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs and against defendants
order (sic):

1. Defendants to comply with the insurance undertaking under Mortgage Redemption Insurance Policy No. G-098496
by paying its proceeds to be applied as payment of the outstanding loan obligation of deceased Jose H. Alvarez with
defendant Union Bank;

2. The extrajudicial foreclosure of the real estate mortgage over Jose H. Alvarez's TCT No. C-315023 a nullity and
without legal force and effect and to release the mortgage encumbrance thereon;

3. Defendant Union Bank to reconvey the title and ownership over TCT No. C-315023 to the Estate of the deceased
Jose H. Alvarez for the benefit of his heirs and successors-in-interest;

4. Defendants jointly and severally to pay the plaintiffs the sum of P50,000.00 as and for attorney's fees;

5. Defendants jointly and severally to pay the costs of the suit.

SO ORDERED.[30]
UnionBank[31] and Insular Life[32] filed separate appeals before the Court of Appeals.
In its assailed May 21, 2013 Decision,[33] the Court of Appeals affirmed the Regional Trial Court's ruling. It noted that
the errors assigned by Insular Life and UnionBank to the Regional Trial Court boiled down to the issue of whether or
not Alvarez was guilty of fraudulent misrepresentation as to warrant the rescission of the Group Mortgage
Redemption Insurance obtained by UnionBank on Alvarez's life. It explained that fraud is never presumed and
fraudulent misrepresentation as a defense of the insurer to avoid liability must be established by convincing evidence.
Insular Life, in this case, failed to establish this defense. It only relied on Alvarez's Health Statement Form where he
wrote "1942" as his birth year. However, this form alone was insufficient to prove that he fraudulently intended to
misrepresent his age. It noted that aside from the Health Statement Form, Alvarez had to fill out an application for
insurance. This application would have supported the conclusion that he consistently wrote "1942" in all the
documents that he had submitted to UnionBank. However, the records made no reference to this document.[34]
The Court of Appeals added that assuming that fraudulent misrepresentation entitled Insular Life to rescind the
contract, it should have first complied with certain conditions before it could exercise its right to rescind. The
conditions were:

(1) prior notice of cancellation to [the] insured; (2) notice must be based on the occurrence after effective date of the
policy of one or more grounds mentioned; (3) must be in writing, mailed or delivered to the insured at the address
shown in the policy; and (4) must state the grounds relied upon provided in Section 64 of the Insurance Code and
upon [the] request of [the] insured, to furnish facts on which cancellation is based.[35]
None of these conditions were fulfilled. Finally, the letter of denial dated April 8, 1999 was furnished only to
UnionBank.[36]
Insular Life opted to directly appeal before this Court. Its appeal was docketed as G.R. No. 207526.[37] UnionBank, on
the other hand, filed its Motion for Reconsideration (of the Decision dated May 21, 2013),[38] which the Court of
Appeals denied in its November 6, 2013 Resolution.[39] UnionBank then filed before this Court its Petition, docketed
as G.R. No. 210156.[40]
In its March 12, 2014 Resolution, this Court consolidated Insular Life's and UnionBank's Petitions.[41]
In response to the Court of Appeals' reasoning that intent to defraud must be established, Insular Life pinpoints
concealment, rather than fraudulent misrepresentation, as the key to the validity of its rescission. It asserts that
Alvarez's concealment of his age, whether intentional or unintentional, entitles it to rescind the insurance contract.[42] It
claims that proof of fraudulent intent is not necessary for the insurer to rescind the contract on account of
concealment.[43] It adds that it did not rely solely on Alvarez's Health Statement Form but also on his representations
during the background check conducted by UnionBank where he said that he was only 55 years old at the time of
application. As an insurance contract is a contract uberrima fides, it claims that it has every right to rely on Alvarez's
good faith in its dealing with him.[44]
UnionBank claims that the real estate mortgage is not affected by the status of the Group Mortgage Redemption
Insurance as they are two (2) different contracts. Thus, any concealment made by Alvarez should not result in the
invalidation of the foreclosure.[45]
For this Court's resolution are the following issues:

First, whether or not petitioner The Insular Life Assurance Co., Ltd. is obliged to pay Union Bank of the Philippines
the balance of Jose H. Alvarez's loan given the claim that he lied about his age at the time of the approval of his loan;
and

Second, whether or not petitioner Union Bank of the Philippines was correct in proceeding with the foreclosure
following Insular Life Assurance Co., Ltd.'s refusal to pay.

I.A
Fraud is not to be presumed, for "otherwise, courts would be indulging in speculations and surmises."[46] Moreover, it
is not to be established lightly. Rather, "[i]t must be established by clear and convincing evidence . . . [; a] mere
preponderance of evidence is not even adequate to prove fraud."[47] These precepts hold true when allegations of
fraud are raised as grounds justifying the invalidation of contracts, as the fraud committed by a party tends to vitiate
the other party's consent.[48]
Citing Section 27 of the Insurance Code, however, Insular Life asserts that in cases of rescission due to concealment,
i.e., when a party "neglect[s] to communicate that which [he or she] knows and ought to communicate,"[49] proof of
fraudulent intent is not necessary.[50]
Section 27 reads:

Section 27. A concealment whether intentional or unintentional entitles the injured party to rescind a contract of
insurance. (Emphasis supplied)
The statutory text is unequivocal. Insular Life correctly notes that proof of fraudulent intent is unnecessary for the
rescission of an insurance contract on account of concealment.

This is neither because intent to defraud is intrinsically irrelevant in concealment, nor because concealment has
nothing to do with fraud. To the contrary, it is because in insurance contracts, concealing material facts[51] is inherently
fraudulent: "if a material fact is actually known to the [insured], its concealment must of itself necessarily be a
fraud."[52] When one knows a material fact and conceals it, "it is difficult to see how the inference of a fraudulent intent
or intentional concealment can be avoided."[53] Thus, a concealment, regardless of actual intent to defraud, "is
equivalent to a false representation."[54]
This Court has long settled this equivalence. Argente v. West Coast Life Insurance,[55] quoting heavily from Joyce's
The Law of Insurance, explained how concealment of material facts in insurance contracts is tantamount to causal
fraud,[56] deceptively inducing an insurer into "accepting the risk, or accepting it at the rate of premium agreed
upon."[57] Argente explained:
One ground for the rescission of a contract of insurance under the Insurance Act is "a concealment," which in section
25 is defined as "A neglect to communicate that which a party knows and ought to communicate." Appellant argues
that the alleged concealment was immaterial and insufficient to avoid the policy. We cannot agree. . . . If the policy
was procured by fraudulent representations, the contract of insurance apparently set forth therein was never legally
existent. It can fairly be assumed that had the true facts been disclosed by the assured, the insurance would never
have been granted.

In Joyce, The Law of Insurance, second edition, volume 3, Chapter LV, is found the following:

Concealment exists where the assured has knowledge of a fact material to the risk, and honesty, good faith, and fair
dealing requires that he should communicate it to the assured, but he designedly and intentionally withholds the
same.

Another rule is that if the assured undertakes to state all the circumstances affecting the risk, a full and fair statement
of all is required.

It is also held that the concealment must, in the absence of inquiries, be not only material, but fraudulent, or the fact
must have been intentionally withheld; so it is held under English law that if no inquiries are made and no fraud or
design to conceal enters into the concealment the contract is not avoided. And it is determined that even though
silence may constitute misrepresentation or concealment it is not of itself necessarily so as it is a question of fact. Nor
is there a concealment justifying a forfeiture where the fact of insanity is not disclosed no questions being asked
concerning the same. . . .

But it would seem that if a material fact is actually known to the assured, its concealment must of itself necessarily be
a fraud, and if the fact is one which the assured ought to know, or is presumed to know, the presumption of
knowledge ought to place the assured in the same position as in the former case with relation to material facts; and if
the jury in such cases find the fact material, and one tending to increase the risk, it is difficult to see how the inference
of a fraudulent intent or intentional concealment can be avoided. And it is declared that if a material fact is concealed
by assured it is equivalent to a false representation that it does not exist and that the essentials are the truth of the
representations whether they were intended to mislead and did insurer accept them as true and act upon them to his
prejudice. So it is decided that under a stipulation voiding the policy for concealment or misrepresentation of any
material fact or if his interest is not truly stated or is other than the sole and unconditional ownership the facts are
unimportant that insured did not intend to deceive or withhold information as to encumbrances even though no
questions were asked. And if insured while being examined for life insurance and knowing that she had heart
disease, falsely stated that she was in good health, and though she could not read the application, it was explained to
her and the questions asked through an interpreter, and the application like the policy contained a provision that no
liability should be incurred unless the policy was delivered while the insured was in good health, the court properly
directed a verdict for the insurer, though a witness who was present at the examination testified that the insured was
not asked whether she had heart disease.
....

The basis of the rule vitiating the contract in cases of concealment is that it misleads or deceives the insurer into
accepting the risk, or accepting it at the rate of premium agreed upon; The insurer, relying upon the belief that the
assured will disclose every material fact within his actual or presumed knowledge, is misled into a belief that the
circumstance withheld does not exist, and he is thereby induced to estimate the risk upon a false basis that it does
not exist. The principal question, therefore, must be, Was the assurer misled or deceived into entering a contract
obligation or in fixing the premium of insurance by a withholding of material information or facts within the assured's
knowledge or presumed knowledge?

It therefore follows that the assurer in assuming a risk is entitled to know every material fact of which the assured has
exclusive or peculiar knowledge, as well as all material facts which directly tend to increase the hazard or risk which
are known by the assured, or which ought to be or are presumed to be known by him. And a concealment of such
facts vitiates the policy. "It does not seem to be necessary . . . that the . . . suppression of the truth should have been
willful." If it were but an inadvertent omission, yet if it were material to the risk and such as the plaintiff should have
known to be so, it would render the policy void. But it is held that if untrue or false answers are given in response to
inquiries and they relate to material facts the policy is avoided without regard to the knowledge or fraud of assured,
although under the statute statements are representations which must be fraudulent to avoid the policy. So under
certain codes the important inquiries are whether the concealment was willful and related to a matter material to the
risk.[58] (Emphasis supplied)
Echoing Argente, Saturnino v. Philippine American Life Insurance Co.[59] stated:
In this jurisdiction, a concealment, whether intentional or unintentional, entitles the insurer to rescind the contract of
insurance, concealment being defined as "negligence to communicate that which a party knows and ought to
communicate" (Sections 25 & 26, Act No. 2427). In the case of Argente vs. West Coast Life Insurance Co., 51 Phil.
725, 732, this Court said, quoting from Joyce, The Law of Insurance, 2nd ed. Vol. 3:
The basis of the rule vitiating the contract in cases of concealment is that it misleads or deceives the insurer into
accepting the risk, or accepting it at the rate of premium agreed upon. The insurer, relying upon the belief that the
assured will disclose every material fact within his actual or presumed knowledge, is misled into a belief that the
circumstance withheld does not exist, and he is thereby induced to estimate the risk upon a false basis that it does
not exist.[60]
In Vda. de Canilang v. Court of Appeals,[61] this Court considered an alternative version of Section 27, i.e., prior to the
Insurance Code's amendment by Batas Pambansa Blg. 874, which omitted the qualifier "whether intentional or
unintentional." Vda. de Canilang clarified that even without this qualifier, Section 27 still covers '"any concealment'
without regard to whether such concealment is intentional or unintentional,"[62] thus:
The Insurance Commissioner had also ruled that the failure of Great Pacific to convey certain information to the
insurer was not "intentional" in nature, for the reason that Jaime Canilang believed that he was suffering from minor
ailment like a common cold. Section 27 of the Insurance Code of 1978 as it existed from 1974 up to 1985, that is,
throughout the time range material for present purposes, provided that:

Sec. 27. A concealment entitles the injured party to rescind a contract of insurance.

The preceding statute, Act No. 2427, as it stood from 1914 up to 1974, had provided:
Sec. 26. A concealment, whether intentional or unintentional, entitles the injured party to rescind a contract of
insurance.
Upon the other hand, in 1985, the Insurance Code of 1978 was amended by B.P. Blg. 874. This subsequent statute
modified Section 27 of the Insurance Code of 1978 so as to read as follows:

Sec. 27. A concealment whether intentional or unintentional entitles the injured party to rescind a contract of
insurance.
The unspoken theory of the Insurance Commissioner appears to have been that by deleting the phrase "intentional or
unintentional," the Insurance Code of 1978 (prior to its amendment by B.P. Blg. 874) intended to limit the kinds of
concealment which generate a right to rescind on the part of the injured party to "intentional concealments." This
argument is not persuasive. As a simple matter of grammar, it may be noted that "intentional" and "unintentional"
cancel each other out. The net result therefore of the phrase "whether intentional or unintentional" is precisely to
leave unqualified the term "concealment." Thus, Section 27 of the Insurance Code of 1978 is properly read as
referring to "any concealment" without regard to whether such concealment is intentional or unintentional. The phrase
"whether intentional or unintentional" was in fact superfluous. The deletion of the phrase "whether intentional or
unintentional" could not have had the effect of imposing an affirmative requirement that a concealment must be
intentional if it is to entitle the injured party to rescind a contract of insurance. The restoration in 1985 by B.P. Blg.
874 of the phrase "whether intentional or unintentional" merely underscored the fact that all throughout (from 1914 to
1985), the statute did not require proof that concealment must be "intentional" in order to authorize rescission by the
injured party.[63] (Emphasis supplied)
Following Vda. de Canilang, this Court was categorical in Sunlife Assurance Co. of Canada v. Court of Appeals:
[64]
'"good faith' is no defense in concealment."[65]
I.B
It does not escape this Court's attention that there have been decisions that maintained that in cases of concealment,
"fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the
contract."[66] However, these decisions proceed from an inordinately segregated reading of Argente and have not
been heedful of plain statutory text. While focusing on the equivalence between concealment and false
representation, they fail to account for the manifest textual peculiarity whereby the negation of distinctions between
intentional and unintentional acts is found only in Section 27, the provision concerning rescission due to concealment,
but not in the counterpart provision concerning false representations.[67]
Ng Gan Zee v. Asian Crusader Life,[68] decided in 1983, stated:
Section 27 of the Insurance Law [Act 2427] provides:
Sec. 27. Such party to a contract of insurance must communicate to the other, in good faith, all facts within his
knowledge which are material to the contract, and which the other has not the means of ascertaining, and as to which
he makes no warranty.

Thus, "concealment exists where the assured had knowledge of a fact material to the risk, and honesty, good faith,
and fair dealing requires that he should communicate it to the assurer, but he designedly and intentionally withholds
the same."

It has also been held "that the concealment must, in the absence of inquiries, be not only material, but fraudulent, or
the fact must have been intentionally withheld."
Assuming that the aforesaid answer given by the insured is false, as claimed by the appellant. Sec. 27 of the
Insurance Law, above-quoted, nevertheless requires that fraudulent intent on the part of the insured be established to
entitle the insurer to rescind the contract. And as correctly observed by the lower court, "misrepresentation as a
defense of the insurer to avoid liability is an 'affirmative' defense. The duty to establish such a defense by satisfactory
and convincing evidence rests upon the defendant. The evidence before the Court does not clearly and satisfactorily
establish that defense."[69] (Emphasis supplied)
Ng Gan Zee makes a fundamental error in interpretation.
Ng Gan Zee's fourth footnote purports that the phrase quoted in the italicized paragraph was from Argente.[70] While
the phrase indeed appears in Argente, it is not Argente itself which stated the quoted phrase; rather, it was Joyce's
The Law of Insurance.
In any case, Ng Gan Zee limited itself to a brief quote from Joyce. It discarded much of the discussion
that Argente lifted from Joyce. Most notably, it discarded the portion where Joyce explained that concealment is
necessarily fraudulent when the matter that was concealed is "a material fact . . . actually known to the
[insured]."[71] Thus, Ng Gan Zee omitted the discussion explaining and accounting for why proof of actual fraudulent
intent may be dispensed with in cases of concealment, i.e., that concealment of material facts is fraudulent in and of
itself. Contrast this with Saturnino which, though also quoting only briefly from Argente and Joyce, did not cursorily
focus on the equivalence between concealment and false representations, but rather on the underlying reason for this
equivalence. Ng Gan Zee focused on the result, i.e., equivalence, without accounting for the cause.
In like manner as Ng Gan Zee, Great Pacific Life v. Court of Appeals[72] stated:
The second assigned error refers to an alleged concealment that the petitioner interposed as its defense to annul the
insurance contract. Petitioner contends that Dr. Leuterio failed to disclose that he had hypertension, which might have
caused his death. Concealment exists where the assured had knowledge of a fact material to the risk, and honesty,
good faith, and fair dealing requires that he should communicate it to the assured, but he designedly and intentionally
withholds the same.
....

The fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the contract.
Misrepresentation as a defense of the insurer to avoid liability is an affirmative defense and the duty to establish such
defense by satisfactory and convincing evidence rests upon the insurer. In the case at bar, the petitioner failed to
clearly and satisfactorily establish its defense, and is therefore liable to pay the proceeds of the insurance.
[73]
(Emphasis supplied)
So too, Philamcare Health Systems, Inc. v. Court of Appeals[74] stated:
The fraudulent intent on the part of the insured must be established to warrant rescission of the insurance
contract. Concealment as a defense for the health care provider or insurer to avoid liability is an affirmative defense
and the duty to establish such defense by satisfactory and convincing evidence rests upon the provider or insurer.
[75]
(Emphasis supplied)
Great Pacific Life and Philamcare perpetuate Ng Gan Zee's unfortunate error.
Of the two (2) paragraphs this Court quoted from Great Pacific Life, the first cites Argente.[76] Much like Ng Gan Zee, it
quotes an isolated portion of Joyce but fails to account for that part of Joyce's discussion that explains how fraud
inheres in concealment. The last sentence in this first quoted paragraph merely reproduces the first paragraph
that Argente lifted from Joyce. The second quoted paragraph cites Ng Gan Zee[77] and confounds concealment with
misrepresentation.
The first sentence of the quoted paragraph from Philamcare cites Great Pacific Life and Ng Gan Zee.[78] At this
juncture, a contagion of Ng Gan Zee's error can be observed.
More than misreading Argente and Joyce, Ng Gan Zee, Great Pacific Life, and Philamcare contradict Section 27's
plain text. The statute's clear and unmistakable text must prevail. For purposes of rescission, Section 27 of the
Insurance Code unequivocally negates any distinction between intentional and unintentional concealments.
Pronouncements in jurisprudence cannot undermine this explicit legislative intent.
I.C
While Insular Life correctly reads Section 27 as making no distinction between intentional and unintentional
concealment, it erroneously pleads Section 27 as the proper statutory anchor of this case.
The Insurance Code distinguishes representations from concealments. Chapter 1, Title 4 is on concealments. It
spans Sections 26 to 35 of the Insurance Code;[79] it is where Section 27 is found. Chapter 1, Title 5 is on
representations. It spans Sections 36 to 48 of the Insurance Code.[80]
Section 26 defines concealment as "[a] neglect to communicate that which a party knows and ought to
communicate." However, Alvarez did not withhold information on or neglect to state his age. He made an actual
declaration and assertion about it.
What this case involves, instead, is an allegedly false representation. Section 44 of the Insurance Code states, "A
representation is to be deemed false when the facts fail to correspond with its assertions or stipulations." If indeed
Alvarez misdeclared his age such that his assertion fails to correspond with his factual age, he made a false
representation, not a concealment.

At no point does Chapter 1, Title 5 of the Insurance Code replicate Section 27's language negating the distinction
between intentional and unintentional concealment. Section 45 is Chapter 1, Title 5's counterpart provision to Section
27, and concerns rescission due to false representations. It reads:

Section 45. If a representation is false in a material point, whether affirmative or promissory, the injured party is
entitled to rescind the contract from the time when the representation becomes false.

Not being similarly qualified as rescission under Section 27, rescission under Section 45 remains subject to the basic
precept of fraud having to be proven by clear and convincing evidence. In this respect, Ng Gan Zee's and similar
cases' pronouncements on the need for proof of fraudulent intent in cases of misrepresentation are logically sound,
albeit the specific reference to Argente as ultimate authority is misplaced. Thus, while Great Pacific Life confounded
concealment with misrepresentation by its citation of Ng Gan Zee, it nevertheless acceptably stated that:
The fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the contract.
Misrepresentation as a defense of the insurer to avoid liability is an affirmative defense and the duty to establish such
defense by satisfactory and convincing evidence rests upon the insurer.[81]
Conformably, subsequent fraud cases citing Great Pacific Life which do not exclusively concern concealment rightly
maintain that "[f]raudulent intent on the part of the insured must be established to entitle the insurer to rescind the
contract."[82] To illustrate, Manila Bankers Life Insurance Corp. v. Aban[83] was correct in explaining:
With the above crucial finding of fact — that it was Sotero who obtained the insurance for herself — petitioner's case
is severely weakened, if not totally disproved. Allegations of fraud, which are predicated on respondent's alleged
posing as Sotero and forgery of her signature in the insurance application, are at once belied by the trial and
appellate courts' finding that Sotero herself took out the insurance for herself. "Fraudulent intent on the part of the
insured must be established to entitle the insurer to rescind the contract." In the absence of proof of such fraudulent
intent, no right to rescind arises.[84]
Concealment applies only with respect to material facts. That is, those facts which by their nature would clearly,
unequivocally, and logically be known by the insured as necessary for the insurer to calculate the proper risks.

The absence of the requirement of intention definitely increases the onus on the insured. Between the insured and
the insurer, it is true that the latter may have more resources to evaluate risks. Insurance companies are imbued with
public trust in the sense that they have the obligation to ensure that they will be able to provide succor to those that
enter into contracts with them by being both frugal and, at the same time, diligent in their assessment of the risk
which they take with every insurance contract. However, even with their tremendous resources, a material fact
concealed by the insured cannot simply be considered by the insurance company. The insurance company may have
huge resources, but the law does not require it to be omniscient.

On the other hand, when the insured makes a representation, it is incumbent on them to assure themselves that a
representation on a material fact is not false; and if it is false, that it is not a fraudulent misrepresentation of a material
fact. This returns the burden to insurance companies, which, in general, have more resources than the insured to
check the veracity of the insured's beliefs as to a statement of fact. Consciousness in defraudation is imperative and
it is for the insurer to show this.

There may be a mistaken impression, on the part of the insured, on the extent to which precision on one's age may
alter the calculation of risks with definitiveness. Deliberation attendant to an apparently inaccurate declaration is vital
to ascertaining fraud.

I.D
Spouses Manalo v. Roldan-Confesor[85] explained what qualifies as clear and convincing proof:
Clear and convincing proof is ". . . more than mere preponderance, but not to extent of such certainty as is required
beyond reasonable doubt as in criminal cases . . ."while substantial evidence ". . . consists of more than a mere
scintilla of evidence but may be somewhat less than a preponderance . . ." Consequently, in the hierarchy of
evidentiary values, We find proof beyond reasonable doubt at the highest level, followed by clear and convincing
evidence, preponderance of evidence, and substantial evidence, in that order.[86]
The assailed Court of Appeals May 21, 2013 Decision discussed the evidentiary deficiency in Insular Life's cause,
i.e., how it relied on nothing but a single piece of evidence to prove fraudulent intent:

At bar, Insular Life basically relied on the Health Statement form personally accomplished by Jose Alvarez wherein
he wrote that his birth year was 1942. However, such form alone is not sufficient absent any other indications that he
purposely wrote 1942 as his birth year. It should be pointed out that, apart from a health statement form, an
application for insurance is required first and foremost to be answered and filled-up. However, the records are
deficient of this application which would eventually depict to Us Jose Alvarez's fraudulent intent to misrepresent his
age. For, if he continually written (sic) 1942 in all the documents he submitted with UBP and Insular Life then there is
really a clear precursor of his fraudulent intent. Otherwise, a mere Health Statement form bearing a wrong birth year
should not be relied at.

