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[[[

The MCTC denied the motion on February 9, 1996. 2 It denied reconsideration on

G.R. No. 125221 June 19, 1997

March 8, 1996. 3
REYNALDO M. LOZANO, petitioner, vs.HON. ELIEZER R. DE LOS SANTOS,

Private respondent filed a petition for certiorari before the Regional Trial Court, Branch

Presiding Judge, RTC, Br. 58, Angeles City; and ANTONIO ANDA, respondents.

58, Angeles City. 4 The trial court found the dispute to be intracorporate, hence,

PUNO, J.:

subject to the jurisdiction of the SEC, and ordered the MCTC to dismiss Civil Case
No. 1214 accordingly. 5 It denied reconsideration on May 31, 1996. 6

This petition for certiorari seeks to annul and set aside the decision of the Regional
Trial Court, Branch 58, Angeles City which ordered the Municipal Circuit Trial Court,

Hence this petition. Petitioner claims that:

Mabalacat and Magalang, Pampanga to dismiss Civil Case No. 1214 for lack of
jurisdiction.

THE RESPONDENT JUDGE ACTED WITH GRAVE ABUSE OF DISCRETION


AMOUNTING TO LACK OR EXCESS OF JURISDICTION AND SERIOUS ERROR

The facts are undisputed. On December 19, 1995, petitioner Reynaldo M. Lozano

OF

filed Civil Case No. 1214 for damages against respondent Antonio Anda before the

LAW

IN

CONCLUDING

THAT

THE

SECURITIES

AND

EXCHANGE

COMMISSION HAS JURISDICTION OVER A CASE OF DAMAGES BETWEEN

Municipal Circuit Trial Court (MCTC), Mabalacat and Magalang, Pampanga. Petitioner

HEADS/PRESIDENTS OF TWO (2) ASSOCIATIONS WHO INTENDED TO

alleged that he was the president of the Kapatirang Mabalacat-Angeles Jeepney

CONSOLIDATE/MERGE THEIR ASSOCIATIONS BUT NOT YET [SIC] APPROVED

Drivers' Association, Inc. (KAMAJDA) while respondent Anda was the president of the

AND REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION. 7

Samahang Angeles-Mabalacat Jeepney Operators' and Drivers' Association, Inc.


(SAMAJODA); in August 1995, upon the request of the Sangguniang Bayan of

The jurisdiction of the Securities and Exchange Commission (SEC) is set forth in

Mabalacat, Pampanga, petitioner and private respondent agreed to consolidate their

Section 5 of Presidential Decree No. 902-A. Section 5 reads as follows:

respective associations and form the Unified Mabalacat-Angeles Jeepney Operators'


and Drivers Association, Inc. (UMAJODA); petitioner and private respondent also

Sec. 5. . . . [T]he Securities and Exchange Commission [has] original and exclusive

agreed to elect one set of officers who shall be given the sole authority to collect the

jurisdiction to hear and decide cases involving:

daily dues from the members of the consolidated association; elections were held on
October 29, 1995 and both petitioner and private respondent ran for president;

(a)

petitioner won; private respondent protested and, alleging fraud, refused to recognize

business

the results of the election; private respondent also refused to abide by their agreement

Devices or schemes employed by or any acts of the board of directors,


associates,

its

officers

or

partners,

amounting

to

fraud

and

misrepresentation which may be detrimental to the interest of the public and/or of the

and continued collecting the dues from the members of his association despite

stockholders, partners, members of associations or organizations registered with the

several demands to desist. Petitioner was thus constrained to file the complaint to

Commission.

restrain private respondent from collecting the dues and to order him to pay damages
in the amount of P25,000.00 and attorney's fees of P500.00. 1

(b)

Controversies arising out of intracorporate or partnership relations, between

and among stockholders, members or associates; between any or all of them and the

Private respondent moved to dismiss the complaint for lack of jurisdiction, claiming

corporation, partnership or association of which they are stockholders, members, or

that jurisdiction was lodged with the Securities and Exchange Commission (SEC).

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associates, respectively; and between such corporation, partnership or association


and the state insofar as it concerns their individual franchise or right to exist as such

There is no intracorporate nor partnership relation between petitioner and private

entity.

respondent. The controversy between them arose out of their plan to consolidate their
respective jeepney drivers' and operators' associations into a single common

(c)

Controversies in the election or appointment of directors, trustees, officers or

association. This unified association was, however, still a proposal. It had not been

managers of such corporations, partnerships or associations.

approved by the SEC, neither had its officers and members submitted their articles of
consolidation is accordance with Sections 78 and 79 of the Corporation Code.

(d)

Petitions of corporations, partnerships or associations to be declared in the

Consolidation becomes effective not upon mere agreement of the members but only

state of suspension of payments in cases where the corporation, partnership or

upon issuance of the certificate of consolidation by the SEC. 13 When the SEC, upon

association possesses sufficient property to cover all its debts but foresees the

processing and examining the articles of consolidation, is satisfied that the

impossibility of meeting them when they respectively fall due or in cases where the

consolidation of the corporations is not inconsistent with the provisions of the

corporation, partnership or association has no sufficient assets to over its liabilities,

Corporation Code and existing laws, it issues a certificate of consolidation which

but is under the management of a Rehabilitation Receiver or Management Committee

makes the reorganization official. 14 The new consolidated corporation comes into

created pursuant to this Decree.

existence and the constituent corporations dissolve and cease to exist. 15

The grant of jurisdiction to the SEC must be viewed in the light of its nature and

The KAMAJDA and SAMAJODA to which petitioner and private respondent belong

function under the law. 8 This jurisdiction is determined by a concurrence of two

are duly registered with the SEC, but these associations are two separate entities.

elements: (1) the status or relationship of the parties; and (2) the nature of the

The dispute between petitioner and private respondent is not within the KAMAJDA nor

question that is the subject of their controversy. 9

the SAMAJODA. It is between members of separate and distinct associations.


Petitioner and private respondent have no intracorporate relation much less do they

The first element requires that the controversy must arise out of intracorporate or

have an intracorporate dispute. The SEC therefore has no jurisdiction over the

partnership relations between and among stockholders, members, or associates;

complaint.

between any or all of them and the corporation, partnership or association of which
they are stockholders, members or associates, respectively; and between such

The doctrine of corporation by estoppel 16 advanced by private respondent cannot

corporation, partnership or association and the State in so far as it concerns their

override jurisdictional requirements. Jurisdiction is fixed by law and is not subject to

individual franchises. 10 The second element requires that the dispute among the

the agreement of the parties. 17 It cannot be acquired through or waived, enlarged or

parties be intrinsically connected with the regulation of the corporation, partnership or

diminished by, any act or omission of the parties, neither can it be conferred by the

association or deal with the internal affairs of the corporation, partnership or

acquiescence of the court. 18

association. 11 After all, the principal function of the SEC is the supervision and
control of corporations, partnership and associations with the end in view that

Corporation by estoppel is founded on principles of equity and is designed to prevent

investments in these entities may be encouraged and protected, and their entities may

injustice and unfairness. 19 It applies when persons assume to form a corporation

be encouraged and protected, and their activities pursued for the promotion of

and exercise corporate functions and enter into business relations with third person.

economic development. 12

Where there is no third person involved and the conflict arises only among those

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assuming the form of a corporation, who therefore know that it has not been

On 27 December 1989, Henri Kahn issued a personal check in the amount of

registered, there is no corporation by estoppel. 20

P50,000 as partial payment for the outstanding balance of the Federation.[5]


Thereafter, no further payments were made despite repeated demands.

IN VIEW WHEREOF, the petition is granted and the decision dated April 18, 1996 and
the order dated May 31, 1996 of the Regional Trial Court, Branch 58, Angeles City are

This prompted petitioner to file a civil case before the Regional Trial Court of Manila.

set aside. The Municipal Circuit Trial Court of Mabalacat and Magalang, Pampanga is

Petitioner sued Henri Kahn in his personal capacity and as President of the

ordered to proceed with dispatch in resolving Civil Case No. 1214. No costs.

Federation and impleaded the Federation as an alternative defendant. Petitioner

SO ORDERED.

sought to hold Henri Kahn liable for the unpaid balance for the tickets purchased by
the Federation on the ground that Henri Kahn allegedly guaranteed the said
obligation.[6]

[G.R. No. 119002. October 19, 2000]


INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., petitioner, vs.

Henri Kahn filed his answer with counterclaim. While not denying the allegation that

HON. COURT OF APPEALS, HENRI KAHN, PHILIPPINE FOOTBALL FEDERATION,

the Federation owed the amount P207,524.20, representing the unpaid balance for

respondents.

the plane tickets, he averred that the petitioner has no cause of action against him

DECISION
KAPUNAN, J.:

either in his personal capacity or in his official capacity as president of the Federation.

On June 30 1989, petitioner International Express Travel and Tour Services, Inc.,

Federation which has a separate and distinct juridical personality.[7]

He maintained that he did not guarantee payment but merely acted as an agent of the

through its managing director, wrote a letter to the Philippine Football Federation

On the other hand, the Federation failed to file its answer, hence, was declared in

(Federation), through its president private respondent Henri Kahn, wherein the former
offered its services as a travel agency to the latter.[1] The offer was accepted.

default by the trial court.[8]

Petitioner secured the airline tickets for the trips of the athletes and officials of the

In due course, the trial court rendered judgment and ruled in favor of the petitioner
and declared Henri Kahn personally liable for the unpaid obligation of the Federation.

Federation to the South East Asian Games in Kuala Lumpur as well as various other

In arriving at the said ruling, the trial court rationalized:

trips to the People's Republic of China and Brisbane. The total cost of the tickets
amounted to P449,654.83. For the tickets received, the Federation made two partial
payments, both in September of 1989, in the total amount of P176,467.50.[2]

Defendant Henri Kahn would have been correct in his contentions had it been duly

On 4 October 1989, petitioner wrote the Federation, through the private respondent a

neither the plaintiff nor the defendant Henri Kahn has adduced any evidence proving

established that defendant Federation is a corporation. The trouble, however, is that


the corporate existence of the defendant Federation. In paragraph 2 of its complaint,

demand letter requesting for the amount of P265,894.33.[3] On 30 October 1989, the

plaintiff asserted that "Defendant Philippine Football Federation is a sports

Federation, through the Project Gintong Alay, paid the amount of P31,603.00.[4]

association xxx." This has not been denied by defendant Henri Kahn in his Answer.
Being the President of defendant Federation, its corporate existence is within the
personal knowledge of defendant Henri Kahn. He could have easily denied

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specifically the assertion of the plaintiff that it is a mere sports association, if it were a

In finding for Henri Kahn, the Court of Appeals recognized the juridical existence of

domestic corporation. But he did not.

the Federation. It rationalized that since petitioner failed to prove that Henri Kahn
guaranteed the obligation of the Federation, he should not be held liable for the same

xxx

as said entity has a separate and distinct personality from its officers.

A voluntary unincorporated association, like defendant Federation has no power to

Petitioner filed a motion for reconsideration and as an alternative prayer pleaded that

enter into, or to ratify, a contract. The contract entered into by its officers or agents on

the Federation be held liable for the unpaid obligation. The same was denied by the

behalf of such association is not binding on, or enforceable against it. The officers or

appellate court in its resolution of 8 February 1995, where it stated that:

agents are themselves personally liable.


As to the alternative prayer for the Modification of the Decision by expressly declaring
x x x[9]

in the dispositive portion thereof the Philippine Football Federation (PFF) as liable for
the unpaid obligation, it should be remembered that the trial court dismissed the

The dispositive portion of the trial court's decision reads:

complaint against the Philippine Football Federation, and the plaintiff did not appeal
from this decision. Hence, the Philippine Football Federation is not a party to this

WHEREFORE, judgment is rendered ordering defendant Henri Kahn to pay the

appeal and consequently, no judgment may be pronounced by this Court against the

plaintiff the principal sum of P207,524.20, plus the interest thereon at the legal rate

PFF without violating the due process clause, let alone the fact that the judgment

computed from July 5, 1990, the date the complaint was filed, until the principal

dismissing the complaint against it, had already become final by virtue of the plaintiff's

obligation is fully liquidated; and another sum of P15,000.00 for attorney's fees.

failure to appeal therefrom. The alternative prayer is therefore similarly DENIED.[12]

The complaint of the plaintiff against the Philippine Football Federation and the

Petitioner now seeks recourse to this Court and alleges that the respondent court

counterclaims of the defendant Henri Kahn are hereby dismissed.

committed the following assigned errors:[13]

With the costs against defendant Henri Kahn.[10]

A. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT


PETITIONER HAD DEALT WITH THE PHILIPPINE FOOTBALL FEDERATION (PFF)

Only Henri Kahn elevated the above decision to the Court of Appeals. On 21

AS A CORPORATE ENTITY AND IN NOT HOLDING THAT PRIVATE RESPONDENT

December 1994, the respondent court rendered a decision reversing the trial court,

HENRI KAHN WAS THE ONE WHO REPRESENTED THE PFF AS HAVING A

the decretal portion of said decision reads:

CORPORATE PERSONALITY.

WHEREFORE, premises considered, the judgment appealed from is hereby

B. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING PRIVATE

REVERSED and SET ASIDE and another one is rendered dismissing the complaint

RESPONDENT HENRI KAHN PERSONALLY LIABLE FOR THE OBLIGATION OF

against defendant Henri S. Kahn.[11]

THE UNINCORPORATED PFF, HAVING NEGOTIATED WITH PETITIONER AND


CONTRACTED THE OBLIGATION IN BEHALF OF THE PFF, MADE A PARTIAL
PAYMENT AND ASSURED PETITIONER OF FULLY SETTLING THE OBLIGATION.

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13. To perform such other acts as may be necessary for the proper accomplishment
C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS NOT

of their purposes and not inconsistent with this Act.

PERSONALLY LIABLE, THE HONORABLE COURT OF APPEALS ERRED IN NOT


EXPRESSLY DECLARING IN ITS DECISION THAT THE PFF IS SOLELY LIABLE

Section 8 of P.D. 604, grants similar functions to these sports associations:

FOR THE OBLIGATION.


SEC. 8. Functions, Powers, and Duties of National Sports Association. - The National
The resolution of the case at bar hinges on the determination of the existence of the

sports associations shall have the following functions, powers, and duties:

Philippine Football Federation as a juridical person. In the assailed decision, the


appellate court recognized the existence of the Federation. In support of this, the CA

1. Adopt a Constitution and By-Laws for their internal organization and government

cited Republic Act 3135, otherwise known as the Revised Charter of the Philippine

which shall be submitted to the Department and any amendment thereto shall take

Amateur Athletic Federation, and Presidential Decree No. 604 as the laws from which

effect upon approval by the Department: Provided, however, That no team, school,

said Federation derives its existence.

club, organization, or entity shall be admitted as a voting member of an association


unless 60 per cent of the athletes composing said team, school, club, organization, or

As correctly observed by the appellate court, both R.A. 3135 and P.D. No. 604

entity are Filipino citizens;

recognized the juridical existence of national sports associations. This may be


gleaned from the powers and functions granted to these associations. Section 14 of

2. Raise funds by donations, benefits, and other means for their purpose subject to

R.A. 3135 provides:

the approval of the Department;

SEC. 14. Functions, powers and duties of Associations. - The National Sports'

3. Purchase, sell, lease, or otherwise encumber property, both real and personal, for

Association shall have the following functions, powers and duties:

the accomplishment of their purpose;

1. To adopt a constitution and by-laws for their internal organization and government;

4. Conduct local, interport, and international competitions, other than the Olympic and
Asian Games, for the promotion of their sport;

2. To raise funds by donations, benefits, and other means for their purposes.
5. Affiliate with international or regional sports associations after due consultation with
3. To purchase, sell, lease or otherwise encumber property both real and personal, for

the Department;

the accomplishment of their purpose;


xxx
4. To affiliate with international or regional sports' Associations after due consultation
with the executive committee;

13. Perform such other functions as may be provided by law.

xxx

The above powers and functions granted to national sports associations clearly
indicate that these entities may acquire a juridical personality. The power to purchase,

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sell, lease and encumber property are acts which may only be done by persons,

organization of the executive committee herein provided: Provided, further, That the

whether natural or artificial, with juridical capacity. However, while we agree with the

functioning executive committee is charged with the responsibility of seeing to it that

appellate court that national sports associations may be accorded corporate status,

the National Sports' Associations are formed and organized within six months from

such does not automatically take place by the mere passage of these laws.

and after the passage of this Act.

It is a basic postulate that before a corporation may acquire juridical personality, the

Section 7 of P.D. 604, similarly provides:

State must give its consent either in the form of a special law or a general enabling
act. We cannot agree with the view of the appellate court and the private respondent

SEC. 7. National Sports Associations. - Application for accreditation or recognition as

that the Philippine Football Federation came into existence upon the passage of these

a national sports association for each individual sport in the Philippines shall be filed

laws. Nowhere can it be found in R.A. 3135 or P.D. 604 any provision creating the

with the Department together with, among others, a copy of the Constitution and By-

Philippine Football Federation. These laws merely recognized the existence of

Laws and a list of the members of the proposed association.

national sports associations and provided the manner by which these entities may
acquire juridical personality. Section 11 of R.A. 3135 provides:

The Department shall give the recognition applied for if it is satisfied that the national
sports association to be organized will promote the objectives of this Decree and has

SEC. 11. National Sports' Association; organization and recognition. - A National

substantially complied with the rules and regulations of the Department: Provided,

Association shall be organized for each individual sports in the Philippines in the

That the Department may withdraw accreditation or recognition for violation of this

manner hereinafter provided to constitute the Philippine Amateur Athletic Federation.

Decree and such rules and regulations formulated by it.

Applications for recognition as a National Sports' Association shall be filed with the
executive committee together with, among others, a copy of the constitution and by-

The Department shall supervise the national sports association: Provided, That the

laws and a list of the members of the proposed association, and a filing fee of ten

latter shall have exclusive technical control over the development and promotion of the

pesos.

particular sport for which they are organized.

The Executive Committee shall give the recognition applied for if it is satisfied that

Clearly the above cited provisions require that before an entity may be considered as

said association will promote the purposes of this Act and particularly section three

a national sports association, such entity must be recognized by the accrediting

thereof. No application shall be held pending for more than three months after the

organization, the Philippine Amateur Athletic Federation under R.A. 3135, and the

filing thereof without any action having been taken thereon by the executive

Department of Youth and Sports Development under P.D. 604. This fact of

committee. Should the application be rejected, the reasons for such rejection shall be

recognition, however, Henri Kahn failed to substantiate. In attempting to prove the

clearly stated in a written communication to the applicant. Failure to specify the

juridical existence of the Federation, Henri Kahn attached to his motion for

reasons for the rejection shall not affect the application which shall be considered as

reconsideration before the trial court a copy of the constitution and by-laws of the

unacted upon: Provided, however, That until the executive committee herein provided

Philippine Football Federation. Unfortunately, the same does not prove that said

shall have been formed, applications for recognition shall be passed upon by the duly

Federation has indeed been recognized and accredited by either the Philippine

elected members of the present executive committee of the Philippine Amateur

Amateur Athletic Federation or the Department of Youth and Sports Development.

Athletic Federation. The said executive committee shall be dissolved upon the

Accordingly, we rule that the Philippine Football Federation is not a national sports

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association within the purview of the aforementioned laws and does not have

RESOLUTION

corporate existence of its own.

NACHURA, J.:
For resolution are the Motion for Reconsideration[1] filed by petitioner

Thus being said, it follows that private respondent Henry Kahn should be held liable

Associated Bank (now United Overseas Bank [Phils.]) and Motion for Leave to

for the unpaid obligations of the unincorporated Philippine Football Federation. It is a

Intervene[2] filed by Spouses Eduardo and Ma. Pilar Vaca (spouses Vaca).

settled principal in corporation law that any person acting or purporting to act on
behalf of a corporation which has no valid existence assumes such privileges and

After a thorough examination of petitioners motion for reconsideration, together

becomes personally liable for contract entered into or for other acts performed as

with its voluminous attachments, it is readily apparent that no new issues are raised

such agent.[14] As president of the Federation, Henri Kahn is presumed to have

and the arguments presented are a mere rehash of what have been discussed in its

known about the corporate existence or non-existence of the Federation. We cannot

pleadings, all of which have been considered and found unmeritorious in the July 14,

subscribe to the position taken by the appellate court that even assuming that the

2008 Decision.[3]

Federation was defectively incorporated, the petitioner cannot deny the corporate
existence of the Federation because it had contracted and dealt with the Federation in

Be that as it may, we would like to reiterate that the second letter-agreement

such a manner as to recognize and in effect admit its existence.[15] The doctrine of

modified the first one entered into by petitioner, through Atty. Jose Soluta, Jr. (Atty.

corporation by estoppel is mistakenly applied by the respondent court to the petitioner.

Soluta). In previously allowing Atty. Soluta to enter into the first letter-agreement

The application of the doctrine applies to a third party only when he tries to escape

without a board resolution expressly authorizing him, petitioner had clothed him with

liability on a contract from which he has benefited on the irrelevant ground of defective

apparent authority to modify the same via the second letter-agreement.[4]

incorporation.[16] In the case at bar, the petitioner is not trying to escape liability from
As early as June 1993, respondents already requested a modification of the

the contract but rather is the one claiming from the contract.

earlier agreement such that the full payment should be made upon receipt of this
WHEREFORE, the decision appealed from is REVERSED and SET ASIDE. The

Courts decision confirming petitioners right to the subject property. Instead of acting

decision of the Regional Trial Court of Manila, Branch 35, in Civil Case No. 90-53595

on the request, the Board of Directors deferred action on it. It was only after one year

is hereby REINSTATED.

and after the banks reorganization that the board rejected respondents request. We
cannot, therefore, blame respondents for believing that the second letter-agreement
signed by Atty. Soluta was petitioners action on their request.[5]

SO ORDERED.
ASSOCIATED BANK (now UNITED OVERSEAS BANK [PHILS.]),

We also would like to stress that the first letter-agreement was not rescinded by

Petitioner, - versus - SPOUSES RAFAEL and MONALIZA PRONSTROLLER,

respondents failure to deposit in escrow their full payment simply because the date of

Respondents.

full payment had already been modified by the later agreement. Neither was the

SPOUSES EDUARDO and MA. PILAR VACA,

second letter-agreement rescinded by respondents new offer because the offer was

Intervenors.

made only to demonstrate their capacity to purchase the subject property.[6]

G.R. No. 148444


September 3, 2009

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In our Decision, we affirmed the factual findings of the Court of Appeals (CA)

successors-in-interest of the transferor, the petitioner, who is already a party to the

because they were amply supported by the evidence on record. Well-established is

action. Thus, the applicable provision is Section 19, Rule 3 of the Rules of Court,

the rule that if there is no showing of error in the appreciation of facts by the CA, this

governing transfers of interest pendente lite. It provides:

Court treats them as conclusive. The conclusions of law that the appellate court drew
SEC. 19. Transfer of interest. In case of any transfer of interest, the action

from those facts are likewise accurate and convincing.[7]

may be continued by or against the original party, unless the court upon motion
Hence, we deny with finality petitioners motion for reconsideration. No further

directs the person to whom the interest is transferred to be substituted in the action or

pleadings will be entertained.

joined with the original party.

After the promulgation of the July 14, 2008 Decision, spouses Vaca filed a
Motion for Leave to Intervene alleging that they are the registered owners of the

In Natalia Realty, Inc. v. Court of Appeals,[10] citing Santiago Land Development

subject property and are thus real parties-in-interest. They add that they stand to be

Corporation v. Court of Appeals,[11] we have ruled that:

deprived of their family home without having been given their day in court. They also
contend that the Court should order petitioner to reimburse the spouses Vaca the

[A] transferee pendente lite of the property in litigation does not have a right to

amount received from the latter.

intervene. We held that a transferee stands exactly in the shoes of his predecessorin-interest, bound by the proceedings and judgment in the case before the rights were
assigned to him.

The Motion for Leave to Intervene must be denied.

It is not legally tenable for a transferee pendente lite to still

intervene. Essentially, the law already considers the transferee joined or substituted
Section 2, Rule 19 of the Rules of Court, provides:

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.[12]

SEC. 2. Time to intervene. The motion to intervene may be filed at any time
before rendition of judgment by the trial court. A copy of the pleading-in-intervention
That the Certificate of Title covering the subject property is in the name of the

shall be attached to the motion and served on the original parties.[8]

spouses Vaca is of no moment. It is noteworthy that a notice of lis pendens was


timely annotated on petitioners title. This was done prior to the sale of the property to
Obviously, the spouses Vacas motion for leave to intervene before this Court

the spouses Vaca, the cancellation of petitioners title, and the issuance of the new

was belatedly filed.

Transfer Certificate of Title in the name of the spouses. By virtue of the notice of lis
pendens, the spouses Vaca are bound by the outcome of the litigation subject of the

The purpose of intervention is to enable a stranger to an action to become a

lis pendens. Their interest is subject to the incidents or results of the pending suit,

party to protect his interest, and the court, incidentally, to settle all conflicting claims.

and their Certificate of Title will afford them no special protection.[13]

[9] The spouses Vaca are not strangers to the action. Their legal interest in the
litigation springs from the sale of the subject property by petitioner in their favor during

Lastly, the spouses Vacas claim for reimbursement, if any, must be ventilated in

the pendency of this case. As transferee pendente lite, the spouses Vaca are the

a separate action against petitioner. To allow the intervention would unduly delay and

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prejudice the rights especially of respondents who have been deprived of the subject

On November 25, 1986, NIDC transferred all its rights, title and interest in PHILSECO

property for so long.

to the Philippine National Bank (PNB). More than two months later or on February 3,

IN LIGHT OF THE FOREGOING, we deny petitioners motion for reconsideration and

1987, by virtue of Administrative Order No. 14, PNBs interest in PHILSECO was

the Spouses Vacas Motion for Intervention.

transferred to the National Government.

SO ORDERED.

Meanwhile, on December 8, 1986, President Corazon C. Aquino issued Proclamation


No. 50 establishing the Committee on Privatization (COP) and the Asset Privatization
Trust (APT) to take title to and possession of, conserve, manage and dispose of nonperforming assets of the National Government.

[G.R. No. 124293. November 20, 2000]

On February 27, 1987, a trust

agreement was entered into between the National Government and the APT by virtue
of which the latter was named the trustee of the National Governments share in

JG SUMMIT HOLDINGS, INC., petitioner, vs. COURT OF APPEALS, COMMITTEE

PHILSECO. In 1989, as a result of a quasi-reorganization of PHILSECO to settle its

ON PRIVATIZATION, its Chairman and Members; ASSET PRIVATIZATION TRUST

huge obligations to PNB, the National Governments shareholdings in PHILSECO

and PHILYARDS HOLDINGS, INC., respondents.

increased to 97.41% thereby reducing Kawasakis shareholdings to 2.59%.

DECISION
YNARES-SANTIAGO, J.:

Exercising their discretion, the COP and the APT deemed it in the best interest of the
national economy and the government to privatize PHILSECO by selling 87.67% of its

On January 27, 1977, the National Investment and Development Corporation (NIDC),

total outstanding capital stock to private entities.

a government corporation, entered into a Joint Venture Agreement (JVA) with

After a series of negotiations

between the APT and Kasawaki, they agreed that the latters right of first refusal

Kawasaki Heavy Industries, Ltd. of Kobe, Japan (Kawasaki) for the construction,

under the JVA be exchanged for the right to top by five percent (5%) the highest bid

operation, and management of the Subic National Shipyard, Inc. (SNS), which

for said shares. They further agreed that Kawasaki would be entitled to name a

subsequently became the Philippine Shipyard and Engineering Corporation

company in which it was a stockholder, which could exercise the right to top. On

(PHILSECO). Under the JVA, NIDC and Kawasaki would maintain a shareholding

September 7, 1990, Kawasaki informed APT that Philyards Holdings, Inc. (PHI) would

proportion of 60%-40%, respectively. One of the provisions of the JVA accorded the

exercise its right to top by 5%.

parties the right of first refusal should either party sell, assign or transfer its interest in
the joint venture. Thus, paragraph 1.4 of the JVA states:

At the pre-bidding conference held on September 28, 1993, interested bidders were
given copies of the JVA between NIDC and Kawasaki, and of the Asset Specific

Neither party shall sell, transfer or assign all or any part of its interest in SNS to any

Bidding Rules (ASBR) drafted for the 87.67% equity (sic)[1] in PHILSECO of the

third party without giving the other under the same terms the right of first refusal. This

National Government. Salient provisions of the ASBR state:

provision shall not apply if the transferee is a corporation owned or controlled by the
GOVERNMENT or by a KAWASAKI affiliate. (Italics supplied.)

1.0.

The subject of this Asset Privatization Trust (APT) sale through public

bidding is the National Governments equity in PHILSECO consisting of 896,869,942

CORPORATION LAW 2014-2015 10


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shares of stock (representing 87.67% of PHILSECOs oustanding capital stock),

Kawasaki, Philyards, Mitsui, Keppel, SM Group, ICTSI and Insular Life violated the

which will be sold as a whole block in accordance with the rules herein enumerated.

ASBR because the last four (4) companies were the losing bidders (for P1.528 billion)
thereby circumventing the law and prejudicing the weak winning bidder; (b) only

xxx

xxx

xxx

Kawasaki could exercise the right to top; (c) giving the same option to top to PHI
constituted unwarranted benefit to a third party; (d) no right of first refusal can be

3.0.

This public bidding shall be on an Indicative Price Bidding basis. The

exercised in a public bidding or auction sale, and (e) the JG Summit Consortium was

Indicative price set for the National Governments 87.67% equity in PHILSECO is

not estopped from questioning the proceedings.

PESOS: ONE BILLION THREE HUNDRED MILLION (P1,300,000,000.00).


On February 2, 1994, petitioner was notified that PHI had fully paid the balance of the
xxx

xxx

xxx

purchase price of the subject bidding.

On February 7, 1994, the APT notified

petitioner that PHI had exercised its option to top the highest bid and that the COP
12.0.

The bidder shall be solely responsible for examining with appropriate care

had approved the same on January 6, 1994. On February 24, 1994, the APT and PHI

these rules, the official bid forms, including any addenda or amendments thereto
issued during the bidding period.

executed a Stock Purchase Agreement.

The bidder shall likewise be responsible for

informing itself with respect to any and all conditions concerning the PHILSECO

Consequently, petitioner filed with this Court a petition for mandamus under G.R. No.

Shares which may, in any manner, affect the bidders proposal. Failure on the part of

114057. On May 11,1994, said petition was referred to the Court of Appeals ---

the bidder to so examine and inform itself shall be its sole risk and no relief for error or
omission will be given by APT or COP. x x x.

x x x for proper determination and disposition, pursuant to Section 9, paragraph 1 of


B.P. 129, granting the Court of Appeals original jurisdiction to issue writs of

The provisions of the ASBR were explained to the interested bidders who were

mandamus x x x and auxiliary writs or processes, whether or not in aid of its appellate

notified that bidding would be held on December 2, 1993.

jurisdiction, which jurisdiction is concurrent with this Court, there being no special and
important reason for this Court to assume jurisdiction over the case in the first

At the public bidding on said date, the consortium composed of petitioner JG Summit

instance.[2]

Holdings, Inc., Sembawang Shipyard Ltd. of Singapore (Sembawang), and Jurong


Shipyard Limited of Malaysia (Jurong), was declared the highest bidder at P2.03

On July 18, 1995, the Court of Appeals denied for lack of merit the petition for

billion. The following day, December 3, 1993, the COP approved the sale of 87.67%

mandamus. Citing Guanio v. Fernandez,[3] it held that mandamus is not the proper

National Government shares of stock in PHILSECO to said consortium. It notified

remedy to compel the undoing of an act already done or the correction of a wrong

petitioner of said approval subject to the right of Kawasaki Heavy Industries,

already perpetuated, even though the action taken was clearly illegal. It was further

Inc./Philyards Holdings, Inc. to top JGSMIs (petitioners) bid by 5% as specified in the

ruled that it was not the proper forum for a mere petition for mandamus that aimed to

bidding rules.

question the constitutionality or legality of the right of first refusal and the right to top
that was exercised by Kawasaki/PHI and that the matter must be brought by the

On December 29, 1993, petitioner informed the APT that it was protesting the offer of

proper party in the proper forum at the proper time and threshed out in a full blown

PHI to top its bid on the grounds that: (a) the Kawasaki/PHI consortium composed of

trial.

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After ruling that the right of first refusal and the right to top are prima facie legal, the

I.

Court of Appeals found petitioner to be in estoppel for the following reasons:


THE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING THAT PETITIONER
5.

If petitioner found the right to top to be illegal, it should not have

JG SUMMIT IS LEGALLY ESTOPPED FROM CHALLENGING THE LEGALITY OF

participated in the public bidding; or it should have questioned the legality of the rules

THE RIGHT TO TOP, INSERTED IN THE BIDDING RULES, AS WELL AS THE

before the courts or filed a petition for declaratory relief (Rule 64, Rules of Court)

RIGHT OF FIRST REFUSAL FROM WHICH THE RIGHT TO TOP WAS

before the public bidding could have taken place.

ADMITTEDLY SOURCED, BY SIMPLY STATING THAT THOSE RIGHTS ARE VALID


AND ENFORCEABLE WITHOUT RULING ON ANY OF THE IMPORTANT LEGAL

By participating in the public bidding, with full knowledge of the right to top granted to

AND CONSTITUTIONAL GROUNDS RAISED BY THE PETITIONER AS FOLLOWS:

Kawasaki/Philyards, petitioner is estopped from questioning the validity of the award


given to Philyards after the latter exercised the right to top and had paid in full the

(A)

purchase price of the subject shares, pursuant to the ASBR.

CORPORATION AT A TIME WHEN IT HELD 40% EQUITY IN PHILSECO, A

THE RIGHT OF FIRST REFUSAL, GRANTED TO A JAPANESE

LANDHOLDING CORPORATION, IS NULL AND VOID FOR BEING CONTRARY TO


6. The fact that the losing bidder, Keppel Consortium (composed of Keppel, SM

THE CONSTITUTION.

Group, Insular Life Assurance, Mitsui and ICTSI) appears to have joined Philyards in
the latters effort to raise P2.131 billion necessary in exercising the right to top by 5%

(B)

THE RIGHT TO TOP WAS GRANTED TO THE JAPANESE CORPORATION

is a valid activity in free enterprise that is not contrary to law, public policy or public

AT A TIME WHEN IT MERELY HELD 2.6% EQUITY IN PHILSECO.

morals. It should not be a cause of grievance for petitioner as it is the very essence of
free competition in the business world. Astute businessmen involved in the public

(C)

THE RIGHT OF FIRST REFUSAL GRANTED TO THE JAPANESE

bidding in question knew what they were up against. And when they participated in

CORPORATION

the public bidding with prior knowledge of the right to top, they did so, with full

CORPORATION CODE.

OVER

SHARES

OF

STOCK

IS

CONTRARY

TO

THE

knowledge of the eventuality that the highest bidder may still be topped by
Kawasaki/Philyards by 5%. It is admitted by petitioner that it likewise represents a

(D)

THE RIGHT TO TOP IS CONTRARY TO PUBLIC POLICY AS IT IS

consortium composed of JG Summit, Sembawang Singapore and Jurong of Malaysia.

ANATHEMA

Why should petitioner then expect Philyards to limit itself to its own resources when

RESTRICTIVE THEREOF, AND, MOREOVER, IS CONTRARY TO DUE PROCESS

the latter can enter into agreements with other entities to help it raise the money it

OF LAW AS IT IS AGAINST THE BASIC RUDIMENTS OF FAIR PLAY.

TO

COMPETITIVE

PUBLIC

BIDDING

FOR

BEING

UNDULY

needed to pay the full purchase price as in fact it had already paid the National
Government in the amount of P2.131 billion as required under the ASBR?[4]

(E)

THE GRANT OF THE RIGHT TO TOP IS A CRIMINAL VIOLATION OF THE

ANTI-GRAFT LAW AS IT GIVES A CLEARLY UNWARRANTED BENEFIT IN FAVOR


Petitioner filed a motion for the reconsideration of said Decision which was denied on

OF PHILYARDS AS SHOWN BY CLEAR AND UNDISPUTED DOCUMENTARY

March 15, 1996. Petitioner thus filed the instant petition for review on certiorari, raising

EVIDENCE.

the following arguments:

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II.

fact.[9] By the nexus that binds the members of the consortium, in the event that
petitioner succeeds in pursuing this case, it is bound to respect the existence of the

THE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING THAT MANDAMUS

consortium and the corresponding responsibilities arising therefrom.

IS NOT A PROPER REMEDY IN THIS CASE.


Public respondents also contend that petitioner has no standing to question the
III.

legality of a provision of the JVA in which it is not a party.[10] However, as this Court
held in Kilosbayan v. Morato,[11] there is a difference between the rule on real-party-

FOLLOWING ITS OWN FINDINGS, THE COURT OF APPEALS GRIEVOUSLY

in-interest and the rule on standing, as the latter has constitutional underpinnings. In

ERRED (A) IN NOT DIRECTING THAT TRIAL BE HELD ON ALLEGED ISSUES OF

the case at bar, petitioner has sufficiently alleged constitutional ramifications in the

FACT AND (B) IN NOT APPOINTING AN AMICUS CURIAE FROM AMONG THE

questioned public bidding of the PHILSECO that merit the attention of the Court.

LAWYERS IN THE COMMISSION ON AUDIT TO DETERMINE THE APPLICABILITY

Moreover, the prospect of financial gains arising from the award of the sale of

OF ITS REQUIREMENTS TO THE TRANSACTIONS IN THIS CASE.[5]

PHILSECO is enough personal stake in the outcome of the controversy to vest upon
petitioner the locus standi to file the petition for mandamus. Besides, without

In their comment on the petition, private respondent PHI contends that the real party

Kawasaki-PHIs right to top the highest bid, petitioner would have been awarded the

in interest which should have filed the petition for mandamus is the JG Summit

sale as the highest bidder. A winning bidder has personality to initiate proceedings to

Consortium and not solely petitioner JG Summit Holdings, Inc. which is just a part of

prevent setting at naught his right; otherwise, his right to due process would be

that consortium. Since Sembawang and Jurong, the other members of the

violated.[12] As such winning bidder, petitioner has a present substantial interest, or

consortium, are indispensable parties to the petition,[6] petitioners failure to implead

such interest in the subject matter of action as will entitle it, under substantive law, to

them as co-petitioners warranted the dismissal of the petition.

recover if the evidence is sufficient.[13]

Public respondents contention must fail. While it is true that Rule 3, Section 2 of the

With respect to the propriety of the remedy availed by petitioner, the Court of Appeals

Rules of Court provides that (a)ll persons having an interest in the subject of the

correctly held that the special civil action of mandamus is not the proper remedy to

action and in obtaining the relief demanded shall be joined as plaintiffs, petitioner

question the legality of the exercise of the right to top by private respondent. It does

may file the petition alone.

In the first place, Sembawang and Jurong are not

not lie to compel the award of a contract subject of bidding to an unsuccessful bidder.

indispensable parties, such that their non-joinder as petitioners will not necessarily

[14] Mandamus applies as a remedy only where petitioners right is founded clearly in

result in a failure to arrive at a final determination of the case.[7] They may be

law and not when it is doubtful.[15] Thus:

necessary parties as they were members of the consortium that won the public
bidding prior to the exercise of the right to top by private respondent, but the petition

In order that a writ of mandamus may issue, it is essential that the person petitioning

may be resolved even without their active participation. Secondly, there is a doubt as

for the same has a clear legal right to the thing demanded and that it is the imperative

to whether or not said foreign corporations are subject to the jurisdiction of the court

duty of the respondent to perform the act required. It neither confers powers nor

as to both service of process and venue.[8] Thirdly, petitioner may be deemed to

imposes duties and is never issued in doubtful cases. It is simply a command to

represent Sembawang and Jurong. The admission of petitioners counsel that said

exercise a power already possessed and to perform a duty already imposed.[16]

foreign corporations are underwriting his and the other counsels fees reflects this

12

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The Court of Appeals cannot declare petitioner as the winning bidder in this case and
direct the COP/APT to award the sale to it without first determining the validity of the

d)

right to top stipulated in the ASBR.