As aptly pointed out by the court a quo:

....
If the defendant Insular Life had any doubt about the information, particularly the data which are material to the risk,
such as the age of the insured, which defendant Union Bank provided, it is not justified for the insurer to rely solely
therefrom, but it is obligated under the circumstances to make further inquiry. . . .[87]
The Court of Appeals' observations are well-taken. Consistent with the requirement of clear and convincing evidence,
it was Insular Life's burden to establish the merits of its own case. Relative strength as against respondents' evidence
does not suffice.

A single piece of evidence hardly qualifies as clear and convincing. Its contents could just as easily have been an
isolated mistake.

Alvarez must have accomplished and submitted many other documents when he applied for the housing loan and
executed supporting instruments like the promissory note, real estate mortgage, and Group Mortgage Redemption
Insurance. A design to defraud would have demanded his consistency. He needed to maintain appearances across
all documents. Otherwise, he would doom his own ruse.

He needed to have been consistent, not only before Insular Life, but even before UnionBank. Even as it was only
Insular Life's approval that was at stake with the Group Mortgage Redemption Insurance, Alvarez must have realized
that as it was an accessory agreement to his housing loan with UnionBank. Insular Life was well in a position to verify
information, whether through simple cross referencing or through concerted queries with UnionBank.

Despite these circumstances, the best that Insular Life could come up with before the Regional Trial Court and the
Court of Appeals was a single document. The Court of Appeals was straightforward, i.e., the most basic document
that Alvarez accomplished in relation to Insular Life must have been an insurance application form. Strangely, Insular
Life failed to adduce even this document—a piece of evidence that was not only commonsensical, but also one which
has always been in its possession and disposal.

Even now, before this Court, Insular Life has been unable to address the importuning for it to account for Alvarez's
insurance application form. Given the basic presumption under our rules on evidence "[t]hat evidence willfully
suppressed would be adverse if produced,"[88] this raises doubts, perhaps not entirely on Insular Life's good faith, but,
at the very least, on the certainty and confidence it has in its own evidence.
Rather than demonstrate Alvarez's consistent fraudulent design, Insular Life comes before this Court pleading
nothing but just one other instance when Alvarez supposedly declared himself to have been 55 years old. It claims
that it did not rely solely on Alvarez's Health Statement Form but also on his Background Checking Report.[89]
Reliance on this report is problematic. It was not prepared by Alvarez himself. Rather, it was accomplished by a
UnionBank employee following the conduct of credit investigation. Insular Life notes a statement by UnionBank's
Josefina Barte that all information in the Background Checking Report was supplied by Alvarez.[90] But this is a self-
serving statement, wholly reliant on the assumption of that employee's flawless performance of her duty to record
findings. Precisely, it is a claim that needed to be vetted. It had to be tested under the crucible of a court trial, that is,
through the rigors of presentation and authentication of evidence, cross-examination, and personal perusal by a
judge. Yet, Insular Life would now have this Court sustain its appreciation, solely on the strength of its own
representations.
An erroneous statement's dual occurrence in the Health Statement Form and the Background Checking Report
concededly reduces the likelihood of honest mistakes or overlooked inaccuracies. However, in the context of so many
other documents being available to ascertain the error, a mere dual occurrence does not definitively establish a
fraudulent scheme. This is especially so when the errors could not be directly and exclusively attributed to a single
author.

Pleading just one (1) additional document still fails to establish the consistent fraudulent design that was Insular Life's
burden to prove by clear and convincing evidence. Insular Life had all the opportunity to demonstrate Alvarez's
pattern of consistently indicating erroneous entries for his age. All it needed to do was to inventory the documents
submitted by Alvarez and note the statements he made concerning his age. This was not a cumbersome task, yet it
failed at it. Its failure to discharge its burden of proving must thwart its plea for relief from this Court.

II
Having settled Insular Life's continuing liability under the Group Mortgage Redemption Insurance, this Court proceeds
to the matter of the propriety of UnionBank's foreclosure.

UnionBank insists that the real estate mortgage is a contract separate and distinct from the Group Mortgage
Redemption Insurance; thus, it should not be affected by the validity or invalidity of Insular Life's rescission.[91] It also
cites Great Pacific Life, which it claims involves a similar set of facts as this case, and underscores how this Court in
that case did not nullify the foreclosure despite a finding that the rescission was improper, but instead considered the
foreclosure as a supervening event.[92]
Great Pacific Life similarly involved an insurer's rescission of a mortgage redemption insurance on account of a
supposed concealment. This Court sustained the lower courts' conclusions holding the rescission invalid and
maintaining the insurer's liability to pay the mortgage. However, this Court considered the foreclosure, which in the
interim had been completed, as a supervening event. Ruling on the basis of equity, this Court concluded that the
insurance proceeds, which should have been paid to the mortgagee, were now due to the heirs of the insured:
However, we noted that the Court of Appeals' decision was promulgated on May 17, 1993. In private respondent's
memorandum, she states that DBP foreclosed in 1995 their residential lot, in satisfaction of mortgagor's outstanding
loan. Considering this supervening event, the insurance proceeds shall inure to the benefit of the heirs of the
deceased person or his beneficiaries. Equity dictates that DBP should not unjustly enrich itself at the expense of
another (Nemo cum alterius detrimenio protest). Hence, it cannot collect the insurance proceeds, after it already
foreclosed on the mortgage. The proceeds now rightly belong to Dr. Leuterio's heirs represented by his widow, herein
private respondent Medarda Leuterio.[93]
Maglaque v. Planters Development Bank[94] sustained a mortgagor's right to foreclose in the event of a mortgagee's
death:
[T]he rule is that a secured creditor holding a real estate mortgage has three (3) options in case of death of the
debtor. These are:

(1) to waive the mortgage and claim the entire debt from the estate of the mortgagor as an
ordinary claim;

(2) to foreclose the mortgage judicially and prove any deficiency as an ordinary claim; and

(3) to rely on the mortgage exclusively, foreclosing the same at anytime before it is barred by
prescription, without right to file a claim for any deficiency.[95]
This is in keeping with Rule 86, Section 7 of the Rules of Court, which states:

Section 7. Mortgage debt due from estate. — A creditor holding a claim against the deceased secured by mortgage
or other collateral security, may abandon the security and prosecute his claim in the manner provided in this rule, and
share in the general distribution of the assets of the estate; or he may foreclose his mortgage or realize upon his
security, by action in court, making the executor or administrator a party defendant, and if there is a judgment for a
deficiency, after the sale of the mortgaged premises, or the property pledged, in the foreclosure or other proceeding
to realize upon the security, he may claim his deficiency judgment in the manner provided in the preceding section; or
he may rely upon his mortgage or other security alone, and foreclose the same at any time within the period of the
statute of limitations, and in that event he shall not be admitted as a creditor, and shall receive no share in the
distribution of the other assets of the estate; but nothing herein contained shall prohibit the executor or administrator
from redeeming the property mortgaged or pledged, by paying the debt for which it is held as security, under the
direction of the court, if the court shall adjudge it to be for the best interest of the estate that such redemption shall be
made.
While the mortgagee's right to proceed with foreclosure is settled, this Court finds the debacle at the heart of this
case to have been borne in large, if not equal measure, by UnionBank's oversight. UnionBank contributed to setting
in motion a course of events that culminated in the unjust foreclosure of Alvarez's mortgaged lot. As such a
contributor, its profiting from the wrongful foreclosure cannot be condoned.

The Regional Trial Court explained how UnionBank was remiss:

If at the time of the application, Jose H. Alvarez appears disqualified, and the personnel of the bank is mindful of his
duties, then the personnel of the bank will immediately tell the late Jose H. Alvarez [that] he is not qualified. As it
would appear in this case, there is nothing to show nor indicate that the late Jose H. Alvarez exhibited any fraudulent
intent when the bank was given certain data such as his age and date of birth. The bank is already in its possession
sufficient materials to inform itself regarding the true and actual age, civil status and other personal circumstances of
Jose Alvarez to merit approval of the loan applied for. It was the same informative materials from which the defendant
Union Bank lifted the data it provided the defendant Insular Life for the consummation of the insurance contract,
without which, the bank would not have favorably approved the loan.[96]
These observations are well-taken.

Great Pacific Life, in considering the insurable interest involved in a mortgage redemption insurance, discussed:
To resolve the issue, we must consider the insurable interest in mortgaged properties and the parties to this type of
contract. The rationale of a group insurance policy of mortgagors, otherwise known as the "mortgage redemption
insurance," is a device for the protection of both the mortgagee and the mortgagor. On the part of the mortgagee, it
has to enter into such form of contract so that in the event of the unexpected demise of the mortgagor during the
subsistence of the mortgage contract, the proceeds from such insurance will be applied to the payment of the
mortgage debt, thereby relieving the heirs of the mortgagor from paying the obligation. In a similar vein, ample
protection is given to the mortgagor under such a concept so that in the event of death; the mortgage obligation will
be extinguished by the application of the insurance proceeds to the mortgage indebtedness.[97] (Emphasis supplied)
The Regional Trial Court was correct in emphasizing that Alvarez entered into the Group Mortgage Redemption
Insurance entirely upon UnionBank's prodding. Bank clients are generally unaware of insurance policies such as a
mortgage redemption insurance unless brought to their knowledge by a bank. The processing of a mortgage
redemption insurance was within UnionBank's regular course of business. It knew the import of truthfully and carefully
accomplished applications. To facilitate the principal contract of the loan and its accessory obligations such as the
real estate mortgage and the mortgage redemption insurance, UnionBank completed credit appraisals and
background checks. Thus, the Regional Trial Court was correct in noting that UnionBank had been in possession of
materials sufficient to inform itself of Alvarez's personal circumstances.[98]
UnionBank was the indispensable nexus between Alvarez and Insular Life. Not only was it well in a position to
address any erroneous information transmitted to Insular Life, it was also in its best interest to do so. After all,
payments by the insurer relieve it of the otherwise burdensome ordeal of foreclosing a mortgage.

This is not to say that UnionBank was the consummate guardian of the veracity and accuracy of Alvarez's
representations. It is merely to say that given the circumstances, considering Insular Life's protestation over
supposedly false declarations, UnionBank was in a position to facilitate the inquiry on whether or not a fraudulent
design had been effected. However, rather than actively engaging in an effort to verify, it appears that UnionBank
stood idly by, hardly bothering to ascertain if other pieces of evidence in its custody would attest to or belie a
fraudulent scheme.

UnionBank approved Alvarez's loan and real estate mortgage, and endorsed the mortgage redemption insurance to
Insular Life. Fully aware of considerations that could have disqualified Alvarez, it nevertheless acted as though
nothing was irregular. It itself acted as if, and therefore represented that, Alvarez was qualified. Yet, when confronted
with Insular Life's challenge, it readily abandoned the stance that it had earlier maintained and capitulated to Insular
Life's assertion of fraud.
UnionBank's headlong succumbing casts doubt on its own confidence in the information in its possession. This, in
turn, raises questions on the soundness of the credit investigation and background checks it had conducted prior to
approving Alvarez' loan.

In Poole-Blunden v. Union Bank of the Philippines,[99] this Court emphasized that the high degree of diligence
required of banks "equally holds true in their dealing with mortgaged real properties, and subsequently acquired
through foreclosure."[100] It specifically drew attention to this requisite high degree of diligence in relation to "[c]redit
investigations [which] are standard practice for banks before approving loans."[101]
The foreclosure here may well be a completed intervening occurrence, but Great Pacific Life's leaning to an
irremediable supervening event cannot avail. What is involved here is not the mortgagor's medical history, as
in Great Pacific Life, which the mortgagee bank was otherwise incapable of perfectly ascertaining. Rather, it is merely
the mortgagor's age. This information was easily available from and verifiable on several documents. UnionBank's
passivity and indifference, even when it was in a prime position to enable a more conscientious consideration, were
not just a cause of Insular Life's rescission bereft of clear and convincing proof of a design to defraud, but also,
ultimately, of the unjust seizure of Alvarez's property. By this complicity, UnionBank cannot be allowed to profit. Its
foreclosure must be annulled.
WHEREFORE, the Petitions are DENIED. The assailed Court of Appeals May 21, 2013 Decision and November 6,
2013 Resolution in CA G.R. CV No. 91820 are AFFIRMED.
Petitioners Union Bank of the Philippines and The Insular Life Assurance Co., Ltd. are ordered to comply with the
insurance undertaking under Mortgage Redemption Insurance Policy No. G-098496 by applying its proceeds as
payment of the outstanding loan obligation of deceased Jose H. Alvarez with respondent Union Bank of the
Philippines;

The extrajudicial foreclosure of the real estate mortgage over Jose H. Alvarez's TCT No. C-315023 is declared null
and without legal force and effect;

Petitioner Union Bank of the Philippines is ordered to reconvey the title and ownership over the lot covered by TCT
No. C-315023 to the Estate of the deceased Jose H. Alvarez for the benefit of his heirs and successors-in-interest;
and

Petitioners Union Bank of the Philippines and The Insular Life Assurance Co., Ltd. are ordered to jointly and severally
pay respondents the Heirs of Jose H. Alvarez attorney's fees and the costs of suit.

SO ORDERED.
G.R. No. 244407. January 26, 2021 ]
UCPB GENERAL, INSURANCE CO., INC., PETITIONER, VS. ASGARD
CORRUGATED BOX MANUFACTURING CORPORATION, RESPONDENT.

DECISION
CARANDANG, J.:
Assailed in this Petition for Partial Review on Certiorari[1] under Rule 45 of the Rules of Court is the Decision[2] dated
August 31, 2018 and the Resolution[3] dated January 8, 2019 of the Court of Appeals (CA) in CA-G.R. CV No. 109543
which partially granted petitioner UCPB General Insurance Co., Inc.'s (UCPB Insurance) appeal by deleting the
awards of exemplary damages and attorney's fees and denied for lack of merit UCPB Insurance's motion for partial
reconsideration.

Facts of the Case

This case stemmed from a complaint for "Sum of Money with Application for Writ of Preliminary Attachment"[4] filed by
respondent Asgard Corrugated Manufacturing Corp. (Asgard) against UCPB Insurance.[5]

On February 1, 2006, Asgard and Milestone Paper Products, Inc. (Milestone) entered into a Toll Manufacturing
Agreement (TMA)[6] whereby Asgard undertook to perform toll-manufacturing of paper products for Milestone,
effective until January 31, 2008, unless earlier terminated by either party upon 60-day prior written notice.[7] The TMA
shall be deemed automatically extended on a month-to-month basis if no new agreement is executed after the lapse
of said time. Section 19 of the TMA provides:
19. EFFECTIVITY AND DURATION
This Agreement shall become effective upon signing hereof and shall be in full force and effect until 31st of January
2008, unless earlier terminated by either Party upon sixty (60) days prior written notice to the other if without cause,
or in accordance with the following Clause. In the event the parties fail to execute a new toll manufacturing
agreement upon the lapse of time indicated in this paragraph, the term of this Agreement shall be deemed
automatically extended on a month to month basis only.

Termination or expiration of this Agreement will not abrogate, impair, release or extinguish any debt, obligation, or
liability of either party incurred or arising prior to the date of termination and all undertakings, obligations, releases or
indemnities which by their terms or by reasonable implication are to survive, or are to be performed in whole or in part
after the termination of this Agreement, will survive such terminations or expiration.

Any renewal of this Agreement, under terms and conditions to be mutually agreed upon, may at the option of the
parties be done by a letter-agreement signed by both Parties. Should this Agreement expire without a written renewal
thereof, the Parties shall continue their relationship herein and the provisions of this Agreement shall continue to
govern them except for the term of the Agreement, which shall henceforth be from month to month.[8]
Under the TMA, Asgard undertook to perform for Milestone toll-manufacturing of paper products in accordance with
the volume and specifications as Milestone may define from time to time.[9] Milestone shall advise Asgard of its
requirements for the products to be toll-manufactured via a purchase order submitted monthly at least fifteen (15)
days in advance of Milestone's desired delivery or withdrawal date stated therein to enable Asgard to timely complete
production thereof. The toll-manufacturing requirements of Milestone shall be performed at Asgard's premises at
Asgard Corrugated Box Manufacturing Corporation, No. 80 P. de la Cruz, Street, San Bartolome, Novaliches (the
Plant) with the use of the facilities therein. Milestone shall source materials and supplies and cause the same to be
delivered to the Plant.[10]

It appears that Asgard needed additional capital for the purchase of new equipment for its manufacturing plant. So, it
invited Milestone to invest in the company. Instead of immediately investing, Milestone proposed to take over the
management and operations of Asgard to determine the probability of the business. Milestone installed new
equipment for the manufacturing plant and paper mill. After months of managing and operating the business,
Milestone accepted Asgard's invitation by contributing the installed equipment and infusing such amount of capital as
may be necessary for the operations of the company.[11]

Sometime in 2007, Asgard and Milestone further agreed that the latter would convert the paper products into
corrugated carton boxes using the corrugating machines owned by Asgard. The agreement likewise included the
modification of the corrugated machines by replacing the parts with the ones owned by Milestone. As a result thereof,
all vital parts of the corrugating machines of Asgard were detached and replaced with parts owned by Milestone.[12]

On December 22, 2007, due to financial difficulties, Asgard filed with the Regional Trial Court (RTC) of Quezon City,
Branch 90 an Amended Petition for Corporate Rehabilitation.[13] It submitted an Amended Rehabilitation Plan stating,
among others, that Milestone shall contribute P150,000,000.00 worth of machinery and equipment in Asgard's
business.[14] However, the rehabilitation court disapproved the Amended Plan finding the same to be vague,
unrealistic and not feasible, and denied the rehabilitation petition in the Order[15] dated June 9, 2009. The
rehabilitation court ruled that it would be extremely difficult for Asgard to undergo corporate rehabilitation with a paid-
up capital of only P12,500,000.00 and negative retained earnings of P168,341,292.51.[16]

On August 7, 2009, Asgard and Milestone took out an insurance policy from UCPB Insurance.[17] Upon payment of
insurance premium, UCPB Insurance issued Industrial All Risk Policy No. HOF09FD-FAR087915 (Policy)[18] to
Milestone and/or Market Link and/or Nova Baile and/or Asgard to insure, among others, Asgard's machinery and
equipment of every kind and description in Novaliches, Quezon City for P500,000,000.00 covering the period August
1, 2009 to August 1, 2010.[19]

On July 15, 2010, Milestone pulled out its stocks, machinery, and equipment from Asgard's plant in Novaliches,
Quezon City for relocation to Milestone's own premises in Laguna. In the course thereof, it caused damage to
Asgard's complete line of Isowa corrugating machine and accessories as well as its printer-slotter-stacker.[20] Physical
inventory of machinery and equipment conducted by the staff of Paul Uy Ong of Asgard showed that the following
machinery and equipment were damaged:
1. "Isowa" corrugating machines such as Single Facer "A" and "B" Flutes, "Lechida" Single Facer "A" Flute,
"Ishikawa" Single facer "E" Flute and other accessories, originally installed at ground level were
dismantled and were dumped at the rear portion of the warehouse.

2. "Isowa" dual backer conveyor heater, Slitter station, Cut-Off Station, Akebono Tsusho Printer Slotter
Machine were welded to steel pole which appear to be unstable.
 3. Other machine parts were unaccounted.[21]
Asgard notified UCPB Insurance about the loss and filed an insurance claim under the Policy based on the Malicious
Damage Endorsement provision which reads:
It is hereby declared and agreed that the insurance under the said Riot and Strike endorsement shall extend to
include MALICIOUS DAMAGE, which for the purpose of this extension shall mean:

LOSS OF OR DAMAGE TO THE PROPERTY INSURED DIRECTLY CAUSED BY THE MALICIOUS ACT OF ANY
PERSON (WHETHER OR NOT SUCH ACT IS COMMITTED IN THE COURSE OF DISTURBANCE OF THE
PUBLIC PEACE) NOT BEING AN ACT AMOUNTING TO OR COMMITTED IN CONNECTION WITH AN
OCCURRENCE MENTIONED IN SPECIAL CONDITION NO. 6 OF THE SAID RIOT AND STRIKE ENDORSEMENT.
[22]

UCPB Insurance denied the claim explaining that the Policy had no cross liability cover, and the malicious damage
was committed by Milestone, one of the name insured, and not committed by a third party.[23]

Asgard moved for reconsideration but UCPB Insurance denied[24] the same contending that Milestone's infliction of
damage is not among the acts contemplated under Section 87 (now Section 89) of the Insurance Code which
provides:
Section 87. An insurer is not liable for a loss caused by the willful act or through the connivance of the insured; but he
is not exonerated by the negligence of the insured, or of the insurance agents of others.[25]
Hence, Asgard filed a complaint for sum of money with application for writ of preliminary attachment praying for actual
damages in the amount of P147,000,000.00 plus legal interest.[26] Asgard alleged that it solely owns the damaged
corrugating machine and Milestone has no insurable interest therein; thus, Section 87 (now Section 89) of the
Insurance Code is inapplicable. Further, UCPB Insurance's consolidation of the building, various machineries,
equipment and stocks, which are owned by different entities then occupying one compound, into a single insurance
policy may have been resorted to only for convenience, and did not reflect the actual and separate ownership thereof
The damaged machine could be repaired for P147,000,000.00 which was paid by Asgard's sister company, Diamond
Packaging Industrial Corporation,[27] as evidenced by 98 Philippine Business Bank checks issued as payment to
Taiphil.[28]

In its Answer with Compulsory Counterclaim,[29] UCPB Insurance countered that the inclusion of Milestone's name
among the insured in the Policy was upon Asgard's request while the malicious damage admittedly caused by
Milestone was not among the risks covered by the Policy pursuant to Section 87 (now Section 89) of the Insurance
Code. Even if Asgard was in fact the sole owner of the machine, Milestone still has an insurable interest therein
because it would suffer a loss upon its destruction as it cannot produce the corrugated boxes. Asgard and Milestone's
insurable interests were not also separate and distinct as the machine would be inoperable without the parts provided
by Milestone.[30]

On July 10, 2012, UCPB Insurance filed a Motion for Summary Judgment[31] contending that there was no genuine
issue of fact since Asgard already admitted that Milestone, its co-insured, maliciously caused the damage, and that
UCPB Insurance had consolidated the insurable interests into only one policy. Hence, the applicability of Section 87
(now Section 89) of the Insurance Code remains to be the only legal issue.[32]

The RTC granted the motion and dismissed Asgard's complaint in its Order[33] dated October 9, 2012. In granting the
motion, the RTC declared that no genuine factual issue is extant in this case that would warrant threshing the same in
a full blown trial. Further, the issue on the insurable interest of Milestone over the property is a legal issue which does
not necessitate a presentation of the parties' respective pieces of evidence considering that this may be determined
by referring to specific provisions of the Insurance Code governing the matter.[34] In dismissing Asgard's complaint,
the RTC ruled that Milestone had insurable interest over the property. It had actual and real interest in the
preservation of the corrugating machines not only because its maintenance was necessary for Asgard but also
because it owns the parts which were incorporated into Asgard's corrugating machines. Even if Milestone was not the
owner of the whole machine, it would still be benefited by its preservation and would be damnified by its loss. Also,
Asgard had already made a judicial admission that Milestone is one of the named insured under the Policy.[35]

On appeal by Asgard, the CA reversed and set aside the RTC's ruling and remanded the case for further
proceedings. The issues raised therein were as follows:
I. Whether the trial court patently erred in law and in fact when it granted defendant-appellee's motion for summary
judgment despite the clear existence of genuine issues of fact.[36]

II. Whether the trial court patently erred in law and in fact when it ruled that plaintiff-appellant had impliedly admitted
MPPI's insurable interest over plaintiff-appellant's machinery and equipment since plaintiff-appellant admitted MPPI is
one of the co-insured and invoked the malicious damage endorsement of the policy.[37]
III. Whether the trial court patently erred in law and in fact when it absolved defendant-appellee from any liability
under the policy.[38]

IV. Whether the trial court patently erred in law and in fact when it took cognizance of defendant-appellee's motion for
summary judgment despite the fact that it failed to comply with Rules 35, Sec 3 of the 1997 Rules of Procedure.[39]
The CA, in its Decision[40] dated April 3, 2014, held that summary judgment cannot be rendered in this case as there
are clearly factual issues disputed or contested by the parties. A trial is necessary to ascertain which of the conflicting
parties' allegations are true. The issue on the existence of insurable interest is a factual and triable issue which the
trial court could not resolve on the basis of the provisions of the Insurance Code. The fact that Asgard admitted that
MPPI (Milestone) is a co-insured at the time the Policy was taken does not amount to an admission that Milestone
has insurable interest at the time when the machinery and equipment were maliciously damaged. The CA ruled that
the core issue is whether Milestone has insurable interest at the time of the loss, not at the time the Policy was taken.