Moreover, the sale of government share in

constructing and repairing vessels or parts thereof shall not be considered a public

Registration required but not as Public Utility. The business of

PHILSECO is a fait accompli, in view of the execution of the Stock Purchase

utility and no Certificate of Public Convenience shall be required therefor. However, no

Agreement between APT and PHI.

Mandamus may not be availed to direct the

shipyard, graving dock, marine railway or marine repair shop and no person or

exercise of judgment or discretion in a particular way or to retract or reverse an action

enterprise shall engage in the construction and/or repair of any vessel, or any phase

already taken in the exercise of either.[17]

or part thereof, without a valid Certificate of Registration and license for this purpose
from the Maritime Industry Authority, except those owned or operated by the Armed

Be that as it may, the Court of Appeals erred when it dismissed the petition on the

Forces of the Philippines or by foreign governments pursuant to a treaty or

sole ground of the impropriety of the special civil action of mandamus. It must be

agreement. (Underscoring supplied.)

stressed that the petition was also one for certiorari, seeking to nullify the award of the
sale to private respondent of the PHILSECO shares. Verily, the petition alleges that

However, Section 1 of P.D. No. 666 was expressly repealed by Section 20 of Batas

respondents COP and APT have committed such a grave abuse of discretion

Pambansa Blg. 391, the Investment Incentive Policy Act of 1983.[21] Subsequently,

tantamount to lack or excess of their jurisdiction in insisting on awarding the bid to

Executive Order No. 226, the Omnibus Investments Code of 1987, was issued and

Philyards, for the various reasons stated herein, particularly since the right of first

Section 85 thereof expressly repealed B.P. Blg. 391.[22]

refusal and the right to top the bid are unconstitutional, contrary to law and public
policy.[18] Petitioners failure to include certiorari in its caption should not negate the

The express repeal of B.P. Blg. 391 by E.O. No. 226 did not revive Section 1 of P.D.

fact that the petition charged public respondent with grave abuse of discretion in

No. 666, declassifying the shipbuilding and ship repair industry as a public utility, as

awarding the sale to private respondent. Well-settled is the rule that it is not the

said executive order did not provide otherwise. When a law which expressly repeals a

caption of the pleading but the allegations therein that determine the nature of the

prior law is itself repealed, the law first repealed shall not be thereby revived unless

action and the Court shall grant relief warranted by the allegations and the proof even

expressly so provided.[23] Consequently, when the APT drafted the ASBR sometime

if no such relief is prayed for.[19]

in 1993, P.D. No. 666 no longer existed in our statute books. While it is true that the
repeal of a statute does not operate to impair rights that have become vested or

Petitioners main contention is that PHILSECO, as a shipyard, is a public utility and,

accrued while the statute was in force, there are no vested rights of the parties that

hence, could be operated only by a corporation at least 60% of whose capital is

should be protected in the case at bar. The reason is simple: said decree was

owned by Filipino citizens, in accordance with Article XII, Section 10 of the

already inexistent when the ASBR was issued.

Constitution. Petitioner asserts that a shipyard is a public utility pursuant to Section


13 (b) of Commonwealth Act No. 146.[20] Respondents, on the other hand, contend

A shipyard such as PHILSECO being a public utility as provided by law, the following

that shipyards are no longer public utilities by express provision of Presidential Decree

provision of the Article XII of the Constitution applies:

No. 666, which provided incentives to the shipbuilding and ship repair industry.
Sec. 11. No franchise, certificate, or any other form of authorization for the operation
Indeed, P.D. No. 666 dated March 5, 1975 explicitly stated that a shipyard was not a

of a public utility shall be granted except to citizens of the Philippines or to

public utility. Section 1 thereof provide as follows:

corporations or associations organized under the laws of the Philippines at least sixty

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per centum of whose capital is owned by such citizens, nor shall such franchise,

Constitution. Consequently, a joint venture that would engage in the business of

certificate, or authorization be exclusive in character or for a longer period than fifty

operating a public utility, such as a shipyard, must observe the proportion of 60%-40%

years. Neither shall any such franchise or right be granted except under the condition

Filipino-foreign capitalization.

that it shall be subject to amendment, alteration, or repeal by the Congress when the
common good so requires. The State shall encourage equity participation in public

Notably, paragraph 1.4 of the JVA accorded the parties the right of first refusal under

utilities by the general public. The participation of foreign investors in the governing

the same terms. This phrase implies that when either party exercises the right of first

body of any public utility enterprise shall be limited to their proportionate share in its

refusal under paragraph 1.4, they can only do so to the extent allowed them by

capital, and all the executive and managing officers of such corporation or association

paragraphs 1.2 and 1.3 of the JVA or under the proportion of 60%-40% of the shares

shall be citizens of the Philippines. (Italics supplied.)

of stock.

Thus, should the NIDC opt to sell its shares of stock to a third party,

Kawasaki could only exercise its right of first refusal to the extent that its total shares
The progenitor of this constitutional provision, Article XIV, Section 5 of the 1973

of stock would not exceed 40% of the entire shares of stock of SNS or PHILSECO.

Constitution, required the same proportion of 60%-40% capitalization.

The JVA

The NIDC, on the other hand, may purchase even beyond 60% of the total shares.

between NIDC and Kawasaki entered into on January 27, 1977 manifests the

As a government corporation and necessarily a 100% Filipino-owned corporation,

intention of the parties to abide by the constitutional mandate on capitalization of

there is nothing to prevent its purchase of stocks even beyond 60% of the

public utilities.[24] Paragraph 1.3 of the JVA, as amended by Addendum No. 2 dated

capitalization as the Constitution clearly limits only foreign capitalization.

December 28, 1983,[25] provides:


Parenthetically, the Maritime Industry Authority (MARINA) which has been tasked to
The authorized capital stock of PHILSECO shall be P330 milion. The parties shall

regulate the operation of shipbuilding and ship repair yards,[29] abides by the Filipino

thereafter increase their subscription in PHILSECO as may be necessary and as

capitalization requirement as far as corporations and partnerships are concerned.

called by the Board of Directors, maintaining a proportion of 60%-40% for NIDC and

However, Section 2.3.1 (a) of its Memorandum Circular No. 95, Series of 1994,[30]

KAWASAKI, respectively, up to a total subscribed and paid-up capital stock of P312

setting out the Revised Implementing Guidelines on the Licensing of Shipbuilders,

million. (Underscoring supplied.)

Ship Repairers, Afloat Repairers, Boatbuilders and Shipbreakers, seems to exempt


joint ventures registered with the SEC, the BOI and the EPZA from the 60%

A joint venture is an association of persons or companies jointly undertaking some

requirement of Filipino ownership.[31] The said provision states:

commercial enterprise with all of them generally contributing assets and sharing risks.
It requires a community of interest in the performance of the subject matter, a right to

The applicant must be a Filipino citizen or a corporation/partnership at least 60% of

direct and govern the policy in connection therewith, and duty, which may be altered

the authorized capital stock of which is owned by Filipino citizens except for joint

by agreement to share both in profit and losses.[26] Persons and business

ventures which are registered with the Securities and Exchange Commission, the

enterprises usually enter into a joint venture because it is exempt from corporate

Board of Investments and/or Export Processing Zone Authorities.[32]

income tax.[27] Considered more of a partnership,[28] a joint venture is governed by


the laws on contracts and on partnership. The joint venture created between NIDC

The constitutionality of said MARINA guideline, however, is not in issue here.

and Kawasaki falls within the purview of an association pursuant to Section 5 of

Kawasaki was bound by its contractual obligation under the JVA that limits its right of

Article XIV of the 1973 Constitution and Section 11 of Article XII of the 1987

first refusal to 40% of the total capitalization of PHILSECO. Thus, Kawasaki cannot

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purchase beyond 40% of the capitalization of the joint venture on account of both

xxx

xxx

xxx

constitutional and contractual proscriptions.


(7)
From the facts on record, it appears that at the outset, the APT and Kawasaki
respected the 60%-40% capitalization proportion in PHILSECO.

To adopt its internal rules and regulations, to adopt, alter and use a seal

which shall be judicially noticed; to enter into contracts; to sue and be sued;

However, APT

subsequently encouraged Kawasaki to participate in the public bidding of the National

xxx

xxx

x x x

Governments shareholdings of 87.67% of the total PHILSECO shares, definitely over


and above the 40% limit of its shareholdings. In so doing, the APT went beyond the

Pursuant to these provisions, the APT drafted the ASBR.

ambit of its authority.

making authority is merely delegated, the ASBR should be measured by the standard

Since the APTs rule-

set by said proclamation.[34] Notably, the discretion granted by the proclamation to


It is well settled that the role of courts is to ascertain whether a branch or

the APT for the sale of government property is circumscribed only by the best interest

instrumentality of Government has transgressed its constitutional or statutory

of the National Government.

boundaries. The courts, must examine those boundaries in the light of provisions of
the law. Otherwise, it would stray into the realm of policy decision-making.[33]

Implicitly written in any delegated legislative authority, such as that provided for in
Proclamation No. 50, is the requisite that the rules and regulations which an

Proclamation No. 50, creating the COP and the APT, was issued by President

administrative body adopts must respect pertinent provisions of the Constitution and

Corazon C. Aquino pursuant to her legislative powers under the Provisional

the law.[35] Article XII, Section 11 of the Constitution providing for a 60% Filipino

Constitution of 1986.

capitalization in order that public utilities may be granted a franchise should thus be

Section 12 of said Proclamation vested the APT with the

following powers:

deemed a paramount consideration in drafting the ASBR. In this regard, worth noting
is paragraph 15.0 of the ASBR, which provides that:

(1)

To formulate and, after approval by the Committee, implement a program

for the disposition of assets transferred to it under this Proclamation, such program to

In the event that the winning bidder is a 100% foreign-owned corporation, it may

be completed within a period of five years from the date of the issuance of this

name its nominee corporation to whom the NG shares shall be conveyed, provided it

Proclamation;

owns 40% equity in the nominee corporation, so as not to affect PHILSECOs


qualification to own real estate properties in the Philippines.

(2)

Subject to its having received the prior written approval of the Committee

to sell such asset at a price and on terms of payment and to a party disclosed to the

This rule is fraught with dangerous implications. It allows a completely foreign

Committee, to sell each asset referred to it by the Committee to such party and on

corporation to participate in the public bidding of more than 60% of the total shares of

such terms as in its discretion are in the best interest of the National Government, and

a public utility corporation without setting a period within which the foreign bidder

for such purpose to execute and deliver, on behalf and in the name of the National

should name its nominee. As it is, the rule allows a totally foreign investor to engage

Government, such deeds of sale, contracts and other instruments as may be

in the business of operating a public utility for an unlimited period of time in total

necessary or appropriate to convey title to such assets;

disregard of the constitutional proscription on the percentage of Filipino ownership of


corporations engaged therein.

15

Paragraph 15.0 of the ASBR is thus directly and

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openly repugnant to the Constitution considering that it allows foreign corporations to

no record that a COA representative witnessed the public auction on December 2,

operate a public utility for an unlimited period of time.

1993. Neither is there a showing that the APT observed the requirement of COA
Circular No. 89-296, to the effect that a government entity that is disposing of

In carrying out its objective of disposing of government property, the APT should take

government property shall furnish the COA with the disposal procedure adopted.

into account the pertinent laws. Since the method of disposing the PHILSECO that

Likewise, nowhere in the record is it stated that the APT heeded the suggestion of

the APT had adopted was through public bidding, it was duty-bound to follow the rules

Secretary of Finance and COP Chairman Jayme that its decision to grant Kawasaki

and regulations on competitive public bidding, in order to uphold the elementary rule

the right to top the highest bid be made known to the Commission on Audit. What

on fairness in such disposition. As this Court once said:

appears on record is that the COA did not approve the ASBR, specifically the
provision on the right to top the highest bidder. Thus, then COA Chairman Pascasio

x x x. A competitive public bidding aims to protect the public interest by giving the

S. Banaria, replying to the query of petitioners counsel on whether or not the COA

public the best possible advantages through open competition. It is a mechanism that

had approved the right to top the highest bid by 5%, stated:

enables the government agency to avoid or preclude anomalies in the execution of


public contracts.[36]

Per information received from our Auditor at APT, no prior approval was issued by
their Office regarding said preferential option. We have instructed our Auditor thereat

The word bidding in its comprehensive sense means making an offer[37] or an

to advise this Office of the result of the review of the Corporations procedures for the

invitation to prospective contractors whereby the government manifests its intention to

sale of the assets including the review of the bidding documents pertaining to the

make proposals[38] for the purchase of supplies, materials and equipment for official

subject public bidding pursuant to the provisions of the Commission on Audit Circular

business or public use,[39] or for public works or repair. The three principles in public

No. 89-296 dated January 27, 1989.[45]

bidding are: the offer to the public; an opportunity for competition; and a basis for
exact comparison of bids. The distinctive character of the system is destroyed and

In according the KHI/PHI the right to top, the APT violated the rule on competitive

the purpose of its adoption is thwarted when a regulation thereon excludes any of

public bidding, under which the highest bidder is declared the winner entitled to the

these principles.[40] Public bidding of government contracts and for the disposition of

award of the subject of the auction sale. In effect, the grant to KHI/PHI of the right to

government assets should have the same principles and objectives. Their only

top can be likened to a second bidding, which, however, is allowed only if there is a

difference, if at all, is that in the public bidding for public contracts, the award is

failure of bidding, such as when there is only one bidder or none at all.[46] By placing

generally given to the lowest bidder while in the disposition of government assets, the

KHI/PHI in the advantageous position of topping the highest bidder, the APT set aside

award is to the highest bidder.[41] The term public bidding imports a sale to the

the basic rule in public bidding that there be an opportunity for competition.

highest bidder with absolute freedom for competitive bidding.[42]


While it may be argued that the right to top was aimed at giving the best financial
Under Section 504 of the Government Auditing Rules and Regulations, a public

advantage to the government, the manner by which that right was conceived and

auction, which is the mode of divestment or disposal of government property, shall

arrived at in this case manifested bias in favor of KHI, thereby clearly brushing aside

adhere to established mechanics and procedures in public bidding.[43] In such public

the rule on fair competition. More importantly, the ASBR provision on the right to top

auction sales, the presence of a Commission on Audit (COA) representative who shall

the highest bidder completely disregarded the stipulation in the JVA between NIDC

see to the proper observance of auditing rules is imperative.[44] In this case, there is

and KHI to comply with the 60%-40% capitalization arrangement whereby KHI, the

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foreign investor, would be able to exercise its right of first refusal to the extent of only

opportunity to examine the ASBR before it participated in the bidding, it cannot be

40% of the total capitalization of the PHILSECO.

Thus, KHI, whose investment

estopped from questioning the unconstitutional, illegal and inequitable provisions

exposure was already diminished to only 2.59% of the total PHILSECO shares, was

thereof. Estoppel is unavailing in this case; otherwise, it would stamp validity to an

given the privilege, through its nominee PHI, of exercising the right to top the highest

act that is prohibited by law or against public policy.[49]

bid to 87.67% of those shares or definitely over and above its 40% contractual right to
PHILSECO shares under the JVA. Consequently, the APT rendered nugatory the

WHEREFORE, the instant petition for review on certiorari is GRANTED. The assailed

constitutional and contractual proscriptions clearly to favor a foreign investor.

Decision and Resolution of the Court of Appeals are REVERSED and SET ASIDE.
Petitioner is ordered to pay to APT its bid price of Two Billion Thirty Million Pesos

Furthermore, while the right of first refusal entitled KHI to priority in the award of the

(P2,030,000,000.00), less its bid deposit plus interests upon the finality of this

contract, that right cannot bar another bidder from submitting a bid because, precisely,

Decision. In turn, APT is ordered to:

the law requires public bidding in government contracts.[47] Thus, by engrafting in the
provisions of the ASBR the right to top, which was only an offshoot of the right of first

(a)

refusal, the APT effectively did away with pubic bidding insofar as KHI/PHI was

interests from petitioner;

accept said amount of P2,030,000,000.00 less bid deposit and

concerned. To be sure, the right to top is different from the right to match. In the latter,
a qualified bidder is given the privilege of offering the same bid as that of the highest

(b)

execute a Stock Purchase Agreement with petitioner;

bidder.[48] In the former, as provided for by the ASBR, a non-bidder is accorded the
right to top the highest bid. There is reason, therefore, for the petitioner to complain

(c)

cause the issuance in favor of petitioner of the certificates of

that the APT made a show of a public bidding in order to elicit the highest bid, only to

stocks representing 87.67% of PHILSECOs total capitalization;

award the sale to a non-bidder. The unfair manner by which the purported public
bidding was conducted by the APT is even made more blatant by the fact that after

(d)

return to private respondent PHI the amount of Two Billion One Hundred

the public bidding, KHI exercised the right to top through its nominee, private

Thirty One Million Five Hundred Thousand Pesos (P2,131,500,000.00); and

respondent PHI, which has among its stockholders some losing bidders.
(e)

cause the cancellation of the stock certificates issued to PHI.

In drafting the ASBR, the APT should have noted the fact that foreign investors were
competing in the bidding.

While it is true that foreign investment should be

encouraged in this country, however, the ASBR provision on the right to top is unfair to

SO ORDERED.

all competitors, be they foreign or local, in the public auction of 87.67% of PHILSECO
shares as it provided for a method that would set at naught the entire public bidding.
G.R. No. L-23145

It was thus error for the Court of Appeals to conclude that petitioner was estopped

November 29, 1968

TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased. RENATO D. TAYAG,

from contesting the validity of the ASBR and the bidding procedure conducted

ancillary

pursuant to it. It is clear from the provisions of the ASBR itself that the basic rules on

administrator-appellee,

oppositor-appellant.

fair competition in public biddings have been disregarded. Although petitioner had the

17

vs.

BENGUET

CONSOLIDATED,

INC.,

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the domiciliary administrator of the estate of the deceased.2 Then came this portion of
Cirilo F. Asperillo, Jr., for ancillary administrator-appellee.

the appellant's brief: "On August 12, 1960, Prospero Sanidad instituted ancillary

Ross, Salcedo, Del Rosario, Bito and Misa for oppositor-appellant.

administration proceedings in the Court of First Instance of Manila; Lazaro A.

FERNANDO, J.:

Marquez was appointed ancillary administrator, and on January 22, 1963, he was
substituted by the appellee Renato D. Tayag. A dispute arose between the domiciary

Confronted by an obstinate and adamant refusal of the domiciliary administrator, the

administrator in New York and the ancillary administrator in the Philippines as to

County Trust Company of New York, United States of America, of the estate of the

which of them was entitled to the possession of the stock certificates in question. On

deceased Idonah Slade Perkins, who died in New York City on March 27, 1960, to

January 27, 1964, the Court of First Instance of Manila ordered the domiciliary

surrender to the ancillary administrator in the Philippines the stock certificates owned

administrator, County Trust Company, to "produce and deposit" them with the ancillary

by her in a Philippine corporation, Benguet Consolidated, Inc., to satisfy the legitimate

administrator or with the Clerk of Court. The domiciliary administrator did not comply

claims of local creditors, the lower court, then presided by the Honorable Arsenio

with the order, and on February 11, 1964, the ancillary administrator petitioned the

Santos, now retired, issued on May 18, 1964, an order of this tenor: "After considering

court to "issue an order declaring the certificate or certificates of stocks covering the

the motion of the ancillary administrator, dated February 11, 1964, as well as the

33,002 shares issued in the name of Idonah Slade Perkins by Benguet Consolidated,

opposition filed by the Benguet Consolidated, Inc., the Court hereby (1) considers as

Inc., be declared [or] considered as lost."3

lost for all purposes in connection with the administration and liquidation of the
Philippine estate of Idonah Slade Perkins the stock certificates covering the 33,002

It is to be noted further that appellant Benguet Consolidated, Inc. admits that "it is

shares of stock standing in her name in the books of the Benguet Consolidated, Inc.,

immaterial" as far as it is concerned as to "who is entitled to the possession of the

(2) orders said certificates cancelled, and (3) directs said corporation to issue new

stock certificates in question; appellant opposed the petition of the ancillary

certificates in lieu thereof, the same to be delivered by said corporation to either the

administrator because the said stock certificates are in existence, they are today in

incumbent ancillary administrator or to the Probate Division of this Court."1

the possession of the domiciliary administrator, the County Trust Company, in New
York, U.S.A...."4

From such an order, an appeal was taken to this Court not by the domiciliary
administrator, the County Trust Company of New York, but by the Philippine

It is its view, therefore, that under the circumstances, the stock certificates cannot be

corporation, the Benguet Consolidated, Inc. The appeal cannot possibly prosper. The

declared or considered as lost. Moreover, it would allege that there was a failure to

challenged order represents a response and expresses a policy, to paraphrase

observe certain requirements of its by-laws before new stock certificates could be

Frankfurter, arising out of a specific problem, addressed to the attainment of specific

issued. Hence, its appeal.

ends by the use of specific remedies, with full and ample support from legal doctrines
of weight and significance.

As was made clear at the outset of this opinion, the appeal lacks merit. The
challenged order constitutes an emphatic affirmation of judicial authority sought to be

The facts will explain why. As set forth in the brief of appellant Benguet Consolidated,

emasculated by the wilful conduct of the domiciliary administrator in refusing to accord

Inc., Idonah Slade Perkins, who died on March 27, 1960 in New York City, left among

obedience to a court decree. How, then, can this order be stigmatized as illegal?

others, two stock certificates covering 33,002 shares of appellant, the certificates
being in the possession of the County Trust Company of New York, which as noted, is

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As is true of many problems confronting the judiciary, such a response was called for

It is to be noted that the scope of the power of the ancillary administrator was, in an

by the realities of the situation. What cannot be ignored is that conduct bordering on

earlier case, set forth by Justice Malcolm. Thus: "It is often necessary to have more

wilful defiance, if it had not actually reached it, cannot without undue loss of judicial

than one administration of an estate. When a person dies intestate owning property in

prestige, be condoned or tolerated. For the law is not so lacking in flexibility and

the country of his domicile as well as in a foreign country, administration is had in both

resourcefulness as to preclude such a solution, the more so as deeper reflection

countries. That which is granted in the jurisdiction of decedent's last domicile is

would make clear its being buttressed by indisputable principles and supported by the

termed the principal administration, while any other administration is termed the

strongest policy considerations.

ancillary administration. The reason for the latter is because a grant of administration
does not ex proprio vigore have any effect beyond the limits of the country in which it

It can truly be said then that the result arrived at upheld and vindicated the honor of

is granted. Hence, an administrator appointed in a foreign state has no authority in the

the judiciary no less than that of the country. Through this challenged order, there is

[Philippines]. The ancillary administration is proper, whenever a person dies, leaving

thus dispelled the atmosphere of contingent frustration brought about by the

in a country other than that of his last domicile, property to be administered in the

persistence of the domiciliary administrator to hold on to the stock certificates after it

nature of assets of the deceased liable for his individual debts or to be distributed

had, as admitted, voluntarily submitted itself to the jurisdiction of the lower court by

among his heirs."7

entering its appearance through counsel on June 27, 1963, and filing a petition for
relief from a previous order of March 15, 1963.

It would follow then that the authority of the probate court to require that ancillary
administrator's right to "the stock certificates covering the 33,002 shares ... standing in

Thus did the lower court, in the order now on appeal, impart vitality and effectiveness

her name in the books of [appellant] Benguet Consolidated, Inc...." be respected is

to what was decreed. For without it, what it had been decided would be set at naught

equally beyond question. For appellant is a Philippine corporation owing full

and nullified. Unless such a blatant disregard by the domiciliary administrator, with

allegiance and subject to the unrestricted jurisdiction of local courts. Its shares of

residence abroad, of what was previously ordained by a court order could be thus

stock cannot therefore be considered in any wise as immune from lawful court orders.

remedied, it would have entailed, insofar as this matter was concerned, not a partial
but a well-nigh complete paralysis of judicial authority.

Our holding in Wells Fargo Bank and Union v. Collector of Internal Revenue8 finds
application. "In the instant case, the actual situs of the shares of stock is in the

1.

Appellant Benguet Consolidated, Inc. did not dispute the power of the

Philippines, the corporation being domiciled [here]." To the force of the above

appellee ancillary administrator to gain control and possession of all assets of the

undeniable proposition, not even appellant is insensible. It does not dispute it. Nor

decedent within the jurisdiction of the Philippines. Nor could it. Such a power is

could it successfully do so even if it were so minded.

inherent in his duty to settle her estate and satisfy the claims of local creditors.5 As
Justice Tuason speaking for this Court made clear, it is a "general rule universally

2.

recognized" that administration, whether principal or ancillary, certainly "extends to the

fashion for the legality of the challenged order, how does appellant, Benguet

In the face of such incontrovertible doctrines that argue in a rather conclusive

assets of a decedent found within the state or country where it was granted," the

Consolidated, Inc. propose to carry the extremely heavy burden of persuasion of

corollary being "that an administrator appointed in one state or country has no power

precisely demonstrating the contrary? It would assign as the basic error allegedly

over property in another state or country."6

committed by the lower court its "considering as lost the stock certificates covering
33,002 shares of Benguet belonging to the deceased Idonah Slade Perkins, ..."9

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More specifically, appellant would stress that the "lower court could not "consider as

order, the fiction which is a working tool of thought, but which at times hides itself from

lost" the stock certificates in question when, as a matter of fact, his Honor the trial

view till reflection and analysis have brought it to the light."14

Judge knew, and does know, and it is admitted by the appellee, that the said stock
certificates are in existence and are today in the possession of the domiciliary

What cannot be disputed, therefore, is the at times indispensable role that fictions as

administrator in New York."10

such played in the law. There should be then on the part of the appellant a further
refinement in the catholicity of its condemnation of such judicial technique. If ever an

There may be an element of fiction in the above view of the lower court. That certainly

occasion did call for the employment of a legal fiction to put an end to the anomalous

does not suffice to call for the reversal of the appealed order. Since there is a refusal,

situation of a valid judicial order being disregarded with apparent impunity, this is it.

persistently adhered to by the domiciliary administrator in New York, to deliver the

What is thus most obvious is that this particular alleged error does not carry

shares of stocks of appellant corporation owned by the decedent to the ancillary

persuasion.

administrator in the Philippines, there was nothing unreasonable or arbitrary in


considering them as lost and requiring the appellant to issue new certificates in lieu

3.

thereof. Thereby, the task incumbent under the law on the ancillary administrator

contention by its invoking one of the provisions of its by-laws which would set forth the

Appellant Benguet Consolidated, Inc. would seek to bolster the above

could be discharged and his responsibility fulfilled.

procedure to be followed in case of a lost, stolen or destroyed stock certificate; it


would stress that in the event of a contest or the pendency of an action regarding

Any other view would result in the compliance to a valid judicial order being made to

ownership of such certificate or certificates of stock allegedly lost, stolen or destroyed,

depend on the uncontrolled discretion of the party or entity, in this case domiciled

the issuance of a new certificate or certificates would await the "final decision by [a]

abroad, which thus far has shown the utmost persistence in refusing to yield

court regarding the ownership [thereof]."15

obedience. Certainly, appellant would not be heard to contend in all seriousness that
a judicial decree could be treated as a mere scrap of paper, the court issuing it being

Such reliance is misplaced. In the first place, there is no such occasion to apply such

powerless to remedy its flagrant disregard.

by-law. It is admitted that the foreign domiciliary administrator did not appeal from the
order now in question. Moreover, there is likewise the express admission of appellant

It may be admitted of course that such alleged loss as found by the lower court did not

that as far as it is concerned, "it is immaterial ... who is entitled to the possession of

correspond exactly with the facts. To be more blunt, the quality of truth may be lacking

the stock certificates ..." Even if such were not the case, it would be a legal absurdity

in such a conclusion arrived at. It is to be remembered however, again to borrow from

to impart to such a provision conclusiveness and finality. Assuming that a contrariety

Frankfurter, "that fictions which the law may rely upon in the pursuit of legitimate ends

exists between the above by-law and the command of a court decree, the latter is to

have played an important part in its development."11

be followed.

Speaking of the common law in its earlier period, Cardozo could state fictions "were

It is understandable, as Cardozo pointed out, that the Constitution overrides a statute,

devices to advance the ends of justice, [even if] clumsy and at times offensive."12

to which, however, the judiciary must yield deference, when appropriately invoked and

Some of them have persisted even to the present, that eminent jurist, noting "the

deemed applicable. It would be most highly unorthodox, however, if a corporate by-

quasi contract, the adopted child, the constructive trust, all of flourishing vitality, to

law would be accorded such a high estate in the jural order that a court must not only

attest the empire of "as if" today."13 He likewise noted "a class of fictions of another

take note of it but yield to its alleged controlling force.

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imprimatur of the state according to law. It is logically inconceivable therefore that it


The fear of appellant of a contingent liability with which it could be saddled unless the

will have rights and privileges of a higher priority than that of its creator. More than

appealed order be set aside for its inconsistency with one of its by-laws does not

that, it cannot legitimately refuse to yield obedience to acts of its state organs,

impress us. Its obedience to a lawful court order certainly constitutes a valid defense,

certainly not excluding the judiciary, whenever called upon to do so.

assuming that such apprehension of a possible court action against it could possibly
materialize. Thus far, nothing in the circumstances as they have developed gives

As a matter of fact, a corporation once it comes into being, following American law still

substance to such a fear. Gossamer possibilities of a future prejudice to appellant do

of persuasive authority in our jurisdiction, comes more often within the ken of the

not suffice to nullify the lawful exercise of judicial authority.

judiciary than the other two coordinate branches. It institutes the appropriate court
action to enforce its right. Correlatively, it is not immune from judicial control in those

4.

What is more the view adopted by appellant Benguet Consolidated, Inc. is

instances, where a duty under the law as ascertained in an appropriate legal

fraught with implications at war with the basic postulates of corporate theory.

proceeding is cast upon it.

We start with the undeniable premise that, "a corporation is an artificial being created

To assert that it can choose which court order to follow and which to disregard is to

by operation of law...."16 It owes its life to the state, its birth being purely dependent

confer upon it not autonomy which may be conceded but license which cannot be

on its will. As Berle so aptly stated: "Classically, a corporation was conceived as an

tolerated. It is to argue that it may, when so minded, overrule the state, the source of

artificial person, owing its existence through creation by a sovereign power."17 As a

its very existence; it is to contend that what any of its governmental organs may

matter of fact, the statutory language employed owes much to Chief Justice Marshall,

lawfully require could be ignored at will. So extravagant a claim cannot possibly merit

who in the Dartmouth College decision defined a corporation precisely as "an artificial

approval.

being, invisible, intangible, and existing only in contemplation of law."18


5.

One last point. In Viloria v. Administrator of Veterans Affairs,22 it was shown

The well-known authority Fletcher could summarize the matter thus: "A corporation is

that in a guardianship proceedings then pending in a lower court, the United States

not in fact and in reality a person, but the law treats it as though it were a person by

Veterans Administration filed a motion for the refund of a certain sum of money paid to

process of fiction, or by regarding it as an artificial person distinct and separate from

the minor under guardianship, alleging that the lower court had previously granted its

its individual stockholders.... It owes its existence to law. It is an artificial person

petition to consider the deceased father as not entitled to guerilla benefits according

created by law for certain specific purposes, the extent of whose existence, powers

to a determination arrived at by its main office in the United States. The motion was

and liberties is fixed by its charter."19 Dean Pound's terse summary, a juristic person,

denied. In seeking a reconsideration of such order, the Administrator relied on an

resulting from an association of human beings granted legal personality by the state,

American federal statute making his decisions "final and conclusive on all questions of

puts the matter neatly.20

law or fact" precluding any other American official to examine the matter anew,
"except a judge or judges of the United States court."23 Reconsideration was denied,

There is thus a rejection of Gierke's genossenchaft theory, the basic theme of which

and the Administrator appealed.

to quote from Friedmann, "is the reality of the group as a social and legal entity,
independent of state recognition and concession."21 A corporation as known to

In an opinion by Justice J.B.L. Reyes, we sustained the lower court. Thus: "We are of

Philippine jurisprudence is a creature without any existence until it has received the

the opinion that the appeal should be rejected. The provisions of the U.S. Code,

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invoked by the appellant, make the decisions of the U.S. Veterans' Administrator final

through the appealed order, the imperative requirement of justice according to law is

and conclusive when made on claims property submitted to him for resolution; but

satisfied and national dignity and honor maintained.

they are not applicable to the present case, where the Administrator is not acting as a
judge but as a litigant. There is a great difference between actions against the

WHEREFORE, the appealed order of the Honorable Arsenio Santos, the Judge of the

Administrator (which must be filed strictly in accordance with the conditions that are

Court of First Instance, dated May 18, 1964, is affirmed. With costs against oppositor-

imposed by the Veterans' Act, including the exclusive review by United States courts),

appelant Benguet Consolidated, Inc.

and those actions where the Veterans' Administrator seeks a remedy from our courts
and submits to their jurisdiction by filing actions therein. Our attention has not been

EN BANC

called to any law or treaty that would make the findings of the Veterans' Administrator,

[G.R. Nos. 84132-33 : December 10, 1990.]

in actions where he is a party, conclusive on our courts. That, in effect, would deprive

192 SCRA 257

our tribunals of judicial discretion and render them mere subordinate instrumentalities
of the Veterans' Administrator."

NATIONAL DEVELOPMENT COMPANY AND NEW AGRIX, INC., Petitioners, vs.


PHILIPPINE VETERANS BANK, THE EX-OFFICIO SHERIFF and GODOFREDO

It is bad enough as the Viloria decision made patent for our judiciary to accept as final

QUILING, in his capacity as Deputy Sheriff of Calamba, Laguna, Respondents.

and conclusive, determinations made by foreign governmental agencies. It is infinitely

DECISION

worse if through the absence of any coercive power by our courts over juridical

CRUZ, J.:

persons within our jurisdiction, the force and effectivity of their orders could be made

This case involves the constitutionality of a presidential decree which, like all other

to depend on the whim or caprice of alien entities. It is difficult to imagine of a

issuances of President Marcos during his regime, was at that time regarded as

situation more offensive to the dignity of the bench or the honor of the country.

sacrosanct. It is only now, in a freer atmosphere, that his acts are being tested by the
touchstone of the fundamental law that even then was supposed to limit presidential

Yet that would be the effect, even if unintended, of the proposition to which appellant

action.: rd

Benguet Consolidated seems to be firmly committed as shown by its failure to accept


the validity of the order complained of; it seeks its reversal. Certainly we must at all

The particular enactment in question is Pres. Decree No. 1717, which ordered the

pains see to it that it does not succeed. The deplorable consequences attendant on

rehabilitation of the Agrix Group of Companies to be administered mainly by the

appellant prevailing attest to the necessity of negative response from us. That is what

National Development Company. The law outlined the procedure for filing claims

appellant will get.

against the Agrix companies and created a Claims Committee to process these
claims. Especially relevant to this case, and noted at the outset, is Sec. 4(1) thereof

That is all then that this case presents. It is obvious why the appeal cannot succeed. It

providing that "all mortgages and other liens presently attaching to any of the assets

is always easy to conjure extreme and even oppressive possibilities. That is not

of the dissolved corporations are hereby extinguished."

decisive. It does not settle the issue. What carries weight and conviction is the result
arrived at, the just solution obtained, grounded in the soundest of legal doctrines and

Earlier, the Agrix Marketing, Inc. (AGRIX) had executed in favor of private respondent

distinguished by its correspondence with what a sense of realism requires. For

Philippine Veterans Bank a real estate mortgage dated July 7, 1978, over three (3)

22

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parcels of land situated in Los Baos, Laguna. During the existence of the mortgage,

Mendoza v. Agrix Marketing, Inc., 1 where the constitutionality of Pres. Decree No.

AGRIX went bankrupt. It was for the expressed purpose of salvaging this and the

1717 was also raised but not resolved. The Court, after noting that the petitioners had

other Agrix companies that the aforementioned decree was issued by President

already filed their claims with the AGRIX Claims Committee created by the decree,

Marcos.

had simply dismissed the petition on the ground of estoppel.

Pursuant thereto, the private respondent filed a claim with the AGRIX Claims

The petitioners stress that in the case at bar the private respondent also invoked the

Committee for the payment of its loan credit. In the meantime, the New Agrix, Inc. and

provisions of Pres. Decree No. 1717 by filing a claim with the AGRIX Claims

the National Development Company, petitioners herein, invoking Sec. 4 (1) of the

Committee. Failing to get results, it sought to foreclose the real estate mortgage

decree, filed a petition with the Regional Trial Court of Calamba, Laguna, for the

executed by AGRIX in its favor, which had been extinguished by the decree. It was

cancellation of the mortgage lien in favor of the private respondent. For its part, the

only when the petitioners challenged the foreclosure on the basis of Sec. 4 (1) of the

private respondent took steps to extrajudicially foreclose the mortgage, prompting the

decree, that the private respondent attacked the validity of the provision. At that stage,

petitioners to file a second case with the same court to stop the foreclosure. The two

however, consistent with Mendoza, the private respondent was already estopped from

cases were consolidated.

questioning the constitutionality of the decree.

After the submission by the parties of their respective pleadings, the trial court

The Court does not agree that the principle of estoppel is applicable.

rendered the impugned decision. Judge Francisco Ma. Guerrero annulled not only the
challenged provision, viz., Sec. 4 (1), but the entire Pres. Decree No. 1717 on the

It is not denied that the private respondent did file a claim with the AGRIX Claims

grounds that: (1) the presidential exercise of legislative power was a violation of the

Committee pursuant to this decree. It must be noted, however, that this was done in

principle of separation of powers; (2) the law impaired the obligation of contracts; and

1980, when President Marcos was the absolute ruler of this country and his decrees

(3) the decree violated the equal protection clause. The motion for reconsideration of

were the absolute law. Any judicial challenge to them would have been futile, not to

this decision having been denied, the present petition was filed.: rd

say foolhardy. The private respondent, no less than the rest of the nation, was aware
of that reality and knew it had no choice under the circumstances but to conform.: nad

The petition was originally assigned to the Third Division of this Court but because of
the constitutional questions involved it was transferred to the Court en banc. On

It is true that there were a few venturesome souls who dared to question the dictator's

August 30, 1988, the Court granted the petitioner's prayer for a temporary restraining

decisions before the courts of justice then. The record will show, however, that not a

order and instructed the respondents to cease and desist from conducting a public

single act or issuance of President Marcos was ever declared unconstitutional, not

auction sale of the lands in question. After the Solicitor General and the private

even by the highest court, as long as he was in power. To rule now that the private

respondent had filed their comments and the petitioners their reply, the Court gave

respondent is estopped for having abided with the decree instead of boldly assailing it

due course to the petition and ordered the parties to file simultaneous memoranda.

is to close our eyes to a cynical fact of life during that repressive time.

Upon compliance by the parties, the case was deemed submitted.


This case must be distinguished from Mendoza, where the petitioners, after filing their
The petitioners contend that the private respondent is now estopped from contesting

claims with the AGRIX Claims Committee, received in settlement thereof shares of

the validity of the decree. In support of this contention, it cites the recent case of

stock valued at P40,000.00 without protest or reservation. The herein private

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respondent has not been paid a single centavo on its claim, which was kept pending
for more than seven years for alleged lack of supporting papers. Significantly, the

A legislative act based on the police power requires the concurrence of a lawful

validity of that claim was not questioned by the petitioner when it sought to restrain the

subject and a lawful method. In more familiar words, a) the interests of the public

extrajudicial foreclosure of the mortgage by the private respondent. The petitioner

generally, as distinguished from those of a particular class, should justify the

limited itself to the argument that the private respondent was estopped from

interference of the state; and b) the means employed are reasonably necessary for

questioning the decree because of its earlier compliance with its provisions.

the accomplishment of the purpose and not unduly oppressive upon individuals. 2

Independently of these observations, there is the consideration that an affront to the

Applying these criteria to the case at bar, the Court finds first of all that the interests of

Constitution cannot be allowed to continue existing simply because of procedural

the public are not sufficiently involved to warrant the interference of the government

inhibitions that exalt form over substance.

with the private contracts of AGRIX. The decree speaks vaguely of the "public,
particularly the small investors," who would be prejudiced if the corporation were not

The Court is especially disturbed by Section 4(1) of the decree, quoted above,

to be assisted. However, the record does not state how many there are of such

extinguishing all mortgages and other liens attaching to the assets of AGRIX. It also

investors, and who they are, and why they are being preferred to the private

notes, with equal concern, the restriction in Subsection (ii) thereof that all "unsecured

respondent and other creditors of AGRIX with vested property rights.:-cralaw

obligations shall not bear interest" and in Subsection (iii) that "all accrued interests,
penalties or charges as of date hereof pertaining to the obligations, whether secured

The public interest supposedly involved is not identified or explained. It has not been

or unsecured, shall not be recognized."

shown that by the creation of the New Agrix, Inc. and the extinction of the property
rights of the creditors of AGRIX, the interests of the public as a whole, as

These provisions must be read with the Bill of Rights, where it is clearly provided in

distinguished from those of a particular class, would be promoted or protected. The

Section 1 that "no person shall be deprived of life, liberty or property without due

indispensable link to the welfare of the greater number has not been established. On

course of law nor shall any person be denied the equal protection of the law" and in

the contrary, it would appear that the decree was issued only to favor a special group

Section 10 that "no law impairing the obligation of contracts shall be passed."

of investors who, for reasons not given, have been preferred to the legitimate creditors
of AGRIX.

In defending the decree, the petitioners argue that property rights, like all rights, are
subject to regulation under the police power for the promotion of the common welfare.

Assuming there is a valid public interest involved, the Court still finds that the means

The contention is that this inherent power of the state may be exercised at any time

employed to rehabilitate AGRIX fall far short of the requirement that they shall not be

for this purpose so long as the taking of the property right, even if based on contract,

unduly oppressive. The oppressiveness is patent on the face of the decree. The right

is done with due process of law.

to property in all mortgages, liens, interests, penalties and charges owing to the
creditors of AGRIX is arbitrarily destroyed. No consideration is paid for the extinction

This argument is an over-simplification of the problem before us. The police power is

of the mortgage rights. The accrued interests and other charges are simply rejected

not a panacea for all constitutional maladies. Neither does its mere invocation conjure

by the decree. The right to property is dissolved by legislative fiat without regard to the

an instant and automatic justification for every act of the government depriving a

private interest violated and, worse, in favor of another private interest.

person of his life, liberty or property.

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A mortgage lien is a property right derived from contract and so comes under the

On top of all this, New Agrix, Inc. was created by special decree notwithstanding the

protection of the Bill of Rights. So do interests on loans, as well as penalties and

provision of Article XIV, Section 4 of the 1973 Constitution, then in force, that:

charges, which are also vested rights once they accrue. Private property cannot
simply be taken by law from one person and given to another without compensation

SEC. 4. The Batasang Pambansa shall not, except by general law, provide for the

and any known public purpose. This is plain arbitrariness and is not permitted under

formation, organization, or regulation of private corporations, unless such corporations

the Constitution.

are owned or controlled by the Government or any subdivision or instrumentality


thereof. 4

And not only is there arbitrary taking, there is discrimination as well. In extinguishing
the mortgage and other liens, the decree lumps the secured creditors with the

The new corporation is neither owned nor controlled by the government. The National

unsecured creditors and places them on the same level in the prosecution of their

Development Corporation was merely required to extend a loan of not more than

respective claims. In this respect, all of them are considered unsecured creditors. The

P10,000,000.00 to New Agrix, Inc. Pending payment thereof, NDC would undertake

only concession given to the secured creditors is that their loans are allowed to earn

the management of the corporation, but with the obligation of making periodic reports

interest from the date of the decree, but that still does not justify the cancellation of the

to the Agrix board of directors. After payment of the loan, the said board can then

interests earned before that date. Such interests, whether due to the secured or the

appoint its own management. The stocks of the new corporation are to be issued to

unsecured creditors, are all extinguished by the decree. Even assuming such

the old investors and stockholders of AGRIX upon proof of their claims against the

cancellation to be valid, we still cannot see why all kinds of creditors, regardless of

abolished corporation. They shall then be the owners of the new corporation. New

security, are treated alike.

Agrix, Inc. is entirely private and so should have been organized under the
Corporation Law in accordance with the above-cited constitutional provision.

Under the equal protection clause, all persons or things similarly situated must be
treated alike, both in the privileges conferred and the obligations imposed.

The Court also feels that the decree impairs the obligation of the contract between

Conversely, all persons or things differently situated should be treated differently. In

AGRIX and the private respondent without justification. While it is true that the police

the case at bar, persons differently situated are similarly treated, in disregard of the

power is superior to the impairment clause, the principle will apply only where the

principle that there should be equality only among equals.- nad

contract is so related to the public welfare that it will be considered congenitally


susceptible to change by the legislature in the interest of the greater number. 5 Most

One may also well wonder why AGRIX was singled out for government help, among

present-day contracts are of that nature. But as already observed, the contracts of

other corporations where the stockholders or investors were also swindled. It is not

loan and mortgage executed by AGRIX are purely private transactions and have not

clear why other companies entitled to similar concern were not similarly treated. And

been shown to be affected with public interest. There was therefore no warrant to

surely, the stockholders of the private respondent, whose mortgage lien had been

amend their provisions and deprive the private respondent of its vested property

cancelled and legitimate claims to accrued interests rejected, were no less deserving

rights.

of protection, which they did not get. The decree operated, to use the words of a
celebrated case, 3 "with an evil eye and an uneven hand."

It is worth noting that only recently in the case of the Development Bank of the
Philippines v. NLRC, 6 we sustained the preference in payment of a mortgage creditor
as against the argument that the claims of laborers should take precedence over all

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other claims, including those of the government. In arriving at this ruling, the Court

ENGR. RANULFO C. FELICIANO, in his capacity as General Manager of the Leyte

recognized the mortgage lien as a property right protected by the due process and

Metropolitan Water District (LMWD), Tacloban City, petitioner, vs. COMMISSION ON

contract clauses notwithstanding the argument that the amendment in Section 110 of

AUDIT, Chairman CELSO D. GANGAN, Commissioners RAUL C. FLORES and

the Labor Code was a proper exercise of the police power.: nad

CARPIO, J.:

The Court reaffirms and applies that ruling in the case at bar.

The Case

Our finding, in sum, is that Pres. Decree No. 1717 is an invalid exercise of the police

This is a petition for certiorari[1] to annul the Commission on Audits (COA)

power, not being in conformity with the traditional requirements of a lawful subject and

Resolution dated 3 January 2000 and the Decision dated 30 January 2001 denying

a lawful method. The extinction of the mortgage and other liens and of the interest

the Motion for Reconsideration. The COA denied petitioner Ranulfo C. Felicianos

and other charges pertaining to the legitimate creditors of AGRIX constitutes taking

request for COA to cease all audit services, and to stop charging auditing fees, to

without due process of law, and this is compounded by the reduction of the secured

Leyte Metropolitan Water District (LMWD).

creditors to the category of unsecured creditors in violation of the equal protection

The COA also denied petitioners

request for COA to refund all auditing fees previously paid by LMWD.

clause. Moreover, the new corporation, being neither owned nor controlled by the
Government, should have been created only by general and not special law. And

Antecedent Facts

insofar as the decree also interferes with purely private agreements without any
demonstrated connection with the public interest, there is likewise an impairment of

A Special Audit Team from COA Regional Office No. VIII audited the accounts of

the obligation of the contract.

LMWD.

Subsequently, LMWD received a letter from COA dated 19 July 1999

requesting payment of auditing fees. As General Manager of LMWD, petitioner sent a

With the above pronouncements, we feel there is no more need to rule on the

reply dated 12 October 1999 informing COAs Regional Director that the water district

authority of President Marcos to promulgate Pres. Decree No. 1717 under

could not pay the auditing fees. Petitioner cited as basis for his action Sections 6 and

Amendment No. 6 of the 1973 Constitution. Even if he had such authority, the decree

20 of Presidential Decree 198 (PD 198)[2], as well as Section 18 of Republic Act No.

must fall just the same because of its violation of the Bill of Rights.

6758 (RA 6758).

The Regional Director referred petitioners reply to the COA

Chairman on 18 October 1999.

WHEREFORE, the petition is DISMISSED. Pres. Decree No. 1717 is declared


UNCONSTITUTIONAL. The temporary restraining order dated August 30, 1988, is

On 19 October 1999, petitioner wrote COA through the Regional Director asking for

LIFTED. Costs against the petitioners.- nad

refund of all auditing fees LMWD previously paid to COA.

SO ORDERED.

On 16 March 2000, petitioner received COA Chairman Celso D. Gangans Resolution


dated 3 January 2000 denying his requests.

[G.R. No. 147402. January 14, 2004]

Petitioner filed a motion for

reconsideration on 31 March 2000, which COA denied on 30 January 2001.

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On 13 March 2001, petitioner filed this instant petition. Attached to the petition were
resolutions of the Visayas Association of Water Districts (VAWD) and the Philippine

2.

Association of Water Districts (PAWD) supporting the petition.

accountants from auditing local water districts; and

Whether Section 20 of PD 198, as amended, prohibits COAs certified public

The Ruling of the Commission on Audit

3.

Whether Section 18 of RA 6758 prohibits the COA from charging government-

owned and controlled corporations auditing fees.


The COA ruled that this Court has already settled COAs audit jurisdiction over local
water districts in Davao City Water District v. Civil Service Commission and

The Ruling of the Court

Commission on Audit,[3] as follows:


The petition lacks merit.
The above-quoted provision [referring to Section 3(b) PD 198] definitely sets to naught
petitioners contention that they are private corporations. It is clear therefrom that the

The Constitution and existing laws[4] mandate COA to audit all government agencies,

power to appoint the members who will comprise the members of the Board of

including government-owned and controlled corporations (GOCCs) with original

Directors belong to the local executives of the local subdivision unit where such

charters. An LWD is a GOCC with an original charter. Section 2(1), Article IX-D of

districts are located.

the Constitution provides for COAs audit jurisdiction, as follows:

In contrast, the members of the Board of Directors or the

trustees of a private corporation are elected from among members or stockholders


thereof. It would not be amiss at this point to emphasize that a private corporation is

SECTION 2. (1) The Commission on Audit shall have the power, authority and duty to

created for the private purpose, benefit, aim and end of its members or stockholders.

examine, audit, and settle all accounts pertaining to the revenue and receipts of, and

Necessarily, said members or stockholders should be given a free hand to choose

expenditures or uses of funds and property, owned or held in trust by, or pertaining to,

who will compose the governing body of their corporation. But this is not the case

the Government, or any of its subdivisions, agencies, or instrumentalities, including

here and this clearly indicates that petitioners are not private corporations.

government-owned and controlled corporations with original charters, and on a postaudit basis: (a) constitutional bodies, commissions and offices that have been granted

The COA also denied petitioners request for COA to stop charging auditing fees as

fiscal autonomy under this Constitution; (b) autonomous state colleges and

well as petitioners request for COA to refund all auditing fees already paid.

universities; (c) other government-owned or controlled corporations and their


subsidiaries; and (d) such non-governmental entities receiving subsidy or equity,

The Issues

directly or indirectly, from or through the government, which are required by law or the
granting institution to submit to such audit as a condition of subsidy or equity.

Petitioner contends that COA committed grave abuse of discretion amounting to lack

However, where the internal control system of the audited agencies is inadequate, the

or excess of jurisdiction by auditing LMWD and requiring it to pay auditing fees.

Commission may adopt such measures, including temporary or special pre-audit, as

Petitioner raises the following issues for resolution:

are necessary and appropriate to correct the deficiencies. It shall keep the general
accounts of the Government and, for such period as may be provided by law,

1.

Whether a Local Water District (LWD) created under PD 198, as amended, is

preserve the vouchers and other supporting papers pertaining thereto.

a government-owned or controlled corporation subject to the audit jurisdiction of COA;

supplied)

27

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controlled corporations created by special charters.


The COAs audit jurisdiction extends not only to government agencies or

Section 16, Article XII of the

Constitution provides:

instrumentalities, but also to government-owned and controlled corporations with


original charters as well as other government-owned or controlled corporations

Sec. 16. The Congress shall not, except by general law, provide for the formation,

without original charters.

organization, or regulation of private corporations. Government-owned or controlled


corporations may be created or established by special charters in the interest of the

Whether LWDs are Private or Government-Owned

common good and subject to the test of economic viability.

and Controlled Corporations with Original Charters


The Constitution emphatically prohibits the creation of private corporations except by
Petitioner seeks to revive a well-settled issue. Petitioner asks for a re-examination of

a general law applicable to all citizens.[9] The purpose of this constitutional provision

a doctrine backed by a long line of cases culminating in Davao City Water District v.

is to ban private corporations created by special charters, which historically gave

Civil Service Commission[5] and just recently reiterated in De Jesus v. Commission

certain individuals, families or groups special privileges denied to other citizens.[10]

on Audit.[6] Petitioner maintains that LWDs are not government-owned and controlled
corporations with original charters.
corporations.

Petitioner even argues that LWDs are private

In short, Congress cannot enact a law creating a private corporation with a special

Petitioner asks the Court to consider certain interpretations of the

charter. Such legislation would be unconstitutional. Private corporations may exist

applicable laws, which would give a new perspective to the issue of the true

only under a general law. If the corporation is private, it must necessarily exist under

character of water districts.[7]

a general law. Stated differently, only corporations created under a general law can
qualify as private corporations.

Under existing laws, that general law is the

Petitioner theorizes that what PD 198 created was the Local Waters Utilities

Corporation Code,[11] except that the Cooperative Code governs the incorporation of

Administration (LWUA) and not the LWDs. Petitioner claims that LWDs are created

cooperatives.[12]

pursuant to and not created directly by PD 198. Thus, petitioner concludes that PD
198 is not an original charter that would place LWDs within the audit jurisdiction of

The Constitution authorizes Congress to create government-owned or controlled

COA as defined in Section 2(1), Article IX-D of the Constitution. Petitioner elaborates

corporations through special charters. Since private corporations cannot have special

that PD 198 does not create LWDs since it does not expressly direct the creation of

charters, it follows that Congress can create corporations with special charters only if

such entities, but only provides for their formation on an optional or voluntary basis.[8]

such corporations are government-owned or controlled.

Petitioner adds that the operative act that creates an LWD is the approval of the
Sanggunian Resolution as specified in PD 198.

Obviously, LWDs are not private corporations because they are not created under the
Corporation Code.

Petitioners contention deserves scant consideration.

Commission.

LWDs are not registered with the Securities and Exchange

Section 14 of the Corporation Code states that [A]ll corporations

organized under this code shall file with the Securities and Exchange Commission
We begin by explaining the general framework under the fundamental law.
Constitution recognizes two classes of corporations.

The

articles of incorporation x x x.

The first refers to private

LWDs have no articles of incorporation, no

incorporators and no stockholders or members.

corporations created under a general law. The second refers to government-owned or

There are no stockholders or

members to elect the board directors of LWDs as in the case of all corporations

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registered with the Securities and Exchange Commission. The local mayor or the

(b)

provincial governor appoints the directors of LWDs for a fixed term of office. This

municipality, such boundary may include all lands within the city or municipality. A

Court has ruled that LWDs are not created under the Corporation Code, thus:

district may include one or more municipalities, cities or provinces, or portions thereof.

From the foregoing pronouncement, it is clear that what has been excluded from the

(c)

coverage of the CSC are those corporations created pursuant to the Corporation

facilities managed, operated by or under the control of such city, municipality or

Code.

province to such district upon the filing of resolution forming the district.

Significantly, petitioners are not created under the said code, but on the

A description of the boundary of the district. In the case of a city or

A statement completely transferring any and all waterworks and/or sewerage

contrary, they were created pursuant to a special law and are governed primarily by its
provision.[13] (Emphasis supplied)

(d)

A statement identifying the purpose for which the district is formed, which

shall include those purposes outlined in Section 5 above.


LWDs exist by virtue of PD 198, which constitutes their special charter. Since under
the Constitution only government-owned or controlled corporations may have special

(e)

charters, LWDs can validly exist only if they are government-owned or controlled. To

term of office for each.

The names of the initial directors of the district with the date of expiration of

claim that LWDs are private corporations with a special charter is to admit that their
existence is constitutionally infirm.

(f)

A statement that the district may only be dissolved on the grounds and

under the conditions set forth in Section 44 of this Title.


Unlike private corporations, which derive their legal existence and power from the
Corporation Code, LWDs derive their legal existence and power from PD 198.

(g)

Sections 6 and 25 of PD 198[14] provide:

Section 36 of this Title.

A statement acknowledging the powers, rights and obligations as set forth in

Section 6.

Formation of District. This Act is the source of authorization and

Nothing in the resolution of formation shall state or infer that the local legislative body

power to form and maintain a district. For purposes of this Act, a district shall be

has the power to dissolve, alter or affect the district beyond that specifically provided

considered as a quasi-public corporation performing public service and supplying

for in this Act.

public wants. As such, a district shall exercise the powers, rights and privileges given
to private corporations under existing laws, in addition to the powers granted in, and

If two or more cities, municipalities or provinces, or any combination thereof, desire to

subject to such restrictions imposed, under this Act.

form a single district, a similar resolution shall be adopted in each city, municipality
and province.

(a)

The name of the local water district, which shall include the name of the city,

municipality, or province, or region thereof, served by said system, followed by the

xxx

words Water District.


Sec. 25.

Authorization. The district may exercise all the powers which are

expressly granted by this Title or which are necessarily implied from or incidental to
the powers and purposes herein stated.

29

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objectives of this Act, a district is hereby granted the power of eminent domain, the
exercise thereof shall, however, be subject to review by the Administration.

MR. ROMULO.

(Emphasis supplied)

or by special law.

Clearly, LWDs exist as corporations only by virtue of PD 198, which expressly confers

MR. FOZ.

We mean that they were created by law, by an act of Congress,

And not under the general corporation law.

on LWDs corporate powers. Section 6 of PD 198 provides that LWDs shall exercise
the powers, rights and privileges given to private corporations under existing laws.

MR. ROMULO.

That is correct. Mr. Presiding Officer.

Without PD 198, LWDs would have no corporate powers. Thus, PD 198 constitutes
the special enabling charter of LWDs. The ineluctable conclusion is that LWDs are

MR. FOZ.

government-owned and controlled corporations with a special charter.

amendment.

The phrase government-owned and controlled corporations with original charters

MR. NATIVIDAD.

means GOCCs created under special laws and not under the general incorporation

law are out.

law.

With that understanding and clarification, the Committee accepts the

Mr. Presiding Officer, so those created by the general corporation

There is no difference between the term original charters and special

charters. The Court clarified this in National Service Corporation v. NLRC[15] by

MR. ROMULO.

That is correct. (Emphasis supplied)

citing the deliberations in the Constitutional Commission, as follows:


Again, in Davao City Water District v. Civil Service Commission,[16] the Court
THE PRESIDING OFFICER (Mr. Trenas). The session is resumed.

reiterated the meaning of the phrase government-owned and controlled corporations


with original charters in this wise:

Commissioner Romulo is recognized.


By government-owned or controlled corporation with original charter, We mean
MR. ROMULO.

Mr. Presiding Officer, I am amending my original proposed

government owned or controlled corporation created by a special law and not under

amendment to now read as follows: including government-owned or controlled

the Corporation Code of the Philippines. Thus, in the case of Lumanta v. NLRC (G.R.

corporations WITH ORIGINAL CHARTERS. The purpose of this amendment is to

No. 82819, February 8, 1989, 170 SCRA 79, 82), We held:

indicate that government corporations such as the GSIS and SSS, which have original
charters, fall within the ambit of the civil service. However, corporations which are

The Court, in National Service Corporation (NASECO) v. National Labor Relations

subsidiaries of these chartered agencies such as the Philippine Airlines, Manila Hotel

Commission, G.R. No. 69870, promulgated on 29 November 1988, quoting

and Hyatt are excluded from the coverage of the civil service.

extensively from the deliberations of the 1986 Constitutional Commission in respect of


the intent and meaning of the new phrase with original charter, in effect held that

THE PRESIDING OFFICER (Mr. Trenas). What does the Committee say?

government-owned and controlled corporations with original charter refer to


corporations chartered by special law as distinguished from corporations organized

MR. FOZ.

Just one question, Mr. Presiding Officer. By the term original charters,

under our general incorporation statute the Corporation Code. In NASECO, the

what exactly do we mean?

company involved had been organized under the general incorporation statute and

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was a subsidiary of the National Investment Development Corporation (NIDC) which


in turn was a subsidiary of the Philippine National Bank, a bank chartered by a special

The Sangguniang Bayan may establish a waterworks system only in accordance with

statute.

the provisions of PD 198.

Thus, government-owned or controlled corporations like NASECO are

effectively, excluded from the scope of the Civil Service. (Emphasis supplied)

The Sangguniang Bayan has no power to create a

corporate entity that will operate its waterworks system. However, the Sangguniang
Bayan may avail of existing enabling laws, like PD 198, to form and incorporate a

Petitioners contention that the Sangguniang Bayan resolution creates the LWDs

water district.

assumes that the Sangguniang Bayan has the power to create corporations. This is a

Sangguniang Bayan has the power to create corporations, the LWDs would remain

patently baseless assumption. The Local Government Code[17] does not vest in the

government-owned or controlled corporations subject to COAs audit jurisdiction. The

Sangguniang Bayan the power to create corporations.[18] What the Local

resolution of the Sangguniang Bayan would constitute an LWDs special charter,

Government Code empowers the Sangguniang Bayan to do is to provide for the

making the LWD a government-owned and controlled corporation with an original

establishment of a waterworks system subject to existing laws.

charter.

Thus, Section

447(5)(vii) of the Local Government Code provides:

Besides, even assuming for the sake of argument that the

In any event, the Court has already ruled in Baguio Water District v.

Trajano[19] that the Sangguniang Bayan resolution is not the special charter of LWDs,
thus:

SECTION 447.

Powers, Duties, Functions and Compensation. (a) The

sangguniang bayan, as the legislative body of the municipality, shall enact

While it is true that a resolution of a local sanggunian is still necessary for the final

ordinances, approve resolutions and appropriate funds for the general welfare of the

creation of a district, this Court is of the opinion that said resolution cannot be

municipality and its inhabitants pursuant to Section 16 of this Code and in the proper

considered as its charter, the same being intended only to implement the provisions of

exercise of the corporate powers of the municipality as provided for under Section 22

said decree.

of this Code, and shall:


Petitioner further contends that a law must create directly and explicitly a GOCC in
xxx

order that it may have an original charter. In short, petitioner argues that one special
law cannot serve as enabling law for several GOCCs but only for one GOCC. Section

(vii)

Subject to existing laws, provide for the establishment, operation,

16, Article XII of the Constitution mandates that Congress shall not, except by

maintenance, and repair of an efficient waterworks system to supply water for the

general law,[20] provide for the creation of private corporations.

Thus, the

inhabitants; regulate the construction, maintenance, repair and use of hydrants,

Constitution prohibits one special law to create one private corporation, requiring

pumps, cisterns and reservoirs; protect the purity and quantity of the water supply of

instead a general law to create private corporations. In contrast, the same Section

the municipality and, for this purpose, extend the coverage of appropriate ordinances

16 states that Government-owned or controlled corporations may be created or

over all territory within the drainage area of said water supply and within one hundred

established by special charters. Thus, the Constitution permits Congress to create a

(100) meters of the reservoir, conduit, canal, aqueduct, pumping station, or watershed

GOCC with a special charter. There is, however, no prohibition on Congress to create

used in connection with the water service; and regulate the consumption, use or

several GOCCs of the same class under one special enabling charter.

wastage of water;
The rationale behind the prohibition on private corporations having special charters
x x x. (Emphasis supplied)

does not apply to GOCCs. There is no danger of creating special privileges to certain

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individuals, families or groups if there is one special law creating each GOCC.

This point is important because the Constitution provides in its Article IX-B, Section

Certainly, such danger will not exist whether one special law creates one GOCC, or

2(1) that the Civil Service embraces all branches, subdivisions, instrumentalities, and

one special enabling law creates several GOCCs.

Thus, Congress may create

agencies of the Government, including government-owned or controlled corporations

GOCCs either by special charters specific to each GOCC, or by one special enabling

with original charters. As the Bank is not owned or controlled by the Government

charter applicable to a class of GOCCs, like PD 198 which applies only to LWDs.

although it does have an original charter in the form of R.A. No. 3518,[23] it clearly
does not fall under the Civil Service and should be regarded as an ordinary

Petitioner also contends that LWDs are private corporations because Section 6 of PD

commercial corporation. Section 28 of the said law so provides. The consequence is

198[21] declares that LWDs shall be considered quasi-public in nature. Petitioners

that the relations of the Bank with its employees should be governed by the labor

rationale is that only private corporations may be deemed quasi-public and not

laws, under which in fact they have already been paid some of their claims.

public corporations. Put differently, petitioner rationalizes that a public corporation

(Emphasis supplied)

cannot be deemed quasi-public because such corporation is already public.


Petitioner concludes that the term quasi-public can only apply to private

Certainly, the government owns and controls LWDs.

corporations. Petitioners argument is inconsequential.

LWDs in accordance with a specific law, PD 198. There is no private party involved
as co-owner in the creation of an LWD.

The government organizes

Just prior to the creation of LWDs, the

Petitioner forgets that the constitutional criterion on the exercise of COAs audit

national or local government owns and controls all their assets. The government

jurisdiction depends on the governments ownership or control of a corporation. The

controls LWDs because under PD 198 the municipal or city mayor, or the provincial

nature of the corporation, whether it is private, quasi-public, or public is immaterial.

governor, appoints all the board directors of an LWD for a fixed term of six years.[24]
The board directors of LWDs are not co-owners of the LWDs. LWDs have no private

The Constitution vests in the COA audit jurisdiction over government-owned and

stockholders or members. The board directors and other personnel of LWDs are

controlled corporations with original charters, as well as government-owned or

government employees subject to civil service laws[25] and anti-graft laws.[26]

controlled corporations without original charters. GOCCs with original charters are
subject to COA pre-audit, while GOCCs without original charters are subject to COA

While Section 8 of PD 198 states that [N]o public official shall serve as director of an

post-audit. GOCCs without original charters refer to corporations created under the

LWD, it only means that the appointees to the board of directors of LWDs shall come

Corporation Code but are owned or controlled by the government. The nature or

from the private sector. Once such private sector representatives assume office as

purpose of the corporation is not material in determining COAs audit jurisdiction.

directors, they become public officials governed by the civil service law and anti-graft

Neither is the manner of creation of a corporation, whether under a general or special

laws. Otherwise, Section 8 of PD 198 would contravene Section 2(1), Article IX-B of

law.

the Constitution declaring that the civil service includes government-owned or


controlled corporations with original charters.

The determining factor of COAs audit jurisdiction is government ownership or control


of the corporation. In Philippine Veterans Bank Employees Union-NUBE v. Philippine

If LWDs are neither GOCCs with original charters nor GOCCs without original

Veterans Bank,[22] the Court even ruled that the criterion of ownership and control is

charters, then they would fall under the term agencies or instrumentalities of the

more important than the issue of original charter, thus:

government and thus still subject to COAs audit jurisdiction. However, the stark and
undeniable fact is that the government owns LWDs.

32

Section 45[27] of PD 198

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recognizes government ownership of LWDs when Section 45 states that the board of

Sec. 20.

System of Business Administration. The Board shall, as soon as

directors may dissolve an LWD only on the condition that another public entity has

practicable, prescribe and define by resolution a system of business administration

acquired the assets of the district and has assumed all obligations and liabilities

and accounting for the district, which shall be patterned upon and conform to the

attached thereto. The implication is clear that an LWD is a public and not a private

standards established by the Administration.

entity.

certified public accountant not in the government service. The Administration may,

Auditing shall be performed by a

however, conduct annual audits of the fiscal operations of the district to be performed
Petitioner does not allege that some entity other than the government owns or

by an auditor retained by the Administration.

controls LWDs.

therewith shall be borne equally by the water district concerned and the

Instead, petitioner advances the theory that the Water Districts

owner is the District itself.[28] Assuming for the sake of argument that an LWD is

Expenses incurred in connection

Administration.[35] (Emphasis supplied)

self-owned,[29] as petitioner describes an LWD, the government in any event


controls all LWDs. First, government officials appoint all LWD directors to a fixed term

Petitioner argues that PD 198 expressly prohibits COA auditors, or any government

of office. Second, any per diem of LWD directors in excess of P50 is subject to the

auditor for that matter, from auditing LWDs. Petitioner asserts that this is the import of

approval of the Local Water Utilities Administration, and directors can receive no other

the second sentence of Section 20 of PD 198 when it states that [A]uditing shall be

compensation for their services to the LWD.[30] Third, the Local Water Utilities

performed by a certified public accountant not in the government service.[36]

Administration can require LWDs to merge or consolidate their facilities or operations.


[31] This element of government control subjects LWDs to COAs audit jurisdiction.

PD 198 cannot prevail over the Constitution.

No amount of clever legislation can

exclude GOCCs like LWDs from COAs audit jurisdiction. Section 3, Article IX-C of the
Petitioner argues that upon the enactment of PD 198, LWDs became private entities

Constitution outlaws any scheme or devise to escape COAs audit jurisdiction, thus:

through the transfer of ownership of water facilities from local government units to
their respective water districts as mandated by PD 198. Petitioner is grasping at

Sec. 3.

No law shall be passed exempting any entity of the Government or its

straws. Privatization involves the transfer of government assets to a private entity.

subsidiary in any guise whatever, or any investment of public funds, from the

Petitioner concedes that the owner of the assets transferred under Section 6 (c) of PD

jurisdiction of the Commission on Audit. (Emphasis supplied)

198 is no other than the LWD itself.[32] The transfer of assets mandated by PD 198 is
a transfer of the water systems facilities managed, operated by or under the control

The framers of the Constitution added Section 3, Article IX-D of the Constitution

of such city, municipality or province to such (water) district.[33] In short, the transfer

precisely to annul provisions of Presidential Decrees, like that of Section 20 of PD

is from one government entity to another government entity. PD 198 is bereft of any

198, that exempt GOCCs from COA audit.

indication that the transfer is to privatize the operation and control of water systems.

deliberations of the Constitutional Commission elucidates this intent of the framers:

Finally, petitioner claims that even on the assumption that the government owns and

MR. OPLE:

controls LWDs, Section 20 of PD 198 prevents COA from auditing LWDs. [34] Section

committee report which reads: NO LAW SHALL BE PASSED EXEMPTING ANY

20 of PD 198 provides:

ENTITY OF THE GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE WHATEVER,

The following exchange in the

I propose to add a new section on line 9, page 2 of the amended

OR ANY INVESTMENTS OF PUBLIC FUNDS, FROM THE JURISDICTION OF THE


COMMISSION ON AUDIT.

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MR. JAMIR: If the honorable Commissioner will change the number of the section to
May I explain my reasons on record.

4, we will accept the amendment.

We know that a number of entities of the government took advantage of the absence

MR. OPLE: Gladly, Madam President. Thank you.

of a legislature in the past to obtain presidential decrees exempting themselves from


the jurisdiction of the Commission on Audit, one notable example of which is the
Philippine National Oil Company which is really an empty shell.
corporation by itself, and strictly on its own account.

MR. DE CASTRO: Madam President, point of inquiry on the new amendment.

It is a holding

Its funds were not very

THE PRESIDENT: Commissioner de Castro is recognized.

impressive in quantity but underneath that shell there were billions of pesos in a
multiplicity of companies. The PNOC the empty shell under a presidential

MR. DE CASTRO:

decree was covered by the jurisdiction of the Commission on Audit, but the billions of

Ople.

Thank you. May I just ask a few questions of Commissioner

pesos invested in different corporations underneath it were exempted from the


coverage of the Commission on Audit.

Is that not included in Section 2 (1) where it states: (c) government-owned or


controlled corporations and their subsidiaries? So that if these government-owned

Another example is the United Coconut Planters Bank. The Commission on Audit has

and controlled corporations and their subsidiaries are subjected to the audit of the

determined that the coconut levy is a form of taxation; and that, therefore, these funds

COA, any law exempting certain government corporations or subsidiaries will be

attributed to the shares of 1,400,000 coconut farmers are, in effect, public funds. And

already unconstitutional.

that was, I think, the basis of the PCGG in undertaking that last major sequestration of
up to 94 percent of all the shares in the United Coconut Planters Bank. The charter of

So I believe, Madam President, that the proposed amendment is unnecessary.

the UCPB, through a presidential decree, exempted it from the jurisdiction of the
Commission on Audit, it being a private organization.

MR. MONSOD:

Madam President, since this has been accepted, we would like to

reply to the point raised by Commissioner de Castro.


So these are the fetuses of future abuse that we are slaying right here with this
additional section.

THE PRESIDENT: Commissioner Monsod will please proceed.

May I repeat the amendment, Madam President: NO LAW SHALL BE PASSED

MR. MONSOD:

EXEMPTING ANY ENTITY OF THE GOVERNMENT OR ITS SUBSIDIARY IN ANY

happened in the past, because the same provision was in the 1973 Constitution and

GUISE WHATEVER, OR ANY INVESTMENTS OF PUBLIC FUNDS, FROM THE

yet somehow a law or a decree was passed where certain institutions were exempted

JURISDICTION OF THE COMMISSION ON AUDIT.

from audit. We are just reaffirming, emphasizing, the role of the Commission on Audit

I think the Commissioner is trying to avoid the situation that

so that this problem will never arise in the future.[37]


THE PRESIDENT: May we know the position of the Committee on the proposed
amendment of Commissioner Ople?

There is an irreconcilable conflict between the second sentence of Section 20 of PD


198 prohibiting COA auditors from auditing LWDs and Sections 2(1) and 3, Article IX-

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D of the Constitution vesting in COA the power to audit all GOCCs. We rule that the

Section 18 of RA 6758 prohibits COA personnel from receiving any kind of

second sentence of Section 20 of PD 198 is unconstitutional since it violates Sections

compensation from any government entity except compensation paid directly by COA

2(1) and 3, Article IX-D of the Constitution.

out of its appropriations and contributions.

Thus, RA 6758 itself recognizes an

exception to the statutory ban on COA personnel receiving compensation from


On the Legality of COAs

GOCCs. In Tejada v. Domingo,[40] the Court declared:

Practice of Charging Auditing Fees


There can be no question that Section 18 of Republic Act No. 6758 is designed to
Petitioner claims that the auditing fees COA charges LWDs for audit services violate

strengthen further the policy x x x to preserve the independence and integrity of the

the prohibition in Section 18 of RA 6758,[38] which states:

COA, by explicitly PROHIBITING: (1) COA officials and employees from receiving
salaries, honoraria, bonuses, allowances or other emoluments from any government

Sec. 18. Additional Compensation of Commission on Audit Personnel and of other

entity, local government unit, GOCCs and government financial institutions, except

Agencies. In order to preserve the independence and integrity of the Commission

such compensation paid directly by the COA out of its appropriations and

on Audit (COA), its officials and employees are prohibited from receiving salaries,

contributions, and (2) government entities, including GOCCs, government financial

honoraria, bonuses, allowances or other emoluments from any government entity,

institutions and local government units from assessing or billing other government

local government unit, government-owned or controlled corporations, and government

entities, GOCCs, government financial institutions or local government units for

financial institutions, except those compensation paid directly by COA out of its

services rendered by the latters officials and employees as part of their regular

appropriations and contributions.

functions for purposes of paying additional compensation to said officials and


employees.

Government entities, including government-owned or controlled corporations including


financial institutions and local government units are hereby prohibited from assessing

xxx

or billing other government entities, including government-owned or controlled


corporations including financial institutions or local government units for services

The first aspect of the strategy is directed to the COA itself, while the second aspect is

rendered by its officials and employees as part of their regular functions for purposes

addressed directly against the GOCCs and government financial institutions. Under

of paying additional compensation to said officials and employees.

the first, COA personnel assigned to auditing units of GOCCs or government financial

(Emphasis

supplied)

institutions can receive only such salaries, allowances or fringe benefits paid directly
by the COA out of its appropriations and contributions. The contributions referred to

Claiming that Section 18 is absolute and leaves no doubt,[39] petitioner asks COA to

are the cost of audit services earlier mentioned which cannot include the extra

discontinue its practice of charging auditing fees to LWDs since such practice

emoluments or benefits now claimed by petitioners. The COA is further barred from

allegedly violates the law.

assessing or billing GOCCs and government financial institutions for services


rendered by its personnel as part of their regular audit functions for purposes of

Petitioners claim has no basis.

paying additional compensation to such personnel. x x x. (Emphasis supplied)

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In Tejada, the Court explained the meaning of the word contributions in Section 18

PANGANIBAN, J.:

of RA 6758, which allows COA to charge GOCCs the cost of its audit services:
A partnership may be deemed to exist among parties who agree to borrow money to
x x x the contributions from the GOCCs are limited to the cost of audit services which

pursue a business and to divide the profits or losses that may arise therefrom, even if

are based on the actual cost of the audit function in the corporation concerned plus a

it is shown that they have not contributed any capital of their own to a "common fund."

reasonable rate to cover overhead expenses. The actual audit cost shall include

Their contribution may be in the form of credit or industry, not necessarily cash or

personnel services, maintenance and other operating expenses, depreciation on

fixed assets. Being partner, they are all liable for debts incurred by or on behalf of the

capital and equipment and out-of-pocket expenses. In respect to the allowances and

partnership. The liability for a contract entered into on behalf of an unincorporated

fringe benefits granted by the GOCCs to the COA personnel assigned to the formers

association or ostensible corporation may lie in a person who may not have directly

auditing units, the same shall be directly defrayed by COA from its own appropriations

transacted on its behalf, but reaped benefits from that contract.

x x x. [41]
The Case
COA may charge GOCCs actual audit cost but GOCCs must pay the same directly
to COA and not to COA auditors. Petitioner has not alleged that COA charges LWDs

In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November

auditing fees in excess of COAs actual audit cost. Neither has petitioner alleged that

26, 1998 Decision of the Court of Appeals in CA-GR CV

the auditing fees are paid by LWDs directly to individual COA auditors.

41477, 1 which disposed as follows:

Thus,

petitioners contention must fail.


WHEREFORE, [there being] no reversible error in the appealed decision, the same is
WHEREFORE, the Resolution of the Commission on Audit dated 3 January 2000 and

hereby affirmed. 2

the Decision dated 30 January 2001 denying petitioners Motion for Reconsideration
are AFFIRMED. The second sentence of Section 20 of Presidential Decree No. 198

The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was

is declared VOID for being inconsistent with Sections 2 (1) and 3, Article IX-D of the

affirmed by the CA, reads as follows:

Constitution. No costs.
WHEREFORE, the Court rules:
SO ORDERED.
G.R. No. 136448 November 3, 1999

1.

That plaintiff is entitled to the writ of preliminary attachment issued by this

Court on September 20, 1990;


LIM TONG LIM, petitioner,
vs.

2.

That defendants are jointly liable to plaintiff for the following amounts, subject

PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.

to the modifications as hereinafter made by reason of the special and unique facts
and circumstances and the proceedings that transpired during the trial of this case;

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a.

P532,045.00 representing [the] unpaid purchase price of the fishing nets

of P900,000.00 replaced the attached property as a guaranty for any judgment that

covered by the Agreement plus P68,000.00 representing the unpaid price of the floats

plaintiff may be able to secure in this case with the ownership and possession of the

not covered by said Agreement;

nets and floats awarded and delivered by the sheriff to plaintiff as the highest bidder in
the public auction sale. It has also been noted that ownership of the nets [was]

b.

12% interest per annum counted from date of plaintiff's invoices and

retained by the plaintiff until full payment [was] made as stipulated in the invoices;

computed on their respective amounts as follows:

hence, in effect, the plaintiff attached its own properties. It [was] for this reason also
that this Court earlier ordered the attachment bond filed by plaintiff to guaranty

i.