Asgard gave the testimony of its Corporate Treasurer, Claire U. Ong,[41] who confirmed that only one policy was
issued over Asgard's machine and Milestone was among those insured. When the petition for rehabilitation was
denied, Asgard asked Milestone to pull out their stocks, machinery, and equipment from the plant. When Milestone
finally complied, it maliciously damaged Asgard's complete line of corrugating machine and left several other
machines "floating" on temporary posts. Asgard had the incident blottered. It also repeatedly asked Milestone to
restore the damaged machine to no avail. Asgard notified UCPB Insurance of the loss, but the latter denied the
insurance claim and the demand for reimbursement of replacement costs amounting to P147,000,000.00. Asgard
was constrained to replace the damaged machine. Since it did not have the money, Asgard asked its sister company,
Diamond Packaging Industrial Corporation, to pay to Taiphil Machinery and Equipment Sales Services which
replaced the damaged parts.

UCPB Insurance presented Agripina De Luna,[42] the Multi-Lines Section Head of UCPB Claim's Department. She
testified that Universal Adjuster-Appraisers Co., Inc. (Universal) conducted an investigation on the insurance claim of
Asgard. It advised UCPB Insurance that Asgard could not claim for damage maliciously caused by Milestone. UCPB
Insurance also based the denial of Asgard's claim on the exception under the policy for loss, damage, or destruction
caused or occasioned by or happening through any willful act committed by or with the connivance of any relative of
the insured. De Luna further testified that UCPB Insurance usually checked for insurable interest in issuing a policy
and Milestone had an insurable interest at the time the Policy took effect because it owned some parts of Asgard's
damaged machine.

Ruling of the Regional Trial Court

In its Order[43] dated June 15, 2011, the RTC, Branch 59, Makati City issued a writ of preliminary attachment upon
Asgard's posting of a bond fixed at P147,000,000.00, directing the Branch Sheriff to attach all the properties, real or
personal, of UCPB Insurance.[44]

On February 17, 2017, the RTC rendered a Decision[45] which granted Asgard's complaint, the dispositive portion of
which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff, ordering the defendant to
pay the plaintiff:

1. One Hundred Forty-Seven Million Pesos (Php147,000,000.00) as actual damages, with legal interest at the rate
of six percent (6%) per annum from date of demand on May 11, 2011;

2. Exemplary damages in the amount of Five Hundred Thousand Pesos (Php500,000.00);

3. Attorney's fees in the amount of Four Hundred Thousand Pesos (Php400,000.00); and

4. Defendant to pay the costs of suit.

SO ORDERED.[46]
The RTC held that UCPB Insurance is liable for the insurance claim of Asgard. It did not apply Section 87 (now
Section 89) of the Insurance Code stressing that Milestone cannot be considered as an insured with respect to the
damaged machine as it has no insurable interest either at the time the policy took effect or at the time of the loss
considering that the TMA was valid only until January 31, 2008; the rehabilitation petition was denied by the
rehabilitation court; and any business relationship with Asgard was effectively terminated when Milestone removed its
equipment and left Asgard's premises.[47]

UCPB Insurance moved for reconsideration but it was denied in the Order dated May 11, 2017.[48]
An appeal was filed by UCPB Insurance with the CA.

Ruling of the Court of Appeals

In the Decision[49] dated August 31, 2018, the CA partially granted UCPB's appeal by deleting the awards of
exemplary damages and attorney's fees.[50] It upheld UCPB Insurance's liability to Asgard under the Policy. The CA
agreed with the RTC that Milestone lacked insurable interest and could not properly be considered an insured under
the Policy. At the time the Policy took effect, Milestone had an insurable interest in the parts of the machine by virtue
of ownership and it also had insurable interest in Asgard's machine by virtue of its existing TMA with Asgard.
However, Milestone terminated any existing relationship with Asgard and any remaining insurable interest in Asgard's
machine when it removed therefrom its parts and pulled out its other properties on July 15, 2010. Hence, Milestone
had no insurable interest at the time of the loss, and could no longer be deemed an insured under the Policy.
Accordingly, the damage inflicted by Milestone on the insured property could neither be considered to have arisen
from an excepted risk nor be deemed to have been caused by the willful act or through the connivance of the insured
under Section 87 (now Section 89) of the Insurance Code.[51]

UCPB Insurance filed a motion for partial reconsideration but it was denied by the CA in its Resolution[52] dated
January 8, 2019.

Hence, this Petition for Partial Review on Certiorari filed by UCPB Insurance anchored on the following grounds:
I. THE COURT OF APPEALS ERRED IN RULING THAT MILESTONE DID NOT HAVE INSURABLE INTEREST
OVER THE CORRUGATING MACHINES AT THE TIME OF THE LOSS, CONSIDERING THAT BOTH ASCARD
AND MILESTONE ARE CO-INSURED UNDER THE INSURANCE POLICY AND THAT THE AGREEMENT, WHICH
THE COURT INTERPRETED AS HAVING TERMINATED TO SUPPORT ITS RULING ON LACK OF INSURABLE
INTEREST, CLEARLY SUBSISTED AND CONTINUED TO TAKE EFFECT AT THE TIME MILESTONE CAUSED
MALICIOUS DAMAGE TO SAID MACHINES.

II. THE COURT OF APPEALS ERRED IN RULING THAT SECTION 87 OF THE INSURANCE CODE (WHICH
RELIEVES THE INSURER FROM LIABILITY FOR LOSS CAUSED BY THE WILLFUL ACT OF THE INSURED) IS
INAPPLICABLE CONSIDERING THAT MILESTONE WAS A CO-INSURED AND HAD INSURABLE INTEREST
OVER THE MACHINES WHICH IT MALICIOUSLY DAMAGED.

III. THE COURT OF APPEALS ERRED IN DISREGARDING UCPB GEN'S ARGUMENT THAT THE MALICIOUS
DAMAGE ENDORSEMENT REFERS ONLY TO STRIKES AND LOCK-OUTS GIVEN THE CLEAR AND
UNMISTAKABLE TERMS OF THE INSURANCE POLICY THAT SUCH CLAUSE APPLIES ONLY IN CONNECTION
WITH THE EXISTENCE OF A STRIKE OR LOCK-OUT. MOREOVER, ASSUMING WITHOUT CONCEDING THAT
SAID ARGUMENT WAS RAISED FOR THE FIRST TIME ON APPEAL, THE SME CLEARLY FALLS UNDER THE
PUBLIC POLICY EXCEPTION ENUNCIATED BY THE HONORABLE COURT. [53]
UCPB Insurance's Arguments

UCPB Insurance argues that Milestone had insurable interest over the corrugating machines at the time of the loss
considering that both Asgard and Milestone are named insured under the Policy. It claimed that the TMA remained in
effect at the time of the loss when Milestone left Asgard's premises by virtue of the provisions of the TMA itself. The
TMA provides that unless there is notice of termination in writing, the TMA would continue to subsist and govern the
relationship of the parties on a month-to-month basis.[54] The fact that Milestone detached the parts it installed on the
corrugating machines and decided to leave the compound owned by Asgard in July 2010 could not have the effect of
terminating the TMA, much less divesting it of insurable interest over the machines because under Section 22
thereof, Asgard shall only allow the withdrawal of materials and supplies provided by Milestone in the event of
termination of the TMA. UCPB Insurance claims that since the TMA was not validly terminated, as it was
automatically renewed on a month-to-month basis, the withdrawal of the parts installed on the corrugating machines
was unauthorized. The performance of unauthorized act could not have the effect of rendering Milestone's insurable
interest inexistent. Milestone had actual and real interest in the preservation of the corrugating machines considering
that its loss or damage would mean that Milestone would not be able to comply with its obligations under the TMA.[55]

Further, since Asgard raised the issue of the non-existence of Milestone's insurable interest over the corrugating
machines, the burden of proving said allegation lies on Asgard - a burden which it failed to discharge. Since
Milestone had insurable interest in the corrugating machines, both at the beginning of the policy and at the time of
loss, Section 89 of the Insurance Code is applicable. Milestone, one of the insured under the Policy caused the
malicious damage, hence, UCPB Insurance should be exonerated from liability for the loss of or damage to the
machines.[56]
In addition, UCPB Insurance contends that the Malicious Damage Endorsement is a mere extension of the Riot and
Strike Endorsement such that the former cannot exists independently of the latter.[57] What the Malicious Damage
Endorsement seeks to cover is malicious damage caused by any person during a strike or lock-out because the
probability of occurrence of malicious damage is higher during a strike or lock-out. To do away with the strike or lock-
out requirement would allow the insured to recover from the insurer in any event just because its property is
maliciously damaged. This would increase the possibility of connivance with the insured, and although such a
situation exempts the insurer from liability under Section 87 (now Section 89) under the Insurance Code, the same is
usually very difficult to prove, to the detriment of the insurer and the insurance industry as a whole.[58]

Asgard's Comment

Asgard asserts that the CA correctly ruled that Milestone did not have any insurable interest over its corrugating
machines at the time of the loss, thus, Milestone could not be deemed an insured under the Policy.[59] Under
paragraph 20 of the TMA, it uses the word "may" and does not limit the means by which the same may be
terminated. When Milestone left Asgard's premises and remove its own equipment, the business relationship,
assuming there was still any at that time, was effectively terminated. Thus, when Milestone maliciously damaged
Asgard's machinery and equipment in July 2010, Milestone had no insurable interest over these machinery and
equipment as it could no longer be damnified by the loss and/or destruction thereof.[60]

Further, Asgard avers that the Policy also covers the loss of or damage to the property insured directly caused by the
malicious act of any person. Milestone, which did not have any insurable interest over Asgard's machinery and
equipment at the time of the loss, is included in the phrase "any party" and not as an "insured", making UCPB
Insurance liable. Also, as the Policy is an "all risk policy," it is incumbent upon UCPB Insurance to prove that the loss
was caused by an excepted risk. Having failed to show that the loss was caused by the risk excepted, UCPB
Insurance is liable to pay Asgard's insurance claim.[61]

Lastly, Asgard claims that the CA correctly ruled that UCPB Insurance's argument that the endorsement refers only to
employee's strikes and lock-out or a disturbance of public peace cannot be considered for the first time on appeal.
[62]
The Policy contains a Malicious Damage Endorsement and/or includes loss of or damage to the property insured
directly caused by the malicious act of any person. This covers the malicious damage caused by Milestone to
Asgard's corrugating machines.[63] The amount of P147,000,000.00 being claimed by Asgard is within the maximum
limit of liability under the Policy.[64]

UCPB Insurance's Reply

UCPB Insurance maintains that the TMA was not terminated upon the withdrawal of materials and supplies. There
should be a valid termination of the Agreement either by a 60-day prior written notice or simply a written notice if
termination is for a cause. Neither party is authorized to terminate their relationship with the other except pursuant to
the terms of the TMA. It is immaterial whether Milestone have anything more to do with Asgard's operations,
properties, or machines because it is the TMA that governs the parties' respective obligations. Considering that the
TMA was not never terminated, it follows that Milestone's insurable interest over Asgard's corrugating machines
continued to subsist.[65]

Ruling of the Court

The petition is meritorious.

In petitions for review under Rule 45, the jurisdiction of this Court is limited to reviewing questions of law which
involves no examination of the probative value of the evidence presented by the litigants or any of them. The
Supreme Court is not a trier of facts; its function is not to analyze or weigh evidence all over again. Accordingly,
findings of fact of the appellate court are generally conclusive on this Court. Nevertheless, jurisprudence has
recognized several exceptions. One of which is when the CA manifestly overlooked certain relevant facts not
disputed by the parties, which, if properly considered, would justify a different conclusion.[66] This exception justifies
this Court's consideration of the instant petition.

At issue is the determination of whether Milestone had insurable interest over Asgard's corrugating machines at the
time of the loss or damage. The resolution of which will determine if UCPB Insurance is liable to Asgard for its
insurance claim in the amount of P147,000,000.00.

It is established that Milestone is a named insured under the Policy. That is settled. A perusal of the Industrial All Risk
Policy No. HOF09FDFAR087915 (Policy) shows that it was issued to Milestone and/or Market Link and/or Nova Bai
and/or Asgard to insure, among others, Asgard's machinery and equipment of every kind and description in
Novaliches, Quezon City for P500,000,000.00, covering the period August 1, 2009 to August 1, 2010. Pertinent
portions of the Policy provide:
Location of Risk: No. 80 P. Dela Cruz Street, Novaliches, Quezon City

INTEREST INSURED SUM INSURED

SECTION I - MATERIAL DAMAGE

900,000,000.00
(REFER TO MEMO FOR BREAKDOWN OF ITEMS)

SECTION II - MACHINERY BREAKDOWN

20,000,000.00

SECTION III - BUSINESS INTERRUPTION

10,000,000.00

INSURANCE PROPERTY BREAKDOWN AND DESCRIPTION

ITEM 1

Ps - 35,000,00

ON THE BUILDING ONLY OF ONE LOFTY STOREY IN HEIGHT (2-SPAN) CONSTRUCTED OF CONCRETE
FOOTINGS, METAL FRAMED POST ON STEEL TRUSSES FRAMED UNDER LONG SPAN ROOF OCCUPIED AS
PAPER MILL PLANT BUILDING.

Ps - 300,000.00

ON VARIOUS MACHINERY AND EQUIPMENT OF EVERY KIND AND DESCRIPTION WHILST CONTAINED IN
THE BUILDING DESCRIBE ABOVE.

Ps - 50,000,000.00

ON STOCKS USUAL TO THE INSURED'S BUSINESS WHILST CONTAINED IN THE BUILDING DESCRIBED
ABOVE.

ITEM 2

Ps - 30,000,000.00

ON THE BUILDING ONLY OF ONE STOREY IN HEIGHT (2-SPAN CONSTRUCTED OF REINFORCED

CONCRETE ON STEEL TRUSSES FRAMED UNDER LONG SPAN ROOF OCCUPIED AS OFFICE, PAPER
CORRUGATING, PRINTING, PACKAGING, MANUFACTURING & MILL WAREHOUSE BUILDING.

Ps - 155,000,000.00

ON VARIOUS MACHINERY & EQUIPMENT OF EVERY KIND & DESCRIPTION WHILST CONTAINED IN THE
BUILDING DESCRIBED UNDER ITEM 2 ABOVE.

Ps - 100,000,000.00

ON STOCKS USUAL TO THE INSURED'S BUSINESS WHILST CONTAINED IN THE BUILDING DESCRIBED
UNDER ITEM 2 ABOVE.

ITEM 3

Ps - 10,000,000.00

ON THE BUILDING ONLY OF ONE LOFTY STOREY IN HEIGHT (2-SPAN) CONSTRUCTED ON REINFORCED
CONCRETE ON STEEL TRUSSES FRAMED UNDER LONG SPAN ROOF OCCUPIED AS WAREHOUSE OF
PAPER PRODUCTS (IN ROLLS/BOTH LOCALE & IMPORTED) MILLED ROLLED WAREHOUSE PLANT
BUILDING.
ITEM 3-A

Ps - 150,000,000.00

ON VARIOUS STOCKS USUAL TO THE INSURED'S BUSINESS WHILST CONTAINED IN BUILDING NUMBER 3 -
MILL ROLLED WAREHOUSE PLANT BUILDING DESCRIBED AS ONE LOFTY STOREY IN HEIGHT (TWO-SPAN)
CONSTRUCTED OF REINFORCED CONCRETE ON STEEL TRUSSES FRAMED UNDER LONG SPAN ROOF
OCCUPIED AS WAREHOUSE OF PAPER PRODUCTS.

PS - 10,000,000.00

ON THE BUILDING ONLY OF ONE LOFTY STOREY IN HEIGHT CONSTRUCTED OF CONCRETE FOOTINGS
UNDER LONG SPAN COLOR ROOF ON STEEL, FRAMED OCCUPIED AS NOVABALE PLANT BUILDING.

Ps - 20,000,000.00

ON VARIOUS MACHINERY & EQUIPMENT OF EVERY KIND & DESCRIPTION WHILST CONTAINED IN THE
BUILDING DESCRIBED UNDER ITEM 4 ABOVE ITEMS.

Ps - 10,000,000.00

ON THE BUILDING ONLY OF ONE STOREY IN HEIGHT WITH MEZZANINE FLOOR CONSTRUCTED ON
REINFORCED CONCRETE UNDER G.I. ROOF OCCUPIED AS MICREX PLANT BUILDING

Ps - 24,000,000.00

ON VARIOUS MACHINERY & EQUIPMENT OF EVERYKIND & DESCRIPTION WHILST CONTAINED IN THE
BUILSING DESCRIBED UNDER ITEM 5 ABOVE.

ITEM 6

Ps - 5,000,000.00

ON THREE (3) BUILDINGS ONLY OF ONE STOREY IN HEIGHT CONSTRUCTED OF CONCRETE AND TIMBER
UNDER G.I. ROOF OCCUPIED AS WAREHOUSE/BODEGA BUILDING & PARTLY TWO STOREY IN HEIGHT
CONSTRUCTED OF CONCRETE AND/OR CONCRETE HOLLOW BLOCKS UNDER G.I. ROOF OCCUPIED AS
GUARDHOUSE BUILDING.

Ps - 1,000,000.00

ON VARIOUS MACHINERY & EQUIPMENT OF EVERY KIND & DESCRIPTION WHILST CONTAINED IN THE
BUILDING DESCRIBED UNDER ITEM 6 ABOVE.

DESCRIPTION OF COVER

FIRE AND LIGHTNING

EXTENDED COVERAGE ENDORSEMENT
EATHQUAKE FIRE ANTI SHOCK ENDORSEMENT
FLOOD ENDORSEMENT
RIOT AND STRIKE-ENDORSEMENT TYPHOON ENDORSEMENT[67]

xxxx

INDUSTRIAL ALL RISK COVER

In consideration of the Insured paying the premium to UCPB General Insurance Co., Inc. (hereinafter called "the
Company"), the Company agrees, subject to the conditions, provisions and exclusions contained herein or endorsed
or otherwise expressed hereon which shall all be deemed to be conditions precedent to the right of the insured to
recover hereunder, to Indemnify the insured respect of

ACCIDENTAL PHYSICAL LOSS OF OR DAMAGE TO THE PROPERTY MORE FULLY DESCRIBED IN THE
SCHEDULE HERETO DIRECTLY AND WHOLLY ATTRIBUTABLE TO ANY CAUSE, EXCEPT AS HEREINAFTER
EXCLUDED, OCCURING DURING THE CURRENCY OF THE POLICY.

In no case shall the liability of the Company in respect of the property or any item thereof exceed the Limits of Liability
expressed in the Schedule.

Basis of Indemnification

In the event of the Property Insured under this Policy, other than stocks, being destroyed or damaged by a
contingency insured against, the basis upon which the amount payable under the Policy is to be calculated on the
cost of replacing or reinstating on the same site with the same kind or type but not superior to or more extensive than
the Property Insured when new, subject also to the terms and conditions of the Policy except insofar as the same
may be varied hereby.

Reinstatement or Replacement shall mean:

1) Where property is destroyed, the rebuilding of any buildings or the replacement by similar property or any other
property, in either case in a condition equal to but not better or more extensive than its condition when new.

2) Where property is damaged, there repair of the damaged and the restoration of the damaged portion of the
property to a condition substantially the same as but not better or more extensive than its condition when new.

Special Provisions

a. The work of reinstatement (which may be carried out in another site and in any manner suitable to the
requirements of the Insured subject to the liability of the Company not being thereby increased) must be carried out
within twelve (12) months of the date of the damage, or within such further time as the Company may (during the said
twelve months) in writing allow and may be carried out wholly or partially upon another site subject to the liability of
the Company under this extension not being thereby increased.

b. Where any property is damaged or destroyed in part only the liability of the Company shall not exceed the sum
representing the cost which the Company could have been called upon to pay for reinstatement if such property had
been wholly destroyed.

c. No payment beyond the amount which would have been payable under this Policy if this clause had not been
incorporated therein shall be made if at the time of any destruction or damage such property shall be covered by any
other insurance affected by or on behalf of the Insured which is not upon the identical basis of reinstatement as
stated in this Policy. If as a result of the application of any of these special provisions no payment is to be made
beyond the amount which would have been payable under the Policy if this clause had not been incorporated therein,
the rights and liabilities of the Insured and the Company in respect of the destruction of same shall be subject to the
terms and conditions of the policy including any Condition of Average as if this memorandum had not been
incorporated therein.

Average/Co-Insurance Clause

If the property hereby insured shall, on the happening of any loss or damage be collectively or greater value than the
total values declared hereon, then the Insured shall be considered as being their own Company for the difference,
and shall bear a ratable proportion of the loss accordingly. Every item. If more than one, of the policy shall be
separately subject to this condition.

MACHINERY BREAKDOWN COVER

THE INSURERS HEREBY AGREE with the Insured (subject to the terms and conditions contained herein or
endorsed herein) that if at any time during the period of insurance stated in the schedule, or during any subsequent
period for which the insured pays the premium for the renewal of this policy, there shall occur to the machinery
insured (or any part thereof) specified in the said Schedule, whilst on the premises mentioned therein, any
unforeseen and sudden physical loss or damage necessitating its repair of replacement due to causes such as
defects in casting and material, faulty design, faults at workshop or in erection, bad workmanship, lack of skill,
carelessness, sabotage, shortage of water in boiler, physical explosion, tearing a part on account of centrifugal force,
short-circuit, or any other cause not specifically excluded herein after.

THE INSURERS WILL INDEMNIFY the Insured in respect of such loss or damage in payment in cash. Replacement
or repair (at their own option) as herein after provided, up to an amount not exceeding in any one year of insurance in
respect of each of machines specified in the schedule the sum set opposite thereto and not exceeding the whole the
total sum insured thereby.

This insurance applies whether the insured machines are at work or at rest, or being dismantled for the purpose of
cleaning, overhauling or of being shifted within the said premises, or in the course of the aforesaid operations
themselves, or in the course of subsequent re-erection, but in any case only after successful commissioning.

THE INSURER SHALL NOT BE LIABLE FOR:

(a) The deductible stated in the schedule to be borne by the insured in any one occurrence; if more than one machine
is lost or damaged in one occurrence, the Insured shall not, however, be called upon to bear more than the highest
single deductible.

(b) Loss of or damage to belts, ropes, wires, chains, rubber, tyres, dies or exchangeable tool, engraved cylinders,
objects made of glass, porcelain, ceramics, felts, sieve or fabrics, all operating media (e.g. lubricating oil, fuel,
catalysts);

(c) Loss of or damage arising directly from lightning, directly from fire, the extinguishment of a fire, or clearance of
debris and dismantling necessitated thereby, chemical explosion (except fuel gas explosion in boilers), smoke, soot,
aggressive substance, theft, subsidence, landslide, rockslide, cyclone, storm, typhoon, flood, inundation, earthquake,
volcanic eruption, tsunami, impact of landborne, waterborne or airborne;

(d) Loss or damage directly or indirectly caused by or arising out of war, invasion, act of foreign enemy, hostilities
(whether war be declared or not), civil war, rebellion, revolution, insurrection, mutiny, riot, strike, lock-out, civil
commotion, military or usurped power, a group of malicious persons or persons acting on behalf of or in connection
with any political organization, conspiracy, confiscation, commandeering requisition or destruction of or damage by
order of any government de facto or by any public authority, nuclear reaction, nuclear radiation or radioactive
contamination;

(e) Loss or damage caused by any faults or defects existing at the time of commencement of the present insurance
within the knowledge of the Insured, or his representative, whether such faults or defects were known to the insurer
or not;

(f) Loss or damage arising out of the willful act or gross negligence of the insured or of his representatives;

(g) Loss or damages for which the supplier or manufacturer is responsible either by law or under contract;

(h) Loss or damage as a direct consequence of the continual influence of operation (e.g. wear and tear, cavitation,
erosion, corrosion, rust, boiler scale);

(i) Consequential loss or liability of any kind or description, any payments over and above the indemnity for material
damage as provided herein.

In any action, suit or other proceedings where the insurers allege that by reason of the provisions of exclusions (d) -
(g) above any loss, destruction, damage or liability is not covered by this insurance the burden proving that such loss,
destruction, damage or liability is covered shall be upon the insured.[68] (Emphasis supplied)
The business relationship of Milestone and Asgard arose pursuant to the TMA. On February 1, 2006, Asgard and
Milestone executed the TMA whereby Asgard undertook to perform for Milestone toll-manufacturing of paper
products in accordance with the volume and specifications as Milestone may define from time to time.[69] Milestone
shall advise Asgard of its requirements for the products to be toll-manufactured via a purchase order submitted
monthly at least 15 days in advance of Milestone's desired delivery or withdrawal date stated therein to enable
Asgard to timely complete production thereof. The toll-manufacturing requirements of Milestone shall be performed at
Asgard's premises at the Plant with the use of the facilities therein. Milestone shall source materials and supplies and
cause the same to be delivered to the Plant.[70]

Stated earlier, in 2007, Asgard and Milestone further agreed that the latter would convert the paper products into
corrugated carton boxes using the corrugating machines ovv11ed by Asgard. The agreement likewise included the
modification of the corrugating machines by replacing the parts with the ones owned by Milestone. As a result, all vital
parts of the corrugating machines of Asgard were detached and replaced with parts owned by Milestone.[71] However,
on July 15, 2010, Milestone pulled out its stocks, machinery, and equipment from Asgard's plant in Novaliches,
Quezon City for relocation to its own premises in Laguna. In the course thereof, it maliciously caused damage to
Asgard's complete line of Isowa corrugating machine and other accessories and its printer slotter-stacker. Asgard
notified UCPB Insurance about the loss and filed an insurance claim under the Policy. This was denied by UCPB
Insurance stating that the malicious damage was committed by Milestone, one of the named insured. As such, UCPB
Insurance is not liable for a loss caused by the willful act of the insured.[72]

In the detailed report[73] of Universal Adjusters-Appraisers Co., Inc., one of the nominated adjusters under the Policy,
it made the following recommendation, viz.:
xxxx

POLICY LIABILITY

In 2007, Asgard agreed with MPPI (Milestone) to replace the parts of its machine with the parts owned by MPPI. All
vital parts of the corrugating machine of Asgard were removed and replaced with new parts by MPPI. In July 2010,
MPPI left the premises but allegedly failed to restore the original parts that were previously attached to the machined.

In our opinion, the failure of MPPI to restore the original parts of Asgard's machine before it left the latter's premises
on July 2010 may not be maliciously done. Milestone merely removed the parts that it owned. There was no contract
to the effect that Milestone had to put back the replaced parts.

Moreover, MPPI which allegedly committed malicious mischief is one of the named insured in the policy. As such an
insured cannot claim against itself.[74]
The Court notes that in the Order dated October 9, 2002,[75] which initially dismissed Asgard's complaint on summary
judgment, the RTC ruled that Milestone had insurable interest over the machine and equipment at the time of
procurement of the Policy and at the time of the loss. It held that Asgard admitted Milestone's insurable interest when
it stated that Milestone is a named insured in the Policy. It "impliedly" admitted Milestone's insurable interest when
Asgard interposed the application of the Malicious Damage Endorsement Clause. The RTC stated that Milestone had
insurable interest over the property as it would be benefited from the use and preservation of the modified machine.
"Milestone had actual and real interest in the preservation of the corrugating machines not only because its
maintenance was necessary for Asgard to be able to comply with its prestation to Milestone but also because it owns
the parts which was (sic) incorporated into Asgard's corrugating machines."[76]

Further, the RTC held that the TMA was not terminated on January 31, 2008. After January 31, 2008, activities in the
plant continued and it was only in July 2010 when Milestone decided to leave the premises. The court applied the
automatic renewal clause, on a month-to-month basis, under paragraph 19 of the TMA. Thus, when the Policy was
procured on August 7, 2009, the TMA was still effective.[77]

The RTC completely overturned the above ruling when it rendered the Decision[78] dated February 17, 2017 granting
the complaint of Asgard. The RTC held that Milestone cannot be considered as an insured with respect to the
damaged machine as it has no insurable interest both at the time the policy took effect on August 1, 2009 and at the
time of the loss on July 2010 considering that the TMA was valid only until January 31, 2008. Also, the corporate
rehabilitation plan was disapproved by the rehabilitation court, and any business relationship with Asgard was
effectively terminated when Milestone removed its own equipment and left Asgard's premises.[79]

In effect, the RTC concluded that since Milestone had no insurable interest over the machinery and equipment, it
cannot be considered an insured under the Policy. And since Milestone caused the loss or damage, Asgard can claim
from UCPB under the insurance policy. Hence, Section 87 (now Section 89) of the Insurance Code does not apply.[80]

In affirming the RTC Decision dated February 17, 2017, the CA declared that Milestone lacked insurable interest and
could not be properly insured under the Policy. Milestone had insurable interest in the parts of the machine at the
time the Policy took effect by virtue of ownership and the TMA with Asgard. However, Milestone terminated any
existing relationship with Asgard and any remaining insurable interest in Asgard's machine was negated when it
removed from the Novaliches plant, its parts and pulled out its other properties on July 15, 2010.[81]

In this petition, UCPB Insurance underscores the fact that Milestone had insurable interest over the corrugating
machines at the time of the loss since the TMA remained effective. It is clear under the TMA that unless there is
notice of termination in writing, the TMA would continue to subsist and govern the relationship of the parties on a
month-to-month basis.[82]

Paragraph 19 and 20 of the TMA provide:

19. EFFECTIVITY AND DURATION

This Agreement shall become effective upon signing hereof and shall be in full force and effect until 31st of January
2008, unless earlier terminated by either Party upon sixty (60) days prior written notice to the other if without cause,
or in accordance with the following Clause. In the event the parties fail to execute a new toll manufacturing
agreement upon the lapse of time indicated in this paragraph, the term of this Agreement shall be deemed
automatically extended on a month to month basis only.

Termination or expiration of this Agreement will not abrogate, impair, release or extinguish any debt, obligation, or
liability of either party incurred or arising prior to the date of termination and all undertakings, obligations, releases or
indemnities which by their terms or by reasonable implication are to survive, or are to be performed in whole or in part
after the termination of this Agreement, will survive such terminations or expiration.

Any renewal of this Agreement, under terms and conditions to be mutually agreed upon, may at the option of the
parties be done by a letter-agreement signed by both Parties. Should this Agreement expire without a written renewal
thereof, the Parties shall continue their relationship herein and the provisions of this Agreement shall continue to
govern them except for the term of the Agreement, which shall henceforth be from month to month.

20. TERMINATION FOR CAUSE

Notwithstanding the provisions in Clause 19, this Agreement may, by notice in writing, be terminated with
immediate effect at the option of either Party (for purposes of this and the succeeding Clause, the
"Terminating Party") in any of the following events:

(a) If the other Party (for purposes of this and the succeeding Clause, the "Defaulting Party")
shall go into liquidation other than a voluntary liquidation for the purpose of reconstruction
or amalgamation, or shall commit an act of bankruptcy or shall compound with its creditors
generally, or if a receiver or juridical manager shall be appointed over the whole or a
substantial part of the assets of the Defaulting Party;

(b) If the Defaulting Party shall commit any material or substantial breach of its obligations
hereunder and/or suffer any default to occur on any of the provisions of this Agreement and
shall fail within thirty (30) days from being notified thereof in writing to remedy such
breach or default;

(c) If the Defaulting Party or all or substantially all of its assets shall pass under the control of
any authority, or of a competitor of the Terminating Party (as determined by the latter), or
other person or corporation which the Terminating Party shall have reasonable cause to
disapprove.[83] (Emphasis supplied)
To restate, the TMA shall be effective until January 31, 2008, unless earlier terminated by either Party upon sixty (60)
days prior written notice to the other. In the event the parties fail to execute a new toll manufacturing agreement after
its expiry date on January 31, 2008, the term of the Agreement shall be deemed automatically extended on a month-
to-month basis only. If the termination is for cause, the Agreement may, by notice in writing, be terminated with
immediate effect at the option of the Terminating Party. Thus, the termination of the TMA, for any reason whatsoever,
should be by notice in writing. It is well-settled that when the words of a contract are plain and readily understood,
there is no room for construction.[84]

There is nothing on record to show that the TMA was earlier terminated by either Milestone or Asgard prior to
January 31, 2008. Neither was the TMA terminated for cause under any of the events enumerated in paragraph 20
thereof.

Contrary to the ruling of the RTC, paragraph 20(a) (i.e., liquidation as a valid cause for termination) will not apply
because the insurance Policy was obtained on August 7, 2009 after the rehabilitation court denied Asgard's amended
petition for corporate rehabilitation in its Order dated June 9, 2009. This means that despite the denial of Asgard's
petition for corporate rehabilitation, the business relationship between Asgard and Milestone pursuant to the TMA
continued. After January 31, 2008, activities in the plant persisted for two years until Milestone left the premises in
July 2010. Verily, the parties could not have obtained an insurance Policy if the TMA between Asgard and Milestone
had been terminated upon the denial of the petition for rehabilitation.
Paragraph 20(b) on material or substantial breach will likewise not apply considering that the breach alluded to relate
to the performance and fulfillment of their respective obligations under the TMA. As explained earlier, Asgard
undertook to perform for Milestone toll-manufacturing of paper products in accordance with the volume and
specifications as Milestone may define from time to time. On the other hand, Milestone shall source materials and
supplies and cause the same to be delivered to Asgard's Plant in Novaliches. The default shall be remedied within 30
days from notice. Thus, the removal of the stocks, machinery, and equipment by Milestone is not a substantial breach
of obligation contemplated that will justify the termination of the TMA for a cause, effective after notice in writing.

Paragraph 20(c) does not apply either. No assets have passed under the control of any authority, or of a competitor
of the terminating party.

When Milestone pulled out its stocks, machinery, and equipment on July 15, 2010 from Asgard's premises in
Novaliches, Quezon City, the TMA remained in force and effect between Milestone and Asgard on a month- to month
basis after January 31, 2008. The TMA continued to govern the business relationship of Asgard and Milestone. While
the TMA ends each month, there is no showing that there was notice in writing served 60 days in advance to
terminate under paragraph 19 of the TMA or mere notice in writing for termination with cause under paragraph 20
thereof.

The Court does not agree with the CA's ratiocination that the mere removal by Milestone of its machine and
equipment from Asgard's premises resulted in the termination of any existing relationship it had with Asgard. As
argued by UCPB Insurance, the withdrawal by Milestone of the parts installed on the corrugating machines was
unauthorized and the termination of the TMA cannot be left to the sole will of one of the parties.

The TMA is the contract between Milestone and Asgard. The TMA has the force of law between the parties and
should be complied with in good faith. Milestone cannot unilaterally terminate the TMA other than for causes of
termination, but always with notice in writing, under paragraphs 19 and 20 of the TMA. A contract binds both
contracting parties; its validity cannot be left to the will of one of them.[85] To hold otherwise would offend the principle
of mutuality of contracts.[86]

When Milestone pulled out the parts installed and caused damage to Asgard's corrugating machines, Milestone
remained insured under the insurance policy since the TMA was not effectively and properly terminated.

The Court disagrees with the finding of the RTC that Milestone lacked insurable interest over the machine and
equipment both at the time the Policy took effect on August 1, 2009 and at the time of the loss in July 2010. Asgard
cannot take an inconsistent position that Milestone had no more insurable interest under the Policy when in the
Appellant's Brief, it admitted that both Asgard and Milestone took out the insurance policy on August 1, 2009 effective
until August 1, 2010. Under the condition We cited above, it is very clear that Milestone has insurable interest on the
property at the time of the loss and damage on July 15, 2010.

Section 13 of the Insurance Code defines insurable interest as "every interest in property, whether real or personal,
or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly damnify
the insured." Parenthetically, under Section 14 of the same Code, an insurable interest in property may consist in: (a)
an existing interest, like that of an owner or lienholder; (b) an inchoate interest founded on existing interest, like that
of a stockholder in corporate property; or (c) an expectancy, coupled with an existing interest in that out of which the
expectancy arises, like that of a shipper of goods in the profits he expects to make from the sale thereof.[87]

Therefore, an insurable interest in property does not necessarily imply a property interest in, or a lien upon, or
possession of, the subject matter of the insurance, and neither the title nor a beneficial interest is requisite to the
existence of such an interest. It is sufficient that the insured is so situated with reference to the property that he would
be liable to loss should it be injured or destroyed by the peril against which it is insured. Anyone has an insurable
interest in property who derives a benefit from its existence or would suffer loss from its destruction.[88]

Insurable interest in property is not limited to property ownership in the subject matter of the insurance. Where the
interest of the insured in, or his relation to, the property is such that he will be benefitted by its continued existence, or
will suffer a direct pecuniary loss by its destruction, his contract of insurance will be upheld, although he has no legal
or equitable title.[89] A husband would thus have an insurable interest in the paraphernal property of his wife since the
fruits thereof belong to the conjugal partnership and may be used for the support of the family.[90]

As in this case, when Milestone removed its parts and machines, Milestone still had an actual and real interest in the
preservation of the corrugating machines while the TMA is not effectively terminated and non-preservation will render
Milestone liable for breach of contract as no corrugated carton boxes would be manufactured under the TMA.
Section 89 of the Insurance Code (Republic Act No. 10607) is clear - an insurer is not liable for a loss caused by the
willful act of the insured, viz.:
Section 89. An insurer is not liable for a loss caused by the willful act or through the connivance of the insured; but he
is not exonerated by the negligence of the insured, or of the insurance agents or others.
The insurer is not liable for a loss caused by the intentional act of the insured or through his connivance. Such
damage/loss is not an insurable risk because the occurrence of the loss was subject to the control of one of the
parties and not merely caused by the negligence of the insured.[91]

However, the insurer is not relieved from liability by the mere fact that the loss was caused by the negligence of the
insured, or of his agents or others.[92] Accordingly, it is no defense to an action on the policy that the negligence of the
insured caused or contributed to the injury.[93] However, when the insured's negligence is so gross that it is
tantamount to misconduct, or willful or wrongful act, the insurer is not liable.[94]

It is basic that the law is deemed written into every contract.[95] Although a contract is the law between the parties, the
provisions of positive law which regulate contracts are deemed written therein and shall limit and govern the relations
between the parties.[96] As such, Section 89 of the Insurance Code is deemed incorporated in every insurance
contract.

More so, under the heading "The Insurer Shall Not Be Liable For" or the exception clause written in the policy, the
Insurer (UCPB Insurance) shall not be liable for:
(f) Loss or damage arising out of the willful act or gross negligence of the insured or of his representatives; (Emphasis
supplied)[97]
Since the damage or loss caused by Milestone to Asgard's corrugating machines was willful or intentional, UCPB
Insurance is not liable under the Policy. To permit Asgard to recover from the Policy for a loss caused by the willful
act of the insured is contrary to public policy, i.e., denying liability for willful wrongs.

It is also stated in the Policy under the heading "Industrial All Risk Cover" that the insured shall be indemnified in
respect of accidental physical loss or damage to the property. To re-state, the provision reads:
INDUSTRIAL ALL RISK COVER

In consideration of the Insured paying the premium to UCPB General Insurance Co., Inc. (hereinafter called "the
Company"), the Company agrees, subject to the conditions, provisions and exclusions contained herein or endorsed
or otherwise expressed hereon which shall all be deemed to be conditions precedent to the right of the insured to
recover hereunder, to Indemnify the insured in respect of

ACCIDENTAL PHYSICAL LOSS OF OR DAMAGE TO THE PROPERTY MORE FULLY DESCRIBED IN THE
SCHEDULE HERETO DIRECTLY AND WHOLLY ATTRIBUTABLE TO ANY CAUSE, EXCEPT AS HEREINAFTER
EXCLUDED, OCCURING DURING THE CURRENCY OF THE POLICY.

In no case shall the liability of the Company in respect of the property or any item thereof exceed the Limits of Liability
expressed in the Schedule.[98]
Even Asgard described the act done by Milestone as malicious; therefore, it is intentional and not accidental.
Consequently, the paragraph on Industrial All Risk which covers accidental physical loss or damage to the property
will likewise not apply.

The California Insurance Code, Section 553 thereof, likewise states a general exclusion for losses caused by the
willful acts of the insured. The statute is based on the stated public policy objectives of (1) prohibiting indemnification
for intentional misconduct, and (2) preventing the encouragement of willful tortious acts.[99] The "no indemnification"
policy is predicated on the desire to deny any economic benefit to the insured whose intentional misconduct causes a
loss.[100] The same public policy obtains in this case.

The cause of the

loss or damage to
the corrugating
machines is not a
covered risk under
the Policy
The insurance policy will specify what risks the insurer has agreed to grant coverage for, and beyond these it may not
be held liable.[101] And unless the insured can establish that the cause of the loss was covered by the policy, his claim
cannot prosper.[102]

Again, We restate the Machinery Breakdown Cover provision in the Policy pertains to loss or damage to the
machines insured, as in the case of the corrugating machines. It states:
MACHINERY BREAKDOWN COVER

THE INSURERS HEREBY AGREE with the Insured (subject to the terms and conditions contained herein or
endorsed herein) that if at any time during the period of insurance stated in the schedule, or during any subsequent
period for which the insured pays the premium for the renewal of this policy, there shall occur to the machinery
insured (or any part thereof) specified in the said Schedule, whilst on the premises mentioned therein, any
unforeseen and sudden physical loss or damage necessitating its repair of replacement due to causes such
as defects in casting and material, faulty design, faults at workshop or in erection, bad workmanship, lack of
skill, carelessness, sabotage, shortage of water in boiler, physical explosion, tearing a part (sic) on account
of centrifugal force, short-circuit, or any other cause not specifically excluded herein after.

THE INSURERS WILL INDEMNIFY the Insured in respect of such loss or damage in payment in cash replacement or
repair (at their own option) as herein after provided, up to an amount not exceeding in any one year of insurance in
respect of each of machines specified in the schedule the sum set opposite thereto and not exceeding the whole the
total sum insured thereby.

This insurance applies whether the insured machines are at work or at rest, or being dismantled for the purpose of
cleaning, overhauling or of being shifted within the said premises, or in the course of the aforesaid operations
themselves, or in the course of subsequent re-erection, but in any case only after successful commissioning.
[103]
(Emphasis supplied)
If at any time during the period of insurance stated in the schedule, or during any subsequent period for which the
insured pays the premium for the renewal of the Policy, there shall occur to the machinery insured any unforeseen
and sudden physical loss or damage necessitating its repair of replacement due to causes such as defects in casting
and material, faulty design, faults at workshop or in erection, bad workmanship, lack of skill, carelessness, sabotage,
shortage of water in boiler, physical explosion, tearing apart on account of centrifugal force, short-circuit, or any other
cause not specifically excluded herein after, the insurer will indemnify the insured in respect of such loss or damage
by paying in cash, by replacing or repairing the machinery. The insurance applies whether the insured machines are
at work or at rest, or being dismantled for cleaning purposes, overhauling or being shifted within the premises, or in
the course of aforesaid operations themselves, or in the course of subsequent re-erection but only after successful
commissioning.

The Malicious
Damage
Endorsement
under the Policy
does not apply to
the loss of or
damage caused
herein.
The Policy provides a Malicious Damage Endorsement, viz.:
xxxx

It is hereby declared and agreed that the insurance under the said Riot and Strike endorsement shall extend to
include MALICIOUS DAMAGE, which for the purpose of this extension shall mean:

LOSS OF OR DAMAGE TO THE PROPERTY INSURED DIRECTLY CAUSED BY THE MALICIOUS ACT OF ANY
PERSON (WHETHER OR NOT SUCH ACT IS COMMITTED IN THE COURSE OF DISTURBANCE OF THE
PUBLIC PEACE) NOT BEING AN ACT AMOUNTING TO OR COMMITTED IN CONNECTION WITH AN
OCCURRENCE MENTIONED IN SPECIAL CONDITION NO. 6 OF THE SAID RIOT AND STRIKE ENDORSEMENT.

but the Company shall not be liable under this extension for any loss or damage by fire or explosion nor for any loss
or damage arising out of or in the course of burglary, housebreaking, theft or larceny or any attempt thereat or caused
by any person taking part therein.

Provided always that all the conditions and provisions of said Riot and Strike Endorsement shall apply to this
extension as if they had been incorporated therein.[104]

xxxx

CONDITION 6

This insurance does not cover any loss or damage occasioned by or through or in consequence, directly or indirectly,
of any of the following occurrences namely:

(a) War, invasion, act of foreign enemy, hostilities or warlike operations (whether war be
declared or not), civil war.

(b) Mutiny, civil commotion, assuming the proportions of or amounting to a popular rising,
military rising, insurrection, rebellion, revolution, military or usurped power, or any act of
any person acting on behalf of or in connection with any organization with activities
directed towards the overthrow by force of the government "de jure" or "de facto" or to the
influencing of it by terrorism or violence.
In any action, suit or other proceeding, where the Company alleges that by reason of the provisions of this Condition,
any loss or damage is not covered by this insurance, the burden of proving that such loss or damage is covered shall
be upon the insured.[105]
In filing its insurance claim with UCPB Insurance, Asgard relied upon the above quoted provision in the Policy.

UCPB Insurance strongly argues that the Malicious Damage Endorsement is a mere extension of the Riot and Strike
Endorsement such that the former cannot exists independently of the latter. The wordings of the Malicious Damage
Endorsement show that it is merely subordinate to and independent on the conditions and provisions set forth in the
Riot and Strike Endorsement. What the Malicious Damage Endorsement seeks to cover is malicious damage caused
by any person during a strike or lock-out because the probability of occurrence of malicious damage is higher during
a strike or lock-out. To do away with the strike or lock-out requirement would allow the insured to recover from the
insurer in any event to include a situation that its property is maliciously damaged by the insured.

The above argument by UCPB Insurance was not considered by the CA stating that it was only raised for the first
time on appeal.

It is not true that it was raised for the first time on appeal because the RTC, even during the pre-trial hearing[106] on
June 15, 2012, already noted the Malicious Damage Endorsement clause under the Policy. However, what is left to
be determined is its application to the loss incurred by Asgard in this case - whether it is a mere extension of the Riot
and Strike Endorsement or an independent risk covered under the Policy.

The Court agrees with UCPB Insurance that the Malicious Damage Endorsement is a mere extension of the Riot and
Strike Endorsement. The beginning of the paragraph made reference to the Riot and Strike Endorsement, providing
that the said Riot and Strike Endorsement shall extend to include Malicious Damage directly caused by the malicious
act of any person, whether or not such act is committed in the course of disturbance of public peace. The application
of the Malicious Damage Endorsement requires the existence of a strike and riot resulting to a loss of or damage to
the property insured. Be it stressed that the risks covered under the policy are: (1) Fire and Lightning; (2) Extended
Coverage Endorsement (to include perils of explosion in aircraft and vehicle and smoke); (3) Earthquake, Fire and
Shock Endorsement; (4) Flood Endorsement; (5) Riot and Strike Endorsement; and (6) Typhoon Endorsement.
[107]
Malicious damage is not an independent risk covered under the Policy.

Since the malicious damage to Asgard's corrugating machines was not committed during a strike or riot which is the
risk covered, the said Malicious Damage Endorsement provision finds no application herein. More so, Milestones
does not fall within the term "any party" as stated therein considering the established fact that it is an insured under
the Policy.