Accrued interest of P73,221.00 on Invoice No. 14407 for P385,377.80 dated

damages to defendants to be cancelled and for the P900,000.00 cash bidded and

February 9, 1990;

paid for by plaintiff to serve as its bond in favor of defendants.

ii.

From the foregoing, it would appear therefore that whatever judgment the plaintiff may

Accrued interest for P27,904.02 on Invoice No. 14413 for P146,868.00 dated

February 13, 1990;

be entitled to in this case will have to be satisfied from the amount of P900,000.00 as
this amount replaced the attached nets and floats. Considering, however, that the total

iii.

Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00 dated

judgment obligation as computed above would amount to only P840,216.92, it would

February 19, 1990;

be inequitable, unfair and unjust to award the excess to the defendants who are not
entitled to damages and who did not put up a single centavo to raise the amount of

c.

P50,000.00 as and for attorney's fees, plus P8,500.00 representing P500.00

P900,000.00 aside from the fact that they are not the owners of the nets and floats.

per appearance in court;

For this reason, the defendants are hereby relieved from any and all liabilities arising
from the monetary judgment obligation enumerated above and for plaintiff to retain

d.

P65,000.00 representing P5,000.00 monthly rental for storage charges on

possession and ownership of the nets and floats and for the reimbursement of the

the nets counted from September 20, 1990 (date of attachment) to September 12,

P900,000.00 deposited by it with the Clerk of Court.

1991 (date of auction sale);


SO ORDERED. 3
e.

Cost of suit.
The Facts

With respect to the joint liability of defendants for the principal obligation or for the
unpaid price of nets and floats in the amount of P532,045.00 and P68,000.00,

On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao

respectively, or for the total amount P600,045.00, this Court noted that these items

entered into a Contract dated February 7, 1990, for the purchase of fishing nets of

were attached to guarantee any judgment that may be rendered in favor of the plaintiff

various sizes from the Philippine Fishing Gear Industries, Inc. (herein respondent).

but, upon agreement of the parties, and, to avoid further deterioration of the nets

They claimed that they were engaged in a business venture with Petitioner Lim Tong

during the pendency of this case, it was ordered sold at public auction for not less

Lim, who however was not a signatory to the agreement. The total price of the nets

than P900,000.00 for which the plaintiff was the sole and winning bidder. The

amounted to P532,045. Four hundred pieces of floats worth P68,000 were also sold

proceeds of the sale paid for by plaintiff was deposited in court. In effect, the amount

to the Corporation. 4

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The buyers, however, failed to pay for the fishing nets and the floats; hence, private

a)

respondents filed a collection suit against Chua, Yao and Petitioner Lim Tong Lim with

sold in the amount of P5,750,000.00 including the fishing net. This P5,750,000.00

That the parties plaintiffs & Lim Tong Lim agree to have the four (4) vessels

a prayer for a writ of preliminary attachment. The suit was brought against the three in

shall be applied as full payment for P3,250,000.00 in favor of JL Holdings Corporation

their capacities as general partners, on the allegation that "Ocean Quest Fishing

and/or Lim Tong Lim;

Corporation" was a nonexistent corporation as shown by a Certification from the


Securities and Exchange Commission. 5 On September 20, 1990, the lower court

b)

If the four (4) vessel[s] and the fishing net will be sold at a higher price than

issued a Writ of Preliminary Attachment, which the sheriff enforced by attaching the

P5,750,000.00 whatever will be the excess will be divided into 3: 1/3 Lim Tong Lim;

fishing nets on board F/B Lourdes which was then docked at the Fisheries Port,

1/3 Antonio Chua; 1/3 Peter Yao;

Navotas, Metro Manila.


c)

If the proceeds of the sale the vessels will be less than P5,750,000.00

Instead of answering the Complaint, Chua filed a Manifestation admitting his liability

whatever the deficiency shall be shouldered and paid to JL Holding Corporation by

and requesting a reasonable time within which to pay. He also turned over to

1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao. 11

respondent some of the nets which were in his possession. Peter Yao filed an Answer,
after which he was deemed to have waived his right to cross-examine witnesses and

The trial court noted that the Compromise Agreement was silent as to the nature of

to present evidence on his behalf, because of his failure to appear in subsequent

their obligations, but that joint liability could be presumed from the equal distribution of

hearings. Lim Tong Lim, on the other hand, filed an Answer with Counterclaim and

the profit and loss. 21

Crossclaim and moved for the lifting of the Writ of Attachment. 6 The trial court
maintained the Writ, and upon motion of private respondent, ordered the sale of the

Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the

fishing nets at a public auction. Philippine Fishing Gear Industries won the bidding

RTC.

and deposited with the said court the sales proceeds of P900,000. 7
Ruling of the Court of Appeals
On November 18, 1992, the trial court rendered its Decision, ruling that Philippine
Fishing Gear Industries was entitled to the Writ of Attachment and that Chua, Yao and

In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao

Lim, as general partners, were jointly liable to pay respondent. 8

in a fishing business and may thus be held liable as a such for the fishing nets and
floats purchased by and for the use of the partnership. The appellate court ruled:

The trial court ruled that a partnership among Lim, Chua and Yao existed based (1)
on the testimonies of the witnesses presented and (2) on a Compromise Agreement

The evidence establishes that all the defendants including herein appellant Lim Tong

executed by the three 9 in Civil Case No. 1492-MN which Chua and Yao had brought

Lim undertook a partnership for a specific undertaking, that is for commercial

against Lim in the RTC of Malabon, Branch 72, for (a) a declaration of nullity of

fishing . . . . Oviously, the ultimate undertaking of the defendants was to divide the

commercial documents; (b) a reformation of contracts; (c) a declaration of ownership

profits among themselves which is what a partnership essentially is . . . . By a contract

of fishing boats; (d) an injunction and (e) damages. 10 The Compromise Agreement

of partnership, two or more persons bind themselves to contribute money, property or

provided:

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industry to a common fund with the intention of dividing the profits among themselves

Existence of a Partnership

(Article 1767, New Civil Code). 13


and Petitioner's Liability
Hence, petitioner brought this recourse before this Court. 14
In arguing that he should not be held liable for the equipment purchased from
The Issues

respondent, petitioner controverts the CA finding that a partnership existed between


him, Peter Yao and Antonio Chua. He asserts that the CA based its finding on the

In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision

Compromise Agreement alone. Furthermore, he disclaims any direct participation in

on the following grounds:

the purchase of the nets, alleging that the negotiations were conducted by Chua and
Yao only, and that he has not even met the representatives of the respondent

THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A

company. Petitioner further argues that he was a lessor, not a partner, of Chua and

COMPROMISE AGREEMENT THAT CHUA, YAO AND PETITIONER LIM ENTERED

Yao, for the "Contract of Lease " dated February 1, 1990, showed that he had merely

INTO IN A SEPARATE CASE, THAT A PARTNERSHIP AGREEMENT EXISTED

leased to the two the main asset of the purported partnership the fishing boat F/B

AMONG THEM.

Lourdes. The lease was for six months, with a monthly rental of P37,500 plus 25
percent of the gross catch of the boat.

II

SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS

ACTING FOR OCEAN QUEST FISHING CORPORATION WHEN HE BOUGHT THE

We are not persuaded by the arguments of petitioner. The facts as found by the two

NETS

lower courts clearly showed that there existed a partnership among Chua, Yao and

FROM

PHILIPPINE

FISHING,

THE

COURT

OF

APPEALS

WAS

UNJUSTIFIED IN IMPUTING LIABILITY TO PETITIONER LIM AS WELL.

him, pursuant to Article 1767 of the Civil Code which provides:

III

Art. 1767 By the contract of partnership, two or more persons bind themselves to

THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND

ATTACHMENT OF PETITIONER LIM'S GOODS.

contribute money, property, or industry to a common fund, with the intention of


dividing the profits among themselves.

In determining whether petitioner may be held liable for the fishing nets and floats
from respondent, the Court must resolve this key issue: whether by their acts, Lim,

Specifically, both lower courts ruled that a partnership among the three existed based

Chua and Yao could be deemed to have entered into a partnership.

on the following factual findings: 15

This Court's Ruling

(1)

That Petitioner Lim Tong Lim requested Peter Yao who was engaged in

commercial fishing to join him, while Antonio Chua was already Yao's partner;
The Petition is devoid of merit.
(2)
First and Second Issues:

That after convening for a few times, Lim, Chua, and Yao verbally agreed to

acquire two fishing boats, the FB Lourdes and the FB Nelson for the sum of P3.35
million;

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brother. In their Compromise Agreement, they subsequently revealed their intention to


(3)

That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim

pay the loan with the proceeds of the sale of the boats, and to divide equally among

Tong Lim, to finance the venture.

them the excess or loss. These boats, the purchase and the repair of which were
financed with borrowed money, fell under the term "common fund" under Article 1767.

(4)

That they bought the boats from CMF Fishing Corporation, which executed a

The contribution to such fund need not be cash or fixed assets; it could be an

Deed of Sale over these two (2) boats in favor of Petitioner Lim Tong Lim only to serve

intangible like credit or industry. That the parties agreed that any loss or profit from the

as security for the loan extended by Jesus Lim;

sale and operation of the boats would be divided equally among them also shows that
they had indeed formed a partnership.

(5)

That Lim, Chua and Yao agreed that the refurbishing, re-equipping,

repairing, dry docking and other expenses for the boats would be shouldered by Chua

Moreover, it is clear that the partnership extended not only to the purchase of the

and Yao;

boat, but also to that of the nets and the floats. The fishing nets and the floats, both
essential to fishing, were obviously acquired in furtherance of their business. It would

(6)

That because of the "unavailability of funds," Jesus Lim again extended a

have been inconceivable for Lim to involve himself so much in buying the boat but not

loan to the partnership in the amount of P1 million secured by a check, because of

in the acquisition of the aforesaid equipment, without which the business could not

which, Yao and Chua entrusted the ownership papers of two other boats, Chua's FB

have proceeded.

Lady Anne Mel and Yao's FB Tracy to Lim Tong Lim.


Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao,
(7)

That in pursuance of the business agreement, Peter Yao and Antonio Chua

a partnership engaged in the fishing business. They purchased the boats, which

bought nets from Respondent Philippine Fishing Gear, in behalf of "Ocean Quest

constituted the main assets of the partnership, and they agreed that the proceeds

Fishing Corporation," their purported business name.

from the sales and operations thereof would be divided among them.

(8)

That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC,

We stress that under Rule 45, a petition for review like the present case should

Branch 72 by Antonio Chua and Peter Yao against Lim Tong Lim for (a) declaration of

involve only questions of law. Thus, the foregoing factual findings of the RTC and the

nullity of commercial documents; (b) reformation of contracts; (c) declaration of

CA are binding on this Court, absent any cogent proof that the present action is

ownership of fishing boats; (4) injunction; and (e) damages.

embraced by one of the exceptions to the rule. 16 In assailing the factual findings of
the two lower courts, petitioner effectively goes beyond the bounds of a petition for

(9)

That the case was amicably settled through a Compromise Agreement

review under Rule 45.

executed between the parties-litigants the terms of which are already enumerated
above.

Compromise Agreement

From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had

Not the Sole Basis of Partnership

decided to engage in a fishing business, which they started by buying boats worth
P3.35 million, financed by a loan secured from Jesus Lim who was petitioner's

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Petitioner argues that the appellate court's sole basis for assuming the existence of a

of the boats, as well as the division among the three of the balance remaining after

partnership was the Compromise Agreement. He also claims that the settlement was

the payment of their loans, proves beyond cavil that F/B Lourdes, though registered in

entered into only to end the dispute among them, but not to adjudicate their

his name, was not his own property but an asset of the partnership. It is not

preexisting rights and obligations. His arguments are baseless. The Agreement was

uncommon to register the properties acquired from a loan in the name of the person

but an embodiment of the relationship extant among the parties prior to its execution.

the lender trusts, who in this case is the petitioner himself. After all, he is the brother

A proper adjudication of claimants' rights mandates that courts must review and

of the creditor, Jesus Lim.

thoroughly appraise all relevant facts. Both lower courts have done so and have
found, correctly, a preexisting partnership among the parties. In implying that the

We stress that it is unreasonable indeed, it is absurd for petitioner to sell his

lower courts have decided on the basis of one piece of document alone, petitioner

property to pay a debt he did not incur, if the relationship among the three of them

fails to appreciate that the CA and the RTC delved into the history of the document

was merely that of lessor-lessee, instead of partners.

and explored all the possible consequential combinations in harmony with law, logic
and fairness. Verily, the two lower courts' factual findings mentioned above nullified

Corporation by Estoppel

petitioner's argument that the existence of a partnership was based only on the
Compromise Agreement.

Petitioner argues that under the doctrine of corporation by estoppel, liability can be
imputed only to Chua and Yao, and not to him. Again, we disagree.

Petitioner Was a Partner,


Sec. 21 of the Corporation Code of the Philippines provides:
Not a Lessor
Sec. 21. Corporation by estoppel. All persons who assume to act as a corporation
We are not convinced by petitioner's argument that he was merely the lessor of the

knowing it to be without authority to do so shall be liable as general partners for all

boats to Chua and Yao, not a partner in the fishing venture. His argument allegedly

debts, liabilities and damages incurred or arising as a result thereof: Provided

finds support in the Contract of Lease and the registration papers showing that he

however, That when any such ostensible corporation is sued on any transaction

was the owner of the boats, including F/B Lourdes where the nets were found.

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.

His allegation defies logic. In effect, he would like this Court to believe that he
consented to the sale of his own boats to pay a debt of Chua and Yao, with the excess

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

of the proceeds to be divided among the three of them. No lessor would do what

performance thereof on the ground that there was in fact no corporation.

petitioner did. Indeed, his consent to the sale proved that there was a preexisting
partnership among all three.

Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a


party may be estopped from denying its corporate existence. "The reason behind this

Verily, as found by the lower courts, petitioner entered into a business agreement with

doctrine is obvious an unincorporated association has no personality and would be

Chua and Yao, in which debts were undertaken in order to finance the acquisition and

incompetent to act and appropriate for itself the power and attributes of a corporation

the upgrading of the vessels which would be used in their fishing business. The sale

as provided by law; it cannot create agents or confer authority on another to act in its

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behalf; thus, those who act or purport to act as its representatives or agents do so
without authority and at their own risk. And as it is an elementary principle of law that

It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to

a person who acts as an agent without authority or without a principal is himself

form a corporation. Although it was never legally formed for unknown reasons, this

regarded as the principal, possessed of all the right and subject to all the liabilities of

fact alone does not preclude the liabilities of the three as contracting parties in

a principal, a person acting or purporting to act on behalf of a corporation which has

representation of it. Clearly, under the law on estoppel, those acting on behalf of a

no valid existence assumes such privileges and obligations and becomes personally

corporation and those benefited by it, knowing it to be without valid existence, are held

liable for contracts entered into or for other acts performed as such agent. 17

liable as general partners.

The doctrine of corporation by estoppel may apply to the alleged corporation and to a

Technically, it is true that petitioner did not directly act on behalf of the corporation.

third party. In the first instance, an unincorporated association, which represented

However, having reaped the benefits of the contract entered into by persons with

itself to be a corporation, will be estopped from denying its corporate capacity in a suit

whom he previously had an existing relationship, he is deemed to be part of said

against it by a third person who relied in good faith on such representation. It cannot

association and is covered by the scope of the doctrine of corporation by estoppel.

allege lack of personality to be sued to evade its responsibility for a contract it entered

We reiterate the ruling of the Court in Alonso v. Villamor: 19

into and by virtue of which it received advantages and benefits.


A litigation is not a game of technicalities in which one, more deeply schooled and
On the other hand, a third party who, knowing an association to be unincorporated,

skilled in the subtle art of movement and position, entraps and destroys the other. It is,

nonetheless treated it as a corporation and received benefits from it, may be barred

rather, a contest in which each contending party fully and fairly lays before the court

from denying its corporate existence in a suit brought against the alleged corporation.

the facts in issue and then, brushing aside as wholly trivial and indecisive all

In such case, all those who benefited from the transaction made by the ostensible

imperfections of form and technicalities of procedure, asks that justice be done upon

corporation, despite knowledge of its legal defects, may be held liable for contracts

the merits. Lawsuits, unlike duels, are not to be won by a rapier's thrust. Technicality,

they impliedly assented to or took advantage of.

when it deserts its proper office as an aid to justice and becomes its great hindrance
and chief enemy, deserves scant consideration from courts. There should be no

There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled

vested rights in technicalities.

to be paid for the nets it sold. The only question here is whether petitioner should be
held jointly 18 liable with Chua and Yao. Petitioner contests such liability, insisting that

Third Issue:

only those who dealt in the name of the ostensible corporation should be held liable.
Since his name does not appear on any of the contracts and since he never directly

Validity of Attachment

transacted with the respondent corporation, ergo, he cannot be held liable.


Finally, petitioner claims that the Writ of Attachment was improperly issued against the
Unquestionably, petitioner benefited from the use of the nets found inside F/B

nets. We agree with the Court of Appeals that this issue is now moot and academic.

Lourdes, the boat which has earlier been proven to be an asset of the partnership. He

As previously discussed, F/B Lourdes was an asset of the partnership and that it was

in fact questions the attachment of the nets, because the Writ has effectively stopped

placed in the name of petitioner, only to assure payment of the debt he and his

his use of the fishing vessel.

partners owed. The nets and the floats were specifically manufactured and tailor-

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made according to their own design, and were bought and used in the fishing venture

Smith, Bell & Co., (Ltd.), is a corporation organized and existing under the laws of the

they agreed upon. Hence, the issuance of the Writ to assure the payment of the price

Philippine Islands. A majority of its stockholders are British subjects. It is the owner of

stipulated in the invoices is proper. Besides, by specific agreement, ownership of the

a motor vessel known as the Bato built for it in the Philippine Islands in 1916, of more

nets remained with Respondent Philippine Fishing Gear, until full payment thereof.

than fifteen tons gross The Bato was brought to Cebu in the present year for the
purpose of transporting plaintiff's merchandise between ports in the Islands.

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs

Application was made at Cebu, the home port of the vessel, to the Collector of

against petitioner.

Customs for a certificate of Philippine registry. The Collector refused to issue the
certificate, giving as his reason that all the stockholders of Smith, Bell & Co., Ltd.,

SO ORDERED.
G.R. No. 15574

were not citizens either of the United States or of the Philippine Islands. The instant
action is the result.

September 17, 1919

SMITH, BELL & COMPANY (LTD.), petitioner vs. JOAQUIN NATIVIDAD, Collector
of Customs of the port of Cebu, respondent.

LAW.

Ross and Lawrence for petitioner.

The Act of Congress of April 29, 1908, repealing the Shipping Act of April 30, 1906
but reenacting a portion of section 3 of this Law, and still in force, provides in its

Attorney-General Paredes for respondent.

section 1:

MALCOLM, J.:

That until Congress shall have authorized the registry as vessels of the United States
of vessels owned in the Philippine Islands, the Government of the Philippine Islands is

A writ of mandamus is prayed for by Smith, Bell & Co. (Ltd.), against Joaquin

hereby authorized to adopt, from time to time, and enforce regulations governing the

Natividad, Collector of Customs of the port of Cebu, Philippine Islands, to compel him

transportation of merchandise and passengers between ports or places in the

to issue a certificate of Philippine registry to the petitioner for its motor vessel Bato.

Philippine Archipelago. (35 Stat. at L., 70; Section 3912, U. S. Comp Stat. [1916]; 7

The Attorney-General, acting as counsel for respondent, demurs to the petition on the

Pub. Laws, 364.)

general ground that it does not state facts sufficient to constitute a cause of action.
While the facts are thus admitted, and while, moreover, the pertinent provisions of law

The Act of Congress of August 29, 1916, commonly known as the Jones Law, still in

are clear and understandable, and interpretative American jurisprudence is found in

force, provides in section 3, (first paragraph, first sentence), 6, 7, 8, 10, and 31, as

abundance, yet the issue submitted is not lightly to be resolved. The question, flatly

follows.

presented, is, whether Act. No. 2761 of the Philippine Legislature is valid or, more
directly stated, whether the Government of the Philippine Islands, through its

SEC. 3. That no law shall be enacted in said Islands which shall deprive any person

Legislature, can deny the registry of vessels in its coastwise trade to corporations

of life, liberty, or property without due process of law, or deny to any person therein

having alien stockholders.

the equal protection of the laws. . . .

FACTS:

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SEC. 6. That the laws now in force in the Philippines shall continue in force and

On February 23, 1918, the Philippine Legislature enacted Act No. 2761. The first

effect, except as altered, amended, or modified herein, until altered, amended, or

section of this law amended section 1172 of the Administrative Code to read as

repealed by the legislative authority herein provided or by Act of Congress of the

follows:

United States.
SEC. 1172.

Certificate of Philippine register. Upon registration of a vessel of

SEC. 7. That the legislative authority herein provided shall have power, when not

domestic ownership, and of more than fifteen tons gross, a certificate of Philippine

inconsistent with this Act, by due enactment to amend, alter modify, or repeal any law,

register shall be issued for it. If the vessel is of domestic ownership and of fifteen tons

civil or criminal, continued in force by this Act as it may from time to time see fit

gross or less, the taking of the certificate of Philippine register shall be optional with
the owner.

This power shall specifically extend with the limitation herein provided as to the tariff
to all laws relating to revenue provided as to the tariff to all laws relating to revenue

"Domestic ownership," as used in this section, means ownership vested in some one

and taxation in effect in the Philippines.

or more of the following classes of persons: (a) Citizens or native inhabitants of the
Philippine Islands; (b) citizens of the United States residing in the Philippine Islands;

SEC. 8. That general legislative power, except as otherwise herein provided, is

(c) any corporation or company composed wholly of citizens of the Philippine Islands

hereby granted to the Philippine Legislature, authorized by this Act.

or of the United States or of both, created under the laws of the United States, or of
any State thereof, or of thereof, or the managing agent or master of the vessel resides

SEC. 10.

That while this Act provides that the Philippine government shall

in the Philippine Islands

have the authority to enact a tariff law the trade relations between the islands and the
United States shall continue to be governed exclusively by laws of the Congress of the

Any vessel of more than fifteen gross tons which on February eighth, nineteen

United States: Provided, That tariff acts or acts amendatory to the tariff of the

hundred and eighteen, had a certificate of Philippine register under existing law, shall

Philippine Islands shall not become law until they shall receive the approval of the

likewise be deemed a vessel of domestic ownership so long as there shall not be any

President of the United States, nor shall any act of the Philippine Legislature affecting

change in the ownership thereof nor any transfer of stock of the companies or

immigration or the currency or coinage laws of the Philippines become a law until it

corporations owning such vessel to person not included under the last preceding

has been approved by the President of the United States: Provided further, That the

paragraph.

President shall approve or disapprove any act mentioned in the foregoing proviso
within six months from and after its enactment and submission for his approval, and if

Sections 2 and 3 of Act No. 2761 amended sections 1176 and 1202 of the

not disapproved within such time it shall become a law the same as if it had been

Administrative Code to read as follows:

specifically approved.
SEC. 1176. Investigation into character of vessel. No application for a certificate of
SEC. 31.

That all laws or parts of laws applicable to the Philippines not in

Philippine register shall be approved until the collector of customs is satisfied from an

conflict with any of the provisions of this Act are hereby continued in force and effect."

inspection of the vessel that it is engaged or destined to be engaged in legitimate

(39 Stat at L., 546.)

trade and that it is of domestic ownership as such ownership is defined in section


eleven hundred and seventy-two of this Code.

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While the Act of the local legislature may in a way be inconsistent with the Act of
The collector of customs may at any time inspect a vessel or examine its owner,

Congress regulating the coasting trade of the Continental United States, yet the

master, crew, or passengers in order to ascertain whether the vessel is engaged in

general rule that only such laws of the United States have force in the Philippines as

legitimate trade and is entitled to have or retain the certificate of Philippine register.

are expressly extended thereto, and the abnegation of power by Congress in favor of
the Philippine Islands would leave no starting point for convincing argument. As a

SEC. 1202. Limiting number of foreign officers and engineers on board vessels. No

matter of fact, counsel for petitioner does not assail legislative action from this

Philippine vessel operating in the coastwise trade or on the high seas shall be

direction (See U. S. vs. Bull [1910], 15 Phil., 7; Sinnot vs. Davenport [1859] 22 How.,

permitted to have on board more than one master or one mate and one engineer who

227.)

are not citizens of the United States or of the Philippine Islands, even if they hold
licenses under section one thousand one hundred and ninety-nine hereof. No other

2.

It is from the negative, prohibitory standpoint that counsel argues against the

person who is not a citizen of the United States or of the Philippine Islands shall be an

constitutionality of Act No. 2761. The first paragraph of the Philippine Bill of Rights of

officer or a member of the crew of such vessel. Any such vessel which fails to comply

the Philippine Bill, repeated again in the first paragraph of the Philippine Bill of Rights

with the terms of this section shall be required to pay an additional tonnage tax of fifty

as set forth in the Jones Law, provides "That no law shall be enacted in said Islands

centavos per net ton per month during the continuance of said failure.

which shall deprive any person of life, liberty, or property without due process of law,
or deny to any person therein the equal protection of the laws." Counsel says that Act

ISSUES.

No. 2761 denies to Smith, Bell & Co., Ltd., the equal protection of the laws because it,
in effect, prohibits the corporation from owning vessels, and because classification of

Predicated on these facts and provisions of law, the issues as above stated recur,

corporations based on the citizenship of one or more of their stockholders is

namely, whether Act No 2761 of the Philippine Legislature is valid in whole or in part

capricious, and that Act No. 2761 deprives the corporation of its properly without due

whether the Government of the Philippine Islands, through its Legislature, can

process of law because by the passage of the law company was automatically

deny the registry of vessel in its coastwise trade to corporations having alien

deprived of every beneficial attribute of ownership in the Bato and left with the naked

stockholders .

title to a boat it could not use .

OPINION.

The guaranties extended by the Congress of the United States to the Philippine
Islands have been used in the same sense as like provisions found in the United

1.

Considered from a positive standpoint, there can exist no measure of doubt

States Constitution. While the "due process of law and equal protection of the laws"

as to the power of the Philippine Legislature to enact Act No. 2761. The Act of

clause of the Philippine Bill of Rights is couched in slightly different words than the

Congress of April 29, 1908, with its specific delegation of authority to the Government

corresponding clause of the Fourteenth Amendment to the United States Constitution,

of the Philippine Islands to regulate the transportation of merchandise and

the first should be interpreted and given the same force and effect as the latter.

passengers between ports or places therein, the liberal construction given to the

(Kepner vs. U.S. [1904], 195 U. S., 100; Sierra vs. Mortiga [1907], 204 U. S.,.470; U.

provisions of the Philippine Bill, the Act of Congress of July 1, 1902, by the courts,

S. vs. Bull [1910], 15 Phil., 7.) The meaning of the Fourteenth Amendment has been

and the grant by the Act of Congress of August 29, 1916, of general legislative power

announced in classic decisions of the United States Supreme Court. Even at the

to the Philippine Legislature, are certainly superabundant authority for such a law.

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expense of restating what is so well known, these basic principles must again be set

vs. Commonwealth of Pennsylvania [1914], 232 U. S. , 138, prohibiting the killing of

down in order to serve as the basis of this decision.

any wild bird or animal by any unnaturalized foreign-born resident; Ex parte Gilleti
[1915], 70 Fla., 442, discriminating in favor of citizens with reference to the taking for

The guaranties of the Fourteenth Amendment and so of the first paragraph of the

private use of the common property in fish and oysters found in the public waters of

Philippine Bill of Rights, are universal in their application to all person within the

the State; Heim vs. McCall [1915], 239 U. S.,.175, and Crane vs. New York [1915],

territorial jurisdiction, without regard to any differences of race, color, or nationality.

239 U. S., 195, limiting employment on public works by, or for, the State or a

The word "person" includes aliens. (Yick Wo vs. Hopkins [1886], 118 U. S., 356; Truax

municipality to citizens of the United States.)

vs. Raich [1915], 239 U. S., 33.) Private corporations, likewise, are "persons" within
the scope of the guaranties in so far as their property is concerned. (Santa Clara

One of the exceptions to the general rule, most persistent and far reaching in

County vs. Southern Pac. R. R. Co. [1886], 118.U. S., 394; Pembina Mining Co. vs.

influence is, that neither the Fourteenth Amendment to the United States Constitution,

Pennsylvania [1888],.125 U. S., 181 Covington & L. Turnpike Road Co. vs. Sandford

broad and comprehensive as it is, nor any other amendment, "was designed to

[1896], 164 U. S., 578.) Classification with the end in view of providing diversity of

interfere with the power of the State, sometimes termed its `police power,' to prescribe

treatment may be made among corporations, but must be based upon some

regulations to promote the health, peace, morals, education, and good order of the

reasonable ground and not be a mere arbitrary selection (Gulf, Colorado & Santa Fe

people, and legislate so as to increase the industries of the State, develop its

Railway Co. vs. Ellis [1897],.165 U. S., 150.) Examples of laws held unconstitutional

resources and add to its wealth and prosperity. From the very necessities of society,

because of unlawful discrimination against aliens could be cited. Generally, these

legislation of a special character, having these objects in view, must often be had in

decisions relate to statutes which had attempted arbitrarily to forbid aliens to engage

certain districts." (Barbier vs. Connolly [1884], 113 U.S., 27; New Orleans Gas Co. vs.

in ordinary kinds of business to earn their living. (State vs. Montgomery [1900], 94

Lousiana Light Co. [1885], 115 U.S., 650.) This is the same police power which the

Maine, 192, peddling but see. Commonwealth vs. Hana [1907], 195 Mass., 262;

United States Supreme Court say "extends to so dealing with the conditions which

Templar vs. Board of Examiners of Barbers [1902], 131 Mich., 254, barbers; Yick Wo

exist in the state as to bring out of them the greatest welfare in of its people." (Bacon

vs. Hopkins [1886], 118 U. S.,.356, discrimination against Chinese; Truax vs. Raich

vs. Walker [1907], 204 U.S., 311.) For quite similar reasons, none of the provision of

[1915], 239 U. S., 33; In re Parrott [1880], 1 Fed , 481; Fraser vs. McConway & Torley

the Philippine Organic Law could could have had the effect of denying to the

Co. [1897], 82 Fed , 257; Juniata Limestone Co. vs. Fagley [1898], 187 Penn., 193, all

Government of the Philippine Islands, acting through its Legislature, the right to

relating to the employment of aliens by private corporations.)

exercise that most essential, insistent, and illimitable of powers, the sovereign police
power, in the promotion of the general welfare and the public interest. (U. S. vs.

A literal application of general principles to the facts before us would, of course, cause

Toribio [1910], 15 Phil., 85; Churchill and Tait vs. Rafferty [1915], 32 Phil., 580; Rubi

the inevitable deduction that Act No. 2761 is unconstitutional by reason of its denial to

vs. Provincial Board of Mindoro [1919], 39 Phil., 660.) Another notable exception

a corporation, some of whole members are foreigners, of the equal protection of the

permits of the regulation or distribution of the public domain or the common property

laws. Like all beneficient propositions, deeper research discloses provisos. Examples

or resources of the people of the State, so that use may be limited to its citizens. (Ex

of a denial of rights to aliens notwithstanding the provisions of the Fourteenth

parte Gilleti [1915], 70 Fla., 442; McCready vs. Virginia [1876], 94 U. S., 391; Patsone

Amendment could be cited. (Tragesser vs. Gray [1890], 73 Md., 250, licenses to sell

vs. Commonwealth of Pennsylvania [1914], 232U. S., 138.) Still another exception

spirituous liquors denied to persons not citizens of the United States; Commonwealth

permits of the limitation of employment in the construction of public works by, or for,

vs. Hana [1907], 195 Mass , 262, excluding aliens from the right to peddle; Patsone

the State or a municipality to citizens of the United States or of the State. (Atkin vs.

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Kansas [1903],191 U. S., 207; Heim vs. McCall [1915], 239 U.S., 175; Crane vs. New

to public use. (Book II, Tit. IV, Ch. I, Civil Code; Spanish Law of Waters of August 3,

York [1915], 239 U. S., 195.) Even as to classification, it is admitted that a State may

1866, arts 1, 2, 3.) Common carriers which in the Philippines as in the United States

classify with reference to the evil to be prevented; the question is a practical one,

and other countries are, as Lord Hale said, "affected with a public interest," can only

dependent upon experience. (Patsone vs. Commonwealth of Pennsylvania [1914],

be permitted to use these public waters as a privilege and under such conditions as to

232 U. S., 138.)

the representatives of the people may seem wise. (See De Villata vs. Stanley [1915],
32 Phil., 541.)

To justify that portion of Act no. 2761 which permits corporations or companies to
obtain a certificate of Philippine registry only on condition that they be composed

In Patsone vs. Commonwealth of Pennsylvania ([1913], 232 U.S., 138), a case herein

wholly of citizens of the Philippine Islands or of the United States or both, as not

before mentioned, Justice Holmes delivering the opinion of the United States

infringing Philippine Organic Law, it must be done under some one of the exceptions

Supreme Court said:

here mentioned This must be done, moreover, having particularly in mind what is so
often of controlling effect in this jurisdiction our local experience and our peculiar

This statute makes it unlawful for any unnaturalized foreign-born resident to kill any

local conditions.

wild bird or animal except in defense of person or property, and `to that end' makes it
unlawful for such foreign-born person to own or be possessed of a shotgun or rifle;

To recall a few facts in geography, within the confines of Philippine jurisdictional limits

with a penalty of $25 and a forfeiture of the gun or guns. The plaintiff in error was

are found more than three thousand islands. Literally, and absolutely, steamship lines

found guilty and was sentenced to pay the abovementioned fine. The judgment was

are, for an Insular territory thus situated, the arteries of commerce. If one be severed,

affirmed on successive appeals. (231 Pa., 46; 79 Atl., 928.) He brings the case to this

the life-blood of the nation is lost. If on the other hand these arteries are protected,

court on the ground that the statute is contrary to the 14th Amendment and also is in

then the security of the country and the promotion of the general welfare is sustained.

contravention of the treaty between the United States and Italy, to which latter country

Time and again, with such conditions confronting it, has the executive branch of the

the plaintiff in error belongs .

Government of the Philippine Islands, always later with the sanction of the judicial
branch, taken a firm stand with reference to the presence of undesirable foreigners.

Under the 14th Amendment the objection is twofold; unjustifiably depriving the alien of

The Government has thus assumed to act for the all-sufficient and primitive reason of

property, and discrimination against such aliens as a class. But the former really

the benefit and protection of its own citizens and of the self-preservation and integrity

depends upon the latter, since it hardly can be disputed that if the lawful object, the

of its dominion. (In re Patterson [1902], 1 Phil., 93; Forbes vs. Chuoco, Tiaco and

protection of wild life (Geer vs. Connecticut, 161 U.S., 519; 40 L. ed., 793; 16 Sup. Ct.

Crossfield [1910], 16 Phil., 534;.228 U.S., 549; In re McCulloch Dick [1918], 38 Phil.,

Rep., 600), warrants the discrimination, the, means adopted for making it effective

41.) Boats owned by foreigners, particularly by such solid and reputable firms as the

also might be adopted. . . .

instant claimant, might indeed traverse the waters of the Philippines for ages without
doing any particular harm. Again, some evilminded foreigner might very easily take

The discrimination undoubtedly presents a more difficult question. But we start with

advantage of such lavish hospitality to chart Philippine waters, to obtain valuable

reference to the evil to be prevented, and that if the class discriminated against is or

information for unfriendly foreign powers, to stir up insurrection, or to prejudice Filipino

reasonably might be considered to define those from whom the evil mainly is to be

or American commerce. Moreover, under the Spanish portion of Philippine law, the

feared, it properly may be picked out. A lack of abstract symmetry does not matter.

waters within the domestic jurisdiction are deemed part of the national domain, open

The question is a practical one, dependent upon experience. . . .

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3.

The power to regulate commerce, expressly delegated to the Congress by

The question therefore narrows itself to whether this court can say that the legislature

the Constitution, includes the power to nationalize ships built and owned in the United

of Pennsylvania was not warranted in assuming as its premise for the law that

States by registries and enrollments, and the recording of the muniments of title of

resident unnaturalized aliens were the peculiar source of the evil that it desired to

American vessels. The Congress "may encourage or it may entirely prohibit such

prevent. (Barrett vs. Indiana,. 229 U.S., 26, 29; 57 L. ed., 1050, 1052; 33 Sup. Ct.

commerce, and it may regulate in any way it may see fit between these two

Rep., 692.)

extremes." (U.S. vs. Craig [1886], 28 Fed., 795; Gibbons vs. Ogden [1824], 9 Wheat.,
1; The Passenger Cases [1849], 7 How., 283.)

Obviously the question, so stated, is one of local experience, on which this court
ought to be very slow to declare that the state legislature was wrong in its facts

Acting within the purview of such power, the first Congress of the United States had

(Adams vs. Milwaukee, 228 U.S., 572, 583; 57 L. ed., 971,.977; 33 Sup. Ct. Rep.,

not been long convened before it enacted on September 1, 1789, "An Act for

610.) If we might trust popular speech in some states it was right; but it is enough that

Registering and Clearing Vessels, Regulating the Coasting Trade, and for other

this court has no such knowledge of local conditions as to be able to say that it was

purposes." Section 1 of this law provided that for any ship or vessel to obtain the

manifestly wrong. . . .

benefits of American registry, it must belong wholly to a citizen or citizens of the


United States "and no other." (1 Stat. at L., 55.) That Act was shortly after repealed,

Judgment affirmed.

but the same idea was carried into the Acts of Congress of December 31, 1792 and
February 18, 1793. (1 Stat. at L., 287, 305.).Section 4 of the Act of 1792 provided that

We are inclined to the view that while Smith, Bell & Co. Ltd., a corporation having

in order to obtain the registry of any vessel, an oath shall be taken and subscribed by

alien stockholders, is entitled to the protection afforded by the due-process of law and

the owner, or by one of the owners thereof, before the officer authorized to make such

equal protection of the laws clause of the Philippine Bill of Rights, nevertheless, Act

registry, declaring, "that there is no subject or citizen of any foreign prince or state,

No. 2761 of the Philippine Legislature, in denying to corporations such as Smith, Bell

directly or indirectly, by way of trust, confidence, or otherwise, interested in such

&. Co. Ltd., the right to register vessels in the Philippines coastwise trade, does not

vessel, or in the profits or issues thereof." Section 32 of the Act of 1793 even went so

belong to that vicious species of class legislation which must always be condemned,

far as to say "that if any licensed ship or vessel shall be transferred to any person who

but does fall within authorized exceptions, notably, within the purview of the police

is not at the time of such transfer a citizen of and resident within the United States, ...

power, and so does not offend against the constitutional provision.

every such vessel with her tackle, apparel, and furniture, and the cargo found on
board her, shall be forefeited." In case of alienation to a foreigner, Chief Justice

This opinion might well be brought to a close at this point. It occurs to us, however,

Marshall said that all the privileges of an American bottom were ipso facto forfeited.

that the legislative history of the United States and the Philippine Islands, and,

(U.S. vs. Willings and Francis [1807], 4 Cranch, 48.) Even as late as 1873, the

probably, the legislative history of other countries, if we were to take the time to

Attorney-General of the United States was of the opinion that under the provisions of

search it out, might disclose similar attempts at restriction on the right to enter the

the Act of December 31, 1792, no vessel in which a foreigner is directly or indirectly

coastwise trade, and might thus furnish valuable aid by which to ascertain and, if

interested can lawfully be registered as a vessel of the United. States. (14 Op. Atty.-

possible, effectuate legislative intention.

Gen. [U.S.], 340.)