Asgard failed to
discharge its
burden as to the
proof of
loss/damage to
justify the grant of
its insurance
claim.
In granting the insurance claim of Asgard amounting to P147,000,000.00, the RTC relied on the quotation (Exh. "K"
and series) submitted by Taiphil Machinery and Equipment Sales Services showing that that the damaged parts of
the insured machine will be replaced at the cost of P147,000,000.00, and the 98 Philippine Business Bank checks
(Exhs. "R" to "KKKKK")[108] issued as payment to Taiphil and which Taiphil deposited to its account. The basis of
indemnity under the Policy is the replacement cost of the property insured. To put its damaged corrugating machines
back in operation, Asgard claimed that the damaged parts had to be replaced.

In affirming the RTC, the CA made no further discussion as to the proof of loss in granting Asgard's insurance claim.

The party who alleges a fact has the burden of proving it.

Section 1, Rule 131 of the Rules of Court defines "burden of proof" as "the duty of a party to present evidence on the
facts in issue necessary to establish his claim or defense by the amount of evidence required by law." In civil cases,
the burden of proof rests upon the plaintiff, who is required to establish his case by a preponderance of evidence.[109]

Since it is Asgard claiming for actual damages or insurance claim against UCPB Insurance, it bears the burden of
proof to substantiate its claim. Testimony or evidence must be given to sustain the correctness of the claim.[110] As
held by this Court, "[a]ctual damages are not presumed. The claimant must prove the actual amount of loss with a
reasonable degree of certainty premised upon competent proof and on the best evidence obtainable. Specific facts
that could afford a basis for measuring whatever compensatory or actual damages are borne must be pointed out.
Actual damages cannot be anchored on mere surmises, speculations or conjectures."[111]

Records show that it was Claire U. Ong, the Corporate Treasurer of Asgard, who testified as regards the malicious
damage caused to Asgard's complete line of Isowa corrugating machines when Milestone pulled out its stocks,
machinery, and equipment in July 2010.

In one of the letters sent by Asgard to UCPB Insurance, it averred that as per the physical inventory of machinery and
equipment conducted by the staff of Paul Uy Ong, the following were damaged:
1. "Isowa" corrugating machines such as Single Facer "A" and "B" Flutes, "Lechida" Single Facer "A" Flute,
"Ishikawa" Single facer "E" Flute and other accessories, originally installed at ground level were
dismantled and were dumped at the rear portion of the warehouse.

2. "Isowa" dual backer conveyor heater, Slitter station, Cut-Off Station, Akebono Tsusho Printer Slatter
Machine were welded to steel pole which appear to be unstable.

3. Other machine parts were unaccounted.[112]

Aside from the foregoing, Asgard did not explain the extent of the damage of its corrugating machines. It failed to
show whether the damaged machines are integral part of the stocks, machinery and equipment pulled out by
Milestone; whether these damaged machines are independent machinery, i.e., it can operate on its own without the
parts installed by Milestone; and whether the stocks, machinery and equipment installed by Milestone are detachable,
or it will not cause any damage when detached.

The Court cannot just rely on the Taiphil quotation to determine the amount of actual loss, the PNB checks issued
and deposited to Taiphil's account as proof of payment, or the pictures[113] of the damaged machines. These pieces of
evidence do not convincingly and substantially prove the exact damage or actual loss sustained by Asgard's
corrugating machines caused maliciously by Milestone. More so, what was presented was a mere "quotation" not a
reliable and competent evidence.

IN VIEW OF ALL THE FOREGOING, the instant petition is GRANTED. The Decision dated August 31, 2018 and the
Resolution dated January 8, 2019 of the Court of Appeals in CA-G.R.CV No. 109543 are PARTIALLY SET ASIDE.
The Complaint for Sum of Money with Application for Writ of Preliminary Attachment in Civil Case No. 11-531 is
hereby DISMISSED.

SO ORDERED.

HERNANDO, J.:
This Petition for Review on Certiorari[1] assails the November 29, 2016
Decision[2] and the March 9, 2017 Resolution[3] of the Court of Appeals (CA)
in CA-G.R. CV No. 106334, affirming the August 26, 2015 Joint
Decision[4] of the Regional Trial Court (RTC) of Manila, Branch 25 in Civil
Case Nos. 02-105291 and 02-105317.
The undisputed facts are as follows:
Petitioner Multi-Ware Manufacturing Corporation (Multi-Ware) is a
domestic corporation engaged in the manufacture of various plastic
products.[5] On December 14, 1999, petitioner took out Fire Policy
Insurance No. 50-118320 from respondent Western Guaranty Corporation
(Western Guaranty) in the amount of P10,000,000.00. The properties
insured were the pieces of machinery and equipment, tools, spare parts and
accessories stored at Buildings 1 and 2, PTA Compound, No. 26 Isidro
Francisco Street, Malinta, Valenzuela, Metro Manila.[6]
On February 20, 2000, petitioner secured another fire insurance policy,
this time from respondent Cibeles Insurance Corporation (Cibeles
Insurance) under Fire Insurance Policy No. 80-43032 for P7,000,000.00,
covering the pieces of machinery and equipment, tools, spare parts and
accessories excluding mould, and stocks of manufactured goods and/or
goods still in process, raw materials and supplies found in the PTA Central
Warehouse Compound, Building 1, No. 26 Isidro Francisco Street, Brgy.
Vicente Reales, Dalandan, Valenzuela, Metro Manila.[7]
Subsequently, petitioner obtained from Prudential Guarantee Corp.
(Prudential Guarantee) Fire Insurance Policy Nos. FLMLAY 00000174NA
and FLMLAY 00000284NA[8] covering the same machinery and equipment
located at Building 1, PTA Compound, No. 26 Francisco St., Malinta,
Valenzuela, Metro Manila.
On April 21, 2000, a fire broke out in the PTA Compound causing damage
and loss on the properties of petitioner covered by the fire insurance
policies. Consequently, petitioner filed insurance claims with respondents
Cibeles Insurance and Western Guaranty, but these were denied on the
ground of Multi-Ware's violation of Policy Condition Nos. 3, on non-
disclosure of co-insurance; 15, on fraudulent claims; and 21, on arson. [9]
Its insurance claims for payment having been denied by Cibeles Insurance
and Western Guaranty, petitioner filed separate civil actions against these
insurance companies before the RTC of Manila. These cases were
eventually consolidated for trial.[10]
Ruling of the Regional Trial Court:
On August 26, 2015, the RTC rendered its Joint Decision, the dispositive
portion of which reads:
WHEREFORE, in the light of the foregoing, considering that plaintiff
violated Policy Condition No. 3 of Fire Insurance Policy No. 50-118230
issued by defendant Western Guaranty and Fire Insurance Policy No. 80-
43032 issued by defendant Cibeles, all the benefits due to plaintiff under
the policies are deemed forfeited.
These two complaints are therefore, ordered DISMISS[ED] for lack of
merit.
Likewise, the counter-claims of the defendants are dismissed. No cost.
SO ORDERED.[11] (Emphasis supplied)
Multi-Ware filed a motion for reconsideration but it was denied by the RTC
in an Order[12] dated January 8, 2016.
Ruling of the Court of Appeals:
On appeal, the CA sustained the RTC judgment, viz.:
WHEREFORE, premises considered, the appeal of Multi-Wave
Manufacturing Corporation is hereby DENIED for lack of merit.
Accordingly, the Joint Decision dated 26 August 2015 and Order dated 8
January 2016 of the RTC in Civil Cases Nos. 02-105291 & 02-105317
are AFFIRMED.
SO ORDERED.[13]
Petitioner's motion for reconsideration was denied by the CA m a
Resolution dated March 9, 2017. Hence, this petition before Us.
Issues:
This petition which is hinged on the following grounds:
 THE HONORABLE [CA] SERIOUSLY ERRED IN HOLDING THAT
PETITIONER VIOLATED POLICY CONDITION NO. 3, DESPITE
I.
UTTER LACK OF COMPETENT EVIDENCE TO SUPPORT
RESPONDENTS' STANCE;

THE HONORABLE [CA] SERIOUSLY ERRED IN HOLDING THAT

II. POLICY CONDITION NO. 3 APPLIES TO MACHINERIES,
EQUIPMENT AND TOOLS.[14]
Stated otherwise, the issue is whether petitioner violated Policy Condition
No. 3 or the "other insurance clause" uniformly contained in the subject
insurance contracts resulting to avoidance of the said policies.
Our Ruling
We deny the Petition for lack merit. Policy Condition No. 3 reads:
3. The insured shall give notice to the Company of any insurance or
insurances already effected, or which may subsequently be effected,
covering any of the property or properties consisting of stocks in trade,
goods in process and/or inventories only hereby insured and unless such
notice be given and the particulars of such insurance or insurances be
stated therein or endorsed on this policy pursuant to Section 50 of the
Insurance Code, by or on behalf of the company before the occurrence of
any loss or damage, all benefits under this policy shall be deemed forfeited,
provided however, that this Condition shall not apply when the total
insurance or insurances in force at the time of loss or damage is not more
than P200,000.00.[15]
Petitioner insists that there was no violation of Policy Condition No. 3 when
it did not disclose to Cibeles Insurance and Western Guaranty the existence
of the other insurance policies that it procured covering its machinery and
equipment since said condition only prohibits non-disclosure of co
insurance on stocks in trade, goods in process and inventories.
We do not agree.
Policy Condition No. 3 is clear that it obligates petitioner, as insured, to
notify the insurer of any insurance effected to cover the insured items
which involve any of its property or stocks in trade, goods in process and/or
inventories and that non-disclosure by the insured of other insurance
policies obtained covering these items would result in the forfeiture of all
the benefits under the policy. To be regarded as a violation of Policy
Condition No. 3, the other existing but undisclosed policies must be upon
the same matter and with the same interest and risk.
The records of this case show that petitioner obtained fire insurance
policies from Cibeles Insurance simultaneously with Western Guaranty and
Prudential Guarantee covering the same matter and the same risk, i.e., the
policies uniformly cover fire losses of petitioner's machinery and
equipment. Although Policy Condition No. 3 does not specifically state
"machinery and equipment" as among the subject of disclosure, it is
apparent that the disclosure extends to pieces of machinery and equipment
as well since Policy Condition No. 3 speaks of disclosure of other insurance
obtained covering "any of the property".
The word "property" is a generic term. Hence, it could include machinery
and equipment which are assets susceptible of being insured. Inasmuch as
machinery and equipment are included under the term "property",
petitioner must give notice to the insurer of any other fire insurance
policies on said machinery and equipment. As established during trial,
petitioner did not notify Cibeles Insurance and Western Guaranty that it
had procured other fire insurance policies covering its property consisting
of the same machinery and equipment. Consequently, the insurers could
validly deny the insurance claim of petitioner for violation of Policy
Condition No. 3.
In American Home Assurance Company v. Chua,[16] the Court held that
where the insurance policy specifies as a condition the disclosure of existing
co insurers, non-disclosure thereof is a violation that entitles the insurer to
avoid the policy. This condition is common in fire insurance policies and is
known as the "other insurance clause".
In Geagonia v. Court of Appeals,[17] the Court explained that the rationale
behind the incorporation of "other insurance" clause in fire policies is to
prevent over-insurance and thus avert the perpetration of fraud. When a
property owner obtains insurance policies from two or more insurers in a
total amount that exceeds the property's value, the insured may have an
inducement to destroy the property for the purpose of collecting the
insurance. The public as well as the insurer is interested in preventing a
situation in which a fire would be profitable to the insured.
Petitioner contends that the insurers in this case failed to prove by
preponderance of evidence that the insurance policies it procured from
them covered the same subject matter. It insists that the findings of the
courts below that the properties insured under the policies obtained by
petitioner from the three insurance firms were one and the same since they
were all located in the same place, is unsubstantiated by the evidence and
grounded entirely on surmises or conjectures. This is not so.
In ruling that the properties subject of the insurance policies obtained by
petitioner from different insurers were identical, the RTC correctly held
that:
[A]nent to the Fire Insurance Policy Nos. FLMLAY 00000175NA (Exhibit
'4' to '4-G') and FLMLAY 00000283NA (Exhibit '5' to '5-G') procured by
plaintiff from Prudential Guarantee on its machineries and equipment
located at Building 1, defendant Western Guaranty and defendant Cibeles
alleged that plaintiff failed to disclose or notify them of these fire insurance
policies taken from Prudential Guarantee.
An examination of these two fire insurance policies issued by Prudential
Guarantee to the plaintiff, reveals that the property subject of insurance are
machineries and equipment located at Building 1, PTA Compound, No. 26,
Francisco St. Malinta, Valenzuela, Metro Manila. Likewise, the properties
subject of insurance in the fire insurance policies issued by Western
Guaranty are machineries and equipment located at Warehouse 1 & 2
within PTA Compound No. 26 Isidro Francisco Street, Malinta, Valenzuela,
M.M. and machineries and equipment insured by defendant Cibeles were
contained in Building 1, within Phil. Tobacco Adm. Central Warehouse Cpd.
along No. 26 Isidro Francisco St. Brgy. Vicente Reales, Dalandanan,
Valenzuela, M.M.
Based on the foregoing, the court finds that the properties such as the
machineries and equipment subject of these four insurance policies are one
and the same properties considering that the location of these machineries
and equipment are all contained in Building 1 within the PTA Compound.
The allegation therefore of the plaintiff that the properties mentioned in all
the insurance policies are not the same properties holds no water. Thus, for
failure of the plaintiff to disclose to defendants Western Guaranty and
Cibeles of the fire insurance policies it procured over its machineries and
equipment from Prudential Guarantee and vice-versa, the plaintiff has
violated Policy Condition No. 3 of its insurance policies."[18]
Well-entrenched in jurisprudence is the rule that factual findings of the
trial court, especially when affirmed by the appellate court, are accorded
the highest degree of respect and considered conclusive between the
parties, save for certain exceptional and meritorious circumstances, such
as: (1) when the findings of a trial court are grounded entirely on
speculation, surmises or conjectures; (2) when a lower court's inference
from its factual findings is manifestly mistaken, absurd or impossible; (3)
when there is grave abuse of discretion in the appreciation of facts; (4)
when the findings of the appellate court go beyond the issues of the case, or
fail to notice certain relevant facts which, if properly considered, will justify
a different conclusion; (5) when there is a misappreciation of facts; (6)
when the findings of fact are conclusions without mention of the specific
evidence on which they are based, are premised on the absence of evidence,
or are contradicted by evidence on record.[19] Not one of these exceptional
circumstances is present in this case.
As discussed earlier, it is apparent that Policy Condition No. 3, or the "other
insurance clause", was violated since petitioner failed to notify the insurers
of the fire insurance policies it procured from the different insurers
covering the same subject and interest. Petitioner utterly failed to disprove
the RTC's reasonable conclusion that the machinery and equipment
covered by all the fire insurance policies were identical considering that all
these properties were located in the same building inside the PTA
Compound. It is significant to note that aside from its bare allegations,
petitioner did not adduce adequate proof to show that the buildings and/or
warehouses referred to in each of the policies pertain to distinct and
separate structures inside the PTA Compound.
Since the policy procured by petitioner from Cibeles Insurance covered the
same subject and interest as that covered by the policies issued by Western
Guaranty and Prudential Guarantee, the existence of other insurance
policies referred to under Policy Condition No. 3 is undeniable. The non-
disclosure of these policies to the insurers was fatal to petitioner's right to
recover on the insurance policies.
WHEREFORE, the petitions are DENIED for lack of merit. The
November 29, 2016 Decision and March 9, 2017 Resolution of the Court of
Appeals in CA-G.R. CV No. 106334 are hereby AFFIRMED. Costs on the
petitioner.
SO ORDERED.
Leonen (Chairperson), Inting, Delos Santos, and J. Lopez, JJ., concur.
G.R. No. 203060, June 28, 2021 ]

MALAYAN INSURANCE COMPANY, INC., PETITIONER, VS. STRONGHOLD INSURANCE

COMPANY, INC., AND RICO J. PABLO, RESPONDENTS.
 DECISION

HERNANDO, J.:

This Petition for Review on Certiorari1 assails the March 21, 2012 Decision2 and August 13, 2012
Resolution3 of the Court of Appeals (CA) in CA-G.R. SP No. 114414, which reversed and set aside
the May 21, 2009 Resolution,4 November 17, 2009 Order,5 and May 25, 2010 Ruling6 of the
Insurance Commission (IC).

The Factual Antecedents:

Petitioner Malayan Insurance Company, Inc. (Malayan) is a corporation organized and existing
under Philippine laws, and is engaged in the business of motor vehicle insurance, among others.
Respondent Stronghold Insurance Company, Inc. (Stronghold) is also a corporation organized and
existing under Philippine laws, and is engaged in the business of non-life insurance.

This case arose from a letter7 dated October 3, 2008 sent by respondent Rico J. Pablo (Pablo) to
the IC, requesting for assistance in the determination of the amounts Malayan and Stronghold must
reimburse to him.

The facts are undisputed. Pablo obtained a Compulsory Third Party Liability (CTPL) insurance for
his newly-acquired vehicle, a 2007 Mitsubishi Adventure GLX Diesel Wagon, from Stronghold.8 The
policy is under Certificate of Cover No. 380623, effective from January 16, 2007 to January 16,
2010.9 The limit of the CTPL insurance coverage is P100,000.00. The policy also contained a
schedule of indemnities.10 Insurance Memorandum Circular No. 4-200611 (IMC No. 4-2006) is the
most recent issuance at that time that sets the limits for third party liability and indemnities in
settlement of claims under compulsory motor vehicle liability insurance (CMVLI) policies.

Pablo also obtained an Excess Cover for Third Party Bodily and Death Liability from Malayan for the
same vehicle, as indicated in Private Vehicle Policy No. PV-0159-200880003.12 The amount of the
excess coverage is P200,000.00.13

In 2008, during the effectivity of the two policies, Pablo, while driving the insured vehicle, sideswiped
a six-year-old pedestrian14 who sustained bodily injuries and was brought to the hospital for
treatment.15 Pablo claimed that he incurred hospital and medical expenses in the amount of
P100,318.08 for the treatment of the pedestrian.16 As a result, he filed third party liability claims for
reimbursement with both Stronghold and Malayan.17

Stronghold computed its liability based on the schedule of indemnities provided in the CTPL
insurance policy, and arrived at the amount of P29,000.00.18 The excess of P71,318.08 (out of the
total amount of P100,318.08) was not covered or in excess of the limits in the schedule of
indemnities, and should be shouldered by Malayan pursuant to the excess coverage.19

Malayan, however, would not agree to pay this excess.20

To resolve the dispute, Pablo sought the assistance of the IC through a letter dated October 3,
2008.21 Proceedings thus ensued. The insurance companies filed their respective position papers.

Ruling of the Insurance Commission:

In its May 21, 2009 Resolution,22 the IC ruled in favor of Malayan. It ordered Stronghold to pay
Pablo the amount of P100,000.00, and Malayan to pay the amount of only P318.08 23 The IC
applied the case of Western Guaranty Corporation v. Court of Appeals24 (Western Guaranty), and
ruled that "the enumerations of bodily injuries provided for in the Schedule of Indemnities in the
policy and the corresponding amount of reimbursement provided therein would not serve as a
limitation on the amount to be recovered x x x as long as the amount claimed would not exceed the
amount of insurance coverage and the expenses were incurred for the hospitalization and
medication of the victim[']s injury."25 It further ruled that the schedule of indemnities in Stronghold's
policy is contrary to Western Guaranty26

The dispositive portion of the May 21, 2009 Resolution of the IC reads:

PREMISES CONSIDERED, Stronghold Insurance Company will reimburse the assured [sic] the
amount of P100,000.00 which is the extent of the CTPL cover whereas, Malayan Insurance
Company will pay the amount of P318.08.

SO ORDERED.27

Stronghold moved for reconsideration of the Resolution which was denied by the IC in its November
17, 2009 Order.28 It, however, modified its May 21, 2009 Resolution. The IC ordered the
amendment of the Schedule of Indemnities in Stronghold's policy (Certificate of Cover No. 380623)
to conform with the ruling in Western Guaranty. It also deleted the first paragraph of the last page of
its Resolution and added the phrase "as their liability under the EXCESS BODILY INJURY
COVERAGE of the policy" in the dispositive portion.29

Stronghold filed a Clarificatory Motion with Second Motion for Reconsideration assailing the
November 17, 2009 Order of the IC. This was denied by the IC in its May 25, 2010 Ruling.30

Aggrieved, Stronghold filed a Petition for Review before the CA.

Ruling of the Court of Appeals:

In its March 21, 2012 Decision,31 the appellate court reversed and set aside the orders of the IC,
and ordered Stronghold and Malayan to reimburse Pablo the amounts of P42,714.83 and
P57,603.25, respectively.32 It ruled that Western Guaranty is applicable to the instant case, hence,
Stronghold can be held liable for any and all kinds of damages necessary to discharge the liability of
the insured to a third-party accident victim.33

On Stronghold's contention that Western Guaranty is no longer controlling because it was

superseded by the case of Government Service Insurance System v. Court of
Appeals34 (GSIS) that ruled that "the insurer could be held liable only up to the extent of what was
provided for by the contract of insurance in accordance with the CMVLI law,"35 the appellate court
held that there is no conflict between the two cases: in GSIS, there was no determination that the
policy therein contained the same all-encompassing clause embodied in the policy in Western
Guaranty.36 The appellate court found that the IC misinterpreted Western Guaranty in disregarding
the Schedule of Indemnities and declaring Stronghold liable for the full amount of P100,000.00. It
struck down the IC's finding that the Schedule of Indemnities is contrary to Western Guaranty as that
case did not rule that such is illegal or contrary to law.37

The appellate court effectively interpreted this Court's ruling in Western Guaranty in stating that:
x x x In other words, the limit of liability of the insurance company with regard to the items listed
under the Schedule of Indemnities is the limit provided thereunder: while its limit of liability regarding
other kinds of damages, not listed under the said Schedule is the total amount of its insurance
coverage.38

With this, it held that Stronghold's schedule of indemnities is in accordance with law.39 The limits
indicated with regard to the items listed therein should be observed, and any excess should be
shouldered by Malayan.40 The dispositive portion of the CA Decision reads:

WHEREFORE, premises considered, the assailed Resolution, Order[,] and Ruling of the Insurance
Commissioner are hereby REVERSED and SET ASIDE. Petitioner Stronghold Insurance Company
and respondent Malayan Insurance Company are hereby ORDERED to reimburse respondent Rico
J. Pablo the amount[s] of Php42,714.83 and Php57,603.25, respectively.

SO ORDERED.41

This time, both insurance companies moved for reconsideration, but the appellate court denied both
motions and affirmed its previous Decision in its August 13, 2012 Resolution.42

Malayan now comes to this Court assailing the appellate court's Decision and Resolution. Malayan
initially asked for time to file the instant Petition, which was eventually filed on October 8, 2012.43

Arguments of Malayan:

Malayan argues that the CA ruling is contrary to Western Guaranty and to the basic concept of
Excess Insurance Coverage.44 Malayan posits that the appellate court's ruling contravenes the
construction given by the IC to limits of liability in CTPL policies.45 It reiterates the IC Resolution that
the Schedule of Indemnities does not limit the amount to be recovered as long as the claim would
not exceed the amount of the coverage.46 Malayan also draws strength from IMC No. 4-2006 in
arguing that the provision on "Schedule of Indemnities" does not explicitly provide that the stated
amounts therein constitute limits for the items listed therein.47 The P100,000.00 limit of Stronghold's
liability should first be exhausted before it could be held liable under the Excess Coverage
Policy.48 It can be inferred that Malayan's contention is that before the excess coverage insurer
could be held liable, the overall limit must be applied to the excess still remaining after applying the
per item limit provided in the Schedule of Indemnities. Stated differently, the amounts in excess of
the limits per item provided in the schedule of indemnities should also be subjected to the overall
limit in the policy. Only then could the excess coverage insurer be held liable.

Lastly, Malayan avers that the CA gravely erred in entertaining Stronghold's Petition for Review as it
was filed beyond the reglementary period.49 Stronghold filed a second Motion for Reconsideration,
which is prohibited by the Rules of Court, hence, the reglementary period for appeal started to run
from Stronghold's receipt of the November 17, 2009 Order denying the first Motion for
Reconsideration.50 In sum, Malayan prays for the reinstatement of the rulings of the IC.