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These laws continued in force without contest, although possibly the Act of March 3,

Without any subterfuge, the apparent purpose of the Philippine Legislature is seen to

1825, may have affected them, until amended by the Act of May 28, 1896 (29 Stat. at

be to enact an anti-alien shipping act. The ultimate purpose of the Legislature is to

L., 188) which extended the privileges of registry from vessels wholly owned by a

encourage Philippine ship-building. This, without doubt, has, likewise, been the

citizen or citizens of the United States to corporations created under the laws of any of

intention of the United States Congress in passing navigation or tariff laws on different

the states thereof. The law, as amended, made possible the deduction that a vessel

occasions. The object of such a law, the United States Supreme Court once said, was

belonging to a domestic corporation was entitled to registry or enrollment even though

to encourage American trade, navigation, and ship-building by giving American ship-

some stock of the company be owned by aliens. The right of ownership of stock in a

owners exclusive privileges. (Old Dominion Steamship Co. vs. Virginia [1905], 198

corporation was thereafter distinct from the right to hold the property by the

U.S., 299; Kent's Commentaries, Vol. 3, p. 139.)

corporation (Humphreys vs. McKissock [1890], 140 U.S., 304; Queen vs. Arnaud
[1846], 9 Q. B., 806; 29 Op. Atty.-Gen. [U.S.],188.)

In the concurring opinion of Justice Johnson in Gibbons vs. Ogden ([1824], 9 Wheat.,
1) is found the following:

On American occupation of the Philippines, the new government found a substantive


law in operation in the Islands with a civil law history which it wisely continued in force

Licensing acts, in fact, in legislation, are universally restraining acts; as, for example,

Article fifteen of the Spanish Code of Commerce permitted any foreigner to engage in

acts licensing gaming houses, retailers of spirituous liquors, etc. The act, in this

Philippine trade if he had legal capacity to do so under the laws of his nation. When

instance, is distinctly of that character, and forms part of an extensive system, the

the Philippine Commission came to enact the Customs Administrative Act (No. 355) in

object of which is to encourage American shipping, and place them on an equal

1902, it returned to the old American policy of limiting the protection and flag of the

footing with the shipping of other nations. Almost every commercial nation reserves to

United States to vessels owned by citizens of the United States or by native

its own subjects a monopoly of its coasting trade; and a countervailing privilege in

inhabitants of the Philippine Islands (Sec. 117.) Two years later, the same body

favor of American shipping is contemplated, in the whole legislation of the United

reverted to the existing Congressional law by permitting certification to be issued to a

States on this subject. It is not to give the vessel an American character, that the

citizen of the United States or to a corporation or company created under the laws of

license is granted; that effect has been correctly attributed to the act of her enrollment.

the United States or of any state thereof or of the Philippine Islands (Act No. 1235,

But it is to confer on her American privileges, as contradistinguished from foreign; and

sec. 3.) The two administration codes repeated the same provisions with the

to preserve the. Government from fraud by foreigners, in surreptitiously intruding

necessary amplification of inclusion of citizens or native inhabitants of the Philippine

themselves into the American commercial marine, as well as frauds upon the revenue

Islands (Adm. Code of 1916, sec. 1345; Adm. Code of 1917, sec. 1172). And now Act

in the trade coastwise, that this whole system is projected.

No. 2761 has returned to the restrictive idea of the original Customs Administrative
Act which in turn was merely a reflection of the statutory language of the first

The United States Congress in assuming its grave responsibility of legislating wisely

American Congress.

for a new country did so imbued with a spirit of Americanism. Domestic navigation
and trade, it decreed, could only be carried on by citizens of the United States. If the

Provisions such as those in Act No. 2761, which deny to foreigners the right to a

representatives of the American people acted in this patriotic manner to advance the

certificate of Philippine registry, are thus found not to be as radical as a first reading

national policy, and if their action was accepted without protest in the courts, who can

would make them appear.

say that they did not enact such beneficial laws under the all-pervading police power,
with the prime motive of safeguarding the country and of promoting its prosperity?

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Quite similarly, the Philippine Legislature made up entirely of Filipinos, representing


the mandate of the Filipino people and the guardian of their rights, acting under
practically autonomous powers, and imbued with a strong sense of Philippinism, has

G.R. No. 75885

May 27, 1987

desired for these Islands safety from foreign interlopers, the use of the common
property exclusively by its citizens and the citizens of the United States, and

BATAAN SHIPYARD & ENGINEERING CO., INC. (BASECO), petitioner

protection for the common good of the people. Who can say, therefore, especially can

PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, CHAIRMAN JOVITO

a court, that with all the facts and circumstances affecting the Filipino people before it,

SALONGA, COMMISSIONER MARY CONCEPCION BAUTISTA, COMMISSIONER

the Philippine Legislature has erred in the enactment of Act No. 2761?

RAMON DIAZ, COMMISSIONER RAUL R. DAZA, COMMISSIONER QUINTIN S.

vs.

DOROMAL, CAPT. JORGE B. SIACUNCO, et al., respondents.


Surely, the members of the judiciary are not expected to live apart from active life, in
monastic seclusion amidst dusty tomes and ancient records, but, as keen spectators

Apostol, Bernas, Gumaru, Ona and Associates for petitioner.

of passing events and alive to the dictates of the general the national welfare,
can incline the scales of their decisions in favor of that solution which will most

Vicente G. Sison for intervenor A.T. Abesamis.

effectively promote the public policy. All the presumption is in favor of the

NARVASA, J.:

constitutionally of the law and without good and strong reasons, courts should not
attempt to nullify the action of the Legislature. "In construing a statute enacted by the

Challenged in this special civil action of certiorari and prohibition by a private

Philippine Commission (Legislature), we deem it our duty not to give it a construction

corporation known as the Bataan Shipyard and Engineering Co., Inc. are: (1)

which would be repugnant to an Act of Congress, if the language of the statute is fairly

Executive Orders Numbered 1 and 2, promulgated by President Corazon C. Aquino

susceptible of another construction not in conflict with the higher law." (In re Guaria

on February 28, 1986 and March 12, 1986, respectively, and (2) the sequestration,

[1913], 24. Phil., 36; U.S. vs. Ten Yu [1912], 24 Phil., 1.) That is the true construction

takeover, and other orders issued, and acts done, in accordance with said executive

which will best carry legislative intention into effect.

orders

by

the

Presidential

Commission

on

Good

Government

and/or

its

Commissioners and agents, affecting said corporation.

With full consciousness of the importance of the question, we nevertheless are clearly
of the opinion that the limitation of domestic ownership for purposes of obtaining a
certificate of Philippine registry in the coastwise trade to citizens of the Philippine
Islands, and to citizens of the United States, does not violate the provisions of
paragraph 1 of section 3 of the Act of Congress of August 29, 1916 No treaty right
relied upon Act No. 2761 of the Philippine Legislature is held valid and constitutional .

1.

The Sequestration, Takeover, and Other Orders Complained of

a.

The Basic Sequestration Order

The sequestration order which, in the view of the petitioner corporation, initiated all its

The petition for a writ of mandamus is denied, with costs against the petitioner. So

misery was issued on April 14, 1986 by Commissioner Mary Concepcion Bautista. It

ordered.

was addressed to three of the agents of the Commission, hereafter simply referred to
as PCGG. It reads as follows:
RE: SEQUESTRATION ORDER

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By virtue of the powers vested in the Presidential Commission on Good Government,

On the strength of the above sequestration order, Mr. Jose M. Balde, acting for the

by authority of the President of the Philippines, you are hereby directed to sequester

PCGG, addressed a letter dated April 18, 1986 to the President and other officers of

the following companies.

petitioner firm, reiterating an earlier request for the production of certain documents,
to wit:

1.
Bataan Shipyard and Engineering Co., Inc.
(Engineering Island Shipyard and Mariveles Shipyard)
2.
Baseco Quarry
3.
Philippine Jai-Alai Corporation
4.
Fidelity Management Co., Inc.
5.
Romson Realty, Inc.
6.
Trident Management Co.
7.
New Trident Management
8.
Bay Transport

1. Stock Transfer Book


2. Legal documents, such as:
2.1. Articles of Incorporation
2.2. By-Laws
2.3. Minutes of the Annual Stockholders Meeting from 1973 to 1986

9.

And all affiliate companies of Alfredo "Bejo" Romualdez


2.4. Minutes of the Regular and Special Meetings of the Board of Directors from 1973

You are hereby ordered:

to 1986

1. To implement this sequestration order with a minimum disruption of these

2.5. Minutes of the Executive Committee Meetings from 1973 to 1986

companies' business activities.


2.6. Existing contracts with suppliers/contractors/others.
2. To ensure the continuity of these companies as going concerns, the care and
maintenance of these assets until such time that the Office of the President through

3. Yearly list of stockholders with their corresponding share/stockholdings from 1973

the Commission on Good Government should decide otherwise.

to 1986 duly certified by the Corporate Secretary.

3. To report to the Commission on Good Government periodically.

4. Audited Financial Statements such as Balance Sheet, Profit & Loss and others
from 1973 to December 31, 1985.

Further, you are authorized to request for Military/Security Support from the
Military/Police authorities, and such other acts essential to the achievement of this

5. Monthly Financial Statements for the current year up to March 31, 1986.

sequestration order. 1
6. Consolidated Cash Position Reports from January to April 15, 1986.
b. Order for Production of Documents

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7. Inventory listings of assets up dated up to March 31, 1986.


d. Aborted Contract for Improvement of Wharf at Engineer Island
8. Updated schedule of Accounts Receivable and Accounts Payable.
On July 9, 1986, a PCGG fiscal agent, S. Berenguer, entered into a contract in behalf
9. Complete list of depository banks for all funds with the authorized signatories for

of BASECO with Deltamarine Integrated Port Services, Inc., in virtue of which the

withdrawals thereof.

latter undertook to introduce improvements costing approximately P210,000.00 on the


BASECO wharf at Engineer Island, allegedly then in poor condition, avowedly to

10. Schedule of company investments and placements. 2

"optimize its utilization and in return maximize the revenue which would flow into the
government coffers," in consideration of Deltamarine's being granted "priority in using

The letter closed with the warning that if the documents were not submitted within five

the improved portion of the wharf ahead of anybody" and exemption "from the

days, the officers would be cited for "contempt in pursuance with Presidential

payment of any charges for the use of wharf including the area where it may install its

Executive Order Nos. 1 and 2."

bagging equipments" "until the improvement remains in a condition suitable for port
operations." 5 It seems however that this contract was never consummated. Capt.

c. Orders Re Engineer Island

Jorge B. Siacunco, "Head- (PCGG) BASECO Management Team," advised


Deltamarine by letter dated July 30, 1986 that "the new management is not in a

(1) Termination of Contract for Security Services

position to honor the said contract" and thus "whatever improvements * * (may be
introduced) shall be deemed unauthorized * * and shall be at * * (Deltamarine's) own

A third order assailed by petitioner corporation, hereafter referred to simply as

risk." 6

BASECO, is that issued on April 21, 1986 by a Capt. Flordelino B. Zabala, a member
of the task force assigned to carry out the basic sequestration order. He sent a letter

e. Order for Operation of Sesiman Rock Quarry, Mariveles, Bataan

to BASECO's Vice-President for Finance, 3 terminating the contract for security


services within the Engineer Island compound between BASECO and "Anchor and

By Order dated June 20, 1986, Commissioner Mary Bautista first directed a PCGG

FAIRWAYS" and "other civilian security agencies," CAPCOM military personnel

agent, Mayor Melba O. Buenaventura, "to plan and implement progress towards

having already been assigned to the area,

maximizing the continuous operation of the BASECO Sesiman Rock Quarry * * by


conventional methods;" but afterwards, Commissioner Bautista, in representation of

(2) Change of Mode of Payment of Entry Charges

the PCGG, authorized another party, A.T. Abesamis, to operate the quarry, located at
Mariveles, Bataan, an agreement to this effect having been executed by them on

On July 15, 1986, the same Capt. Zabala issued a Memorandum addressed to "Truck

September 17, 1986. 7

Owners and Contractors," particularly a "Mr. Buddy Ondivilla National Marine


Corporation," advising of the amendment in part of their contracts with BASECO in

f.

Order to Dispose of Scrap, etc.

the sense that the stipulated charges for use of the BASECO road network were
made payable "upon entry and not anymore subject to monthly billing as was

By another Order of Commissioner Bautista, this time dated June 26, 1986, Mayor

originally agreed upon." 4

Buenaventura was also "authorized to clean and beautify the Company's compound,"

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and in this connection, to dispose of or sell "metal scraps" and other materials,

6. Holds itself fully accountable to the Presidential Commission on Good Government

equipment and machineries no longer usable, subject to specified guidelines and

on all aspects related to this take-over order.

safeguards including audit and verification. 8


h. Termination of Services of BASECO Officers
g. The TAKEOVER Order
Thereafter, Capt. Siacunco, sent letters to Hilario M. Ruiz, Manuel S. Mendoza,
By letter dated July 14, 1986, Commissioner Ramon A. Diaz decreed the provisional

Moises M. Valdez, Gilberto Pasimanero, and Benito R. Cuesta I, advising of the

takeover by the PCGG of BASECO, "the Philippine Dockyard Corporation and all their

termination of their services by the PCGG. 10

affiliated companies." 9 Diaz invoked the provisions of Section 3 (c) of Executive


Order No. 1, empowering the Commission

2.

Petitioner's Plea and Postulates

* * To provisionally takeover in the public interest or to prevent its disposal or

It is the foregoing specific orders and acts of the PCGG and its members and agents

dissipation, business enterprises and properties taken over by the government of the

which, to repeat, petitioner BASECO would have this Court nullify. More particularly,

Marcos Administration or by entities or persons close to former President Marcos,

BASECO prays that this Court-

until the transactions leading to such acquisition by the latter can be disposed of by
the appropriate authorities.

1)

declare unconstitutional and void Executive Orders Numbered 1 and 2;

A management team was designated to implement the order, headed by Capt.

2)

annul the sequestration order dated April- 14, 1986, and all other orders

Siacunco, and was given the following powers:

subsequently issued and acts done on the basis thereof, inclusive of the takeover
order of July 14, 1986 and the termination of the services of the BASECO executives.

1.

Conducts all aspects of operation of the subject companies;

11

2.

Installs key officers, hires and terminates personnel as necessary;

a. Re Executive Orders No. 1 and 2, and the Sequestration and Takeover Orders

3. Enters into contracts related to management and operation of the companies;

While BASECO concedes that "sequestration without resorting to judicial action,


might be made within the context of Executive Orders Nos. 1 and 2 before March 25,

4. Ensures that the assets of the companies are not dissipated and used effectively

1986 when the Freedom Constitution was promulgated, under the principle that the

and efficiently; revenues are duly accounted for; and disburses funds only as may be

law promulgated by the ruler under a revolutionary regime is the law of the land, it

necessary;

ceased to be acceptable when the same ruler opted to promulgate the Freedom
Constitution on March 25, 1986 wherein under Section I of the same, Article IV (Bill of

5. Does actions including among others, seeking of military support as may be

Rights) of the 1973 Constitution was adopted providing, among others, that "No

necessary, that will ensure compliance to this order;

person shall be deprived of life, liberty and property without due process of law."
(Const., Art. I V, Sec. 1)." 12

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2)

allowing PCGG Agent Silverio Berenguer to enter into an "anomalous

It declares that its objection to the constitutionality of the Executive Orders "as well as

contract" with Deltamarine Integrated Port Services, Inc., giving the latter free use of

the Sequestration Order * * and Takeover Order * * issued purportedly under the

BASECO premises; 16

authority of said Executive Orders, rests on four fundamental considerations: First, no


notice and hearing was accorded * * (it) before its properties and business were taken

3)

over; Second, the PCGG is not a court, but a purely investigative agency and

operate its rock quarry at Sesiman, Mariveles; 17

authorizing PCGG Agent, Mayor Melba Buenaventura, to manage and

therefore not competent to act as prosecutor and judge in the same cause; Third,
there is nothing in the issuances which envisions any proceeding, process or remedy

4)

by which petitioner may expeditiously challenge the validity of the takeover after the

machinery and other materials; 18

authorizing the same mayor to sell or dispose of its metal scrap, equipment,

same has been effected; and Fourthly, being directed against specified persons, and
in disregard of the constitutional presumption of innocence and general rules and

5)

procedures, they constitute a Bill of Attainder." 13

all their affiliated companies;

b.

6)

Re Order to Produce Documents

authorizing the takeover of BASECO, Philippine Dockyard Corporation, and

terminating the services of BASECO executives: President Hilario M. Ruiz;

EVP Manuel S. Mendoza; GM Moises M. Valdez; Finance Mgr. Gilberto Pasimanero;


It argues that the order to produce corporate records from 1973 to 1986, which it has

Legal Dept. Mgr. Benito R. Cuesta I; 19

apparently already complied with, was issued without court authority and infringed its
constitutional right against self-incrimination, and unreasonable search and seizure.

7)

planning to elect its own Board of Directors; 20

8)

allowing willingly or unwillingly its personnel to take, steal, carry away from

14
c. Re PCGG's Exercise of Right of Ownership and Management

petitioner's premises at Mariveles * * rolls of cable wires, worth P600,000.00 on May


11, 1986; 21

BASECO further contends that the PCGG had unduly interfered with its right of
dominion and management of its business affairs by

9)

allowing "indiscriminate diggings" at Engineer Island to retrieve gold bars

supposed to have been buried therein. 22


1)

terminating its contract for security services with Fairways & Anchor, without

the consent and against the will of the contracting parties; and amending the mode of

3.

payment of entry fees stipulated in its Lease Contract with National Stevedoring &

Orders

Doubts, Misconceptions regarding Sequestration, Freeze and Takeover

Lighterage Corporation, these acts being in violation of the non-impairment clause of


the constitution; 15

Many misconceptions and much doubt about the matter of sequestration, takeover
and freeze orders have been engendered by misapprehension, or incomplete
comprehension if not indeed downright ignorance of the law governing these
remedies. It is needful that these misconceptions and doubts be dispelled so that

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uninformed and useless debates about them may be avoided, and arguments tainted

public office and/or using their powers, authority, influence, connections or

b sophistry or intellectual dishonesty be quickly exposed and discarded. Towards this

relationship. 27

end, this opinion will essay an exposition of the law on the matter. In the process
many of the objections raised by BASECO will be dealt with.

In relation to the takeover or sequestration that it was authorized to undertake in the


fulfillment of its mission, the PCGG was granted "power and authority" to do the

4.

The Governing Law

following particular acts, to wit:

a. Proclamation No. 3

1. To sequester or place or cause to be placed under its control or possession any


building or office wherein any ill-gotten wealth or properties may be found, and any

The impugned executive orders are avowedly meant to carry out the explicit

records pertaining thereto, in order to prevent their destruction, concealment or

command of the Provisional Constitution, ordained by Proclamation No. 3, 23 that the

disappearance which would frustrate or hamper the investigation or otherwise prevent

President-in the exercise of legislative power which she was authorized to continue to

the Commission from accomplishing its task.

wield "(until a legislature is elected and convened under a new Constitution" "shall
give priority to measures to achieve the mandate of the people," among others to

2. To provisionally take over in the public interest or to prevent the disposal or

(r)ecover ill-gotten properties amassed by the leaders and supporters of the previous

dissipation, business enterprises and properties taken over by the government of the

regime and protect the interest of the people through orders of sequestration or

Marcos Administration or by entities or persons close to former President Marcos,

freezing of assets or accounts." 24

until the transactions leading to such acquisition by the latter can be disposed of by
the appropriate authorities.

b. Executive Order No. 1


3. To enjoin or restrain any actual or threatened commission of acts by any person or
Executive Order No. 1 stresses the "urgent need to recover all ill-gotten wealth," and

entity that may render moot and academic, or frustrate or otherwise make ineffectual

postulates that "vast resources of the government have been amassed by former

the efforts of the Commission to carry out its task under this order. 28

President Ferdinand E. Marcos, his immediate family, relatives, and close associates
both here and abroad." 25 Upon these premises, the Presidential Commission on

So that it might ascertain the facts germane to its objectives, it was granted power to

Good Government was created, 26 "charged with the task of assisting the President

conduct

in regard to (certain specified) matters," among which was precisely-

testificandum and duces tecum; administer oaths; punish for contempt. 29 It was

investigations;

require

submission

of

evidence

by

subpoenae

ad

given power also to promulgate such rules and regulations as may be necessary to
* * The recovery of all in-gotten wealth accumulated by former President Ferdinand E.

carry out the purposes of * * (its creation). 30

Marcos, his immediate family, relatives, subordinates and close associates, whether
located in the Philippines or abroad, including the takeover or sequestration of all

c. Executive Order No. 2

business enterprises and entities owned or controlled by them, during his


administration, directly or through nominees, by taking undue advantage of their

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Executive Order No. 2 gives additional and more specific data and directions

conversion of funds belonging to the Government of the Philippines or any of its

respecting "the recovery of ill-gotten properties amassed by the leaders and

branches, instrumentalities, enterprises, banks or financial institutions, or by taking

supporters of the previous regime." It declares that:

undue advantage of their official position, authority, relationship, connection or


influence to unjustly enrich themselves at the expense and to the grave damage and

1) * * the Government of the Philippines is in possession of evidence showing that

prejudice of the Filipino people and the Republic of the Philippines;

there are assets and properties purportedly pertaining to former Ferdinand E. Marcos,
and/or his wife Mrs. Imelda Romualdez Marcos, their close relatives, subordinates,

3)

prohibited "any person from transferring, conveying, encumbering or

business associates, dummies, agents or nominees which had been or were acquired

otherwise depleting or concealing such assets and properties or from assisting or

by them directly or indirectly, through or as a result of the improper or illegal use of

taking part in their transfer, encumbrance, concealment or dissipation under pain of

funds or properties owned by the government of the Philippines or any of its

such penalties as are prescribed by law;" and

branches, instrumentalities, enterprises, banks or financial institutions, or by taking


undue advantage of their office, authority, influence, connections or relationship,

4) required "all persons in the Philippines holding such assets or properties, whether

resulting in their unjust enrichment and causing grave damage and prejudice to the

located in the Philippines or abroad, in their names as nominees, agents or trustees,

Filipino people and the Republic of the Philippines:" and

to make full disclosure of the same to the Commission on Good Government within
thirty (30) days from publication of * (the) Executive Order, * *. 32

2) * * said assets and properties are in the form of bank accounts, deposits, trust
accounts, shares of stocks, buildings, shopping centers, condominiums, mansions,

d. Executive Order No. 14

residences, estates, and other kinds of real and personal properties in the Philippines
and in various countries of the world." 31

A third executive order is relevant: Executive Order No. 14, 33 by which the PCGG is
empowered, "with the assistance of the Office of the Solicitor General and other

Upon these premises, the President-

government agencies, * * to file and prosecute all cases investigated by it * * as may


be warranted by its findings." 34 All such cases, whether civil or criminal, are to be

1) froze "all assets and properties in the Philippines in which former President Marcos

filed "with the Sandiganbayan which shall have exclusive and original jurisdiction

and/or his wife, Mrs. Imelda Romualdez Marcos, their close relatives, subordinates,

thereof." 35 Executive Order No. 14 also pertinently provides that civil suits for

business associates, dummies, agents, or nominees have any interest or

restitution, reparation of damages, or indemnification for consequential damages,

participation;

forfeiture proceedings provided for under Republic Act No. 1379, or any other civil
actions under the Civil Code or other existing laws, in connection with * * (said

2) prohibited former President Ferdinand Marcos and/or his wife * *, their close

Executive Orders Numbered 1 and 2) may be filed separately from and proceed

relatives, subordinates, business associates, duties, agents, or nominees from

independently of any criminal proceedings and may be proved by a preponderance of

transferring, conveying, encumbering, concealing or dissipating said assets or

evidence;" and that, moreover, the "technical rules of procedure and evidence shall

properties in the Philippines and abroad, pending the outcome of appropriate

not be strictly applied to* * (said)civil cases." 36

proceedings in the Philippines to determine whether any such assets or properties


were acquired by them through or as a result of improper or illegal use of or the

5.

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The situations envisaged and sought to be governed are self-evident, these being:

6.

Government's Right and Duty to Recover All Ill-gotten Wealth

1) that "(i)ll-gotten properties (were) amassed by the leaders and supporters of the

There can be no debate about the validity and eminent propriety of the Government's

previous regime"; 37

plan "to recover all ill-gotten wealth."

a) more particularly, that ill-gotten wealth (was) accumulated by former President

Neither can there be any debate about the proposition that assuming the above

Ferdinand E. Marcos, his immediate family, relatives, subordinates and close

described factual premises of the Executive Orders and Proclamation No. 3 to be

associates, * * located in the Philippines or abroad, * * (and) business enterprises and

true, to be demonstrable by competent evidence, the recovery from Marcos, his family

entities (came to be) owned or controlled by them, during * * (the Marcos)

and his dominions of the assets and properties involved, is not only a right but a duty

administration, directly or through nominees, by taking undue advantage of their

on the part of Government.

public office and/or using their powers, authority, influence, Connections or


relationship; 38

But however plain and valid that right and duty may be, still a balance must be sought
with the equally compelling necessity that a proper respect be accorded and

b) otherwise stated, that "there are assets and properties purportedly pertaining to

adequate protection assured, the fundamental rights of private property and free

former President Ferdinand E. Marcos, and/or his wife Mrs. Imelda Romualdez

enterprise which are deemed pillars of a free society such as ours, and to which all

Marcos, their close relatives, subordinates, business associates, dummies, agents or

members of that society may without exception lay claim.

nominees which had been or were acquired by them directly or indirectly, through or
as a result of the improper or illegal use of funds or properties owned by the

* * Democracy, as a way of life enshrined in the Constitution, embraces as its

Government of the Philippines or any of its branches, instrumentalities, enterprises,

necessary components freedom of conscience, freedom of expression, and freedom

banks or financial institutions, or by taking undue advantage of their office, authority,

in the pursuit of happiness. Along with these freedoms are included economic

influence, connections or relationship, resulting in their unjust enrichment and causing

freedom and freedom of enterprise within reasonable bounds and under proper

grave damage and prejudice to the Filipino people and the Republic of the

control. * * Evincing much concern for the protection of property, the Constitution

Philippines"; 39

distinctly recognizes the preferred position which real estate has occupied in law for
ages. Property is bound up with every aspect of social life in a democracy as

c) that "said assets and properties are in the form of bank accounts. deposits, trust.

democracy is conceived in the Constitution. The Constitution realizes the

accounts, shares of stocks, buildings, shopping centers, condominiums, mansions,

indispensable role which property, owned in reasonable quantities and used

residences, estates, and other kinds of real and personal properties in the Philippines

legitimately, plays in the stimulation to economic effort and the formation and growth

and in various countries of the world;" 40 and

of a solid social middle class that is said to be the bulwark of democracy and the
backbone of every progressive and happy country. 42

2) that certain "business enterprises and properties (were) taken over by the
government of the Marcos Administration or by entities or persons close to former

a. Need of Evidentiary Substantiation in Proper Suit

President Marcos. 41

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Consequently, the factual premises of the Executive Orders cannot simply be


assumed. They will have to be duly established by adequate proof in each case, in a

By the clear terms of the law, the power of the PCGG to sequester property claimed to

proper judicial proceeding, so that the recovery of the ill-gotten wealth may be validly

be "ill-gotten" means to place or cause to be placed under its possession or control

and properly adjudged and consummated; although there are some who maintain that

said property, or any building or office wherein any such property and any records

the fact-that an immense fortune, and "vast resources of the government have been

pertaining thereto may be found, including "business enterprises and entities,"-for the

amassed by former President Ferdinand E. Marcos, his immediate family, relatives,

purpose of preventing the destruction, concealment or dissipation of, and otherwise

and close associates both here and abroad," and they have resorted to all sorts of

conserving and preserving, the same-until it can be determined, through appropriate

clever schemes and manipulations to disguise and hide their illicit acquisitions-is

judicial proceedings, whether the property was in truth will- gotten," i.e., acquired

within the realm of judicial notice, being of so extensive notoriety as to dispense with

through or as a result of improper or illegal use of or the conversion of funds

proof thereof, Be this as it may, the requirement of evidentiary substantiation has

belonging to the Government or any of its branches, instrumentalities, enterprises,

been expressly acknowledged, and the procedure to be followed explicitly laid down,

banks or financial institutions, or by taking undue advantage of official position,

in Executive Order No. 14.

authority relationship, connection or influence, resulting in unjust enrichment of the


ostensible owner and grave damage and prejudice to the State. 44 And this, too, is

b. Need of Provisional Measures to Collect and Conserve Assets Pending Suits

the sense in which the term is commonly understood in other jurisdictions. 45

Nor may it be gainsaid that pending the institution of the suits for the recovery of such

b. "Freeze Order"

"ill-gotten wealth" as the evidence at hand may reveal, there is an obvious and
imperative need for preliminary, provisional measures to prevent the concealment,

A "freeze order" prohibits the person having possession or control of property alleged

disappearance, destruction, dissipation, or loss of the assets and properties subject of

to constitute "ill-gotten wealth" "from transferring, conveying, encumbering or

the suits, or to restrain or foil acts that may render moot and academic, or effectively

otherwise depleting or concealing such property, or from assisting or taking part in its

hamper, delay, or negate efforts to recover the same.

transfer, encumbrance, concealment, or dissipation." 46 In other words, it commands


the possessor to hold the property and conserve it subject to the orders and

7.

Provisional Remedies Prescribed by Law

disposition of the authority decreeing such freezing. In this sense, it is akin to a


garnishment by which the possessor or ostensible owner of property is enjoined not to

To answer this need, the law has prescribed three (3) provisional remedies. These

deliver, transfer, or otherwise dispose of any effects or credits in his possession or

are: (1) sequestration; (2) freeze orders; and (3) provisional takeover.

control, and thus becomes in a sense an involuntary depositary thereof. 47

Sequestration and freezing are remedies applicable generally to unearthed instances

c. Provisional Takeover

of "ill-gotten wealth." The remedy of "provisional takeover" is peculiar to cases where


"business enterprises and properties (were) taken over by the government of the

In providing for the remedy of "provisional takeover," the law acknowledges the

Marcos Administration or by entities or persons close to former President Marcos." 43

apparent distinction between "ill gotten" "business enterprises and entities" (going
concerns, businesses in actual operation), generally, as to which the remedy of

a. Sequestration

sequestration applies, it being necessarily inferred that the remedy entails no

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interference, or the least possible interference with the actual management and

such acquisition * * can be disposed of by the appropriate authorities." 49 Executive

operations thereof; and "business enterprises which were taken over by the

Order No. 2 declares that the assets or properties therein mentioned shall remain

government government of the Marcos Administration or by entities or persons close

frozen "pending the outcome of appropriate proceedings in the Philippines to

to him," in particular, as to which a "provisional takeover" is authorized, "in the public

determine whether any such assets or properties were acquired" by illegal means.

interest or to prevent disposal or dissipation of the enterprises." 48 Such a "provisional

Executive Order No. 14 makes clear that judicial proceedings are essential for the

takeover" imports something more than sequestration or freezing, more than the

resolution of the basic issue of whether or not particular assets are "ill-gotten," and

placing of the business under physical possession and control, albeit without or with

resultant recovery thereof by the Government is warranted.

the least possible interference with the management and carrying on of the business
itself. In a "provisional takeover," what is taken into custody is not only the physical

e. State of Seizure Not To Be Indefinitely Maintained; The Constitutional Command

assets of the business enterprise or entity, but the business operation as well. It is in
fine the assumption of control not only over things, but over operations or on- going

There is thus no cause for the apprehension voiced by BASECO 50 that

activities. But, to repeat, such a "provisional takeover" is allowed only as regards

sequestration, freezing or provisional takeover is designed to be an end in itself, that it

"business enterprises * * taken over by the government of the Marcos Administration

is the device through which persons may be deprived of their property branded as "ill-

or by entities or persons close to former President Marcos."

gotten," that it is intended to bring about a permanent, rather than a passing,


transitional state of affairs. That this is not so is quite explicitly declared by the

d. No Divestment of Title Over Property Seized

governing rules.

It may perhaps be well at this point to stress once again the provisional, contingent

Be this as it may, the 1987 Constitution should allay any lingering fears about the

character of the remedies just described. Indeed the law plainly qualifies the remedy

duration of these provisional remedies. Section 26 of its Transitory Provisions, 51 lays

of take-over by the adjective, "provisional." These remedies may be resorted to only

down the relevant rule in plain terms, apart from extending ratification or confirmation

for a particular exigency: to prevent in the public interest the disappearance or

(although not really necessary) to the institution by presidential fiat of the remedy of

dissipation of property or business, and conserve it pending adjudgment in

sequestration and freeze orders:

appropriate proceedings of the primary issue of whether or not the acquisition of title
or other right thereto by the apparent owner was attended by some vitiating anomaly.

SEC. 26. The authority to issue sequestration or freeze orders under Proclamation

None of the remedies is meant to deprive the owner or possessor of his title or any

No. 3 dated March 25, 1986 in relation to the recovery of ill-gotten wealth shag remain

right to the property sequestered, frozen or taken over and vest it in the sequestering

operative for not more than eighteen months after the ratification of this Constitution.

agency, the Government or other person. This can be done only for the causes and

However, in the national interest, as certified by the President, the Congress may

by the processes laid down by law.

extend said period.

That this is the sense in which the power to sequester, freeze or provisionally take

A sequestration or freeze order shall be issued only upon showing of a prima facie

over is to be understood and exercised, the language of the executive orders in

case. The order and the list of the sequestered or frozen properties shall forthwith be

question leaves no doubt. Executive Order No. 1 declares that the sequestration of

registered with the proper court. For orders issued before the ratification of this

property the acquisition of which is suspect shall last "until the transactions leading to

Constitution, the corresponding judicial action or proceeding shall be filed within six

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months from its ratification. For those issued after such ratification, the judicial action

Constitution." 57 It is, to be sure, a proposition on which there can be no

or proceeding shall be commenced within six months from the issuance thereof.

disagreement.

The sequestration or freeze order is deemed automatically lifted if no judicial action or

h.

Orders May Issue Ex Parte

proceeding is commenced as herein provided. 52


Like the remedy of preliminary attachment and receivership, as well as delivery of
f. Kinship to Attachment Receivership

personal property in replevin suits, sequestration and provisional takeover writs may
issue ex parte. 58 And as in preliminary attachment, receivership, and delivery of

As thus described, sequestration, freezing and provisional takeover are akin to the

personality, no objection of any significance may be raised to the ex parte issuance of

provisional remedy of preliminary attachment, or receivership. 53 By attachment, a

an order of sequestration, freezing or takeover, given its fundamental character of

sheriff seizes property of a defendant in a civil suit so that it may stand as security for

temporariness or conditionality; and taking account specially of the constitutionally

the satisfaction of any judgment that may be obtained, and not disposed of, or

expressed "mandate of the people to recover ill-gotten properties amassed by the

dissipated, or lost intentionally or otherwise, pending the action. 54 By receivership,

leaders and supporters of the previous regime and protect the interest of the people;"

property, real or personal, which is subject of litigation, is placed in the possession

59 as well as the obvious need to avoid alerting suspected possessors of "ill-gotten

and control of a receiver appointed by the Court, who shall conserve it pending final

wealth" and thereby cause that disappearance or loss of property precisely sought to

determination of the title or right of possession over it. 55 All these remedies

be prevented, and the fact, just as self-evident, that "any transfer, disposition,

sequestration, freezing, provisional, takeover, attachment and receivership are

concealment or disappearance of said assets and properties would frustrate, obstruct

provisional, temporary, designed for-particular exigencies, attended by no character of

or hamper the efforts of the Government" at the just recovery thereof. 60

permanency or finality, and always subject to the control of the issuing court or
agency.

8.

Requisites for Validity

g. Remedies, Non-Judicial

What is indispensable is that, again as in the case of attachment and receivership,


there exist a prima facie factual foundation, at least, for the sequestration, freeze or

Parenthetically, that writs of sequestration or freeze or takeover orders are not issued

takeover order, and adequate and fair opportunity to contest it and endeavor to cause

by a court is of no moment. The Solicitor General draws attention to the writ of

its negation or nullification. 61

distraint and levy which since 1936 the Commissioner of Internal Revenue has been
by law authorized to issue against property of a delinquent taxpayer. 56 BASECO

Both are assured under the executive orders in question and the rules and regulations

itself declares that it has not manifested "a rigid insistence on sequestration as a

promulgated by the PCGG.

purely judicial remedy * * (as it feels) that the law should not be ossified to a point that
makes it insensitive to change." What it insists on, what it pronounces to be its

a. Prima Facie Evidence as Basis for Orders

"unyielding position, is that any change in procedure, or the institution of a new one,
should conform to due process and the other prescriptions of the Bill of Rights of the

Executive Order No. 14 enjoins that there be "due regard to the requirements of
fairness and due process." 62 Executive Order No. 2 declares that with respect to

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claims on allegedly "ill-gotten" assets and properties, "it is the position of the new

and official acts which are devoid of rational basis in fact or law, or are whimsical and

democratic government that President Marcos * * (and other parties affected) be

capricious, are condemned and struck down. 66

afforded fair opportunity to contest these claims before appropriate Philippine


authorities." 63 Section 7 of the Commission's Rules and Regulations provides that

9.

Constitutional Sanction of Remedies

sequestration or freeze (and takeover) orders issue upon the authority of at least two
commissioners, based on the affirmation or complaint of an interested party, or motu

If any doubt should still persist in the face of the foregoing considerations as to the

proprio when the Commission has reasonable grounds to believe that the issuance

validity and propriety of sequestration, freeze and takeover orders, it should be

thereof is warranted. 64 A similar requirement is now found in Section 26, Art. XVIII of

dispelled by the fact that these particular remedies and the authority of the PCGG to

the 1987 Constitution, which requires that a "sequestration or freeze order shall be

issue them have received constitutional approbation and sanction. As already

issued only upon showing of a prima facie case." 65

mentioned, the Provisional or "Freedom" Constitution recognizes the power and duty
of the President to enact "measures to achieve the mandate of the people to * * *

b. Opportunity to Contest

(recover ill- gotten properties amassed by the leaders and supporters of the previous
regime and protect the interest of the people through orders of sequestration or

And Sections 5 and 6 of the same Rules and Regulations lay down the procedure by

freezing of assets or accounts." And as also already adverted to, Section 26, Article

which a party may seek to set aside a writ of sequestration or freeze order, viz:

XVIII of the 1987 Constitution 67 treats of, and ratifies the "authority to issue
sequestration or freeze orders under Proclamation No. 3 dated March 25, 1986."

SECTION 5. Who may contend.-The person against whom a writ of sequestration or


freeze or hold order is directed may request the lifting thereof in writing, either

The institution of these provisional remedies is also premised upon the State's

personally or through counsel within five (5) days from receipt of the writ or order, or in

inherent police power, regarded, as t lie power of promoting the public welfare by

the case of a hold order, from date of knowledge thereof.

restraining and regulating the use of liberty and property," 68 and as "the most
essential, insistent and illimitable of powers * * in the promotion of general welfare and

SECTION 6. Procedure for review of writ or order.-After due hearing or motu proprio

the public interest," 69 and said to be co-extensive with self-protection and * * not

for good cause shown, the Commission may lift the writ or order unconditionally or

inaptly termed (also) the'law of overruling necessity." " 70

subject to such conditions as it may deem necessary, taking into consideration the
evidence and the circumstance of the case. The resolution of the commission may be

10.

PCGG not a "Judge"; General Functions

appealed by the party concerned to the Office of the President of the Philippines
within fifteen (15) days from receipt thereof.

It should also by now be reasonably evident from what has thus far been said that the
PCGG is not, and was never intended to act as, a judge. Its general function is to

Parenthetically, even if the requirement for a prima facie showing of "ill- gotten wealth"

conduct investigations in order to collect evidence establishing instances of "ill-gotten

were not expressly imposed by some rule or regulation as a condition to warrant the

wealth;" issue sequestration, and such orders as may be warranted by the evidence

sequestration or freezing of property contemplated in the executive orders in question,

thus collected and as may be necessary to preserve and conserve the assets of

it would nevertheless be exigible in this jurisdiction in which the Rule of Law prevails

which it takes custody and control and prevent their disappearance, loss or
dissipation; and eventually file and prosecute in the proper court of competent

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jurisdiction all cases investigated by it as may be warranted by its findings. It does not

Jose A. Rojas, (2) Anthony P. Lee, (3) Eduardo T. Marcelo, (4) Jose P. Fernandez, (5)

try and decide, or hear and determine, or adjudicate with any character of finality or

Generoso Tanseco, (6) Emilio T. Yap, (7) Antonio M. Ezpeleta, (8) Zacarias Amante,

compulsion, cases involving the essential issue of whether or not property should be

(9) Severino de la Cruz, (10) Jose Francisco, (11) Dioscoro Papa, (12) Octavio

forfeited and transferred to the State because "ill-gotten" within the meaning of the

Posadas, (13) Manuel S. Mendoza, (14) Magiliw Torres, and (15) Rodolfo Torres.

Constitution and the executive orders. This function is reserved to the designated
court, in this case, the Sandiganbayan. 71 There can therefore be no serious regard

By 1986, however, of these fifteen (15) incorporators, six (6) had ceased to be

accorded to the accusation, leveled by BASECO, 72 that the PCGG plays the

stockholders, namely: (1) Generoso Tanseco, (2) Antonio Ezpeleta, (3) Zacarias

perfidious role of prosecutor and judge at the same time.

Amante, (4) Octavio Posadas, (5) Magiliw Torres, and (6) Rodolfo Torres. As of this
year, 1986, there were twenty (20) stockholders listed in BASECO's Stock and

11.

Facts Preclude Grant of Relief to Petitioner

Transfer Book. 75 Their names and the number of shares respectively held by them
are as follows:

Upon these premises and reasoned conclusions, and upon the facts disclosed by the
record, hereafter to be discussed, the petition cannot succeed. The writs of certiorari

1. Jose A. Rojas

and prohibition prayed for will not be issued.


1,248 shares
The facts show that the corporation known as BASECO was owned or controlled by
President Marcos "during his administration, through nominees, by taking undue

2. Severino G. de la Cruz

advantage of his public office and/or using his powers, authority, or influence, " and
that it was by and through the same means, that BASECO had taken over the

1,248 shares

business and/or assets of the National Shipyard and Engineering Co., Inc., and other
government-owned or controlled entities.

3. Emilio T. Yap

12.

2,508 shares

Organization and Stock Distribution of BASECO

BASECO describes itself in its petition as "a shiprepair and shipbuilding company * *

4. Jose Fernandez

incorporated as a domestic private corporation * * (on Aug. 30, 1972) by a consortium


of Filipino shipowners and shipping executives. Its main office is at Engineer Island,

1,248 shares

Port Area, Manila, where its Engineer Island Shipyard is housed, and its main
shipyard is located at Mariveles Bataan." 73 Its Articles of Incorporation disclose that

5. Jose Francisco

its authorized capital stock is P60,000,000.00 divided into 60,000 shares, of which
12,000 shares with a value of P12,000,000.00 have been subscribed, and on said

128 shares

subscription, the aggregate sum of P3,035,000.00 has been paid by the incorporators.
74 The same articles Identify the incorporators, numbering fifteen (15), as follows: (1)

6. Manuel S. Mendoza

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8 shares
96 shares
15. Metro Bay Drydock
7. Anthony P. Lee
136,370 shares
1,248 shares
16. Manuel Jacela
8. Hilario M. Ruiz
1 share
32 shares
17. Jonathan G. Lu
9. Constante L. Farias
1 share
8 shares
18. Jose J. Tanchanco
10. Fidelity Management, Inc.
1 share
65,882 shares
19. Dioscoro Papa
11. Trident Management
128 shares
7,412 shares
20. Edward T. Marcelo
12. United Phil. Lines
4 shares
1,240 shares
TOTAL
13. Renato M. Tanseco
218,819 shares.
8 shares
13
14. Fidel Ventura

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Barely six months after its incorporation, BASECO acquired from National Shipyard &

of which, as set out in the document of sale, P2,000.000.00 was paid upon its

Steel Corporation, or NASSCO, a government-owned or controlled corporation, the

execution, and the balance stipulated to be payable in installments. 78

latter's shipyard at Mariveles, Bataan, known as the Bataan National Shipyard (BNS),
and except for NASSCO's Engineer Island Shops and certain equipment of the

16.

Acquisition of Other Assets of NASSCO; Intervention of Marcos

BNS, consigned for future negotiation all its structures, buildings, shops, quarters,
houses, plants, equipment and facilities, in stock or in transit. This it did in virtue of a

Some nine months afterwards, or on July 15, 1975, to be precise, BASECO, again

"Contract of Purchase and Sale with Chattel Mortgage" executed on February 13,

with the intervention of President Marcos, acquired ownership of the rest of the assets

1973. The price was P52,000,000.00. As partial payment thereof, BASECO delivered

of NASSCO which had not been included in the first two (2) purchase documents.

to NASSCO a cash bond of P11,400,000.00, convertible into cash within twenty-four

This was accomplished by a deed entitled "Contract of Purchase and Sale," 79 which,

(24) hours from completion of the inventory undertaken pursuant to the contract. The

like the Memorandum of Agreement dated October 9, 1973 supra also bore at the

balance of P41,600,000.00, with interest at seven percent (7%) per annum,

upper right-hand corner of its first page, the handwritten notation of President Marcos

compounded semi-annually, was stipulated to be paid in equal semi-annual

reading, "APPROVED, July 29, 1973," and underneath it, his usual full signature.

installments over a term of nine (9) years, payment to commence after a grace period

Transferred to BASECO were NASSCO's "ownership and all its titles, rights and

of two (2) years from date of turnover of the shipyard to BASECO. 76

interests over all equipment and facilities including structures, buildings, shops,
quarters, houses, plants and expendable or semi-expendable assets, located at the

14.

Subsequent Reduction of Price; Intervention of Marcos

Engineer Island, known as the Engineer Island Shops, including all the equipment of
the Bataan National Shipyards (BNS) which were excluded from the sale of NBS to

Unaccountably, the price of P52,000,000.00 was reduced by more than one-half, to

BASECO but retained by BASECO and all other selected equipment and machineries

P24,311,550.00, about eight (8) months later. A document to this effect was executed

of NASSCO at J. Panganiban Smelting Plant." In the same deed, NASSCO

on October 9, 1973, entitled "Memorandum Agreement," and was signed for

committed itself to cooperate with BASECO for the acquisition from the National

NASSCO by Arturo Pacificador, as Presiding Officer of the Board of Directors, and

Government or other appropriate Government entity of Engineer Island. Consideration

David R. Ines, as General Manager. 77 This agreement bore, at the top right corner of

for the sale was set at P5,000,000.00; a down payment of P1,000,000.00 appears to

the first page, the word "APPROVED" in the handwriting of President Marcos,

have been made, and the balance was stipulated to be paid at 7% interest per annum

followed by his usual full signature. The document recited that a down payment of

in equal semi annual installments over a term of nine (9) years, to commence after a

P5,862,310.00 had been made by BASECO, and the balance of P19,449,240.00 was

grace period of two (2) years. Mr. Arturo Pacificador again signed for NASSCO,

payable in equal semi-annual installments over nine (9) years after a grace period of

together with the general manager, Mr. David R. Ines.

two (2) years, with interest at 7% per annum.


17.
15.

Loans Obtained

Acquisition of 300 Hectares from Export Processing Zone Authority


It further appears that on May 27, 1975 BASECO obtained a loan from the NDC,

On October 1, 1974, BASECO acquired three hundred (300) hectares of land in

taken from "the last available Japanese war damage fund of $19,000,000.00," to pay

Mariveles from the Export Processing Zone Authority for the price of P10,047,940.00

for "Japanese made heavy equipment (brand new)." 80 On September 3, 1975, it got
another loan also from the NDC in the amount of P30,000,000.00 (id.). And on

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January 28, 1976, it got still another loan, this time from the GSIS, in the sum of

Capt. A.T. Romualdez' report to the President was submitted eleven (11) days later. It

P12,400,000.00. 81 The claim has been made that not a single centavo has been

opened with the following caption:

paid on these loans. 82


MEMORANDUM:
18.

Reports to President Marcos


FOR : The President

In September, 1977, two (2) reports were submitted to President Marcos regarding
BASECO. The first was contained in a letter dated September 5, 1977 of Hilario M.

SUBJECT:

An Evaluation and Re-assessment of a Performance of a Mission

Ruiz, BASECO president. 83 The second was embodied in a confidential


memorandum dated September 16, 1977 of Capt. A.T. Romualdez. 84 They further

FROM: Capt. A.T. Romualdez.

disclose the fine hand of Marcos in the affairs of BASECO, and that of a Romualdez,
a relative by affinity.

Like Ruiz, Romualdez wrote that BASECO faced great difficulties in meeting its loan
obligations due chiefly to the fact that "orders to build ships as expected * * did not

a. BASECO President's Report

materialize."

In his letter of September 5, 1977, BASECO President Ruiz reported to Marcos that

He advised that five stockholders had "waived and/or assigned their holdings inblank,"

there had been "no orders or demands for ship construction" for some time and

these being: (1) Jose A. Rojas, (2) Severino de la Cruz, (3) Rodolfo Torres, (4)

expressed the fear that if that state of affairs persisted, BASECO would not be able to

Magiliw Torres, and (5) Anthony P. Lee. Pointing out that "Mr. Magiliw Torres * * is

pay its debts to the Government, which at the time stood at the not inconsiderable

already dead and Mr. Jose A. Rojas had a major heart attack," he made the following

amount of P165,854,000.00. 85 He suggested that, to "save the situation," there be a

quite revealing, and it may be added, quite cynical and indurate recommendation, to

"spin-off (of their) shipbuilding activities which shall be handled exclusively by an

wit:

entirely new corporation to be created;" and towards this end, he informed Marcos
that BASECO was

* * (that) their replacements (be effected) so we can register their names in the stock
book prior to the implementation of your instructions to pass a board resolution to

* * inviting NDC and LUSTEVECO to participate by converting the NDC shipbuilding

legalize the transfers under SEC regulations;

loan to BASECO amounting to P341.165M and assuming and converting a portion of


BASECO's shipbuilding loans from REPACOM amounting to P52.2M or a total of

2.

By getting their replacements, the families cannot question us later on; and

3.

We will owe no further favors from them. 87

P83.365M as NDC's equity contribution in the new corporation. LUSTEVECO will


participate by absorbing and converting a portion of the REPACOM loan of Bay
Shipyard and Drydock, Inc., amounting to P32.538M. 86
He also transmitted to Marcos, together with the report, the following documents: 88
b. Romualdez' Report

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1.

Stock certificates indorsed and assigned in blank with assignments and

Capt. Romualdez also recommended that BASECO's loans be restructured "until

waivers; 89

such period when BASECO will have enough orders for ships in order for the
company to meet loan obligations," and that

2.

The articles of incorporation, the amended articles, and the by-laws of

BASECO;

An LOI may be issued to government agencies using floating equipment, that a


linkage scheme be applied to a certain percent of BASECO's net profit as part of

3.

Deed of Sales, wherein NASSCO sold to BASECO four (4) parcels of land in

BASECO's amortization payments to make it justifiable for you, Sir. 91

"Engineer Island", Port Area, Manila;


It is noteworthy that Capt. A.T. Romualdez does not appear to be a stockholder or
4. Transfer Certificate of Title No. 124822 in the name of BASECO, covering

officer of BASECO, yet he has presented a report on BASECO to President Marcos,

"Engineer Island";

and his report demonstrates intimate familiarity with the firm's affairs and problems.

5.

19. Marcos' Response to Reports

Contract dated October 9, 1973, between NASSCO and BASECO re-

structure and equipment at Mariveles, Bataan;


President Marcos lost no time in acting on his subordinates' recommendations,
6.

Contract dated July 16, 1975, between NASSCO and BASECO re-structure

particularly as regards the "spin-off" and the "linkage scheme" relative to "BASECO's

and equipment at Engineer Island, Port Area Manila;

amortization payments."

7.

a. Instructions re "Spin-Off"

Contract dated October 1, 1974, between EPZA and BASECO re 300

hectares of land at Mariveles, Bataan;


Under date of September 28, 1977, he addressed a Memorandum to Secretary
8.

List of BASECO's fixed assets;

Geronimo Velasco of the Philippine National Oil Company and Chairman Constante
Farias of the National Development Company, directing them "to participate in the

9.

Loan Agreement dated September 3, 1975, BASECO's loan from NDC of

formation of a new corporation resulting from the spin-off of the shipbuilding

P30,000,000.00;

component of BASECO along the following guidelines:

10.

a.

BASECO-REPACOM Agreement dated May 27, 1975;

Equity participation of government shall be through LUSTEVECO and NDC

in the amount of P115,903,000 consisting of the following obligations of BASECO


11. GSIS loan to BASECO dated January 28, 1976 of P12,400,000.00 for the housing

which are hereby authorized to be converted to equity of the said new corporation, to

facilities for BASECO's rank-and-file employees. 90

wit:
1.

66

NDC P83,865,000 (P31.165M loan & P52.2M Reparation)

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2.

LUSTEVECO P32,538,000 (Reparation)

invested by LUSTEVECO, acting through PNOC and NDC, as the government's


equity participation in a shipbuilding corporation to be established in partnership with

b. Equity participation of government shall be in the form of non- voting shares.

the private sector.

For immediate compliance. 92

xxx

Mr. Marcos' guidelines were promptly complied with by his subordinates. Twenty-two

And so, through a simple letter of instruction and memorandum, BASECO's loan

(22) days after receiving their president's memorandum, Messrs. Hilario M. Ruiz,

obligation to NDC and REPACOM * * in the total amount of P83.365M and BSD's

Constante L. Farias and Geronimo Z. Velasco, in representation of their respective

REPACOM loan of P32.438M were wiped out and converted into non-voting preferred

corporations, executed a PRE-INCORPORATION AGREEMENT dated October 20,

shares. 95

xxx

xxx

1977. 93 In it, they undertook to form a shipbuilding corporation to be known as


"PHIL-ASIA SHIPBUILDING CORPORATION," to bring to realization their president's

20.

Evidence of Marcos'

instructions. It would seem that the new corporation ultimately formed was actually
named "Philippine Dockyard Corporation (PDC)." 94

Ownership of BASECO

b.

It cannot therefore be gainsaid that, in the context of the proceedings at bar, the

Letter of Instructions No. 670

actuality of the control by President Marcos of BASECO has been sufficiently shown.
Mr. Marcos did not forget Capt. Romualdez' recommendation for a letter of
instructions. On February 14, 1978, he issued Letter of Instructions No. 670

Other evidence submitted to the Court by the Solicitor General proves that President

addressed to the Reparations Commission REPACOM the Philippine National Oil

Marcos not only exercised control over BASECO, but also that he actually owns well

Company (PNOC), the Luzon Stevedoring Company (LUSTEVECO), and the National

nigh one hundred percent of its outstanding stock.

Development Company (NDC). What is commanded therein is summarized by the


Solicitor General, with pithy and not inaccurate observations as to the effects thereof

It will be recalled that according to petitioner- itself, as of April 23, 1986, there were

(in italics), as follows:

218,819 shares of stock outstanding, ostensibly owned by twenty (20) stockholders.


96 Four of these twenty are juridical persons: (1) Metro Bay Drydock, recorded as

* * 1) the shipbuilding equipment procured by BASECO through reparations be

holding 136,370 shares; (2) Fidelity Management, Inc., 65,882 shares; (3) Trident

transferred to NDC subject to reimbursement by NDC to BASECO (of) the amount of

Management, 7,412 shares; and (4) United Phil. Lines, 1,240 shares. The first three

s allegedly representing the handling and incidental expenses incurred by BASECO in

corporations, among themselves, own an aggregate of 209,664 shares of BASECO

the installation of said equipment (so instead of NDC getting paid on its loan to

stock, or 95.82% of the outstanding stock.

BASECO, it was made to pay BASECO instead the amount of P18.285M); 2) the
shipbuilding equipment procured from reparations through EPZA, now in the

Now, the Solicitor General has drawn the Court's attention to the intriguing

possession of BASECO and BSDI (Bay Shipyard & Drydocking, Inc.) be transferred to

circumstance that found in Malacanang shortly after the sudden flight of President

LUSTEVECO through PNOC; and 3) the shipbuilding equipment (thus) transferred be

Marcos, were certificates corresponding to more than ninety-five percent (95%) of all

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the outstanding shares of stock of BASECO, endorsed in blank, together with deeds

petitioner is still endeavoring to secure copies thereof from them." 102 On the same

of assignment of practically all the outstanding shares of stock of the three (3)

day he filed another motion praying that he be allowed "to secure copies of the

corporations above mentioned (which hold 95.82% of all BASECO stock), signed by

Certificates of Stock in the name of Metro Bay Drydock, Inc., and of all other

the owners thereof although not notarized. 97

Certificates, of Stock of petitioner's stockholders in possession of respondents." 103

More specifically, found in Malacanang (and now in the custody of the PCGG) were:

In a Manifestation dated October 10, 1986,, 104 the Solicitor General not
unreasonably argued that counsel's aforestated motion to secure copies of the stock

1) the deeds of assignment of all 600 outstanding shares of Fidelity Management Inc.

certificates "confirms the fact that stockholders of petitioner corporation are not in

which supposedly owns as aforesaid 65,882 shares of BASECO stock;

possession of * * (their) certificates of stock," and the reason, according to him, was
"that 95% of said shares * * have been endorsed in blank and found in Malacaang

2)

the deeds of assignment of 2,499,995 of the 2,500,000 outstanding shares

after the former President and his family fled the country." To this manifestation

of Metro Bay Drydock Corporation which allegedly owns 136,370 shares of

BASECO's counsel replied on November 5, 1986, as already mentioned, Stubbornly

BASECO stock;

insisting that the firm's stockholders had not really assigned their stock. 105

3) the deeds of assignment of 800 outstanding shares of Trident Management Co.,

In view of the parties' conflicting declarations, this Court resolved on November 27,

Inc. which allegedly owns 7,412 shares of BASECO stock, assigned in blank; 98

1986 among other things "to require * * the petitioner * * to deposit upon proper

and

receipt with Clerk of Court Juanito Ranjo the originals of the stock certificates alleged
to be in its possession or accessible to it, mentioned and described in Annex 'P' of its

4) stock certificates corresponding to 207,725 out of the 218,819 outstanding shares

petition, (and other pleadings) * * within ten (10) days from notice." 106 In a motion

of BASECO stock; that is, all but 5 % all endorsed in blank. 99

filed on December 5, 1986, 107 BASECO's counsel made the statement, quite
surprising in the premises, that "it will negotiate with the owners (of the BASECO

While the petitioner's counsel was quick to dispute this asserted fact, assuring this

stock in question) to allow petitioner to borrow from them, if available, the certificates

Court that the BASECO stockholders were still in possession of their respective stock

referred to" but that "it needs a more sufficient time therefor" (sic). BASECO's counsel

certificates and had "never endorsed * * them in blank or to anyone else," 100 that

however eventually had to confess inability to produce the originals of the stock

denial is exposed by his own prior and subsequent recorded statements as a mere

certificates, putting up the feeble excuse that while he had "requested the

gesture of defiance rather than a verifiable factual declaration.

stockholders to allow * * (him) to borrow said certificates, * * some of * * (them)


claimed that they had delivered the certificates to third parties by way of pledge and/or

By resolution dated September 25, 1986, this Court granted BASECO's counsel a

to secure performance of obligations, while others allegedly have entrusted them to

period of 10 days "to SUBMIT, as undertaken by him, * * the certificates of stock

third parties in view of last national emergency." 108 He has conveniently omitted, nor

issued to the stockholders of * * BASECO as of April 23, 1986, as listed in Annex 'P'

has he offered to give the details of the transactions adverted to by him, or to explain

of the petition.' 101 Counsel thereafter moved for extension; and in his motion dated

why he had not impressed on the supposed stockholders the primordial importance of

October 2, 1986, he declared inter alia that "said certificates of stock are in the

convincing this Court of their present custody of the originals of the stock, or if he had

possession of third parties, among whom being the respondents themselves * * and

done so, why the stockholders are unwilling to agree to some sort of arrangement so

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that the originals of their certificates might at the very least be exhibited to the Court.

orders pursuant to which they were done, are fatally defective in not according to the

Under the circumstances, the Court can only conclude that he could not get the

parties affected prior notice and hearing, or an adequate remedy to impugn, set aside

originals from the stockholders for the simple reason that, as the Solicitor General

or otherwise obtain relief therefrom, or that the PCGG had acted as prosecutor and

maintains, said stockholders in truth no longer have them in their possession, these

judge at the same time.

having already been assigned in blank to then President Marcos.


22.
21.

Executive Orders Not a Bill of Attainder

Facts Justify Issuance of Sequestration and Takeover Orders


Neither will this Court sustain the theory that the executive orders in question are a bill

In the light of the affirmative showing by the Government that, prima facie at least, the

of attainder. 110 "A bill of attainder is a legislative act which inflicts punishment

stockholders and directors of BASECO as of April, 1986 109 were mere "dummies,"

without judicial trial." 111 "Its essence is the substitution of a legislative for a judicial

nominees or alter egos of President Marcos; at any rate, that they are no longer

determination of guilt." 112

owners of any shares of stock in the corporation, the conclusion cannot be avoided
that said stockholders and directors have no basis and no standing whatever to cause

In the first place, nothing in the executive orders can be reasonably construed as a

the filing and prosecution of the instant proceeding; and to grant relief to BASECO, as

determination or declaration of guilt. On the contrary, the executive orders, inclusive of

prayed for in the petition, would in effect be to restore the assets, properties and

Executive Order No. 14, make it perfectly clear that any judgment of guilt in the

business sequestered and taken over by the PCGG to persons who are "dummies,"

amassing or acquisition of "ill-gotten wealth" is to be handed down by a judicial

nominees or alter egos of the former president.

tribunal, in this case, the Sandiganbayan, upon complaint filed and prosecuted by the
PCGG. In the second place, no punishment is inflicted by the executive orders, as the

From the standpoint of the PCGG, the facts herein stated at some length do indeed

merest glance at their provisions will immediately make apparent. In no sense,

show that the private corporation known as BASECO was "owned or controlled by

therefore, may the executive orders be regarded as a bill of attainder.

former President Ferdinand E. Marcos * * during his administration, * * through


nominees, by taking advantage of * * (his) public office and/or using * * (his) powers,

23.

authority, influence * *," and that NASSCO and other property of the government had

and Seizures

No Violation of Right against Self-Incrimination and Unreasonable Searches

been taken over by BASECO; and the situation justified the sequestration as well as
the provisional takeover of the corporation in the public interest, in accordance with

BASECO also contends that its right against self incrimination and unreasonable

the terms of Executive Orders No. 1 and 2, pending the filing of the requisite actions

searches and seizures had been transgressed by the Order of April 18, 1986 which

with the Sandiganbayan to cause divestment of title thereto from Marcos, and its

required it "to produce corporate records from 1973 to 1986 under pain of contempt of

adjudication in favor of the Republic pursuant to Executive Order No. 14.

the Commission if it fails to do so." The order was issued upon the authority of
Section 3 (e) of Executive Order No. 1, treating of the PCGG's power to "issue

As already earlier stated, this Court agrees that this assessment of the facts is

subpoenas requiring * * the production of such books, papers, contracts, records,

correct; accordingly, it sustains the acts of sequestration and takeover by the PCGG

statements of accounts and other documents as may be material to the investigation

as being in accord with the law, and, in view of what has thus far been set out in this

conducted by the Commission, " and paragraph (3), Executive Order No. 2 dealing

opinion, pronounces to be without merit the theory that said acts, and the executive

with its power to "require all persons in the Philippines holding * * (alleged "ill-gotten")

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assets or properties, whether located in the Philippines or abroad, in their names as

corporation which is charged with a criminal violation of the statute may plead the

nominees, agents or trustees, to make full disclosure of the same * *." The contention

criminality of such corporation as a refusal to produce its books. To state this

lacks merit.

proposition is to answer it. While an individual may lawfully refuse to answer


incriminating questions unless protected by an immunity statute, it does not follow that

It is elementary that the right against self-incrimination has no application to juridical

a corporation, vested with special privileges and franchises may refuse to show its

persons.

hand when charged with an abuse of such privileges. (Wilson v. United States, 55
Law Ed., 771, 780 [emphasis, the Solicitor General's])

While an individual may lawfully refuse to answer incriminating questions unless


protected by an immunity statute, it does not follow that a corporation, vested with

At any rate, Executive Order No. 14-A, amending Section 4 of Executive Order No. 14

special privileges and franchises, may refuse to show its hand when charged with an

assures protection to individuals required to produce evidence before the PCGG

abuse ofsuchprivileges * * 113

against any possible violation of his right against self-incrimination. It gives them
immunity from prosecution on the basis of testimony or information he is compelled to

Relevant jurisprudence is also cited by the Solicitor General. 114

present. As amended, said Section 4 now provides that

* * corporations are not entitled to all of the constitutional protections which private

xxx

xxx

xxx

individuals have. * * They are not at all within the privilege against self-incrimination,
although this court more than once has said that the privilege runs very closely with

The witness may not refuse to comply with the order on the basis of his privilege

the 4th Amendment's Search and Seizure provisions. It is also settled that an officer

against self-incrimination; but no testimony or other information compelled under the

of the company cannot refuse to produce its records in its possession upon the plea

order (or any information directly or indirectly derived from such testimony, or other

that they will either incriminate him or may incriminate it." (Oklahoma Press Publishing

information) may be used against the witness in any criminal case, except a

Co. v. Walling, 327 U.S. 186; emphasis, the Solicitor General's).

prosecution for perjury, giving a false statement, or otherwise failing to comply with
the order.

* * The corporation is a creature of the state. It is presumed to be incorporated for the


benefit of the public. It received certain special privileges and franchises, and holds

The constitutional safeguard against unreasonable searches and seizures finds no

them subject to the laws of the state and the limitations of its charter. Its powers are

application to the case at bar either. There has been no search undertaken by any

limited by law. It can make no contract not authorized by its charter. Its rights to act as

agent or representative of the PCGG, and of course no seizure on the occasion

a corporation are only preserved to it so long as it obeys the laws of its creation.

thereof.

There is a reserve right in the legislature to investigate its contracts and find out
whether it has exceeded its powers. It would be a strange anomaly to hold that a

24.

Scope and Extent of Powers of the PCGG

state, having chartered a corporation to make use of certain franchises, could not, in
the exercise of sovereignty, inquire how these franchises had been employed, and

One other question remains to be disposed of, that respecting the scope and extent of

whether they had been abused, and demand the production of the corporate books

the powers that may be wielded by the PCGG with regard to the properties or

and papers for that purpose. The defense amounts to this, that an officer of the

businesses placed under sequestration or provisionally taken over. Obviously, it is not

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a question to which an answer can be easily given, much less one which will suffice

contempt in accordance with the Rules of Court; and seek and secure the assistance

for every conceivable situation.

of any office, agency or instrumentality of the government. 116 In the case of


sequestered businesses generally (i.e., going concerns, businesses in current

a.

PCGG May Not Exercise Acts of Ownership

operation), as in the case of sequestered objects, its essential role, as already


discussed, is that of conservator, caretaker, "watchdog" or overseer. It is not that of

One thing is certain, and should be stated at the outset: the PCGG cannot exercise

manager, or innovator, much less an owner.

acts of dominion over property sequestered, frozen or provisionally taken over. AS


already earlier stressed with no little insistence, the act of sequestration; freezing or

c. Powers over Business Enterprises Taken Over by Marcos or Entities or Persons

provisional takeover of property does not import or bring about a divestment of title

Close to him; Limitations Thereon

over said property; does not make the PCGG the owner thereof. In relation to the
property sequestered, frozen or provisionally taken over, the PCGG is a conservator,

Now, in the special instance of a business enterprise shown by evidence to have been

not an owner. Therefore, it can not perform acts of strict ownership; and this is

"taken over by the government of the Marcos Administration or by entities or persons

specially true in the situations contemplated by the sequestration rules where, unlike

close to former President Marcos," 117 the PCGG is given power and authority, as

cases of receivership, for example, no court exercises effective supervision or can

already adverted to, to "provisionally take (it) over in the public interest or to prevent *

upon due application and hearing, grant authority for the performance of acts of

* (its) disposal or dissipation;" and since the term is obviously employed in reference

dominion.

to going concerns, or business enterprises in operation, something more than mere


physical custody is connoted; the PCGG may in this case exercise some measure of

Equally evident is that the resort to the provisional remedies in question should entail

control in the operation, running, or management of the business itself. But even in

the least possible interference with business operations or activities so that, in the

this special situation, the intrusion into management should be restricted to the

event that the accusation of the business enterprise being "ill gotten" be not proven, it

minimum degree necessary to accomplish the legislative will, which is "to prevent the

may be returned to its rightful owner as far as possible in the same condition as it was

disposal or dissipation" of the business enterprise. There should be no hasty,

at the time of sequestration.

indiscriminate, unreasoned replacement or substitution of management officials or


change of policies, particularly in respect of viable establishments. In fact, such a

b. PCGG Has Only Powers of Administration

replacement or substitution should be avoided if at all possible, and undertaken only


when justified by demonstrably tenable grounds and in line with the stated objectives

The PCGG may thus exercise only powers of administration over the property or

of the PCGG. And it goes without saying that where replacement of management

business sequestered or provisionally taken over, much like a court-appointed

officers may be called for, the greatest prudence, circumspection, care and attention -

receiver, 115 such as to bring and defend actions in its own name; receive rents;

should accompany that undertaking to the end that truly competent, experienced and

collect debts due; pay outstanding debts; and generally do such other acts and things

honest managers may be recruited. There should be no role to be played in this area

as may be necessary to fulfill its mission as conservator and administrator. In this

by rank amateurs, no matter how wen meaning. The road to hell, it has been said, is

context, it may in addition enjoin or restrain any actual or threatened commission of

paved with good intentions. The business is not to be experimented or played around

acts by any person or entity that may render moot and academic, or frustrate or

with, not run into the ground, not driven to bankruptcy, not fleeced, not ruined. Sight

otherwise make ineffectual its efforts to carry out its task; punish for direct or indirect

should never be lost sight of the ultimate objective of the whole exercise, which is to

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turn over the business to the Republic, once judicially established to be "ill-gotten."

stock in the firm, if they ever were at all. This is why, in its Resolution of October 28,

Reason dictates that it is only under these conditions and circumstances that the

1986; 118 this Court declared that

supervision, administration and control of business enterprises provisionally taken


over may legitimately be exercised.

Petitioner has failed to make out a case of grave abuse or excess of jurisdiction in
respondents' calling and holding of a stockholders' meeting for the election of

d. Voting of Sequestered Stock; Conditions Therefor

directors as authorized by the Memorandum of the President * * (to the PCGG) dated
June 26, 1986, particularly, where as in this case, the government can, through its

So, too, it is within the parameters of these conditions and circumstances that the

designated directors, properly exercise control and management over what appear to

PCGG may properly exercise the prerogative to vote sequestered stock of

be properties and assets owned and belonging to the government itself and over

corporations, granted to it by the President of the Philippines through a Memorandum

which the persons who appear in this case on behalf of BASECO have failed to show

dated June 26, 1986. That Memorandum authorizes the PCGG, "pending the

any right or even any shareholding in said corporation.

outcome of proceedings to determine the ownership of * * (sequestered) shares of


stock," "to vote such shares of stock as it may have sequestered in corporations at all

It must however be emphasized that the conduct of the PCGG nominees in the

stockholders' meetings called for the election of directors, declaration of dividends,

BASECO Board in the management of the company's affairs should henceforth be

amendment of the Articles of Incorporation, etc." The Memorandum should be

guided and governed by the norms herein laid down. They should never for a moment

construed in such a manner as to be consistent with, and not contradictory of the

allow themselves to forget that they are conservators, not owners of the business;

Executive Orders earlier promulgated on the same matter. There should be no

they are fiduciaries, trustees, of whom the highest degree of diligence and rectitude is,

exercise of the right to vote simply because the right exists, or because the stocks

in the premises, required.

sequestered constitute the controlling or a substantial part of the corporate voting


power. The stock is not to be voted to replace directors, or revise the articles or by-

25.

No Sufficient Showing of Other Irregularities

laws, or otherwise bring about substantial changes in policy, program or practice of

As to the other irregularities complained of by BASECO, i.e., the cancellation or

the corporation except for demonstrably weighty and defensible grounds, and always

revision, and the execution of certain contracts, inclusive of the termination of the

in the context of the stated purposes of sequestration or provisional takeover, i.e., to

employment of some of its executives, 119 this Court cannot, in the present state of

prevent the dispersion or undue disposal of the corporate assets. Directors are not to

the evidence on record, pass upon them. It is not necessary to do so. The issues

be voted out simply because the power to do so exists. Substitution of directors is not

arising therefrom may and will be left for initial determination in the appropriate action.

to be done without reason or rhyme, should indeed be shunned if at an possible, and

But the Court will state that absent any showing of any important cause therefor, it will

undertaken only when essential to prevent disappearance or wastage of corporate

not normally substitute its judgment for that of the PCGG in these individual

property, and always under such circumstances as assure that the replacements are

transactions. It is clear however, that as things now stand, the petitioner cannot be

truly possessed of competence, experience and probity.

said to have established the correctness of its submission that the acts of the PCGG
in question were done without or in excess of its powers, or with grave abuse of

In the case at bar, there was adequate justification to vote the incumbent directors out

discretion.

of office and elect others in their stead because the evidence showed prima facie that
the former were just tools of President Marcos and were no longer owners of any

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WHEREFORE, the petition is dismissed. The temporary restraining order issued on

The facts as found by the respondent Court of Appeals, in affirming the decision of

October 14, 1986 is lifted.

the Court of First Instance of Manila, are quoted hereunder:

G.R. No. L-27155 May 18, 1978


Plaintiff executed its Bond, Exh. A, with defendant Rita Gueco Tapnio as principal, in
PHILIPPINE NATIONAL BANK, petitioner,

favor of the Philippine National Bank Branch at San Fernando, Pampanga, to

vs.

guarantee the payment of defendant Rita Gueco Tapnio's account with said Bank. In

THE COURT OF APPEALS, RITA GUECO TAPNIO, CECILIO GUECO and THE

turn, to guarantee the payment of whatever amount the bonding company would pay

PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC., respondents.

to the Philippine National Bank, both defendants executed the indemnity agreement,
Exh. B. Under the terms and conditions of this indemnity agreement, whatever

Medina, Locsin, Corua, & Sumbillo for petitioner.

amount the plaintiff would pay would earn interest at the rate of 12% per annum, plus
attorney's fees in the amount of 15 % of the whole amount due in case of court

Manuel Lim & Associates for private respondents.

litigation.
The original amount of the bond was for P4,000.00; but the amount was later reduced
to P2,000.00.

ANTONIO, J.:
It is not disputed that defendant Rita Gueco Tapnio was indebted to the bank in the
Certiorari to review the decision of the Court of Appeals which affirmed the judgment

sum of P2,000.00, plus accumulated interests unpaid, which she failed to pay despite

of the Court of First Instance of Manila in Civil Case No. 34185, ordering petitioner, as

demands. The Bank wrote a letter of demand to plaintiff, as per Exh. C; whereupon,

third-party defendant, to pay respondent Rita Gueco Tapnio, as third-party plaintiff,

plaintiff paid the bank on September 18, 1957, the full amount due and owing in the

the sum of P2,379.71, plus 12% interest per annum from September 19, 1957 until

sum of P2,379.91, for and on account of defendant Rita Gueco's obligation (Exhs. D

the same is fully paid, P200.00 attorney's fees and costs, the same amounts which

and D-1).

Rita Gueco Tapnio was ordered to pay the Philippine American General Insurance
Co., Inc., to be paid directly to the Philippine American General Insurance Co., Inc. in

Plaintiff, in turn, made several demands, both verbal and written, upon defendants

full satisfaction of the judgment rendered against Rita Gueco Tapnio in favor of the

(Exhs. E and F), but to no avail.

former; plus P500.00 attorney's fees for Rita Gueco Tapnio and costs. The basic
action is the complaint filed by Philamgen (Philippine American General Insurance

Defendant Rita Gueco Tapnio admitted all the foregoing facts. She claims, however,

Co., Inc.) as surety against Rita Gueco Tapnio and Cecilio Gueco, for the recovery of

when demand was made upon her by plaintiff for her to pay her debt to the Bank, that

the sum of P2,379.71 paid by Philamgen to the Philippine National Bank on behalf of

she told the Plaintiff that she did not consider herself to be indebted to the Bank at all

respondents Tapnio and Gueco, pursuant to an indemnity agreement. Petitioner Bank

because she had an agreement with one Jacobo-Nazon whereby she had leased to

was made third-party defendant by Tapnio and Gueco on the theory that their failure

the latter her unused export sugar quota for the 1956-1957 agricultural year,

to pay the debt was due to the fault or negligence of petitioner.

consisting of 1,000 piculs at the rate of P2.80 per picul, or for a total of P2,800.00,
which was already in excess of her obligation guaranteed by plaintiff's bond, Exh. A.

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This lease agreement, according to her, was with the knowledge of the bank. But the

manager that he was agreeable to raising the consideration to P2.80 per picul. He

Bank has placed obstacles to the consummation of the lease, and the delay caused

further informed the manager that he was ready to pay said amount as the funds were

by said obstacles forced 'Nazon to rescind the lease contract. Thus, Rita Gueco

in his folder which was kept in the bank.

Tapnio filed her third-party complaint against the Bank to recover from the latter any
and all sums of money which may be adjudged against her and in favor of the plaitiff

Explaining the meaning of Tuazon's statement as to the funds, it was stated by him

plus moral damages, attorney's fees and costs.

that he had an approved loan from the bank but he had not yet utilized it as he was
intending to use it to pay for the quota. Hence, when he said the amount needed to

Insofar as the contentions of the parties herein are concerned, we quote with approval

pay Mrs. Tapnio was in his folder which was in the bank, he meant and the manager

the following findings of the lower court based on the evidence presented at the trial of

understood and knew he had an approved loan available to be used in payment of the

the case:

quota. In said Exh. "6-Gueco", Tuazon also informed the manager that he would want
for a notice from the manager as to the time when the bank needed the money so that

It has been established during the trial that Mrs. Tapnio had an export sugar quota of

Tuazon could sign the corresponding promissory note.

1,000 piculs for the agricultural year 1956-1957 which she did not need. She agreed
to allow Mr. Jacobo C. Tuazon to use said quota for the consideration of P2,500.00

Further Consideration of the evidence discloses that when the branch manager of the

(Exh. "4"-Gueco). This agreement was called a contract of lease of sugar allotment.

Philippine National Bank at San Fernando recommended the approval of the contract
of lease at the price of P2.80 per picul (Exh. 1 1-Bank), whose recommendation was

At the time of the agreement, Mrs. Tapnio was indebted to the Philippine National

concurred in by the Vice-president of said Bank, J. V. Buenaventura, the board of

Bank at San Fernando, Pampanga. Her indebtedness was known as a crop loan and

directors required that the amount be raised to 13.00 per picul. This act of the board

was secured by a mortgage on her standing crop including her sugar quota allocation

of directors was communicated to Tuazon, who in turn asked for a reconsideration

for the agricultural year corresponding to said standing crop. This arrangement was

thereof. On November 19, 1956, the branch manager submitted Tuazon's request for

necessary in order that when Mrs. Tapnio harvests, the P.N.B., having a lien on the

reconsideration to the board of directors with another recommendation for the

crop, may effectively enforce collection against her. Her sugar cannot be exported

approval of the lease at P2.80 per picul, but the board returned the recommendation

without sugar quota allotment Sometimes, however, a planter harvest less sugar than

unacted upon, considering that the current price prevailing at the time was P3.00 per

her quota, so her excess quota is utilized by another who pays her for its use. This is

picul (Exh. 9-Bank).

the arrangement entered into between Mrs. Tapnio and Mr. Tuazon regarding the
former's excess quota for 1956-1957 (Exh. "4"-Gueco).