Contentions of Stronghold:

In its Comment,51 Stronghold argues that the CA is correct in ruling that insurance companies are
required to pay only with respect to the items in the Schedule of Indemnity and only up to the limits
specified therein.52 It, however, maintains that Western Guaranty is not applicable to the policy in
issue, thus, the limits in the Schedule of Indemnities should be strictly applied.53 It argues
that GSIS is the applicable case—where the claim of an insured is limited by the Schedule of
Indemnities.54 Therefore, Stronghold could not be held liable for damages In excess of those stated
in the Schedule of Indemnities, and it should only be liable in the amount of P29,000.00, with the
excess in the amount of P71,318.08 for the account of Malayan.55

Stronghold adds that the purpose of the Excess Third Party Bodily Injury Cover is to answer for
liability not covered or in excess of the amounts provided in the schedule of indemnities in the CTPL;
the CTPL overall limit need not be exhausted before the excess coverage insurer could be held
liable.56 On the issue of belated filing of the petition before the CA, Stronghold posits that Malayan
failed to raise this issue earlier before the IC or the CA.57 Such ground, therefore, has been waived,
and is merely an afterthought.58 To add, Stronghold points out that the IC modified the original
ruling (May 21, 2009 Resolution) in promulgating the second ruling (November 17, 2009 Order),
allowing the filing of a second motion for reconsideration to assail the modified
resolution.59 Stronghold prays that it be made to pay the amount of P29,000.00 only and for
Malayan to pay P71,318.08.60

As for Pablo, the Court dispensed with the filing of his comment in its Resolution dated July 24,
2017,61

In its Reply,62 Malayan reiterated its arguments in its Petition.

Issue

Considering the foregoing, the issue for the resolution of this Court is the extent of liability of
Stronghold pursuant to the insurance policy it issued. Resulting from this would be the amount of
Malayan's liability, which is the excess not covered by Stronghold's policy.

Our Ruling

There is no merit in the Petition. The Court affirms the findings of the CA, with the modification that
the amounts payable to Pablo shall be subject to legal interest.

The purpose of CMVLI is to provide compensation for the death or bodily injuries suffered by
innocent third parties or passengers as a result of the negligent operation and use of motor
vehicles.63 The victims or their dependents are assured of immediate financial assistance,
regardless of the financial capacity of motor vehicle owners.64

With the different interpretations of Western Guaranty, it is necessary to revisit the case. Both the
appellate court and IC used the case as basis in their respective rulings. The parties have likewise
argued on its applicability.

In Western Guaranty,65 a pedestrian was hit by a passenger bus that was insured with Western
Guaranty Corporation. The policy provided that the company's liability in cases of death, injury, or
damage to property of any party shall not exceed the limits of liability set forth, and that the payment
per victim in any one accident shall not exceed the limits indicated in the Schedule of Indemnities
provided for excluding additional medical or burial expenses that might have been incurred.66 The
pedestrian filed a complaint for damages against the bus company, which in turn filed a third-party
complaint against petitioner therein. The Regional Trial Court ruled in favor of the pedestrian and
ordered the payment of actual damages, compensation for loss of earning capacity, moral damages,
and attorney's fees.67 On appeal, the CA affirmed the trial court's ruling in its entirety. Petitioner
therein further appealed to this Court and contended that as the schedule therein limits the amount
payable for certain kinds of expenses, that schedule should be read as excluding liability for any
other type of expense or damage or loss even though actually sustained or incurred by the third-
party victim.

The Court ruled against petitioner insurance provider, the relevant portions of which provide, to wit:

Firstly, the Schedule of Indemnities does not purport to restrict the kinds of damages that may be
awarded against Western once liability has arisen. Section 1, quoted above, does refer to certain
ℒαwρhi ৷

"Limits of Liability" which in the case of the third[-]party liability section of the Master Policy, is
apparently P50,000.00 per person per accident. Within this over-all quantitative limit, all kinds of
damages allowable by law — "actual or compensatory damages"; "moral damages"; "nominal
damages"; "temperate or moderate damages"; "liquidated damages"; and "exemplary damages" —
may be awarded by a competent court against the insurer once liability is shown to have arisen, and
the essential requisites or conditions for grant of each species of damages are present. It appears to
us self-evident that the Schedule of Indemnities was not intended to be an enumeration, much less a
closed enumeration, of the specific kinds of damages which may be awarded under the Master
Policy Western has issued. Accordingly[,] we agree with the Court of Appeals that:

"... we cannot agree with the movant that the schedule was meant to be an exclusive enumeration of
the nature of the damages for which it would be liable under its policy. As we see it, the schedule
was merely meant to set limits to the amounts the movant would be liable for in cases of 'claims for
death, bodily injuries of, professional services and hospital charges, for services rendered to traffic
accident victims,' and not necessarily exclude claims against the insurance policy for other kinds of
damages, such as those in question."

Secondly, the reading urged by Western of the Schedule of Indemnities comes too close to working
fraud upon both the insured and the third[-]party beneficiary of Section 1, quoted above. For
Western's reading would drastically and without warning limit the otherwise unlimited (save for the
over-all quantitative limit of liability of P50,000.00 per person per accident) and comprehensive
scope of liability assumed by the insurer Western under Section 1: "all sums necessary to discharge
liability of the insured in respect of [bodily injury to a third party]." This result — which is not
essentially different from taking away with the left hand what had been given with the right hand —
we must avoid as obviously repugnant to public policy. If what Western now urges is what Western
intended to achieve by its Schedule of Indemnities, it was incumbent upon Western to use language
far more specific and precise than that used in fact by Western, so that the insured, and potential
purchasers of its Master Policy, and the Office of the Insurance Commissioner, may be properly
informed and act accordingly.68

The Court ruled that the schedule does not restrict the kinds of damages that petitioner therein may
be made to pay as long as liability is shown to have arisen and the requisites for each kind of
damages are present. The schedule is not an enumeration of the specific kinds of damages that may
be awarded. Its purpose was to set limits to the amounts the insurance company would be liable for
in cases of "claims for death, bodily injuries of, professional services and hospital charges, for
services rendered to traffic accident victims"; it does not limit or exclude claims for other kinds of
damages. The Court added that petitioner therein should have used a more specific and precise
language to reflect its intentions as presented in its arguments.

In other words, Western Guaranty clarifies the applicability of the limits provided in the Schedule of
Indemnities to injuries listed therein and allows claims for other kinds of damages not otherwise
indicated in the schedule against CMVLI policy providers, as long as liability is established and the
requisites for the kind of damages claimed are present.
In the instant case, the CA did not err in applying Western Guaranty. Upon examination of
Stronghold's policy in the instant case, the Court finds that the appellate court is correct in finding
that the subject policy is similar—and in fact identical—with the policy in Western Guaranty. The
salient portion of Stronghold's policy states:

Section I — Liability to the Public

The Company will, subject to the Limits of Liability, pay all sums necessary to discharge liability of
the insured in respect of bodily injury and/or death to any THIRD PARTY, in an accident caused by
or arising out of the use of the Scheduled Vehicle, provided that the insured's liability shall have first
been determined. In no case, however, shall the Company's total payment under both Section I and
Section II combined exceed the Limits of Liability set forth herein. With respect to bodily injury and/or
death to any party, the [C]ompany's payment per victim in any one accident shall not exceed the
limits indicated in the Schedule of Indemnities provided for in this policy.69

It is clear that Stronghold's policy is identical with the assailed policy in Western Guaranty.70 It must
be noted, however, that the issues in Western Guaranty and in the instant case are at variance. But,
this Court nonetheless upholds the CA's finding on the applicability of limits in CTPL policies. As the
appellate court have held, the limit of liability with regard to the items listed in the Schedule of
Indemnities is the amount provided therein; the limit of liability with regard to other kinds of damages
not listed in the same Schedule of Indemnities is the total amount of insurance coverage. It then
follows that the amounts in excess of the limits of liability in the schedule for items listed therein are
not covered by the total coverage. Such excess is already for the personal account of the insured or
an excess coverage provider. This interpretation upholds the purpose of indicating limits of liability
on the specific injuries listed in the schedule.

Therefore, Stronghold's liability with regard to injuries provided in its policy's Schedule of Indemnities
is subject to the limits provided therein. Any excess will not be for its account, and will be for the
account of the excess coverage provider—Malayan in this case. As found by the CA, Stronghold is
liable in the amount of P42,714.83; Malayan, on the other hand, is liable in the amount of P57,603
25.

The Court, however, imposes legal interest on the amounts to be paid by the insurance companies
to Pablo. Pursuant to Nacar v. Gallery Frames,71 legal interest should be imposed as follows: (a)
12% per annum from October 3, 2008, the date of extrajudicial demand, until June 30, 2013; and (b)
6% per annum from July 1, 2013 until full payment thereof.

As to Stronghold's contention that GSIS is the applicable case, the Court agrees with the CA that it is
not the applicable case. The insurance policy therein is different from the policy in Western
Guaranty (and Stronghold's policy in the instant case). There was no determination that the policy
in GSIS contained the same wording and all-encompassing clause embodied in the policy assailed
in Western Guaranty. Moreover, the issues in GSIS are different from Western Guaranty and the
instant case; in GSIS, the issues pertained to the insurer's solidary liability with the insured, and the
prescription of an action to file an insurance claim.72

As regards the issue of Stronghold's filing of a second motion for reconsideration in the IC, the Court
finds that the November 17, 2009 Resolution (second issuance) of the IC, which ordered the
amendment of the schedule of indemnities in Stronghold's policy, is an amended decision. It added a
new undertaking on Stronghold's part. The filing of a second motion for reconsideration to assail an
amended decision of an administrative agency or tribunal is permissible.73 Hence, the Court finds
no procedural infirmity in this instance.
WHEREFORE, the Petition is DENIED. The March 21, 2012 Decision and August 13, 2012
Resolution of the Court of Appeals in CA-G.R. SP No. 114414
are AFFIRMED with MODIFICATION that the respective amounts payable by respondent
Stronghold Insurance Company, Inc. and petitioner Malayan Insurance Company, Inc. to respondent
Rico J. Pablo shall be subjected to legal interest as follows: (a) 12% per annum from October 3,
2008, the date of extrajudicial demand, until June 30, 2013; and (b) 6% per annum from July 1, 2013
until full payment thereof.

SO ORDERED.

G.R. No. 203756. February 10, 2021 ]

ALPHA PLUS INTERNATIONAL ENTERPRISES CORP., PETITIONER, VS.
PHILIPPINE CHARTER INSURANCE CORP., BIENVENIDO E. LAGUESMA,
VYTONNE SO, GERRY Y. TEE, HENRY M. SUN, EMMANUEL R. QUE, BENJAMIN
S. TY, ROBERT T. YU, EDWIN V. SALVAN AND ATTY. MARIA LUISA CECILIA E.
GARCIA, RESPONDENTS.

DECISION
HERNANDO, J.:
This Petition for Review on Certiorari[1] assails the July 20, 2012 Decision[2] of the Court of Appeals (CA) in CA-GR.
SP No. 121025 which nullified and set aside the April 5, 2011[3] and June 21, 2011[4] Orders of the Regional Trial
Court (RTC), Branch 84 of Malolos, Bulacan in Civil Case No. 41-M-2010, as well as order the dismissal of said civil
case.

In its October 3, 2012 Resolution,[5] the appellate court denied petitioner's Motion for Reconsideration.

Factual Antecedents:

Petitioner Alpha Plus International Enterprises Corporation (Alpha Plus), a company engaged in optical media
business,[6] obtained two fire insurance policies from respondent Philippine Charter Insurance Corp. (PCIC) covering
the period of June 9, 2007 to June 9, 2008.[7] On February 24, 2008, petitioner's warehouse was gutted by fire
destroying its equipment and pieces of machinery stored therein. Thus, it sought to recover from its insurance policies
with the PCIC but its claim was denied in a letter dated January 22, 2009, a copy of which was received by petitioner
on January 24, 2009.[8] The parties exchanged clarification and reply letters but they failed to arrive at a settlement.[9]

Thus, on January 20, 2010, Alpha Plus filed a Complaint[10] before Branch 84 of the RTC of Malolos, Bulacan against
respondent PCIC and its officers for Specific Performance, Collection of Sum of Money and Damages and docketed
as Civil Case No. 41-M-2010. Petitioner prayed that respondents be ordered to pay the following: the amount due as
per insurance coverage plus legal interest thereon as actual damages; amount of not less than P1 million as
exemplary damages; amount of not less than P1 million as attorney's fees; and costs of suit and litigation expenses.
[11]
The initial docket fees paid by petitioner amounted to P42,545.00 representing the P1 million claim for exemplary
damages and another P1 million for attorney's fees.[12]

On February 9, 2010, petitioner filed an Amended Complaint[13] praying for similar reliefs as stated in its original
complaint[14] but, this time, it specifically claimed the amount of P300 million as actual damages[15] and that
respondents be ordered to pay "two (2) times the legal interest per annum on the proceeds of the policies for the
duration of the delay."[16] Petitioner paid additional docket fees in the amount of P6,056,465.00 for its P300 million
claim against respondents.[17]

Respondents filed Motions to Dismiss[18] on grounds of lack of cause of action and insufficient payment of docket
fees, but these were denied by the RTC.[19]

In their Answer Ad Cautelam with Compulsory Counterclaim,[20] respondents averred that petitioner's insurance claim
is already barred by prescription based on Condition No. 27 of the fire insurance policies.[21]

Thereafter, respondents filed a Motion for Preliminary Hearing of Affirmative Defenses and/or Motion to
Dismiss[22] anchored on the RTC's failure to acquire jurisdiction over the case due to insufficient payment of docket
fees, lack of cause of action and prescription.[23] Petitioner Alpha Plus filed a Comment/Opposition[24] thereto.

Ruling of the
Regional
Trial Court:
In the Order[25] dated April 5, 2011, the RTC denied respondents' Motion for Preliminary Hearing of Affirmative
Defenses and/or Motion to Dismiss. It also did not pass upon the issue of prescription despite the fact that it was
squarely raised by the respondents in their motion to dismiss. The RTC Order provides:
Submitted is the motion for preliminary hearing of affirmative defenses and/or motion to dismiss filed by the defendant
Philippine Charter Insurance Corp. xxx and the comment/opposition thereto by the plaintiff.

PCIC invokes Section 6, Rule 16 of the Revised Rules of Civil Procedure and argues that the Court should conduct a
preliminary hearing on its affirmative defense as it has not acquired jurisdiction over the case at bench due to the
insufficient payment of the prescribed and correct docket and filing fees. The record however shows that, in
compliance with the [O]rder dated September 6, 2010, plaintiff paid the balance of the required docket and filing fees
reflected in the official receipts it attached as Annexes A and B to its manifestation of November 19, 2010.

Be that as it may, the Court has already resolved the same issue in its Order of June 22, 2010 and it finds no basis to
reverse the proceedings and conduct first hearings on the merits of such affirmative defense. Withal, while docket
fees were based only on the amounts specified, the trial court acquired jurisdiction over the action, and judgment
awards which were left for determination by the court as or as may be proven during the trial would still be subject to
additional filing fees which shall constitute a lien on the judgment.

WHEREFORE, for lack of merit, the motion at bar is denied.

Meantime, let this case be set for pre-trial conference on June 2, 2011 at 8:30 in the morning as previously
scheduled.

SO ORDERED.[26]
Respondents filed a Motion for Reconsideration[27] but it was denied by the RTC in its Order[28] dated June 21, 2011
for lack of merit.

Thus, respondents filed a Petition for Certiorari[29] under Rule 65 of the Rules of Court before the CA.

Ruling of the Court of Appeals:

The appellate court granted the Petition for Certiorari of respondents. Consequently, it nullified and set aside the RTC
Orders dated April 5, 2011 and June 21, 2011, and ordered the trial court to dismiss Civil Case No. 41- M-2010. The
CA found that since petitioner raised new demands in its Amended Complaint,[30] the period of prescription should be
counted from the filing thereof, and not from the filing of the original complaint.[31] The appellate court, relying on the
prescriptive period of 360 days,[32] found that "prescription had already set in"[33] and that the RTC oddly "chose to be
silent about the said issue. "[34] The dispositive portion of the assailed CA Decision reads:
WHEREFORE, premises considered, the petition is GRANTED. The April 5, 2011 and June 21, 2011 Orders of the
Regional Trial Court of Malolos City, Branch 84, is (sic) NULLIFIED and SET ASIDE. Aforesaid Regional Trial Court
is ORDERED to DISMISS the civil complaint before it docketed as Civil Case No. 41-M-2010.

SO ORDERED.[35] (Emphasis in the original)

Petitioner filed a Motion for Reconsideration[36] which was denied in the appellate court's Resolution[37] dated October
3, 2012.
Issues
a. The Court of Appeals egregiously erred in holding that the petitioner's complaint before the court a quo had already
prescribed when the same was filed with it.

b. The Court of Appeals egregiously erred in holding that the prescriptive period should be counted from the time the
amended complaint was filed.[38]
The threshold issue before Us is whether or not the CA erred in ordering the dismissal of petitioner's complaint on the
ground of prescription.

The Parties' Arguments:

Petitioner contends that the appellate court erred in holding that its complaint filed before the RTC had already
prescribed. Petitioner insists that the prescriptive period should have been counted from the filing of its original
complaint and not from the filing of the amended complaint. As a rule, when the amended complaint does not
introduce new issues or causes of action, the suit is deemed to have commenced on the date that the original
complaint was filed. Petitioner asserts that its amended complaint did not introduce new or different causes of action.
Hence, the prescriptive period should be counted from the time that the original complaint was filed.[39]

Respondents, on the other hand, riposte that the CA correctly reckoned the prescriptive period from the date of filing
of the Amended Complaint on February 9, 2010. Petitioner alleged in its Amended Complaint the amount of P300
million as its insurance claim against respondents. In its original complaint, petitioner merely paid the measly sum of
P42,545.00 as docket fees, and it was only upon the filing of the amended complaint that Alpha Plus paid additional
docket fees of P6,056,465.00 representing its P300 million claim against the respondents.

Thus, the prescriptive period has not been interrupted by the filing of petitioner's original complaint considering that it
raised the additional claim of P300 million in its Amended Complaint. Petitioner received the notice denying its
insurance claim on January 24, 2009, hence it had until January 24, 2010 within which to bring a court action. In this
case, petitioner's amended complaint was only filed on February 9, 2010 which clearly shows that its action had
already prescribed.[40]

Our Ruling

The petition is bereft of merit.

Prescription is a ground for the dismissal of a complaint without going into trial on the merits.[41] Prescription is based
on a fixed time[42] and is concerned with the fact of delay.[43] When it appears from the pleadings or the evidence on
record that an action is barred by prescription, the court is mandated to dismiss the same.[44]

In the present case, We agree with the CA's finding that petitioner's insurance claim had already prescribed and that
the RTC should dismiss the complaint before it based on said ground. Nonetheless, We differ with the appellate court
in the computation of the prescriptive period. Instead of the 360-day period used by the CA in computing whether or
not petitioner's action has already prescribed, We find that the 365-day period should be utilized instead.

To determine the prescription of the subject insurance claim, Article 63 of the Insurance Code as well as Condition
No. 27 of the two fire insurance policies should be considered.

Section 63 of the Insurance Code states that:

Sec. 63. A condition, stipulation or agreement in any policy of insurance, limiting the time for commencing an action
thereunder to a period of less than one year from the time when the cause of action accrues, is void.
On the other hand, Condition No. 27 of the parties' fire insurance policies provides:
27. Action or suit clause - If a claim be made and rejected and an action or suit be not commenced either in the
Insurance Commission or any court of competent jurisdiction within twelve (12) months from receipt of notice of such
rejection, or in case of arbitration taking place as provided herein, within twelve (12) months after due notice of the
award made by the arbitrator or arbitrators or umpire, then the claim shall for all purposes be deemed to have been
abandoned and shall not thereafter be recoverable hereunder.[45] (Underscoring supplied)
In the case of Sun Insurance Office, Ltd. v. Court of Appeals[46] which involved an insurance policy that contained the
same condition of bringing a suit within a period of twelve months, it was interpreted therein that the 12-month period
stated in the insurance policy referred to the period of one year, with a view that the said insurance policy was
stipulated pursuant to Section 63 of the Insurance Code. New Life Enterprises v. Court of Appeals[47] also adopted a
similar stance.[48]

Thus, contrary to the finding of the appellate court that the 12-month period should mean 360 days,[49] We hold that
the 12-month period in Condition No. 27 of the parties' fire insurance policies should refer to the period of one (1)
year, or 365 days, in line with Section 63 of the Insurance Code and prevailing jurisprudence. This is also consistent
with Article 13 of the Civil Code which provides that when the law speaks of a year, it is understood to be equivalent
to 365 days.[50]

Like any other contract, parties to a contract of insurance could stipulate on terms and conditions that would govern
them as long as these stipulations are not contrary to law. An insurance contract is the law between the parties. Its
terms and conditions constitute the measure of the insurer's liability and compliance therewith is a condition
precedent to the insured's right to recovery from the insurer.[51]
In the instant case, Condition No. 27 of the parties' fire insurance policies to be considered as an integral part of their
agreement and compliance therewith is a condition precedent to petitioner's right to recover on the insurance policy
that it secured from the respondents.

It bears to stress that the rationale for the necessity of bringing suits against the insurer within one year from the
rejection of the claim[52] has already been settled. As already laid down in precedent, the condition contained in an
insurance policy that claims must be presented within one year after rejection is not merely a procedural requirement
but an important matter essential to a prompt settlement of claims against insurance companies as it demands that
insurance suits be brought by the insured while the evidence as to the origin and cause of destruction have not yet
disappeared.[53]

Case law teaches that the prescriptive period for the insured's action for indemnity should be reckoned from the "final
rejection" of the claim.[54] The "final rejection" simply means denial by the insurer of the claims of the insured and not
the rejection or denial by the insurer of the insured's motion or request for reconsideration. The rejection referred to
should be construed as the rejection in the first instance.[55]

In this case, it is settled that respondents' rejection of petitioner's claim was embodied in a Letter dated January 22,
2009, copy of which was received by petitioner on January 24, 2009.[56] Hence, in accordance with the parties'
Condition No. 27 of their fire insurance policies, the prescriptive period should be reckoned from petitioner's receipt of
the notice of rejection, specifically on January 24, 2009. One (1) year or 365 days from January 24, 2009 would show
that petitioner's prescriptive period to file its insurance claim ends on January 24, 2010.

Based on the records, petitioner Alpha Plus filed its original Complaint on January 20, 2010.[57] Subsequently, it filed
an Amended Complaint[58] against the respondents on February 9, 2010. Petitioner posits that its action has not yet
prescribed and that the suit is deemed to have been commenced on the date that the original complaint was filed on
January 20, 2010.

We do not agree.

An amended complaint supersedes an original one. As a consequence, the original complaint is deemed withdrawn
and no longer considered part of the record.[59]

The settled rule is that the filing of an amended pleading does not retroact to the date of the filing of the original
pleading; hence, the statute of limitation runs until the submission of the amendment. It is true that as an exception,
this Court has held that an amendment which merely supplements and amplifies facts originally alleged in the
complaint relates back to the date of the commencement of the action and is not barred by the statute of limitations
which expired after the service of the original complaint.[60] Thus, when the amended complaint does not introduce
new issues, cause of action, or demands, the suit is deemed to have commenced on the date the original complaint
was filed.[61]

In the present case, We find that the exception does not apply to petitioner's case as to allow the period of
prescription to run and for prescription to ultimately set in. A perusal of petitioner's Complaint[62] and Amended
Complaint[63] reveals that the latter pleading introduced new demands that were not specified and averred expressly
in the original complaint. In paragraph 26 of the original complaint,[64] what was merely claimed was actual damages
against respondents without specifying therein any definite amount. Legal interest was also claimed by petitioner.

On the other hand, in paragraph 26 of petitioner's Amended Complaint,[65] it was specified therein that the actual
damages being claimed is in the amount of P300 million and that payment of respondents shall be for "two times the
legal interest per annum on the proceeds of the policies." Clearly, petitioner essentially introduced new demands
against respondents in their Amended Complaint. The disparity of the claims between the original complaint and the
amended complaint is magnified by the fact that petitioner was required to pay additional docket fees in the amount of
P6,056,465.00[66] for its Amended Complaint.

With petitioner's filing of the Amended Complaint which raised new demands, the original complaint of petitioner must
be deemed to have been abandoned and to have been rendered functus officio.[67] Consequently, petitioner could not
argue that the filing of the Amended Complaint should retroact to the date of filing of the original complaint.[68]

Verily, as the Amended Complaint superseded the original complaint of petitioner, the suit of the latter is deemed to
have been commenced on the date of filing of the Amended Complaint on February 9, 2010. During this time,
prescription had already set in as petitioner had only until January 24, 2010 within which to file its insurance claim. In
sum, We agree with the appellate court as to its ruling that petitioner's Amended Complaint should have been
dismissed by the RTC on the ground of prescription. No hearing by the RTC was even needed thereon since it could
determine the fact of prescription by simply looking at the date of filing of the complaints.[69]

From the foregoing disquisition, We find that the appellate court did not err in rendering its assailed Decision and
Resolution.

WHEREFORE, the Petition for Review on Certiorari is DENIED. The Decision dated July 20, 2012 and Resolution
dated October 3, 2012 of the Court of Appeals in CA-G.R. SP No. 121025 are AFFIRMED. Costs on petitioner.

SO ORDERED.
G.R. No. 208140. July 12, 2021 ]
CARLOS J. VALDES, GABRIEL A.S. VALDES, FATIMA DELA CONCEPTION AND
ASUNCION V. MERCADO,* PETITIONERS, VS. LA COLINA DEVELOPMENT
CORPORATION (LCDC), PHILIPPINE COMMUNICATION SATELLITE, INC.
(PHILCOMSAT), LA COLINA RESORTS CORPORATION (LCRC), MONTEMAR
RESORTS AND DEVELOPMENT CORPORATION (MRDC), JOSE MARI CACHO,
HONORIO A. POBLADOR III, AND ALFREDO L. AFRICA, RESPONDENTS.

DECISION
HERNANDO, J.:
This Petition for Review on Certiorari[1] seeks to reverse and set aside the October 31, 2012 Decision[2] and July 16,
2013 Resolution[3] of the Court of Appeals (CA) in CA-G.R. CV No. 94713 that reversed and set aside the October 26,
2009 Decision[4] of the Regional Trial Court (RTC), Branch 2, Balanga City, Bataan in Civil Case No. 6134.
The RTC declared as null and void the Memorandum of Agreement[5] dated September 3, 1992 involving respondents
La Colina Resorts Corporation (LCRC), La Colina Development Corporation (LCDC), Montemar Beach Club, Inc.
(MBCI), and Philippine Communication Satellite, Inc. (Philcomsat), and the Consolidated Deed of Sale[6] dated August
31, 1992 executed by LCRC and LCDC in favor of Montemar Resort and Development Corporation (MRDC).
The July 16, 2013 Resolution of the CA denied petitioners' Motion for Reconsideration.[7]
Factual Antecedents:
The facts, culled from the records and Decision of the CA, are as follows:

Carlos Valdes (Carlos, Sr.)[8] and his children, herein petitioners Gabriel A. S. Valdes (Gabriel), Carlos J. Valdes,
Antonio A.S. Valdes, Fatima de la Concepcion, Asuncion Mercado, and Virginia A.S. Valdes (Valdeses), are the
stockholders of Bataan Resorts Corporation (BARECO), which owned a large tract of land in Bagac, Bataan under
Transfer Certificates of Title Numbers 45864, 45865, 45867, 45868, and 45869 of the Registry of Deeds of Bataan.[9]
Sometime in 1974, Carlos, Sr. invited Francisco Cacho (Francisco) and his son, individual respondent Jose Mari
Cacho (Jose Mari), to visit and assess the property's suitability for a beach resort project (Montemar Project). Having
received a favorable response from Francisco, both Carlos, Sr. and Francisco proceeded to carry out the Montemar
Project, which included the development and improvement of the beach basin as a beach resort (Montemar Beach
Club), and the conversion of the remaining land area into a residential subdivision (Montemar Villas).[10]
To implement the project, the Valdeses transferred and conveyed their shares of stock in BARECO in favor of LCDC,
a fully-owned corporation of the Cacho family, through a Deed of Sale[11] dated May 24, 1975, for a consideration of
P20 Million. LCDC then made a partial payment thereof in the amount of P2.5 Million from February 1975 to
December 1979,[12] while the remaining balance amounting to P17.5 Million was covered by promissory notes.[13]
The P17.5 Million was to be paid by way of an Assignment of Rights[14] dated October 30, 1975, wherein LCDC: (1)
assigned to the Valdeses three million worth of shares in LCRC, the corporation established by LCDC to market and
sell the shares of the beach resort; and (2) undertook to pay the Valdeses (50%) of the net proceeds (later reduced
40%) from the sale of the Montemar Villas lots inside BARECO, as previously acquired by LCDC.
Since Carlos, Sr. did not intend to use all BARECO real properties for the Montemar Project, he prepared a Deed of
Partition,[15] whereby only the real properties intended to be part of the project were transferred to LCDC. These
properties, now owned by LCDC through its purchase of the BARECO shares were, in turn, transferred by LCDC to
LCRC in exchange for fifty thousand LCRC shares issued in favor of LCDC.
By virtue of the aforementioned Assignment of Rights, LCDC and Carlos, Sr. became seventy percent (70%) and
thirty (30%) shareholders of LCRC, respectively.[16]
Meanwhile, LCDC, as sole shareholder of BARECO, amended BARECO's Articles of Incorporation and dissolved
BARECO by shortening its term of existence up to June 30, 1975.[17] Thereafter, MBCI, a non-stock, non-profit club,
was organized to develop the Montemar Project. Proprietary shares in MBCI were later sold by LCRC to the general
public. Meanwhile, LCDC obtained loans to finance the construction and development of the Montemar Villas,
including the building and facilities in the Montemar Beach Club. The loans were obtained from the Development
Bank of the Philippines (DBP) – subsequently the Asset Privatization Trust (APT), Metrobank, and General Credit
Corporation (GCC), formerly the Commercial Credit Corporation.[18]
Sales of the MBCI proprietary shares and the lots in the Montemar Villas, including the patronage in the Montemar
Beach Club were bringing adequate income for some time. The loans obtained by LCDC were serviced and the
remittances of the agreed share of the Valdeses in the sale of the Montemar Villas lots were made on a regular basis.
The Montemar Beach Club, on the other hand, was able to sustain regular operations. However, during the years
1981 up to 1985, there was a delay in the remittances of the shares to the Valdeses in the net proceeds from the sale
of the Montemar Villas lots. The records, however, would bear that a portion of the purchase price of P20 Million, or
P16,125,717.31, was eventually paid to the Valdeses.[19]
The foregoing notwithstanding, Carlos, Sr. filed a Complaint[20] dated July 13, 1987 for Annulment or Rescission of
Contract or Specific Performance and Damages with Prayers for Receivership Pendente Lite and Preliminary
Injunction against LCDC before the RTC of Balanga, Bataan, docketed as Civil Case No. 5558. The case was settled
on a Joint Motion to Dismiss[21] dated April 26, 1990 filed by both parties pursuant to a letter agreement[22] dated
February 21, 1990.
In the said letter agreement, LCDC vowed to continue to undertake the marketing of the Montemar Villas lots for the
purpose of remitting to the Valdeses their 40% share in the sale of the said lots until full payment of the purchase
price of BARECO shares amounting to P20 Million. The RTC thus dismissed the case with prejudice in its
Order[23] dated April 27, 1990.
Meanwhile, as the loans obtained by LCDC from DBP/APT remained unpaid, the mortgaged properties of LCDC,
LCRC, and MBCI were eventually foreclosed by DBP/ATP.[24]
Sometime in 1992, LCDC and LCRC initiated negotiations with Philcomsat, a prospective investor of the Montemar
Project. In this regard, Philcomsat presented a Memorandum of Intent[25] dated August 18, 1992, which embodied the
terms and conditions agreed upon by LCDC, LCRC, MBCI, and Philcomsat. This was with a view toward the latter
investing on the project, and, concurrently, bailing out LCDC, LCRC and MBCI from their loan obligations with APT,
GCC, and Philcomsat. The Memorandum of Intent was presented in the board and stockholders' meeting of MBCI. A
project profile was also furnished to the board members of MBCI, wherein MRDC, a proposed new corporation, would
transform and develop the unsold Montemar Villas lots into a golf course and sports complex.[26]
Under the said agreement, Philcomsat vowed to settle the outstanding loans of LCDC, LCRC, and MBCI with APT,
GCC, and Philcomsat. In consideration thereof, the ownership over the properties of LCDC and LCRC, including their
shares in MBCI, would be transferred to MRDC. MRDC would then proceed with the improvement of the facilities and
services of MBCI and development of the properties conveyed to it by LCDC and LCRC into a sports or recreation
complex, which includes a gold course and a country club.

Meanwhile, to obtain from APT an extension of the period to pay the outstanding obligation of LCDC and LCRC,
Philcomsat paid APT the amount of P4 Million. During the extension period, Philcomsat eventually decided to invest
in the new project, subject to conditions, particularly, that the Valdeses: (1) give their conformity to the new project;
and (2) forego their claim to the proceeds of the sale of the Montemar Villas lots.[27]
To convince Gabriel, acting attorney-in-fact of Carlos, Sr. to conform to the conditions set by Philcomsat, Rafael
Cacho (Rafael), the brother of Francisco, presented orally and in writing to petitioner two (2) scenarios:[28]
Scenario A - Philcomsat will not come in as an investor and all the properties will be sold at public auction and all the
parties will be left with nothing.

Scenario B - Philcomsat will invest and bail out LCDC, MBCI, and the Valdeses and the Cachos from their
indebtedness to their creditors. They will incorporate Montemar Resorts Development Corporation ("MRDC"), which
will develop the beach project under a new concept that includes a gold course, with Philcomsat owning (70%) of
MRDC. The balance of thirty percent (30%) will be distributed among the Valdeses (owning 7.5% out of the 30%) and
the Cachos and creditors GCC (the remaining 22.5% of the 30%).[29]
In response Gabriel approached Honorio Poblador III (Poblador), president of Philcomsat, and presented an
unsigned draft letter,[30] which contained, among others, the following statement:
We understand that while the sale of the above is not consummated, the existing contract between La Colina
Development Corp. and Amb. Carlos J. Valdes per Assignment of Rights dated October 30, 1975 is still in force and
effect.[31]
Poblador did not agree to the draft letter and the same was rejected by LCDC, LCRC, and Cacho. After further
discussion between Rafael and Gabriel, and after the aforementioned portion of the letter was deleted, a letter-
conformity[32] dated August 27, 1992 was eventually finalized. Pertinent portions of the letter-conformity dated August
27, 1992 reads as follows:
Dear Gabby,

This is to confirm your support to the new concept of the Montemar Project which will involve the entry of Philcomsat
as an investor.
However you have indicated to us your preference to sell all your holding in:

a) All your shareholdings in La Colina Resorts Corporation

b) All your rights as an unpaid seller of the Montemar Villas (which is now conceived to be a
future golf course consisting of approximately over 60 hectares)
xxxx

Your indicative price you have set for the above is P35M (negotiable). Kindly issue the necessary authority.

Very truly yours,

(signed)
RAFAEL M. CACHO

(signed)
JOSE MARI CACHO

CONFORME:

(signed)
GABRIEL A.S. VALDES
Attorney-in-fact of Carlos J. Valdes
Thereafter, pursuant to the Memorandum of Intent dated August 18, 1992 and the letter-conformity dated August 27,
1992, Philcomsat, together with LCDC, LCRC, and MBCI executed a Memorandum of Agreement[33] dated
September 3, 1992 essentially identical to the Memorandum of Intent dated August 18, 1992 executed by and
between LCDC, LCRC, MBCI, and Philcomsat. Meanwhile, on August 31, 1992, LCRC and LCDC, through a
Consolidated Deed of Absolute Sale,[34] conveyed and sold to MRDC all their real and personal properties situated in
Bagac, Bataan.
Notably, after executing the letter-conformity dated August 27, 1992, Gabriel appointed Jose Mari and Rafael on
August 28, 1992 to sell the shareholdings of Carlo, Sr. in LCRC and other real properties of the Valdeses.
[35]
Thereafter, on November 18, 1992, Rafael informed Gabriel that Philcomsat offered to purchase Carlo, Sr.'s
shareholdings in LCRC and the Valdeses' other real properties for a consideration of P24,771,800.00,[36] which
petitioners rebuffed. Gabriel then visited Poblador to request for a higher offer, but nothing materialized from their
negotiations.
Proceedings before the Regional
Trial Court:
On April 6, 1993, the Valdeses filed before the RTC a Complaint for Reconveyance, Annulment and/or Rescission of
Contract, Specific Performance and Damages with Prayer for Temporary Restraining Order and Writ of Preliminary
Injunction against LCDC, LCRC, Philcomsat, MRDC, Jose Mari, including Poblador and Alfredo L. Africa (Africa), in
their capacities as officers for Philcomsat and MRDC (herein collectively referred to as respondents).[37]
MRDC, Poblador, and Africa filed their Joint Answer on May 19, 1993 and an Omnibus Motion for Issuance of
Amended Order and to Admit Joint Answer on May 21, 1993. Meanwhile Philcomsat filed its Answer on May 21,
1993. LCDC, LCRC, and Cacho filed their Answer on June 3, 1993.[38]
Meanwhile, trial on the application for preliminary injunction ensued. On May 2, 1995, the RTC issued an Order,
directing the issuance of a writ of injunction against respondents. The dispositive potion of the Order reads:
WHEREFORE, in view of all the foregoing, the application of plaintiffs for the issuance of a writ of preliminary
injunction is hereby granted and defendants and all those claiming rights under them are enjoined from:
1) Alienating, disposing, or otherwise encumbering the properties subject matter of this case, that is, the parcels of
land registered under the name of Montemar Resorts and Development Corporation listed in Exhibit "PP-Inj." To PP-
3-Inj.";

2) Implementing the provisions of the Memorandum of Agreement (Exhibit "Q-Inj.") sought to be nullified; and

3) Introducing improvements or otherwise transforming the aforesaid properties into a golf course or a commercial or
industrial complex upon posting of a bond by plaintiffs in the amount of PhP100,000.00

SO ORDERED.[39]
The RTC then resumed pre-trial proceedings and, thereafter, conducted trial on the main case. On October 26, 2009,
the trial court rendered a Decision[40] declaring the Memorandum of Agreement dated September 3, 1992 and the
Consolidated Deed of Absolute Sale dated August 31, 1992 null and void. The dispositive portion of the said Decision
states:
WHEREFORE, foregoing considered, judgment is hereby rendered:
1. Declaring null and void the Memorandum of Agreement dated September 3, 1992 between LCRC, LCDC and
MBCI and PHILCOMSAT being contrary to the spirit, intent and obligation of the original joint venture agreement and
without consent and approval by the plaintiffs;
2. Declaring null and void the Consolidated Deed of Sale dated August 31, 1992 executed by LCRC, LCDC thru its
President Jose Mari Cacho as vendor in favor of MRDC as vendee, represented by defendant Alfredo Africa for lack
of consent of the plaintiffs and for having been entered into in bad faith by herein defendants. All the properties
involved in the transaction should, therefore, revert back to LCDC;
3. Denying plaintiffs' prayer for damages for lack of factual basis;

4. Ordering the defendants, to pay attorney's fees amounting to 10% of any recovery and as well as the expenses of
litigation and costs of suit, jointly and severally.

SO ORDERED.[41]
The RTC found that the Valdeses and LCDC entered into a joint venture agreement, whereby the former would
contribute to the joint venture the BARECO properties in Bagac, Bataan, and in return, LCDC would develop and
improve them into a residential subdivision or the Montemar Villas. The proceeds of the sale of the Montemar Villas
lots would then be divided between them in the following manner: 60% to LCDC, and 40% to the Valdeses.[42]
The trial court further found that despite the Valdeses' refusal to allow Philcomsat to take part in the joint venture
agreement, LCDC, LCRC, MBCI, and Philcomsat, unknowingly to the Valdeses, executed the September 3, 1992
Memorandum of Agreement, an agreement that effectively disregarded the rights and interests of the Valdeses,
particularly, their forty percent (40%) share in the proceeds of the sale of the Montemar Villas lots. Moreover, the
agreement, without the conformity of the Valdeses, set aside the original intent of the joint venture agreement only to
be replaced by respondents' plan to convert the Montemar Villas lots into a golf course and sports complex.[43]
Considering the foregoing, the RTC held that the two (2) agreements are null and void. It considered the lack of
consent on the part of the Valdeses to the said contracts and the evident bad faith, which attended their execution,
thus:

These transactions in so far as they involve the properties of the plaintiffs are null and void for lack of consent of the
plaintiffs and for having been entered into bad faith because the parties were all aware of the rights of plaintiffs and
the need to obtain from them their consent which was already evident from the beginning. This Court must strike
down these transactions and restore the properties to where they were when the rights of plaintiffs and the
obligations of the co-joint venturers [sic] were clear and unmolested.

There was indeed a joint venture agreement between plaintiffs and the Cachos and this was expressly admitted by
defendant LCDC (Exhibit V) which would bind PHILCOMSAT and MRDC being the successor of LCDC. This being
the case, fiduciary relationship exists among the joint ventures [sic]. Utmost good faith is demanded of the party in
possession of the property or profits and he should not be allowed to obtain any unfair advantage of the other co-
adventurers. In this light alone, LCDC did not have any right to execute the [Memorandum of Agreement] and the
Consolidated Deed of Sale in derogation of the rights of the plaintiffs under their covenant with LCDC so that the
execution of said [Memorandum of Agreement] and Consolidated Deed of Sale constituted a gross breach of trust
and of the contracts with the plaintiffs which at the time obtained for the violators unfair advantage over the plaintiffs.
LCDC should not be allowed to breach with impunity its covenants with plaintiffs and when it did in conspiracy with
the rest of the defendants the plaintiffs are entitled to obtain from the Court the reliefs they demanded.

The defendants were at all times aware of the obligation regarding the BARECO properties and the restrictions on
their use and still they cooperated in disregarding them and in instituting moves which undeniably deprived the
plaintiffs of their rights. This systematic divestment of rights took several steps, all without the consent of or
knowledge of the plaintiffs, and even against their manifest will.

xxxx

The Court, in view of the foregoing disquisitions, holds that plaintiffs' rights to the Bagac properties have been
violated when LCRC and the rest of the defendants in a series of maneuvers deprived them their right of ownership
and their rights to possession, use and benefits therefrom. All transactions executed and entered into by defendants
who violated plaintiffs' rights and deprived them of the same by means of fraud and violations of trust are hereby
declared null and void. All properties should revert to LCDC.[44]
Philcomsat, MRDC, and Poblador filed a Motion for Reconsideration of the RTC Decision on November 11, 2009.
They later filed a Supplemental Motion for Reconsideration on December 18, 2009. However, the trial court denied
the Motion for Reconsideration and the Supplemental Motion for Reconsideration on January 4, 2010.[45]
Proceedings before the Court of
Appeals:
On October 31, 2012, the CA rendered its assailed Decision, which reversed and set aside the aforesaid RTC ruling.
The dispositive portion of the Decision reads:

WHEREFORE, premises considered, the appeal is GRANTED. The Decision dated October 26, 2009 rendered by
the Regional Trial Court of Balanga City, Bataan, Branch 2, declaring null and void the Memorandum of Agreement
dated September 3, 1992 between LCRC, LCDC, and MBCI and Philcomsat and the Consolidated Deed of Sale
dated August 31, 1992 executed by LCRC, LCDC as vendor in favor of MRDC as vendee is REVERSED and SET
ASIDE. The Writ of Preliminary Injunction issued by the RTC dated May 2, 1995 is LIFTED and SET ASIDE. The
Complaint in Civil Case No. 6134 is DISMISSED.
SO ORDERED.[46]
The CA found that the Deed of Sale dated May 24, 1975, promissory notes executed by LCDC, and the Assignment
of Rights dated October 30, 1975, negated the existence of a joint venture agreement between the Valdeses and
LCDC.[47] In this regard, the CA held that the relationship between the Valdeses and LCDC was, instead, one of
vendor-vendee. As explained by the appellate court, "there was no contract to contribute properties to a common
fund so as to share the profits between themselves. There is even no common fund to speak of LCDC's obligation to
pay persists as long as it is able to sell the subdivision lots even if the corporation itself is experiencing losses."[48]
The CA also found that Gabriel was well aware of the new concept of the Montemar Project and consented to the
entry of Philcomsat as a new investor. Considering Gabriel's express conformity to the new concept of the Montemar
Project, as embodied in the August 27, 1992 letter, the appellate court thus ruled that the obligation of LCDC to sell
the Montemar Villas lots and remit the proceeds thereof to the Valdeses has been extinguished. It then held that the
August 31, 1992 Consolidated Deed of Absolute Sale and the September 3, 1992 Memorandum of Agreement are
valid contracts. The CA explained the foregoing in this wise:

To dispose all or substantial all or a substantial amount of its properties and assets, a corporation, through a majority
vote of its board of directors, is required to be authorized by the vote of at least two-thirds (2/3) of the outstanding
capital stock of the members in a stockholder's meeting duly called for the purpose.

xxxx

The requirement before LCRC can dispose of all or a substantial amount of its properties has been complied with
when the stockholders of LCRC approved the new concept of the Montemar project, as shown by the Certification of
the Corporate Secretary of LCRC dated August 27, 1992 x x x x[49]
xxxx

As we have previously mentioned, this new concept of the Montemar Project has been discussed extensively in
MBCI meetings which [petitioner] attended or which minutes he signed. Carlos Valdes, 30% owner of LCRC,
therefore assented to the transfer.[50]
According to the CA, neither bad faith nor fraud attended the execution of the August 31, 1992 Consolidated Deed of
Sale and September 3, 1992 Memorandum of Agreement. As such, ordering their rescission or cancellation would be
improper considering that the Valdeses have already been substantially paid in cash and properties.[51]
Petitioners sought reconsideration of the October 31, 2012 Decision of the CA, which was, however, denied by the
appellate court in its July, 16 2013 Resolution.[52]
Issues
Hence, this instant petition, raising the following assignment of errors:

THE [CA] SERIOUSLY ERRED WHEN IT GRANTED THE APPEAL AND SET ASIDE THE DECISION DATED
OCTOBER 26, 2009 RENDERED BY THE REGIONAL TRIAL COURT OF BATAAN, WHICH DECLARED THE
MEMORANDUM OF AGREEMENT DATED 3 SEPTEMBER 1992 NULL AND VOID BETWEEN LCRC, LCDC, MBCI
AND PHILCOMSAT; AND THE CONSOLIDATED DEED OF SALE DATED 31 AUGUST 1992 EXECUTED BY
LCRC, LCDC AS VENDORS IN FAVOR OF MRDC AS VENDEE, BASED ON THE FOLLOWING GROUNDS:

I.

THE [CA] SERIOUSLY ERRED WHEN IT RULED THAT THERE IS NO JOINT VENTURE AGREEMENT TO BEGIN
WITH AND THAT THE CONTRACT ENTERED INTO BY THE VALDESES AND CACHOS WAS THAT OF A
SIMPLE SALE. CONTRARY TO ITS FINDINGS AND AS APTLY POINTED OUT BY THE LOWER COURT, THE
ASSIGNMENT OF RIGHTS DATED 30 OCTOBER 1975 CLEARLY STATES THE TERMS AND CONDITIONS OF
THE PARTIES WHICH MUST BE FAITHFULLY COMPLIED WITH, IN SUPPORT OF THE ORIGINAL DEED OF
SALE.

II.