The parties were notified of the refusal on the part of the board of directors of the
Bank to grant the motion for reconsideration. The matter stood as it was until

Since the quota was mortgaged to the P.N.B., the contract of lease had to be

February 22, 1957, when Tuazon wrote a letter (Exh. 10-Bank informing the Bank that

approved by said Bank, The same was submitted to the branch manager at San

he was no longer interested to continue the deal, referring to the lease of sugar quota

Fernando, Pampanga. The latter required the parties to raise the consideration of

allotment in favor of defendant Rita Gueco Tapnio. The result is that the latter lost the

P2.80 per picul or a total of P2,800.00 (Exh. "2-Gueco") informing them that "the

sum of P2,800.00 which she should have received from Tuazon and which she could

minimum lease rental acceptable to the Bank, is P2.80 per picul." In a letter

have paid the Bank to cancel off her indebtedness,

addressed to the branch manager on August 10, 1956, Mr. Tuazon informed the

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The court below held, and in this holding we concur that failure of the negotiation for

the rental of price per picul of 1,000 piculs of sugar quota leased by respondent Rita

the lease of the sugar quota allocation of Rita Gueco Tapnio to Tuazon was due to the

Gueco Tapnio to Jacobo C. Tuazon at P3.00 per picul.

fault of the directors of the Philippine National Bank, The refusal on the part of the
bank to approve the lease at the rate of P2.80 per picul which, as stated above, would

Petitioner argued that as an assignee of the sugar quota of Tapnio, it has the right,

have enabled Rita Gueco Tapnio to realize the amount of P2,800.00 which was more

both under its own Charter and under the Corporation Law, to safeguard and protect

than sufficient to pay off her indebtedness to the Bank, and its insistence on the rental

its rights and interests under the deed of assignment, which include the right to

price of P3.00 per picul thus unnecessarily increasing the value by only a difference of

approve or disapprove the said lease of sugar quota and in the exercise of that

P200.00. inevitably brought about the rescission of the lease contract to the damage

authority, its

and prejudice of Rita Gueco Tapnio in the aforesaid sum of P2,800.00. The
unreasonableness of the position adopted by the board of directors of the Philippine

Board of Directors necessarily had authority to determine and fix the rental price per

National Bank in refusing to approve the lease at the rate of P2.80 per picul and

picul of the sugar quota subject of the lease between private respondents and Jacobo

insisting on the rate of P3.00 per picul, if only to increase the retail value by only

C. Tuazon. It argued further that both under its Charter and the Corporation Law,

P200.00 is shown by the fact that all the accounts of Rita Gueco Tapnio with the Bank

petitioner, acting thru its Board of Directors, has the perfect right to adopt a policy with

were secured by chattel mortgage on standing crops, assignment of leasehold rights

respect to fixing of rental prices of export sugar quota allocations, and in fixing the

and interests on her properties, and surety bonds, aside from the fact that from Exh.

rentals at P3.00 per picul, it did not act arbitrarily since the said Board was guided by

8-Bank, it appears that she was offering to execute a real estate mortgage in favor of

statistics of sugar price and prices of sugar quotas prevailing at the time. Since the

the Bank to replace the surety bond This statement is further bolstered by the fact that

fixing of the rental of the sugar quota is a function lodged with petitioner's Board of

Rita Gueco Tapnio apparently had the means to pay her obligation fact that she has

Directors and is a matter of policy, the respondent Court of Appeals could not

been granted several value of almost P80,000.00 for the agricultural years from 1952

substitute its own judgment for that of said Board of Directors, which acted in good

to 56. 1

faith, making as its basis therefore the prevailing market price as shown by statistics
which were then in their possession.

Its motion for the reconsideration of the decision of the Court of Appeals having been
denied, petitioner filed the present petition.

Finally, petitioner emphasized that under the appealed judgment, it shall suffer a great
injustice because as a creditor, it shall be deprived of a just claim against its debtor

The petitioner contends that the Court of Appeals erred:

(respondent Rita Gueco Tapnio) as it would be required to return to respondent


Philamgen the sum of P2,379.71, plus interest, which amount had been previously

(1)

In finding that the rescission of the lease contract of the 1,000 piculs of sugar

paid to petitioner by said insurance company in behalf of the principal debtor, herein

quota allocation of respondent Rita Gueco Tapnio by Jacobo C. Tuazon was due to

respondent Rita Gueco Tapnio, and without recourse against respondent Rita Gueco

the unjustified refusal of petitioner to approve said lease contract, and its

Tapnio.

unreasonable insistence on the rental price of P3.00 instead of P2.80 per picul; and
We must advert to the rule that this Court's appellate jurisdiction in proceedings of this
(2)

In not holding that based on the statistics of sugar price and prices of sugar

nature is limited to reviewing only errors of law, accepting as conclusive the factual fin

quota in the possession of the petitioner, the latter's Board of Directors correctly fixed

dings of the Court of Appeals upon its own assessment of the evidence. 2

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It has been clearly shown that when the Branch Manager of petitioner required the
The contract of lease of sugar quota allotment at P2.50 per picul between Rita Gueco

parties to raise the consideration of the lease from P2.50 to P2.80 per picul, or a total

Tapnio and Jacobo C. Tuazon was executed on April 17, 1956. This contract was

of P2,800-00, they readily agreed. Hence, in his letter to the Branch Manager of the

submitted to the Branch Manager of the Philippine National Bank at San Fernando,

Bank on August 10, 1956, Tuazon informed him that the minimum lease rental of

Pampanga. This arrangement was necessary because Tapnio's indebtedness to

P2.80 per picul was acceptable to him and that he even offered to use the loan

petitioner was secured by a mortgage on her standing crop including her sugar quota

secured by him from petitioner to pay in full the sum of P2,800.00 which was the total

allocation for the agricultural year corresponding to said standing crop. The latter

consideration of the lease. This arrangement was not only satisfactory to the Branch

required the parties to raise the consideration to P2.80 per picul, the minimum lease

Manager but it was also approves by Vice-President J. V. Buenaventura of the PNB.

rental acceptable to the Bank, or a total of P2,800.00. Tuazon informed the Branch

Under that arrangement, Rita Gueco Tapnio could have realized the amount of

Manager, thru a letter dated August 10, 1956, that he was agreeable to raising the

P2,800.00, which was more than enough to pay the balance of her indebtedness to

consideration to P2.80 per picul. He further informed the manager that he was ready

the Bank which was secured by the bond of Philamgen.

to pay the said sum of P2,800.00 as the funds were in his folder which was kept in the
said Bank. This referred to the approved loan of Tuazon from the Bank which he

There is no question that Tapnio's failure to utilize her sugar quota for the crop year

intended to use in paying for the use of the sugar quota. The Branch Manager

1956-1957 was due to the disapproval of the lease by the Board of Directors of

submitted the contract of lease of sugar quota allocation to the Head Office on

petitioner. The issue, therefore, is whether or not petitioner is liable for the damage

September 7, 1956, with a recommendation for approval, which recommendation was

caused.

concurred in by the Vice-President of the Bank, Mr. J. V. Buenaventura. This


notwithstanding, the Board of Directors of petitioner required that the consideration be

As observed by the trial court, time is of the essence in the approval of the lease of

raised to P3.00 per picul.

sugar quota allotments, since the same must be utilized during the milling season,
because any allotment which is not filled during such milling season may be

Tuazon, after being informed of the action of the Board of Directors, asked for a

reallocated by the Sugar Quota Administration to other holders of allotments. 3 There

reconsideration thereof. On November 19, 1956, the Branch Manager submitted the

was no proof that there was any other person at that time willing to lease the sugar

request for reconsideration and again recommended the approval of the lease at

quota allotment of private respondents for a price higher than P2.80 per picul. "The

P2.80 per picul, but the Board returned the recommendation unacted, stating that the

fact that there were isolated transactions wherein the consideration for the lease was

current price prevailing at that time was P3.00 per picul.

P3.00 a picul", according to the trial court, "does not necessarily mean that there are
always ready takers of said price. " The unreasonableness of the position adopted by

On February 22, 1957, Tuazon wrote a letter, informing the Bank that he was no

the petitioner's Board of Directors is shown by the fact that the difference between the

longer interested in continuing the lease of sugar quota allotment. The crop year

amount of P2.80 per picul offered by Tuazon and the P3.00 per picul demanded by

1956-1957 ended and Mrs. Tapnio failed to utilize her sugar quota, resulting in her

the Board amounted only to a total sum of P200.00. Considering that all the accounts

loss in the sum of P2,800.00 which she should have received had the lease in favor of

of Rita Gueco Tapnio with the Bank were secured by chattel mortgage on standing

Tuazon been implemented.

crops, assignment of leasehold rights and interests on her properties, and surety
bonds and that she had apparently "the means to pay her obligation to the Bank, as
shown by the fact that she has been granted several sugar crop loans of the total

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value of almost P80,000.00 for the agricultural years from 1952 to 1956", there was
no reasonable basis for the Board of Directors of petitioner to have rejected the lease

WHEREFORE, in view of the foregoing, the decision of the Court of Appeals is hereby

agreement because of a measly sum of P200.00.

AFFIRMED.

While petitioner had the ultimate authority of approving or disapproving the proposed
lease since the quota was mortgaged to the Bank, the latter certainly cannot escape
its responsibility of observing, for the protection of the interest of private respondents,
that degree of care, precaution and vigilance which the circumstances justly demand
in approving or disapproving the lease of said sugar quota. The law makes it
imperative that 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, 4 This petitioner failed to do. Certainly, it knew that the agricultural year was

G.R. No. L-8527

about to expire, that by its disapproval of the lease private respondents would be

WEST COAST LIFE INSURANCE CO., plaintiff, vs. GEO N. HURD, Judge of Court of

March 30, 1914

unable to utilize the sugar quota in question. In failing to observe the reasonable

First Instance, defendant.

degree of care and vigilance which the surrounding circumstances reasonably

Southworth, Hargis & Springer for plaintiff.

impose, petitioner is consequently liable for the damages caused on private

Haussermann, Cohn & Fisher for defendant.

respondents. Under Article 21 of the New Civil Code, "any person who wilfully causes
loss or injury to another in a manner that is contrary to morals, good customs or public

MORELAND, J.:

policy shall compensate the latter for the damage." The afore-cited provisions on
human relations were intended to expand the concept of torts in this jurisdiction by

This is an action for the issuance of a writ of prohibition against the defendant

granting adequate legal remedy for the untold number of moral wrongs which is

"commanding the defendant to desist or refrain from further proceedings in a criminal

impossible for human foresight to specifically provide in the statutes. 5

action pending in that court."

A corporation is civilly liable in the same manner as natural persons for torts, because

The petitioner is a foreign life-insurance corporation, duly organized under and by

"generally speaking, the rules governing the liability of a principal or master for a tort

virtue of the laws of the State of California, doing business regularly and legally in the

committed by an agent or servant are the same whether the principal or master be a

Philippine Islands pursuant to its laws.

natural person or a corporation, and whether the servant or agent be a natural or


artificial person. All of the authorities agree that a principal or master is liable for every

On the 16th of December, 1912, the assistant prosecuting attorney of the city of

tort which he expressly directs or authorizes, and this is just as true of a corporation

Manila filed an information in a criminal action in the Court of First Instance of that city

as of a natural person, A corporation is liable, therefore, whenever a tortious act is

against the plaintiff, said corporation, and also against John Northcott and Manuel C.

committed by an officer or agent under express direction or authority from the

Grey, charging said corporation and said individuals with the crime of libel. On the

stockholders or members acting as a body, or, generally, from the directors as the

17th day of December the defendant in his official capacity as judge of the court of

governing body." 6

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First Instance signed and issued a process directed to the plaintiff and the other

The undersigned accuses the West Coast Life Insurance Company, John Northcott,

accused in said criminal action, which said process reads as follows:

and Manuel C. Grey of the crime of libel, committed as follows:

UNITED STATES OF AMERICA,

That on or about the 14th day of September, 1912, and continuously thereafter up to
and including the date of this complaint, in the city of Manila, P. I., the said defendant

PHILIPPINE ISLANDS.

West Coast Life Insurance Company was and has been a foreign corporation duly
organized in the State of California, United States of America, and registered and

In the Court of First Instance of the Judicial District of Manila.

doing business in the Philippine Islands; that the said defendant John Nortcott then
and there was and has been the general agent and manager for the Philippine Islands

THE UNITED STATES


versus

No. 9661

of the said defendant corporation West Coast Life Insurance Company, and the said

Libel.

defendant Manuel C. Grey was and has been an agent and employee of the said
defendant corporation West Coast Life Insurance Company, acting in the capacity of

WEST COAST LIFE INSURANCE CO., JOHN NORTHCOTT, AND MANUEL C.

treasurer of the branch of the said defendant corporation in the Philippine Islands; that

GREY.

on or about the said 14th day of September, 1912, and for some time thereafter, to
wit, during the months of September and October, 1912, in the city of Manila, P.I., the

To West Coast Life Insurance Co., John Northcott, and Manuel C. Grey, Manila.

said defendants West Coast Life Insurance Company, John Northcott, and Manuel C.
Grey, conspiring and confederating together, did then and there willfully, unlawfully,

SUMMONS.

and maliciously, and to the damage of the Insular Life Insurance Company, a
domestic corporation duly organized, registered, and doing business in the Philippine

You are hereby summoned to appear before the Court of First Instance of the city of

Islands, and with intent o cause such damage and to expose the said Insular Life

Manila P.I., on the 18th day of December, 1912, at the hour of 8 a.m., to answer the

Insurance Company to public hatred, contempt, and ridicule, compose and print, and

charge made against you upon the information of F. H. Nesmith, assistant prosecuting

cause to be printed a large number of circulars, and, in numerous printings in the form

attorney of the city of Manila, for libel, as set forth in the said information filed in this

of said circulars, did publish and distribute, and cause to be published and distributed,

copurt on December 16, 1912, a copy of which is hereto attached and herewith

among other persons, to policy holders and prospective policy holders of the said

served upon you.

Insular Life Insurance Company, among other things, a malicious defamation and libel
in the Spanish language, of the words and tenor following:

Dated at the city of Manila, P. I., this 17th day of December, 1912.
"First. For some time past various rumors are current to the effect that the Insular Life
(Sgd.)

GEO N. HURD,

Insurance Company is not in as good a condition as i should be at the present time,

Judge, Court of First Instance.

and that really it is in bad shape. Nevertheless, the investigations made by the
representative of the "Bulletin" have failed fully to confirm these rumors. It is known

The information upon which said process was issued is as follows:

that the Insular Auditor has examined the books of the company and has found that its

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capital has diminished, and that by direction of said official the company has decided

The prayer of the complaint is, "your petitioner prays judgment for the issuance of a

to double the amount of its capital, and also to pay its reserve fund. All this is true."

writ of prohibition against the respondent, commanding the respondent absolutely to


desist or refrain from further proceedings against your petitioner in the said criminal

That the said circulars, and the matters therein contained hereinbefore set forth in this

action."

information, tend to impeach and have impeached the honesty, virtue, and reputation
of the said Insular Life Insurance Company by exposing it to public hatred, contempt,

The basis of the action is that the Court of First Instance has no power or authority,

and ridicule; that by the matters printed in said circulars, and hereinbefore set forth in

under the laws of the Philippine Islands, to proceed against a corporation, as such,

this information, the said defendants West Coast Life Insurance Company, John

criminally, to bring it into court for the purpose of making it amenable to the criminal

Northcott, and Manuel C. Grey meant and intended to state and represent to those to

laws. It is contended that the court had no jurisdiction to issue the process in evidence

whom the said defendants delivered said circulars as aforesaid, that the said Insular

against the plaintiff corporation; that the issuance and service thereof upon the

Life Insurance Company was then and there in a dangerous financial condition and on

plaintiff corporation were outside of the authority and jurisdiction of the court, were

the point of going into insolvency, to the detriment of the policy holders of the said

authorized by no law, conferred no jurisdiction over said corporation, and that they

Insular Life Insurance Company, and of those with whom the said Insular Life

were absolutely void and without force or effect.

Insurance Company have and have had business transactions, and each and all of
said persons to whom the said defendants delivered said circulars, and all persons as

The plaintiff, further attacking said process, alleges that the process is a mixture of

well who read said circulars understood the said matters in said circulars to have said

civil and criminal process, that it is not properly signed, that it does not direct or

libelous sense and meaning. Contrary to law.

require an arrest; that it s an order to appear and answer on a date certain without
restraint of the person, and that it is not in the form required by law.

On the 20th day of December, 1912, the plaintiff, together with the other persons
named as accused in said process through their attorneys, served upon the

Section 5 of General Orders, No. 58, defines an information as "accusation in writing

prosecuting attorney and filed with the clerk of the court a motion to quash said

charging a period with a public offense." Section 6 provide that a complaint or

summons and the service thereof, on the ground that the court had no jurisdiction

information is sufficient it if shows "the name of the defendant, or if his name cannot

over the said company, there being no authority in the court for the issuance of the

be discovered, that he is described under a fictitious name with a statement that his

process, Exhibit B, the order under which it was issued being void. The court denied

true name is unknown to the informant or official signing the same. His true name may

the motion and directed plaintiff to appear before it on the 28th day of December,

be inserted at any stage of the proceedings instituted against him, whenever

1912, and to plead to the information, to which order the plaintiff then and there duly

ascertained." These provisions, as well as those which relate to arraignment and

excepted.

counsel, and to demurrers and pleas, indicate clearly that the maker of the Code of
Criminal Procedure had no intention or expectation that corporations would be

It is alleged in the complaint that "unless restrained by this Court the respondent will

included among those who would fall within the provisions thereof. The only process

proceed to carry out said void order and compel your petitioner to appear before his

known to the Code of Criminal Procedure, or which any court is by that order

court and plead and submit to criminal prosecution without having acquired any

authorized to issue, is an order of arrest. The Code of Criminal Procedure provides

jurisdiction whatever over your petitioner."

that "if the magistrate be satisfied from the investigation that the crime complained of
has been committed, and there is reasonable ground to believe that the party charged

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has committed it, he must issue an order for his arrest. If the offense be bailable, and

against the criminal laws; and the legislature, at the same time established a

the defendant offer a sufficient security, he shall be admitted to bail; otherwise he

procedure applicable to corporations. No case has been cited to us where a

shall be committed to prison." There is no authority for the issuance of any other

corporation has been proceeded against under a criminal statute where the court did

process than an order of arrest. As a necessary consequence, the process issued in

not exercise its common law powers or where there was not in force a special

the case before us is without express authorization of statute.

procedure applicable to corporations.

The question remains as to whether or not he court may, of itself and on its own

The courts of the Philippine Islands are creatures of statute and, as we have said,

motion, create not only a process but a procedure by which the process may be made

have only those powers conferred upon them by statute and those which are required

effective.

to exercise that authority fully and adequately. The courts here have no common law
jurisdiction or powers. If they have any powers not conferred by statute, expressly or

We do not believe that the authority of the courts of the Philippine Islands extends so

impliedly, they would naturally come from Spanish and not from common law sources.

far. While having the inherent powers which usually go with courts of general

It is undoubted that, under the Spanish criminal law and procedure, a corporation

jurisdiction, we are of the opinion that, under the circumstances of their creation, they

could not have been proceeded against criminally, as such, if such an entity as a

have only such authority in criminal matters as is expressly conferred upon them by

corporation in fact existed under the Spanish law, and as such it could not have

statute or which it is necessary to imply from such authority in order to carry out fully

committed a crime in which a willful purpose or a malicious intent was required.

and adequately the express authority conferred. We do not feel that Courts of First

Criminal actions would have been restricted or limited, under that system, to the

Instance have authority to create new procedure and new processes in criminal law.

officials of such corporations and never would have been directed against the

The exercise of such power verges too closely on legislation. Even though it be

corporation itself. This was the rule with relation to associations or combinations of

admitted, a question we do not now decide, that there are various penal laws in the

persons approaching, more or less, the corporation as it is now understood, and it

Philippine Islands which corporation as such may violate, still we do not believe that

would undoubtedly have been the rue with corporations. From this source, then, the

the courts are authorized to go to the extent of creating special procedure and special

courts derive no authority to bring corporations before them in criminal actions, nor to

processes for the purpose of carrying out those penal statutes, when the legislature

issue processes for that purpose.

itself has neglected to do so. To bring a corporation into court criminally requires
many additions to the present criminal procedure. While it may be said to be the duty

The case was submitted to this Court on an agreed statement of facts with a

of courts to see to it that criminals are punished, it is no less their duty to follow

stipulation for a decision upon the merits. We are of the opinion that the plaintiff is

prescribed forms of procedure and to go out upon unauthorized ways or act in an

entitled, under that stipulation, to the remedy prayed for.

unauthorized manner.
It is adjudged that the Court of First Instance of the city of Manila be and it is hereby
There are many cases cited by counsel for the defendant which show that

enjoined and prohibited from proceeding further in the criminal cause which is before

corporations have been proceeded against criminally by indictment and otherwise and

us in this proceeding, entitled United States vs. West Coast Life Insurance Company,

have been punished as malefactors by the courts. Of this, of course, there can be no

a corporation, John Northcott and Manuel C. Grey, so far as said proceedings relate

doubt; but it is clear that, in those cases, the statute, by express words or by

to the said West Coast Life Insurance Company, a corporation, the plaintiff in the

necessary intendment, included corporations within the persons who could offend

case.

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G.R. No. L-30896 April 28, 1983

said accused with the bank as marginal deposit and forfeited by the said from the
value of the said goods, in the said sum of P71,023.60. (Original Records, p. 1).

JOSE O. SIA, petitioner,


vs.

In reviewing the evidence, the Court of Appeals came up with the following findings of

THE PEOPLE OF THE PHILIPPINES, respondent.

facts which the Solicitor General alleges should be conclusive upon this Court:
There is no debate on certain antecedents: Accused Jose 0. Sia sometime prior to 24
May, 1963, was General Manager of the Metal Manufacturing Company of the

DE CASTRO, J.:

Philippines, Inc. engaged in the manufacture of steel office equipment; on 31 May,


1963, because his company was in need of raw materials to be imported from abroad,

Petition for review of the decision of the Court of Appeals affirming the decision of the

he applied for a letter of credit to import steel sheets from Mitsui Bussan Kaisha, Ltd.

Court of First Instance of Manila convicting the appellant of estafa, under an

of Tokyo, Japan, the application being directed to the Continental Bank, herein

information which reads:

complainant, Exhibit B and his application having been approved, the letter of credit
was opened on 5 June, 1963 in the amount of $18,300, Exhibit D; and the goods

That in, about or during the period comprised' between July 24, 1963 and December

arrived sometime in July, 1963 according to accused himself, tsn. II:7; now from here

31, 1963, both dates inclusive, in the City of Manila, Philippines, the said accused did

on there is some debate on the evidence; according to Complainant Bank, there was

then and there willfully, unlawfully and feloniously defraud the Continental Bank, a

permitted delivery of the steel sheets only upon execution of a trust receipt, Exhibit A;

banking institution duly organized and doing business in the City of Manila, in the

while according to the accused, the goods were delivered to him sometime before he

following manner, to wit: the said accused, in his capacity as president and general

executed that trust receipt in fact they had already been converted into steel office

manager of the Metal Manufacturing of the Philippines, Inc. (MEMAP) and on behalf

equipment by the time he signed said trust receipt, tsn. II:8; but there is no question -

of said company, obtained delivery of 150 M/T Cold Rolled Steel Sheets valued at P

and this is not debated - that the bill of exchange issued for the purpose of collecting

71,023.60 under a trust receipt agreement under L/C No. 63/109, which cold rolled

the unpaid account thereon having fallen due (see Exh. B) neither accused nor his

steel sheets were consigned to the Continental Bank, under the express obligation on

company having made payment thereon notwithstanding demands, Exh. C and C-1,

the part of said accused of holding the said steel sheets in trust and selling them and

dated 17 and 27 December, 1963, and the accounts having reached the sum in pesos

turning over the proceeds of the sale to the Continental Bank; but the said accused,

of P46,818.68 after deducting his deposit valued at P28,736.47; that was the reason

once in possession of the said goods, far from complying with his aforesaid obligation

why upon complaint by Continental Bank, the Fiscal filed the information after

and despite demands made upon him to do so, with intent to defraud, failed and

preliminary investigation as has been said on 22 October, 1964. (Rollo [CA], pp. 103-

refused to return the said cold rolled sheets or account for the proceeds thereof, if

104).

sold, which the said accused willfully, unlawfully and feloniously misappropriated,
misapplied and converted to his own personal use and benefit, to the damage and

The first issue raised, which in effect combines the first three errors assigned, is

prejudice of the said Continental Bank in the total amount of P146,818.68, that is the

whether petitioner Jose O. Sia, having only acted for and in behalf of the Metal

balance including the interest after deducting the sum of P28,736.47 deposited by the

Manufacturing Company of the Philippines (Metal Company, for short) as President

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thereof in dealing with the complainant, the Continental Bank, (Bank for short) he may

law on the corporation. Since it is a responsible officer or officers of the corporation

be liable for the crime charged.

who actually perform the act for the corporation, they must of necessity be the ones to
assume the criminal liability; otherwise this liability as created by the law would be

In discussing this question, petitioner proceeds, in the meantime, on the assumption

illusory, and the deterrent effect of the law, negated.

that the acts imputed to him would constitute the crime of estafa, which he also
disputes, but seeks to avoid liability on his theory that the Bank knew all along that

In the present case, a distinction is to be found with the Tan Boon Kong case in that

petitioner was dealing with him only as an officer of the Metal Company which was the

the act alleged to be a crime is not in the performance of an act directly ordained by

true and actual applicant for the letter of credit (Exhibit B) and which, accordingly,

law to be performed by the corporation. The act is imposed by agreement of parties,

assumed sole obligation under the trust receipt (Exhibit A). In disputing the theory of

as a practice observed in the usual pursuit of a business or a commercial transaction.

petitioner, the Solicitor General relies on the general principle that when a corporation

The offense may arise, if at all, from the peculiar terms and condition agreed upon by

commits an act which would constitute a punishable offense under the law, it is the

the parties to the transaction, not by direct provision of the law. The intention of the

responsible officers thereof, acting for the corporation, who would be punished for the

parties, therefore, is a factor determinant of whether a crime was committed or

crime, The Court of Appeals has subscribed to this view when it quoted approvingly

whether a civil obligation alone intended by the parties. With this explanation, the

from the decision of the trial court the following:

distinction adverted to between the Tan Boon Kong case and the case at bar should
come out clear and meaningful. In the absence of an express provision of law making

A corporation is an artificial person, an abstract being. If the defense theory is

the petitioner liable for the criminal offense committed by the corporation of which he

followed unscrupulously legions would form corporations to commit swindle right and

is a president as in fact there is no such provisions in the Revised Penal Code under

left where nobody could be convicted, for it would be futile and ridiculous to convict an

which petitioner is being prosecuted, the existence of a criminal liability on his part

abstract being that can not be pinched and confined in jail like a natural, living person,

may not be said to be beyond any doubt. In all criminal prosecutions, the existence of

hence the result of the defense theory would be hopeless chose in business and

criminal liability for which the accused is made answerable must be clear and certain.

finance. It is completely untenable. (Rollo [CA], p. 108.)

The maxim that all doubts must be resolved in favor of the accused is always of
compelling force in the prosecution of offenses. This Court has thus far not ruled on

The above-quoted observation of the trial court would seem to be merely restating a

the criminal liability of an officer of a corporation signing in behalf of said corporation a

general principle that for crimes committed by a corporation, the responsible officers

trust receipt of the same nature as that involved herein. In the case of Samo vs.

thereof would personally bear the criminal liability. (People vs. Tan Boon Kong, 54

People, L-17603-04, May 31, 1962, the accused was not clearly shown to be acting

Phil. 607. See also Tolentino, Commercial Laws of the Philippines, p. 625, citing

other than in his own behalf, not in behalf of a corporation.

cases.)
The next question is whether the violation of a trust receipt constitutes estafa under
The case cited by the Court of Appeals in support of its stand-Tan Boon Kong case,

Art. 315 (1-[2]) of the Revised Penal Code, as also raised by the petitioner. We now

supra-may however not be squarely applicable to the instant case in that the

entertain grave doubts, in the light of the promulgation of P.D. 115 providing for the

corporation was directly required by law to do an act in a given manner, and the same

regulation of trust receipts transaction, which is a very comprehensive piece of

law makes the person who fails to perform the act in the prescribed manner expressly

legislation, and includes an express provision that if the violation or offense is

liable criminally. The performance of the act is an obligation directly imposed by the

committed by a corporation, partnership, association or other juridical entities the

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penalty provided for in this Decree shall be imposed upon the directors, officers,

We consider the view that the trust receipt arrangement gives rise only to civil liability

employees or other officials or persons therein responsible for the offense, without

as the more feasible, before the promulgation of P.D. 115. The transaction being

prejudice to civil liabilities arising from the criminal offense. The question that

contractual, the intent of the parties should govern. Since the trust receipt has, by its

suggests itself is, therefore, whether the provisions of the Revised Penal Code, Article

nature, to be executed upon the arrival of the goods imported, and acquires legal

315, par. 1 (b) are not adequate to justify the punishment of the act made punishable

standing as such receipt only upon acceptance by the "entrustee," the trust receipt

by P.D. 115, that the necessity was felt for the promulgation of the decree. To answer

transaction itself, the antecedent acts consisting of the application of the L/C, the

this question, it is imperative to make an indepth analysis of the conditions usually

approval of the L/C and the making of the marginal deposit and the effective

embodied in a trust receipt to best their legal sufficiency to constitute the basis for

importation of the goods, all through the efforts of the importer who has to find his

holding the violation of said conditions as estafa under Article 315 of the Revised

supplier, arrange for the payment and shipment of the imported goods-all these

Penal Code which P.D. 115 now seeks to punish expressly.

circumstances would negate any intent of subjecting the importer to criminal


prosecution, which could possibly give rise to a case of imprisonment for non-

As executed, the trust receipt in question reads:

payment of a debt. The parties, therefore, are deemed to have consciously entered
into a purely commercial transaction that could give rise only to civil liability, never to

I/WE HEREBY AGREE TO HOLD SAID GOODS IN TRUST FOR THE SAID BANK as

subject the "entrustee" to criminal prosecution. Unlike, for instance, when several

its property with liberty to sell the same for its account but without authority to make

pieces of jewelry are received by a person from the owner for sale on commission,

any other disposition whatsoever of the said goods or any part thereof (or the

and the former misappropriates for his personal use and benefit, either the jewelries

proceeds thereof) either way of conditional sale, pledge or otherwise;

or the proceeds of the sale, instead of returning them to the owner as is his obligation,
the bank is not in the same concept as the jewelry owner with full power of disposition

In case of sale I/we further agree to hand the proceeds as soon as received to the

of the goods, which the bank does not have, for the bank has previously extended a

BANK to apply against the relative acceptance (as described above) and for the

loan which the L/C represents to the importer, and by that loan, the importer should

payment of any other indebtedness of mine/ours to CONTINENTAL BANK. (Original

be the real owner of the goods. If under the trust receipt the bank is made to appear

Records, p. 108)

as the owner, it was but an artificial expedient, more of a legal fiction than fact, for if it
were really so, it could dispose of the goods in any manner it wants, which it cannot

One view is to consider the transaction as merely that of a security of a loan, and that

do, just to give consistency with the purpose of the trust receipt of giving a stronger

the trust element is but and inherent feature of the security aspect of the arrangement

security for the loan obtained by the importer. To consider the bank as the true owner

where the goods are placed in the possession of the "entrustee," to use the term used

from the inception of the transaction would be to disregard the loan feature thereof, a

in P.D. 115, violation of the element of trust not being intended to be in the same

feature totally absent in the case of the transaction between the jewel-owner and his

concept as how it is understood in the criminal sense. The other view is that the bank

agent.

as the owner and "entrustor" delivers the goods to the "entrustee, " with the authority
to sell the goods, but with the obligation to give the proceeds to the "entrustor" or

Consequently, if only from the fact that the trust receipt transaction is susceptible to

return the goods themselves if not sold, a trust being thus created in the full sense as

two reasonable interpretation, one as giving rise only to civil liability for the violation of

contemplated by Art. 315, par. 1 (b).

the condition thereof, and the other, as generating also criminal liability, the former
should be adopted as more favorable to the supposed offender. (Duran vs. CA, L-

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39758, May 7, 1976, 71 SCRA 68; People vs. Parayno, L-24804, July 5, 1968, 24
SCRA 3; People vs. Abendan, L-1481, January 28,1949,82 Phil. 711; People vs.

It is also worthy of note that while the trust receipt speaks of authority to sell, the fact

Bautista, L-1502, May 24, 1948, 81 Phil. 78; People vs. Abana, L-39, February 1,

is undisputed that the imported goods were to be manufactured into finished products

1946, 76 Phil. 1.)

first before they could be sold, as the Bank had full knowledge of. This fact is,
however, not embodied in the trust agreement, thus impressing on the trust receipt

There is, moreover, one circumstance appearing on record, the significance of which

vagueness and ambiguity which should not be the basis for criminal prosecution, in

should be properly evaluated. As stated in petitioner's brief (page 2), not denied by

the event of a violation of the terms of the trust receipt. Again, P.D. 115 has express

the People, "before the Continental Bank approved the application for a letter of credit

provision relative to the "manufacture or process of the good with the purpose of

(Exhibit 'D'), subsequently covered by the trust receipt, the Continental Bank

ultimate sale," as a distinct condition from that of "to sell the goods or procure their

examined the financial capabilities of the applicant, Metal Manufacturing Company of

sale" (Section 4, (1). Note that what is embodied in the receipt in question is the sale

the Philippines because that was the bank's standard procedure (Testimony of Mr.

of imported goods, the manufacture thereof not having been mentioned. The

Ernesto Garlit, Asst. Manager of the Foreign Department, Continental Bank, t.s.n.,

requirement in criminal prosecution, that there must be strict harmony, not variance,

August 30, 1965). The Continental Bank did not examine the financial capabilities of

between the allegation and the evidence, may therefore, not be said to have been

herein petitioner, Jose O. Sia, in connection with the same letter of credit. (Ibid). "

satisfied in the instance case.

From this fact, it would appear as positively established that the intention of the
parties in entering into the "trust receipt" agreement is merely to afford a stronger

FOR ALL THE FOREGOING, We reverse the decision of the Court of Appeals and

security for the loan evidenced by the letter of credit, may be not as an ordinary

hereby acquit the petitioner, with costs de oficio.

pledge as observed in P.N.B. vs. Viuda e Hijos de Angel Jose, et al., 63 Phil. 814,
citing In re Dunlap C (206 Fed. 726) but neither as a transaction falling under Article

SO ORDERED.

315-1 (b) of the Revised Penal Code giving rise to criminal liability, as previously
explained and demonstrated.

ARNEL U. TY, MARIE ANTONETTE TY, JASON ONG, WILLY DY, and ALVIN TY,

It is worthy of note that the civil liability imposed by the trust receipt is exclusively on

JEMIL, PETRON GASUL DEALERS ASSOCIATION, and TOTALGAZ DEALERS

the Metal Company. Speaking of such liability alone, as one arising from the contract,

ASSOCIATION,

Petitioners, - versus - NBI SUPERVISING AGENT MARVIN E. DE

as distinguished from the civil liability arising out of a crime, the petitioner was never

Respondents.

intended to be equally liable as the corporation. Without being made so liable

G.R. No. 182147

personally as the corporation is, there would then be no basis for holding him

December 15, 2010

criminally liable, for any violation of the trust receipt. This is made clearly so upon

The Case

consideration of the fact that in the violation of the trust agreement and in the absence

61In this Petition for Review on Certiorari under Rule 45, petitioners seek the reversal

of positive evidence to the contrary, only the corporation benefited, not the petitioner

of the Decision[1] dated September 28, 2007 of the Court of Appeals (CA) in CA-G.R.

personally, yet, the allegation of the information is to effect that the misappropriation

SP No. 98054, which reversed and set aside the Resolutions dated October 9,

or conversion was for the personal use and benefit of the petitioner, with respect to

2006[2] and December 14, 2006[3] of the Secretary of Justice, and reinstated the

which there is variance between the allegation and the evidence.

November 7, 2005 Joint Resolution[4] of the Office of the Chief State Prosecutor.

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Petitioners assail also the CA Resolution[5] dated March 14, 2008, denying their

Gaz to Omni for refilling. The branded LPG cylinders were refilled, for which the

motion for reconsideration.

National Bureau of Investigation (NBI) agents paid PhP 1,582 as evidenced by Sales

The Facts

Invoice No. 90040[13] issued by Omni on April 15, 2004. The refilled LPG cylinders
were without LPG valve seals and one of the cylinders was actually underfilled, as

Petitioners are stockholders of Omni Gas Corporation (Omni) as per Omnis General

found by LPG Inspector Noel N. Navio of the Liquefied Petroleum Gas Industry

Information Sheet[6] (GIS) dated March 6, 2004 submitted to the Securities and

Association (LPGIA) who inspected the eight branded LPG cylinders on April 23,

Exchange Commission (SEC). Omni is in the business of trading and refilling of

2004 which were properly marked by the NBI after the test-buy.

Liquefied Petroleum Gas (LPG) cylinders and holds Pasig City Mayors Permit No.
RET-04-001256 dated February 3, 2004.

The NBIs test-buy yielded positive results for violations of BP 33, Section 2(a) in
relation to Secs. 3(c) and 4, i.e., refilling branded LPG cylinders without authority; and

The case all started when Joaquin Guevara Adarlo & Caoile Law Offices (JGAC Law

Sec. 2(c) in relation to Sec. 4, i.e., underdelivery or underfilling of LPG cylinders.

Offices) sent a letter dated March 22, 2004[7] to the NBI requesting, on behalf of their

Thus, on April 28, 2004, Agent De Jemil filed an Application for Search Warrant (With

clients Shellane Dealers Association, Inc., Petron Gasul Dealers Association, Inc.,

Request for Temporary Custody of the Seized Items)[14] before the Regional Trial

and Totalgaz Dealers Association, Inc., for the surveillance, investigation, and

Court (RTC) in Pasig City, attaching, among others, his affidavit[15] and the affidavit of

apprehension of persons or establishments in Pasig City that are engaged in alleged

Edgardo C. Kawada,[16] an NBI confidential agent.

illegal trading of petroleum products and underfilling of branded LPG cylinders in


violation of Batas Pambansa Blg. (BP) 33,[8] as amended by Presidential Decree No.

On the same day of the filing of the application for search warrants on April 28, 2004,

(PD) 1865.[9]

the RTC, Branch 167 in Pasig City issued Search Warrants No. 2624[17] and 2625.
[18] The NBI served the warrants the next day or on April 29, 2004 resulting in the

Earlier, the JGAC Law Offices was furnished by several petroleum producers/brand

seizure of several items from Omnis premises duly itemized in the NBIs

owners their respective certifications on the dealers/plants authorized to refill their

Receipt/Inventory of Property/Item Seized.[19] On May 25, 2004, Agent De Jemil

respective branded LPG cylinders, to wit: (1) On October 3, 2003, Pilipinas Shell

filed his Consolidated Return of Search Warrants with Ex-Parte Motion to Retain

Petroleum Corporation (Pilipinas Shell) issued a certification[10] of the list of entities

Custody of the Seized Items[20] before the RTC Pasig City.

duly authorized to refill Shellane LPG cylinders; (2) on December 4, 2003, Petron
Corporation (Petron) issued a certification[11] of their dealers in Luzon, Visayas, and

Subsequently, Agent De Jemil filed before the Department of Justice (DOJ) his

Mindanao authorized to refill Petron Gasul LPG cylinders; and (3) on January 5, 2004,

Complaint-Affidavits against petitioners for: (1) Violation of Section 2(a), in relation to

Total (Philippines) Corporation (Total) issued two certifications[12] of the refilling

Sections 3(c) and 4, of B.P. Blg. 33, as amended by P.D. 1865;[21] and (2) Violation of

stations and plants authorized to refill their Totalgaz and Superkalan Gaz LPG

Section 2(c), in relation to Section 4, of B.P. Blg. 33, as amended by P.D. 1865,[22]

cylinders.

docketed as I.S. Nos. 2004-616 and 2004-618, respectively.