THE [CA] SERIOUSLY ERRED WHEN IT RULED THAT THE RESPONDENT LCDC, LCRC AND CACHOS, TO
THE EXCLUSION OF THE PETITIONERS, HAVE THE RIGHT TO MORTGAGE THE SUBJECT PROPERTIES,
BEING THE OWNERS THEREOF.

III.

THE [CA] SERIOUSLY ERRED WHEN IT RULED THAT THE PETITIONERS CONSENTED TO THE MONTEMAR
PROJECT, WHICH AS A RESULT, EXTINGUISHED/NOVATED THE OBLIGATION OF LCDC TO SELL
MONTEMAR VILLAS LOTS AND REMIT THE PROCEEDS.

IV.

THE [CA] SERIOUSLY ERRED WHEN IT RULED THAT THE CONSOLIDATED DEED OF SALE DATED 31
AUGUST 1992 AND DEED OF ABSOLUTE SALE AND MEMORANDUM OF AGREEMENT DATED 3 SEPTEMBER
1992 ARE VALID IN SPITE OF LACK OF KNOWLEDGE ON THE PART OF THE PETITIONERS.

V.

THE [CA] SERIOUSLY ERRED IN APPLYING THE PRINCIPLE OF INNOCENT PURCHASER FOR VALUE AND IN
GOOD FAITH. EVIDENTLY, RESPONDENTS PHILCOMSAT AND MRDC KNEW OF THE IMPENDING RIGHTS
AND INTEREST OF THE ORIGINAL OWNERS WHEN THE CONSOLIDATED DEED OF SALE AND THE
MEMORANDUM OF AGREEMENT FOR THE ENTRY OF PHILCOMSAT, WERE CONSUMMATED. [53]
In sum, the issues are whether: (1) there was a joint venture between LCDC and the Valdeses; (2) there was a
novation of the May 24, 1975 Deed of Sale between LCDC and the Valdeses that would result in the extinguishment
of LCDC's liability to the Valdeses; (3) Philcomsat and MRDC are purchasers in good faith and for value of the
subject properties in Bataan; and (4) petitioner can avail of the remedy of rescission of the September 3, 1992
Memorandum of Agreement and the August 31, 1992 Consolidated Deed of Sale.

Petitioners' Arguments:
Petitioners contend that the original agreement between the Valdeses and LCDC required the Valdeses to contribute
the BARECO properties to the Montemar Project. In consideration thereof, LCDC shall form LCRC to develop and
improve the said properties. Meanwhile, both the Valdeses and LCRC shall sell the properties and share
proportionately in the profits realized. This scenario, petitioners insist, is the very joint venture agreement executed by
and between the Valdeses and LCRC, which is supposedly reflected in the Deed of Sale dated May 24, 1975, the
promissory notes issued to the Valdeses, including the Assignment of Rights dated October 30, 1975 and a
Memorandum of Agreement.[54] Taking all these documents together, petitioners emphasize that the joint venture
agreement between the Valdeses and LCDC is not a one-time transaction, but a recurring promise to share in the
proceeds of the sale of the Montemar Villas lots.[55]
From the foregoing, petitioners argue that LCDC cannot, without violating the existing fiduciary relationship between it
and the Valdeses, encumber or mortgage the properties subject of the joint venture agreement without their consent
and approval. They further claim that any act committed by LCDC, as co-venturer, without the express authority of
the Valdeses, is not binding upon the latter.[56]
In this connection, the entrance of Philcomsat as a new investor in the Montemar Project and the execution of the
September 3, 1992 Memorandum of Agreement between LCRC, LCDC, MBCI and Philcomsat, including the
execution of the August 31, 1992 Consolidated Deed of Sale by LCRC and LCDC in favor MRDC, are acts in
violation of the true intent and purpose of the joint venture i.e., that LCDC and the Valdeses shall share in the
proceeds of the sale of the Montemar Villas lots, in proportion of sixty percent (60%) and forty percent (40%),
respectively. Petitioners insist that these acts cannot bind the Valdeses since they are in violation of their rights under
the joint venture agreement, and in disregard of their forty percent (40%) share in the sale of the Montemar Villas lots.
[57]

Petitioners further point out that the CA committed serious error of fact and law when it concluded that there was
novation, which produced the effect of extinguishing the contract of sale between the Valdeses and LCDC given that
the supposed substitution of creditors i.e., the entry of Philcomsat, was never declared in clear and unequivocal
terms.[58] Also, Philcomsat and MRDC could not be considered as innocent purchasers for value considering that they
had knowledge of the impending rights and interest of the Valdeses over the subject properties when the September
3, 1992 Memorandum of Agreement and the August 31, 1992 Consolidated Deed of Sale were consummated.[59]
Considering the foregoing recitals, petitioners thus maintain that the Valdeses are entitled to the: (1) rescission of the
September 3, 1992 Memorandum of Agreement and August 31, 1992 Consolidated Deed of Sale; (2) reconveyance
of the subject properties from LCDC; and (3) payment of their forty percent (40%) share in the income derived from
sale of the Montemar Villas lots.

Respondents' Arguments:
For their part, respondents LCDC, LCRC, and Cacho argue that being a lawyer and accountant, nothing should have
prevented Carlos, Sr. from manifesting in unequivocal terms in any of the documents presented by petitioners that he
intended to form a joint venture between the Valdeses and LCDC. Respondents, in this regard, maintain that the
contract executed by and between the Valdeses and LCDC was a contract of sale, whereby the Valdeses, for a
consideration of P20 Million, conveyed to LCDC, and later, to LCRC, the BARECO properties in Bataan. As owner in
fee simple of the said BARECO properties by virtue of a Deed of Sale dated May 24, 1975, LCDC had full disposal of
the said properties, which necessarily included the right to convey, sell, encumber, or mortgage the same.[60]
Respondents also agreed with the CA that the August 27, 1994 letter-conformity of Gabriel, who signed the said
document for himself and on behalf of the other Valdeses, manifested his unqualified recognition that the rights of the
Valdeses as unpaid sellers have been novated into participation and sharing in the new concept of the Montemar
Project. Notably, such fact was supposedly confirmed when Gabriel authorized the Cacho family to sell Carlos, Sr.'s
shareholdings in LCRC and other real properties of the Valdeses. Furthermore, Gabriel was a member of the MBCI
board to whom the entry of Philcomsat as a new investor was extensively discussed during a board meeting called
for such purpose, and that the fact Gabriel himself signed the minutes of the meeting ultimately signifies his
knowledge of the proposed new concept of the Montemar Project.[61]
Meanwhile, respondents Philcomsat and MRDC essentially raise the same arguments as respondents LCDC, LCRC,
and Jose Mari, and further argue that Gabriel cannot avail of the remedy of rescission of the September 3, 1992
Memorandum of Agreement and the August 31, 1992 Consolidated Deed of Sale, as he failed to satisfactorily prove
that the Valdeses cannot, in any manner, collect the unpaid obligation of LCDC.[62]
Our Ruling
Factual findings of the CA are generally not subject to this Court's review under a Rule 45 petition. However, the
general rule on the conclusiveness of the factual findings of the CA is also subject to well recognized exceptions such
as where the CA's findings of facts contradict those of the RTC, as in this case.[63] All these considered, we are
compelled to review factual questions thus presented.
After a judicious review of the records of the case, this Court finds that the CA committed no error in setting aside the
October 26, 2009 Decision of the RTC. The Court, therefore, denies the instant Petition.

The Valdeses and LCDC did not

enter into a joint venture
agreement. The agreement entered
into by the parties is a contract of
sale.
As discussed above, petitioners contend that while Carlos, Sr. and LCDC appeared to have entered into a contract of
sale i.e., Deed of Sale dated May 24, 1975, the parties intended to enter into a joint venture agreement to develop the
BARECO properties into a beach resort and residential subdivision. In particular, the determination of whether both
parties entered into such agreement is necessary to address the side of issue of whether LCDC wrongfully
mortgaged the subject properties to various financial institutions without the authority and consent of its co-venturers
or partners, and the main issue of whether the September 3, 1992 Memorandum of Agreement and the August 31,
1992 Consolidated Deed of Sale were entered into in violation of the terms of the joint venture agreement.
Article 1370 of the Civil Code sets forth the first rule m the interpretation of contracts. The article reads:

Art. 1370. If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the
literal meaning of its stipulations shall control.

If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former.

As embodied in Article 1370 of the Civil Code, the cardinal rule in the interpretation of contracts is that when the
terms of the contract are clear, its literal meaning shall control. Thus, in Norton Resources and Development
Corporation v. All Asia Bank Corporation,[64] this Court held that:
x x x A court's purpose in examining a contract is to interpret the intent of the contracting patties, as objectively
manifested by them. The process of interpreting a contract requires the court to make a preliminary inquiry as to
whether the contract before it is ambiguous. A contract provision is ambiguous if it is susceptible of two reasonable
alternative interpretations. Where the written terms of the contract are not ambiguous and can only be read one
way, the court will interpret the contract as a matter of law. If the contract is determined to be ambiguous, then
the interpretation of the contract is left to the court, to resolve the ambiguity in the light of the intrinsic evidence.
[65]
(Emphasis supplied)
Thus, in interpreting the agreement between the Valdeses and LCDC, the inquiry is not what contract the
parties intended to enter into, but what contract did they enter into. Notably, the Deed of Sale, if read in conjunction
with the promissory notes issued to the Valdeses and the Assignment of Rights dated October 30, 1975, leaves no
room for interpretation as to the exact intention of the parties – they entered into a contract of sale.
A contract of sale is defined under Article 1458 of the Civil Code:

By the contract of sale one of the contracting patties obligates himself to transfer the ownership of and to deliver a
determinate thing, and the other to pay therefore a price certain in money or its equivalent.

"The elements of a contract of sale are: (a) consent or meeting of the minds, that is, consent to transfer ownership in
exchange for the price; (b) determinate subject matter; and (c) price certain in money or its equivalent."[66]
The Deed of Sale executed by Carlos, Sr. and LCDC resulted in a perfected contract of sale, all its elements being
present. There was a mutual agreement between them, wherein 4,000 shares of stock of the Valdeses in BARECO
were sold to LCDC for a consideration of P20 Million. To be clear, the foregoing amount was paid in cash and the
balance covered by promissory notes to be paid by way of an Assignment of Rights. Specifically, P2.5 Million of the
P20 Million purchase price was paid in cash, while the balance of P17.5 Million was covered by promissory notes and
settled through the Assignment of Rights.

Notably, a perusal of the Assignment of Rights would show that the same constituted full payment of the BARECO
shares of stock, thus: "That the ASSIGNEE hereby accepts this assignment in full payment of the aforementioned
promissory note."[67] There is, therefore, in this case, an absolute transfer of ownership of the BARECO shares to
LCDC for a consideration of P20 Million.
Significantly, there is nothing in the abovementioned documents, nor in any of the subsequent contracts between the
parties that indicates that the transaction entered by and between them was a joint venture. The transaction between
the parties was clearly a sale of property.

In contrast, a joint venture has been defined by this Court as follows:

The legal concept of a joint venture is of common law origin. It has no precise legal definition, but it has been
generally understood to mean an organization formed for some temporary purpose. x x x It is in fact hardly
distinguishable from the partnership, since their elements are similar – community of interest in the business,
sharing of profits and losses, and a mutual right of control. x x x The main distinction cited by most opinions in
common law jurisdictions is that the partnership contemplates a general business with some degree of continuity,
while the joint venture is formed for the execution of a single transaction, and is thus of a temporary nature. x x x This
observation is not entirely accurate in this jurisdiction, since under the Civil Code, a partnership may be particular or
universal, and a particular partnership may have for its object a specific undertaking. x x x It would seem therefore
that under Philippine law, a joint venture is a form of partnership and should be governed by the law of partnerships.
The Supreme Court has however recognized a distinction between these two business forms, and has held that
although a corporation cannot enter into a partnership contract, it may however engage in a joint venture with others.
x x x[68]
A joint venture, therefore, is akin to a partnership, the essential elements of which are as follows: (1) an agreement to
contribute money, property, or industry to a common fund; and (2) an intent to divide the profits among the
contracting parties. On account thereof, petitioners insist that the parties had all along entered into a joint venture
agreement. This can be gleaned from fact that LCDC undertook to divide the net proceeds from the sale of the
Montemar Villas lots between LCDC and the Valdeses, in proportion to 60% and 40%, respectively. This fact was
later affirmed by the February 21, 1990 letter agreement between the parties.

We disagree. A perusal of the Assignment of Rights and the February 21, 1990 letter agreement clearly shows that
the Valdeses' share in the sale of the subdivision lots was the manner of paying, or mode of payment of the P20
Million consideration for the 4,000 BARECO shares. While we understand that this type of provision may be peculiar
to a contract of sale, this profit-sharing scheme, as explained by LCDC, was a means for the latter to acquire the
necessary funds to develop and improve the said lots.

Notably, LCDC was contractually obliged to remit to the Valdeses' their 40% share in the sale of the Montemar Villas
lots despite the fact that LCDC may be experiencing losses. This runs counter to a partnership or joint venture
relationship. The essence of a true partnership is that the partners share in the profits and losses of the business.
This is clearly not the case here. As correctly found by the CA:

There was no contract to contribute properties to a common fund so as to share the profits between themselves,
There is even no common fund to speak of. LCDC's obligation to pay persists as long as it is able to sell subdivision
lots even if the corporation itself is experiencing losses, as what happened. x x x x Hence, there is nothing here that
may be said to be akin to a joint venture in its legal definition.[69]
Thus, as the sole stockholder of BARECO pursuant to the Deed of Sale dated May 24, 1975, LCDC, had full disposal
of the BARECO properties in Bataan, including the right to encumber and mortgage the same as attributes of
ownership. Along the same lines, considering that some of properties of LCDC were transferred and conveyed to
LCRC, the latter likewise had every right to mortgage these properties. The rights and interests of the Valdeses, lie
only on the proceeds of the sale of the Montemar Villas lots. They could not also question the mortgages constituted
on the properties after the titles have already passed to LCDC and LCRC.

Given the foregoing recitals, this Court cannot nullify the September 3, 1992 Memorandum of Agreement and the
August 31, 1992 Consolidated Deed of Sale on the sole ground that they were supposedly entered into in violation of
the joint venture between the Valdeses and LCDC, where, from the outset, such relationship is clearly non-existent
between the parties. Failing to substantiate their claim of a joint venture or partnership, petitioners' argument has no
leg to stand on.

There was a valid novation of the

initial agreement between LCDC
and the Valdeses to develop and sell
the Montemar Villas lots which
thereby extinguished LCDC's
original obligation to the Valdeses.
It is undisputed that LCDC, by virtue of the May 24, 1975 Deed of Absolute Sale and October 30, 1975 Assignment of
Rights, was obligated to sell the Montemar Villas lots and remit a portion of the proceeds thereof to the Valdeses. On
the basis of this finding, the next question is whether the implementation of the new Montemar Project, through the
execution of the September 3, 1992 Memorandum of Agreement and the August 31, 1992 Consolidated Deed of
Sale, resulted in the novation of the terms and conditions contained in the initial agreements between the parties.

Relevantly, novation is defined "as the extinguishment of an obligation by the substitution or change of the obligation
by a subsequent one which terminates the first, either by changing the object or principal conditions, or by
substituting the person of the debtor, or subrogating a third person in the rights of the creditor."[70] In this regard,
Article 1292 of the Civil Code provides:
Article 1292. In order that an obligation may be extinguished by another which substitute the same, it is imperative
that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible
with each other.

It is well settled that "[t]he cancellation of the old obligation by the new one is a necessary element of novation which
may be effected either expressly or impliedly. While there is really no hard and fast rule to determine what might
constitute sufficient change resulting in novation, the touchstone, however, is irreconcilable incompatibility between
the old and the new obligations."[71] Notably, "[i]n the absence of an express provision to this effect, a contract may
still be considered as novated if it passes the test of incompatibility, that is, whether the contracts can stand together,
each one having an independent existence."[72]
On this point, it must be stressed that the new concept of the Montemar Project would entail the development of a
golf course or sports complex on the unsold lots of the Montemar Villas. Necessarily, the implementation of this new
concept is incompatible with the old obligation of LCDC under their previous agreement. The construction of these
new sports facilities will effectively halt the development and eventual sale of the Montemar Villas lots and render
unavailing LCDC's original obligation to remit to the Valdeses' their 40% share in the proceeds derived from the sale
of the said lots.

Was there a valid novation in this case?

For a valid novation to take place, the following requisites must concur: "(1) a previous valid obligation; (2) the
agreement of all the parties to the new contract; (3) the extinguishment of the old contract; and (4) validity of the new
one. There must be consent of all the parties to the substitution, resulting in the extinction of the old obligation and
the creation of a valid new one."[73]
There is no question that the new concept of the Montemar Project, as intimated in the September 3, 1992
Memorandum of Agreement and the August 31, 1992 Consolidated Deed of Sale, was wholly incompatible with its
original concept earlier agreed upon by the Valdeses and LCDC. At that point, what was required for the validity of
the new concept was Valdeses' express conformity thereto, with full knowledge that its implementation will denote
that their rights to the 40% share of the proceeds derived from the sale of the Montemar Villa lots will be novated and
converted into a 7.5% equity in MRDC.

In light of the foregoing facts, this Court finds that Gabriel, as the representative of the Valdeses, had knowledge of
the new concept of the Montemar Project, and consented to the entry of Philcomsat as a new investor, this finding is
based on the following established facts: (1) the August 27, 1992 letter-conformity which bore Gabriel's signature on
the conforme portion thereof; (2) several minutes of the board meetings of MBCI, where MBCI directors, including
Gabriel, discussed the entry of Philcomsat as a possible investor of the Montemar Project; and (3) the notices sent to
the LCRC stockholders and directors of scheduled meetings for the purpose of discussing the proposed new concept
of the said project. We agree with the findings of the CA that the wordings in the notices sent to Gabriel sufficiently
apprised him of the changes in the Montemar Project.[74]
It cannot be overemphasized that Gabriel, being a director of the MBCI board, never questioned the proposed new
concept of the Montemar Project and the entry of Philcomsat as a new investor. More importantly, his signature in
the conforme portion of the August 27, 1992 letter shows his explicit acknowledgment and recognition of the novation
by the parties (Valdeses and LCDC) of their earlier agreement of selling the Montemar Villas lots to the public. His
authorization to the Cachos to sell their shareholdings in LCDC also confirms this recognition. Notably, it was only
after Philcomsat failed to offer an agreeable purchase price for Carlos, Sr.'s shareholdings in LCRC and the
Valdeses' other real properties that the Valdeses filed the instant complaint against respondents.[75]
With the express conformity of Gabriel to the new concept of the Montemar Project, the obligation of LCDC to sell the
Montemar Villas lots, and remit the proceeds to the Valdeses has been extinguished.

Respondents Philcomsat and

MRDC were not in bad faith in
executing the the September 3, 1992
Memorandum of Agreement and
the August 31, 1992 Consolidated
Deed of Sale.
As discussed above, petitioners insist th.at the September 3, 1992 Memorandum of Agreement and the August 31,
1992 Consolidated Deed of Sale are null and void for having been executed in bad faith and for the purpose of
defrauding the Valdeses.

We disagree. Jurisprudence has shown that in order to constitute :fraud that provides basis to annul contracts, it must
fulfill two conditions: "First, the fraud must be dolo causante or it must be fraud in obtaining the consent of the party,"
and "[s]econd, the fraud must be proven by clear and convincing evidence and not merely by a preponderance
thereof."[76]
It bears noting that prior to its entry as investor of the Montemar Project, Philcomsat required the: (1) written approval
of the stockholders and board members of LCDC, LCRC and MBCI of all the provisions in the September 3, 1992
Memorandum of Agreement; and (2) consent of the Valdeses to the new Montemar Project as embodied in the
August 27, 1992 letter-conformity signed by Carlos, Sr. himself.[77]
Clearly, Philcomsat had to make sure that LCDC and LCRC are able to procure the assent of the Valdeses to the
new concept of the Montemar Project. It was for this reason that Gabriel executed and signed the August 27, 1992
letter-conformity, which bore his written approval to the entry of Philcomsat as an investor.[78] Moreover, the
Memorandum of Intent dated August 18, 1992 stated that:
x x x 1. MBCI, LCRC and LCDC shall first secure the explicit approval by their respective stockholders and/or
members (owning at least 2/3 of the outstanding shares) of all the provisions hereinafter enumerated on or before the
middle of August 1992; x x x[79]
Clearly, the above-quoted provision also proves that Philcomsat would not have agreed to invest in the Montemar
Project without first securing the consent and written approval of LCRC, LCDC, and MBCI stockholders, which
included the Valdeses.

In all the foregoing circumstances, it must be stressed that petitioners have not presented to this Court how
respondent Philcomsat employed fraudulent acts to deceive the Valdeses, or any of the stockholders of LCRC,
LCDC, and MBCI to consent to the implementation and execution of the September 3, 1992 Memorandum of
Agreement and the August 31, 1992 Consolidated Deed of Sale.

On the other hand, Philcomsat was able to state the steps it undertook to ensure utmost consideration of the
Valdeses' rights before it decided to invest in the Monetemar Project, and, pursuant thereto, execute the September
3, 1992 Memorandum of Agreement and the August 31, 1992 Consolidated Deed of Sale. There is simply no fraud or
bad faith to speak of.

Petitioners cannot avail of the

remedy of rescission under the Civil
Code.
Petitioners ask this Court to have the September 3, 1992 Memorandum of Agreement and August 31, 1992
Consolidated Deed of Sale rescinded as both these contracts caused damage to the interests and participation of the
Valdeses of their 40% share in the proceeds of the sale of the Montemar Villas lots.

"Rescission is a remedy granted by law to the contracting parties, and even to third persons, to secure the reparation
of damages caused to them by a contract, even if it should be valid" by reason of external causes resulting in a
pecuniary prejudice to one of the contracting parties or their creditors, the result of which, is the "restoration of things
to their condition at the moment prior to celebration of said contract."[80] "The kinds of rescissible contracts are the
following: first, those rescissible because of lesion or prejudice;[81] second, those rescissible on account of fraud or
bad faith;[82] and third, those which, by special provisions of law,[83] are susceptible to rescission."[84]
None of the above circumstances are present in this case. As discussed above, the records of the case are replete
with evidence that the Valdeses, through Gabriel, gave their express conformity to the new concept of the Montemar
Project and the entrance of Philcomsat as new investor for the said project. Having expressed their consent to the
changes brought about by these new contracts, and having been made aware of the effects thereof, the Valdeses
cannot now feign ignorance and assert that they were prejudiced in their rights and interests. While they feel
shorthanded as they will cease receiving their 40% income share from the sale of the Montemar Villas lots, the fact of
the matter is that they would have maintained a share or interest in the new Montemar Project, which, however, the
Valdeses opted to sell to respondent Philcomsat. Notably, it appears that nothing has materialized from their
negotiations.

In this regard, we have held that "[c]ourts cannot follow one every step of his life and extricate him from bad bargains,
protect him from unwise investments, relieve him from one-sided contracts, or annul the effects of foolish acts. Courts
cannot constitute themselves guardians of persons who are not legally incompetent. Courts operate not because one
person has been defeated or overcome by another, but because he has been defeated or overcome illegally. Men
may do foolish things, make ridiculous contracts, use miserable judgment, and lose money by them – indeed, all they
have in the world; but not for that alone can the law intervene and restore. There must be, in addition, a violation of
the law, the commission of what the law knows as an actionable wrong, before the courts are authorized to lay hold
of the situation and remedy it."[85]
As there was a valid consent on the part of petitioners and good faith on the part of respondents, no reversible error
was committed by the CA in reversing the RTC's Decision that declared as null and void the September 3, 1992
Memorandum of Agreement and August 31, 1992 Consolidated Deed of Sale.

WHEREFORE, the petition for review on certiorari is DENIED for lack of merit. The October 31, 2012 Decision and
July 16, 2013 Resolution of the Court of Appeals in CA-G.R. CV No. 94713 are hereby AFFIRMED. Costs on
petitioners.
SO ORDERED.