Agents De Jemil and Kawada attested to conducting surveillance of Omni in the

During the preliminary investigation, petitioners submitted their Joint Counter-Affidavit,

months of March and April 2004 and doing a test-buy on April 15, 2004. They brought

[23] which was replied[24] to by Agent De Jemil with a corresponding rejoinder[25]

eight branded LPG cylinders of Shellane, Petron Gasul, Totalgaz, and Superkalan

from petitioners.

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In time, petitioners appealed to the Office of the Secretary of Justice.[30]


The Ruling of the Office of the Chief State Prosecutor
in I.S. No. 2004-616 and I.S. No. 2004-618

The Ruling of the DOJ Secretary


in I.S. No. 2004-616 and I.S. No. 2004-618

On November 7, 2005, the 3rd Assistant City Prosecutor Leandro C. Catalo of Manila

On October 9, 2006, the Office of the Secretary of Justice issued a Resolution[31]

issued a Joint Resolution,[26] later approved by the Chief State Prosecutor Jovencito

reversing and setting aside the November 7, 2005 Joint Resolution of the Office of the

R. Zuo upon the recommendation of the Head of the Task Force on Anti-Intellectual

Chief State Prosecutor, the dispositive portion of which reads:

Property Piracy (TFAIPP), Assistant Chief State Prosecutor Leah C. TanodraArmamento, finding probable cause to charge petitioners with violations of pertinent

WHEREFORE, the assailed resolution is hereby REVERSED and SET ASIDE. The

sections of BP 33, as amended, resolving as follows:

Chief State Prosecutor is directed to cause the withdrawal of the informations for
violations of Sections 2(a) and 2(c) of B.P. Blg. 33, as amended by P.D. 1865, against
respondents Arnel Ty, Mari Antonette Ty, Jason Ong, Willy Dy and Alvin Ty and report

WHEREFORE, premises considered, it is hereby recommended that two (2)

the action taken within ten (10) days from receipt hereof.

Informations for violations of Section 2 [a] (illegal trading in petroleum and/or


petroleum products) and Section 2 [c] (underfilling of LPG cylinders), both of Batas

SO ORDERED.[32]

Pambansa Bilang 33, as amended, be filed against respondents [herein petitioners]


ARNEL TY, MARIE ANTONETTE TY, JASON ONG, WILLY DY and ALVIN TY.[27]
The Office of the Secretary of Justice viewed, first, that the underfilling of one of the
eight LPG cylinders was an isolated incident and cannot give rise to a conclusion of
Assistant City Prosecutor Catalo found the existence of probable cause based on the

underfilling, as the phenomenon may have been caused by human error, oversight or

evidence submitted by Agent De Jemil establishing the fact that Omni is not an

technical error. Being an isolated case, it ruled that there was no showing of a clear

authorized refiller of Shellane, Petron Gasul, Totalgaz and Superkalan Gaz LPG

pattern of deliberate underfilling. Second, on the alleged violation of refilling branded

cylinders.

Debunking petitioners contention that the branded LPG cylinders are

LPG cylinders sans written authority, it found no sufficient basis to hold petitioners

already owned by consumers who are free to do with them as they please, the law is

responsible for violation of Sec. 2 (c) of BP 33, as amended, since there was no proof

clear that the stamped markings on the LPG cylinders show who are the real owners

that the branded LPG cylinders seized from Omni belong to another company or firm,

thereof and they cannot be refilled sans authority from Pilipinas Shell, Petron or Total,

holding that the simple fact that the LPG cylinders with markings or stamps of other

as the case may be. On the underfilling of one LPG cylinder, the findings of LPG

petroleum producers cannot by itself prove ownership by said firms or companies as

Inspector Navio of the LPGIA were uncontroverted by petitioners.

the consumers who take them to Omni fully owned them having purchased or
acquired them beforehand.

Petitioners motion for reconsideration,[28] was denied through a Resolution[29] by


the Office of the Chief State Prosecutor issued on May 3, 2006.

Agent De Jemil moved but was denied reconsideration[33] through another


Resolution[34] dated December 14, 2006 prompting him to repair to the CA via a

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petition for certiorari[35] under Rule 65 of the Rules of Court, docketed as CA-G.R.
Moreover, the CA found strong probable violation of refilling of another companys or

SP No. 98054.

firms cylinders without such companys or firms written authorization under Sec. 3
The Ruling of the CA

(c) of BP 33, as amended. The CA relied on the affidavits of Agents De Jemil and
Kawada, the certifications from various LPG producers that Omni is not authorized to

The Office of the Solicitor General (OSG), in its Comment[36] on Agent De Jemils

refill their branded LPG cylinders, the results of the test-buy operation as attested to

appeal, sought the dismissal of the latters petition viewing that the determination by

by the NBI agents and confirmed by the examination of LPG Inspector Navio of the

the Office of the Secretary of Justice of probable cause is entitled to respect owing to

LPGIA, the letter-opinion[41] of the Department of Energy (DOE) to Pilipinas Shell

the exercise of his prerogative to prosecute or not.

confirming that branded LPG cylinders are properties of the companies whose stamp
markings appear thereon, and Department Circular No. 2000-05-007[42] of the DOE

On August 31, 2007, Petron filed a Motion to Intervene and to Admit Attached

on the required stamps or markings by the manufacturers of LPG cylinders.

Petition-in-Intervention[37] and Petition-in-Intervention[38] before the CA in CA-G.R.


SP No. 98054. And much earlier, the Nationwide Association of Consumers, Inc.

After granting the appeal of Agent De Jemil, however, the motions to intervene filed by

(NACI) also filed a similar motion.

Petron and NACI were simply noted by the appellate court.

On September 28, 2007, the appellate court rendered the assailed Decision[39]

Petitioners motion for reconsideration was rebuffed by the CA through the equally

revoking the resolutions of the Office of the Secretary of Justice and reinstated the

assailed March 14, 2008 Resolution.[43]

November 7, 2005 Joint Resolution of the Office of the Chief State Prosecutor. The
fallo reads:
WHEREFORE, the instant petition is GRANTED.

Thus, the instant petition.


The assailed resolutions dated

The Issues

October 9, 2006 and December 14, 2006 are hereby REVERSED and SET ASIDE.
The Joint Resolution dated November 7, 2005 of the Office of the Chief State

I.

WHETHER OR NOT RESPONDENTS WERE ENTITLED TO THE SPECIAL

Prosecutor finding probable cause against private respondents Arnel Ty, Marie

CIVIL ACTION OF CERTIORARI IN THE COURT OF APPEALS.

Antonette Ty, Jason Ong, Willy Dy, and Alvin Ty is hereby REINSTATED.
II.

WHETHER OR NOT UNDER THE CIRCUMSTANCES THERE WAS

PROBABLE CAUSE TO BELIEVE THAT PETITIONERS VIOLATED SECTION 2(A)

SO ORDERED.[40]

OF BATAS PAMBANSA BLG. 33, AS AMENDED.


Citing Sec. 1 (1) and (3) of BP 33, as amended, which provide for the presumption of

III.

underfilling, the CA held that the actual underfilling of an LPG cylinder falls under the

PROBABLE CAUSE TO BELIEVE THAT PETITIONERS VIOLATED SECTION 2(C)

prohibition of the law which does not require for the underfilling to be substantial and

OF BATAS PAMBANSA BLG. 33, AS AMENDED.

deliberate.

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IV.

WHETHER OR NOT PETITIONERS CAN BE HELD LIABLE UNDER BATAS


Procedural Issue: Petition for Certiorari under Rule 65 Proper

PAMBANSA BLG. 33, AS AMENDED, FOR BEING MERE DIRECTORS, NOT


ACTUALLY IN CHARGE OF THE MANAGEMENT OF THE BUSINESS AFFAIRS OF

Petitioners raise the sole procedural issue of the propriety of the legal remedy availed

THE CORPORATION.[44]

of by public respondent Agent De Jemil. They strongly maintain that the Office of the
Secretary of Justice properly assumed jurisdiction and did not gravely abuse its
discretion in its determination of lack of probable causethe exercise thereof being its
The foregoing issues can be summarized into two core issues: first, whether probable

sole prerogativewhich, they lament, the appellate court did not accord proper

cause exists against petitioners for violations of Sec. 2 (a) and (c) of BP 33, as

latitude. Besides, they assail the non-exhaustion of administrative remedies when

amended; and second, whether petitioners can be held liable therefor. We, however,

Agent De Jemil immediately resorted to court action through a special civil action for

will tackle at the outset the sole procedural issue raised: the propriety of the petition

certiorari under Rule 65 before the CA without first appealing the resolutions of the

for certiorari under Rule 65 availed of by public respondent Agent De Jemil to assail

Office of the Secretary of Justice to the Office of the President (OP).

the resolutions of the Office of the Secretary of Justice.


We cannot agree with petitioners.
Petrons Comment-in-Intervention
For one, while it is the consistent principle in this jurisdiction that the determination of
On April 14, 2009, Petron entered its appearance by filing a Motion for Leave to

probable cause is a function that belongs to the public prosecutor[48] and, ultimately,

Intervene and to Admit Comment-in-Intervention[45] and its Comment-in-Intervention

to the Secretary of Justice, who may direct the filing of the corresponding information

[To petition for Review on Certiorari dated 13 May 2008].[46]

It asserted vested

or move for the dismissal of the case;[49] such determination is subject to judicial

interest in the seizure of several Gasul LPG cylinders and the right to prosecute

review where it is established that grave abuse of discretion tainted the determination.

petitioners for unauthorized refilling of its branded LPG cylinders by Omni. Petitioners
duly filed their Comment/Opposition[47] to Petrons motion to intervene. It is clear,

For another, there is no question that the Secretary of Justice is an alter ego of the

however, that Petron has substantial interest to protect in so far as its business

President who may opt to exercise or not to exercise his or her power of review over

relative to the sale and refilling of Petron Gasul LPG cylinders is concerned, and

the formers determination in criminal investigation cases. As aptly noted by Agent De

therefore its intervention in the instant case is proper.

Jemil, the determination of probable cause by the Secretary of Justice is, under the
doctrine of qualified political agency, presumably that of the Chief Executive unless

The Courts Ruling

disapproved or reprobated by the latter.

We partially grant the petition.

of the Secretary of Justice. Therein, the Court, after expounding on the policy of non-

Chan v. Secretary of Justice[50] delineated the proper remedy from the determination
interference in the determination of the existence of probable cause absent any
showing of arbitrariness on the part of the public prosecutor and the Secretary of
Justice, however, concluded, citing Alcaraz v. Gonzalez[51] and Preferred Home
Specialties, Inc. v. Court of Appeals,[52] that an aggrieved party from the resolution of

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the Secretary of Justice may directly resort to judicial review on the ground of grave

swapping, for example, will effectively transfer ownership of the LPG cylinders to the

abuse of discretion, thus:

transferee, like Omni.

x x x [T]he findings of the Justice Secretary may be reviewed through a petition for

Fourth, LPG cylinder exchange or swapping is a common industry practice that the

certiorari under Rule 65 based on the allegation that he acted with grave abuse of

DOE recognizes.

discretion. This remedy is available to the aggrieved party.[53] (Emphasis supplied.)

institutionalizing the validity of swapping of all and any kind of LPG cylinders among

They point to a series of meetings conducted by the DOE for

the industry players. The meetings resulted in a draft Memorandum of Agreement


(MOA) which unfortunately was not signed due to the withdrawal of petroleum major
It is thus clear that Agent De Jemil, the aggrieved party in the assailed resolutions of

players Petron, Total and Pilipinas Shell. Nonetheless, the non-signing of the MOA

the Office of the Secretary of Justice, availed of and pursued the proper legal remedy

does not diminish the fact of the recognized industry practice of cylinder exchange or

of a judicial review through a petition for certiorari under Rule 65 in assailing the

swapping. Relying on Republic Act No. (RA) 8479,[54] petitioners maintain that said

latters finding of lack of probable cause on the ground of grave abuse of discretion.

law promotes and encourages the entry of new participants in the petroleum industry
such as Omni. And in furtherance of this mandate is the valid practice of cylinder

First Core Issue: Existence of Probable Cause

exchange or swapping in the LPG industry.

Petitioners contend that there is no probable cause that Omni violated Sec. 2 (a), in

We are not persuaded by petitioners strained rationalizations.

relation to Secs. 3 (c) and 4 of BP 33, as amended, prohibiting the refilling of another
companys or firms LPG cylinders without its written authorization. First, the branded
LPG cylinders seized were not traded by Omni as its representative annotated in the
NBI receipt of seized items that the filled LPG cylinders came from customers trucks

Probable violation of Sec. 2 (a) of BP 33, amended

and the empty ones were taken from the warehouse or swapping section of the
refilling plant and not from the refilling section. Second, the branded LPG cylinders

First. The test-buy conducted on April 15, 2004 by the NBI agents, as attested to by

are owned by end-user customers and not by the major petroleum companies, i.e.,

their respective affidavits, tends to show that Omni illegally refilled the eight branded

Petron, Pilipinas Shell and Total. And even granting arguendo that Omni is selling

LPG cylinders for PhP 1,582. This is a clear violation of Sec. 2 (a), in relation to

these LPG cylinders, still there cannot be a prima facie case of violation since there is

Secs. 3 (c) and 4 of BP 33, as amended.

no proof that the refilled branded LPG cylinders are owned by another company or

complaints, as clearly shown in the complaint-affidavits of Agent De Jemil, are not

firm.

based solely on the seized items pursuant to the search warrants but also on the test-

It must be noted that the criminal

buy earlier conducted by the NBI agents.


Third, granting that Petron, Total and Pilipinas Shell still own their respective branded
LPG cylinders already sold to consumers, still such fact will not bind third persons, like

Second. The written certifications from Pilipinas Shell, Petron and Total show that

Omni, who is not privy to the agreement between the buying consumers and said

Omni has no written authority to refill LPG cylinders, embossed, marked or stamped

major petroleum companies.

Shellane, Petron Gasul, Totalgaz and Superkalan Gaz. In fact, petitioners neither

Thus, a subsequent transfer by the customers of

dispute this nor claim that Omni has authority to refill these branded LPG cylinders.

Petron, Total and Pilipinas Shell of the duly marked or stamped LPG cylinders through

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consisting of nine branded LPG cylinders, specifically Totalgaz, Petron Gasul and
Third.

Belying petitioners contention, the seized items during the service of the

Shellane, tends to show that Omni indeed refilled these branded LPG cylinders

search warrants tend to show that Omni illegally refilled branded LPG cylinders

without authorization from Total, Petron and Pilipinas Shell. Such a fact is bolstered

without authority.

by the test-buy conducted by Agent De Jemil and NBI confidential agent Kawada:
Omnis unauthorized refilling of branded LPG cylinders, contrary to Sec. 2 (a) in

On April 29, 2004, the NBI agents who served the search warrants on Omni seized

relation to Sec. 3 (c) of BP 33, as amended. Said provisos provide:

the following:
Sec. 2.

Prohibited Acts.The following acts are prohibited and penalized:

Quantity/Unit

Description

7 LPG cylinders

Totalgaz, 11.0 kg [filled]

1 LPG cylinder

Petron Gasul, 11.0 kg [filled]

1 LPG cylinder

Shellane, 11.0 kg [filled]

29 LPG cylinders

Superkalan Gaz, 2.7 kg [empty]

17 LPG cylinders

Petron Gasul, 11.0 kg [emptly]

Sec. 3.

8 LPG cylinders

Marked as Omnigas with Shell emboss,

construed to mean:

(a)

Illegal trading in petroleum and/or petroleum products;

xxxx
Definition of terms.For the purpose of this Act, the following terms shall be

11.0 kg [empty]
5 LPG cylinders

Marked as Omnigas with Totalgaz emboss,

23 LPG cylinders

Shellane, 11.0 kg [empty]

3 LPG cylinders

Marked as Omnigas with Gasul emboss,

21 LPG cylinders

Totalgaz, 11.0 kg [empty]

Illegal trading in petroleum and/or petroleum products

11.0 kg [empty]
xxxx

11.0 kg [empty]

(c)

Refilling of liquefied petroleum gas cylinders without authority from

said Bureau, or refilling of another companys or firms cylinders without such


companys or firms written authorization; (Emphasis supplied.)

The foregoing list is embodied in the NBIs Receipt/Inventory of Property/Item


Seized[55] signed by NBI Agent Edwin J. Roble who served and implemented the
And a copy thereof was duly received by Atty. Allan U. Ty,

As petitioners strongly argue, even if the branded LPG cylinders were indeed owned

representative of Omni, who signed the same under protest and made the

by customers, such fact does not authorize Omni to refill these branded LPG cylinders

annotation at the bottom part thereon: The above items/cylinders were taken at

without written authorization from the brand owners Pilipinas Shell, Petron and Total.

customers trucks and the empty cylinders taken at the warehouse (swapping section)

In Yao, Sr. v. People,[57] a case involving criminal infringement of property rights

of the company.[56]

under Sec. 155 of RA 8293,[58] in affirming the courts a quos determination of the

search warrants.

presence of probable cause, this Court held that from Sec. 155.1[59] of RA 8293 can
Even considering that the filled LPG cylinders were indeed already loaded on

be gleaned that mere unauthorized use of a container bearing a registered trademark

customers trucks when confiscated, yet the fact that these refilled LPG cylinders

in connection with the sale, distribution or advertising of goods or services which is

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likely to cause confusion, mistake or deception among the buyers/consumers can be

cylinders even if these are possessed by customers or consumers.

considered as trademark infringement.[60]

The Court

The Court affirmed the presence of

recognizes this right pursuant to our laws, i.e., Intellectual Property Code of the

infringement involving the unauthorized sale of Gasul and Shellane LPG cylinders

Philippines. Thus the issuance by the DOE Circular No. 2000-05-007,[61] the letter-

and the unauthorized refilling of the same by Masagana Gas Corporation as duly

opinion[62] dated December 9, 2004 of then DOE Secretary Vincent S. Perez

attested to and witnessed by NBI agents who conducted the surveillance and test-

addressed to Pilipinas Shell, the June 6, 2007 letter[63] of then DOE Secretary

buys.

Raphael P.M. Lotilla to the LPGIA, and DOE Department Circular No. 2007-100007[64] on LPG Cylinder Ownership and Obligations Related Thereto issued on

Similarly, in the instant case, the fact that Omni refilled various branded LPG cylinders

October 13, 2007 by DOE Secretary Angelo T. Reyes.

even if owned by its customers but without authority from brand owners Petron,
Pilipinas Shell and Total shows palpable violation of BP 33, as amended. As aptly

Fifth. The ownership of the seized branded LPG cylinders, allegedly owned by Omni

noted by the Court in Yao, Sr. v. People, only the duly authorized dealers and refillers

customers as petitioners adamantly profess, is of no consequence.

of Shellane, Petron Gasul and, by extension, Total may refill these branded LPG
cylinders.

The law does not require that the property to be seized should be owned by the

Our laws sought to deter the pernicious practices of unscrupulous

person against whom the search warrants is directed. Ownership, therefore, is of no

businessmen.

consequence, and it is sufficient that the person against whom the warrant is directed
Fourth. The issue of ownership of the seized branded LPG cylinders is irrelevant and

has control or possession of the property sought to be seized.[65] Petitioners cannot

hence need no belaboring. BP 33, as amended, does not require ownership of the

deny that the seized LPG cylinders were in the possession of Omni, found as they

branded LPG cylinders as a condition sine qua non for the commission of offenses

were inside the Omni compound.

involving petroleum and petroleum products. Verily, the offense of refilling a branded
LPG cylinder without the written consent of the brand owner constitutes the offense

In fine, we also note that among those seized by the NBI are 16 LPG cylinders

regardless of the buyer or possessor of the branded LPG cylinder.

bearing the embossed brand names of Shellane, Gasul and Totalgaz but were
marked as Omnigas. Evidently, this pernicious practice of tampering or changing the

After all, once a consumer buys a branded LPG cylinder from the brand owner or its

appearance of a branded LPG cylinder to look like another brand violates the brand

authorized dealer, said consumer is practically free to do what he pleases with the

owners property rights as infringement under Sec. 155.1 of RA 8293. Moreover,

branded LPG cylinder. He can simply store the cylinder once it is empty or he can

tampering of LPG cylinders is a mode of perpetrating the criminal offenses under BP

even destroy it since he has paid a deposit for it which answers for the loss or cost of

33, as amended, and clearly enunciated under DOE Circular No. 2000-06-010 which

the empty branded LPG cylinder. Given such fact, what the law manifestly prohibits is

provided penalties on a per cylinder basis for each violation.

the refilling of a branded LPG cylinder by a refiller who has no written authority from
the brand owner. Apropos, a refiller cannot and ought not to refill branded LPG

Foregoing considered, in the backdrop of the quantum of evidence required to support

cylinders if it has no written authority from the brand owner.

a finding of probable cause, we agree with the appellate court and the Office of the
Chief State Prosecutor, which conducted the preliminary investigation, that there

Besides, persuasive are the opinions and pronouncements by the DOE:

brand

exists probable cause for the violation of Sec. 2 (a) in relation to Sec. 3 (c) of BP 33,

owners are deemed owners of their duly embossed, stamped and marked LPG

as amended. Probable cause has been defined as the existence of such facts and

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circumstances as would excite belief in a reasonable mind, acting on the facts within
the knowledge of the prosecutor, that the person charged was guilty of the crime for

B.P. Blg. 33, as amended, criminalizes illegal trading, adulteration, underfilling,

which he was prosecuted.[66] After all, probable cause need not be based on clear

hoarding, and overpricing of petroleum products. Under this general description of

and convincing evidence of guilt, as the investigating officer acts upon reasonable

what constitutes criminal acts involving petroleum products, the Circular merely lists

beliefprobable cause implies probability of guilt and requires more than bare

the various modes by which the said criminal acts may be perpetrated, namely: no

suspicion but less than evidence which would justify a conviction.[67]

price display board, no weighing scale, no tare weight or incorrect tare weight
markings, no authorized LPG seal, no trade name, unbranded LPG cylinders, no

Probable violation of Sec. 2 (c) of BP 33, as amended

serial number, no distinguishing color, no embossed identifying markings on cylinder,


underfilling LPG cylinders, tampering LPG cylinders, and unauthorized decanting of

Anent the alleged violation of Sec. 2 (c) in relation to Sec. 4 of BP 33, as amended,

LPG cylinders.

petitioners strongly argue that there is no probable cause for said violation based

contemplation of the law, which seeks to curb the pernicious practices of some

upon an underfilling of a lone cylinder of the eight branded LPG cylinders refilled

petroleum merchants.[69] (Emphasis supplied.)

These specific acts and omissions are obviously within the

during the test-buy. Besides, they point out that there was no finding of underfilling in
any of the filled LPG cylinders seized during the service of the search warrants.
Citing DOEs Bureau of Energy Utilization Circular No. 85-3-348, they maintain that

Moreover, in denying the motion for reconsideration of the LPG Refillers Association

some deviation is allowed from the exact filled weight. Considering the fact that an

of the Philippines, Inc., the Court upheld the basis of said DOE Circular No. 2000-06-

isolated underfilling happened in so many LPG cylinders filled, petitioners are of the

010 on the imposition of penalties on a per cylinder basis, thus:

view that such is due to human or equipment error and does not in any way constitute
deliberate underfilling within the contemplation of the law.

Respondents position is untenable.

The Circular is not confiscatory in providing

penalties on a per cylinder basis.

Those penalties do not exceed the ceiling

Moreover, petitioners cast aspersion on the report and findings of LPG Inspector

prescribed in Section 4 of B.P. Blg. 33, as amended, which penalizes any person

Navio of the LPGIA by assailing his independence for being a representative of the

who commits any act [t]herein prohibited. Thus, violation on a per cylinder basis falls

major petroleum companies and that the inspection he conducted was made without

within the phrase any act as mandated in Section 4. To provide the same penalty for

the presence of any DOE representative or any independent body having technical

one who violates a prohibited act in B.P. Blg. 33, as amended, regardless of the

expertise in determining LPG cylinder underfilling beyond the authorized quantity.

number of cylinders involved would result in an indiscriminate, oppressive and


impractical operation of B.P. Blg. 33, as amended.

Again, we are not persuaded.

The equal protection clause

demands that all persons subject to such legislation shall be treated alike, under like
circumstances and conditions, both in the privileges conferred and in the liabilities

Contrary to petitioners arguments, a single underfilling constitutes an offense under

imposed.[70]

BP 33, as amended by PD 1865, which clearly criminalizes these offenses. In Perez


v. LPG Refillers Association of the Philippines, Inc.,[68] the Court affirmed the validity
of DOE Circular No. 2000-06-010 which provided penalties on a per cylinder basis for

The Court made it clear that a violation, like underfilling, on a per cylinder basis falls

each violation, thus:

within the phrase of any act as mandated under Sec. 4 of BP 33, as amended.

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Ineluctably, the underfilling of one LPG cylinder constitutes a clear violation of BP 33,

Trials of cases arising from this Act shall be terminated within thirty (30) days after

as amended. The finding of underfilling by LPG Inspector Navio of the LPGIA, as

arraignment.

aptly noted by Manila Assistant City Prosecutor Catalo who conducted the preliminary
investigation, was indeed not controverted by petitioners.

When the offender is a corporation, partnership, or other juridical person, the


president, the general manager, managing partner, or such other officer charged with

On the issue of manifest bias and partiality, suffice it to say that aside from the

the management of the business affairs thereof, or employee responsible for the

allegation by petitioners, they have not shown that LPG Inspector Navio is neither an

violation shall be criminally liable; in case the offender is an alien, he shall be subject

expert nor qualified to determine underfilling.

to deportation after serving the sentence.

Besides, it must be noted that the

inspection by LPG Inspector Navio was conducted in the presence of NBI agents on
April 23, 2004 who attested to that fact through their affidavits. Moreover, no rules

If the offender is a government official or employee, he shall be perpetually

require and petitioners have not cited any that the inspection be conducted in the

disqualified from office. (Emphasis supplied.)

presence of DOE representatives.


Relying on the third paragraph of the above statutory proviso, petitioners argue that

Second Core Issue: Petitioners Liability for Violations

they cannot be held liable for any perceived violations of BP 33, as amended, since
Sec. 4 of BP 33, as amended, provides for the penalties and persons who are

they are mere directors of Omni who are not in charge of the management of its

criminally liable, thus:

business affairs. Reasoning that criminal liability is personal, liability attaches to a


person from his personal act or omission but not from the criminal act or negligence of

Sec. 4.

Penalties. Any person who commits any act herein prohibited shall, upon

another. Since Sec. 4 of BP 33, as amended, clearly provides and enumerates who

conviction, be punished with a fine of not less than twenty thousand pesos (P20,000)

are criminally liable, which do not include members of the board of directors of a

but not more than fifty thousand pesos (P50,000), or imprisonment of at least two (2)

corporation, petitioners, as mere members of the board of directors who are not in

years but not more than five (5) years, or both, in the discretion of the court. In cases

charge of Omnis business affairs, maintain that they cannot be held liable for any

of second and subsequent conviction under this Act, the penalty shall be both fine

perceived violations of BP 33, as amended. To bolster their position, they attest to

and imprisonment as provided herein. Furthermore, the petroleum and/or petroleum

being full-time employees of various firms as shown by the Certificates of

products, subject matter of the illegal trading, adulteration, shortselling, hoarding,

Employment[71] they submitted tending to show that they are neither involved in the

overpricing or misuse, shall be forfeited in favor of the Government: Provided, That if

day-to-day business of Omni nor managing it. Consequently, they posit that even if

the petroleum and/or petroleum products have already been delivered and paid for,

BP 33, as amended, had been violated by Omni they cannot be held criminally liable

the offended party shall be indemnified twice the amount paid, and if the seller who

thereof not being in any way connected with the commission of the alleged violations,

has not yet delivered has been fully paid, the price received shall be returned to the

and, consequently, the criminal complaints filed against them based solely on their

buyer with an additional amount equivalent to such price; and in addition, if the

being members of the board of directors as per the GIS submitted by Omni to SEC

offender is an oil company, marketer, distributor, refiller, dealer, sub-dealer and other

are grossly discriminatory.

retail outlets, or hauler, the cancellation of his license.

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On this point, we agree with petitioners except as to petitioner Arnel U. Ty who is

management of the business affairs of the corporation or juridical entity which is a

indisputably the President of Omni.

factual issue which must be alleged and supported by evidence.


A scrutiny of the GIS reveals that among the petitioners who are members of the

It may be noted that Sec. 4 above enumerates the persons who may be held liable for

board of directors are the following who are likewise elected as corporate officers of

violations of the law, viz:

(1) the president, (2) general manager, (3) managing

Omni: (1) Petitioner Arnel U. Ty (Arnel) as President; (2) petitioner Mari Antonette Ty

partner, (4) such other officer charged with the management of the business affairs of

as Treasurer; and (3) petitioner Jason Ong as Corporate Secretary. Sec. 4 of BP 33,

the corporation or juridical entity, or (5) the employee responsible for such violation. A

as amended, clearly indicated firstly the president of a corporation or juridical entity to

common thread of the first four enumerated officers is the fact that they manage the

be criminally liable for violations of BP 33, as amended.

business affairs of the corporation or juridical entity. In short, they are operating
officers of a business concern, while the last in the list is self-explanatory.

Evidently, petitioner Arnel, as President, who manages the business affairs of Omni,
can be held liable for probable violations by Omni of BP 33, as amended. The fact
that petitioner Arnel is ostensibly the operations manager of Multi-Gas Corporation, a

It is undisputed that petitioners are members of the board of directors of Omni at the

family owned business, does not deter him from managing Omni as well. It is well-

time pertinent. There can be no quibble that the enumeration of persons who may be

settled that where the language of the law is clear and unequivocal, it must be taken

held liable for corporate violators of BP 33, as amended, excludes the members of the

to mean exactly what it says.[75] As to the other petitioners, unless otherwise shown

board of directors. This stands to reason for the board of directors of a corporation is

that they are situated under the catch-all such other officer charged with the

generally a policy making body. Even if the corporate powers of a corporation are

management of the business affairs, they may not be held liable under BP 33, as

reposed in the board of directors under the first paragraph of Sec. 23[72] of the

amended, for probable violations.

Corporation Code, it is of common knowledge and practice that the board of directors

Arnel, the charges against other petitioners must perforce be dismissed or dropped.

Consequently, with the exception of petitioner

is not directly engaged or charged with the running of the recurring business affairs of
the corporation.

Depending on the powers granted to them by the Articles of

WHEREFORE, premises considered, we PARTIALLY GRANT the instant petition.

Incorporation, the members of the board generally do not concern themselves with

Accordingly, the assailed September 28, 2007 Decision and March 14, 2008

the day-to-day affairs of the corporation, except those corporate officers who are

Resolution of the Court of Appeals in CA-G.R. SP No. 98054 are AFFIRMED with

charged with running the business of the corporation and are concomitantly members

MODIFICATION that petitioners Mari Antonette Ty, Jason Ong, Willy Dy and Alvin Ty

of the board, like the President. Section 25[73] of the Corporation Code requires the

are excluded from the two Informations charging probable violations of Batas

president of a corporation to be also a member of the board of directors.

Pambansa Bilang 33, as amended. The Joint Resolution dated November 7, 2005 of
the Office of the Chief State Prosecutor is modified accordingly.

Thus, the application of the legal maxim expressio unius est exclusio alterius, which

No pronouncement as to costs.

means the mention of one thing implies the exclusion of another thing not mentioned.

SO ORDERED.

If a statute enumerates the thing upon which it is to operate, everything else must

G.R. No. 128690. January 21, 1999]

necessarily and by implication be excluded from its operation and effect.[74] The

ABS-CBN BROADCASTING CORPORATION, petitioners, vs. HONORABLE COURT

fourth officer in the enumerated list is the catch-all such other officer charged with the

OF APPEALS, REPUBLIC BROADCASTING CORP., VIVA PRODUCTIONS, INC.,


and VICENTE DEL ROSARIO, respondents.

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DECISION
DAVIDE, JR., C.J.:
In this petition for review on certiorari, petitioners ABS-CBN Broadcasting

6 January 1992
Corp.

Dear Vic,

(hereinafter ABS-CBN) seeks to reverse and set aside the decision[1] of 31 October
1996 and the resolution[2] of 10 March 1997 of the Court of Appeals in CA-G.R. CV

This is not a very formal business letter I am writing to you as I would like to express

No. 44125. The former affirmed with modification the decision[3] of 28 April 1993 of

my difficulty in recommending the purchase of the three film packages you are

the Regional Trial Court (RTC) of Quezon City, Branch 80, in Civil Case No. Q-12309.

offering ABS-CBN.

The latter denied the motion to reconsider the decision of 31 October 1996.
From among the three packages I can only tick off 10 titles we can purchase. Please
The antecedents, as found by the RTC and adopted by the Court of Appeals, are as

see attached. I hope you will understand my position. Most of the action pictures in

follows:

the list do not have big action stars in the cast. They are not for primetime. In line
with this I wish to mention that I have not scheduled for telecast several action

In 1990, ABS-CBN and VIVA executed a Film Exhibition Agreement (Exh. A)

pictures in our very first contract because of the cheap production value of these

whereby Viva gave ABS-CBN an exclusive right to exhibit some Viva films. Sometime

movies as well as the lack of big action stars. As a film producer, I am sure you

in December 1991, in accordance with paragraph 2.4 [sic] of said agreement stating

understand what I am trying to say as Viva produces only big action pictures.

thatIn fact, I would like to request two (2) additional runs for these movies as I can only
1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) Viva films

schedule them in out non-primetime slots. We have to cover the amount that was

for TV telecast under such terms as may be agreed upon by the parties hereto,

paid for these movies because as you very well know that non-primetime advertising

provided, however, that such right shall be exercised by ABS-CBN from the actual

rates are very low. These are the unaired titles in the first contract.

offer in writing.
1. Kontra Persa [sic]
Viva, through defendant Del Rosario, offered ABS-CBN, through its vice-president

2. Raider Platoon

Charo Santos-Concio, a list of three (3) film packages (36 title) from which ABS-CBN

3. Underground guerillas

may exercise its right of first refusal under the afore-said agreement (Exhs. 1 par. 2,

4. Tiger Command

2, 2-A and 2-B Viva). ABS-CBN, however through Mrs. Concio, can tick off only

5. Boy de Sabog

ten (10) titles (from the list) we can purchase (Exh. 3 Viva) and therefore did not

6. lady Commando

accept said list (TSN, June 8, 1992, pp. 9-10). The titles ticked off by Mrs. Concio are

7. Batang Matadero

not the subject of the case at bar except the film Maging Sino Ka Man.

8. Rebelyon

For further enlightenment, this rejection letter dated January 06, 1992 (Exh 3 Viva)

I hope you will consider this request of mine.

is hereby quoted:

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The other dramatic films have been offered to us before and have been rejected

which came in the form of a proposal contract Annex C of the complaint (Exh. 1

because of the ruling of MTRCB to have them aired at 9:00 p.m. due to their very

Viva; Exh C ABS-CBN).

adult themes.
On April 06, 1992, Del Rosario and Mr. Graciano Gozon of RBS Senior vice-president
As for the 10 titles I have choosen [sic] from the 3 packages please consider including

for Finance discussed the terms and conditions of Vivas offer to sell the 104 films,

all the other Viva movies produced last year, I have quite an attractive offer to make.

after the rejection of the same package by ABS-CBN.

Thanking you and with my warmest regards.

On April 07, 1992, defendant Del Rosario received through his secretary , a
handwritten note from Ms. Concio, (Exh. 5 Viva), which reads: Heres the draft of

(Signed)

the contract. I hope you find everything in order, to which was attached a draft

Charo Santos-Concio

exhibition agreement (Exh. C ABS-CBN; Exh. 9 Viva p. 3) a counter-proposal


covering 53 films, 52 of which came from the list sent by defendant Del Rosario and

On February 27, 1992, defendant Del Rosario approached ABS-CBNs Ms. Concio,

one film was added by Ms. Concio, for a consideration of P35 million. Exhibit C

with a list consisting of 52 original movie titles (i.e., not yet aired on television)

provides that ABS-CBN is granted film rights to 53 films and contains a right of first

including the 14 titles subject of the present case, as well as 104 re-runs (previously

refusal to 1992 Viva Films. The said counter proposal was however rejected by

aired on television) from which ABS-CBN may choose another 52 titles, as a total of

Vivas Board of Directors [in the] evening of the same day, April 7, 1992, as Viva

156 titles, proposing to sell to ABS-CBN airing rights over this package of 52 originals

would not sell anything less than the package of 104 films for P60 million pesos (Exh.

and 52 re-runs for P60,000,000.00 of which P30,000,000.00 will be in cash and

9 Viva), and such rejection was relayed to Ms. Concio.

P30,000,000.00 worth of television spots (Exh. 4 to 4-C Viva; 9 Viva).


On April 29, 1992, after the rejection of ABS-CBN and following several negotiations
On April 2, 1992, defendant Del Rosario and ABS-CBNs general manager, Eugenio

and meetings defendant Del Rosario and Vivas President Teresita Cruz, in

Lopez III, met at the Tamarind Grill Restaurant in Quezon City to discuss the package

consideration of P60 million, signed a letter of agreement dated April 24, 1992,

proposal of VIVA. What transpired in that lunch meeting is the subject of conflicting

granting RBS the exclusive right to air 104 Viva-produced and/or acquired films (Exh.

versions. Mr. Lopez testified that he and Mr. Del Rosario allegedly agreed that ABS-

7-A - RBS; Exh. 4 RBS) including the fourteen (14) films subject of the present

CBN was granted exclusive film rights to fourteen (14) films for a total consideration of

case.[4]

P36 million; that he allegedly put this agreement as to the price and number of films in
a napkin and signed it and gave it to Mr. Del Rosario (Exh. D; TSN, pp. 24-26, 77-

On 27 May 1992, ABS-CBN filed before the RTC a complaint for specific performance

78, June 8, 1992).

Del Rosario denied having made any

with a prayer for a writ of preliminary injunction and/or temporary restraining order

agreement with Lopez regarding the 14 Viva films; denied the existence of a napkin in

On the other hand.

against private respondents Republic Broadcasting Corporation[5] (hereafter RBS),

which Lopez wrote something; and insisted that what he and Lopez discussed at the

Viva Production (hereafter VIVA), and Vicente del Rosario.

lunch meeting was Vivas film package offer of 104 films (52 originals and 52 re-runs)

docketed as Civil Case No. Q-92-12309.

for a total price of P60 million. Mr. Lopez promising [sic]to make a counter proposal

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On 28 May 1992, the RTC issued a temporary restraining order[6] enjoining private

On 29 October, the RTC conducted a pre-trial.[16]

respondents from proceeding with the airing, broadcasting, and televising of the
fourteen VIVA films subject of the controversy, starting with the film Maging Sino Ka

Pending resolution of its motion for reconsideration, ABS-CBN filed with the Court of

Man, which was scheduled to be shown on private respondent RBS channel 7 at

Appeals a petition[17] challenging the RTCs Order of 3 August and 15 October 1992

seven oclock in the evening of said date.

and praying for the issuance of a writ of preliminary injunction to enjoin the RTC from
enforcing said orders. The case was docketed as CA-G.R. SP No. 29300.

On 17 June 1992, after appropriate proceedings, the RTC issued an order[7] directing
the issuance of a writ of preliminary injunction upon ABS-CBNs posting of a P35

On 3 November 1992, the Court of Appeals issued a temporary restraining order[18]

million bond.

to enjoin the airing, broadcasting, and televising of any or all of the films involved in

ABS-CBN moved for the reduction of the bond,[8] while private

respondents moved for reconsideration of the order and offered to put up a

the controversy.

counterbond.[9]
On 18 December 1992, the Court of Appeals promulgated a decision[19] dismissing
In the meantime, private respondents filed separate answer with counterclaim.[10]

the petition in CA-G.R. SP No. 29300 for being premature. ABS-CBN challenged the

RBS also set up a cross-claim against VIVA.

dismissal in a petition for review filed with this Court on 19 January 1993, which was
docketed s G.R. No. 108363.

On 3 August 1992, the RTC issued an order[11] dissolving the writ of preliminary
injunction upon the posting by RBS of a P30 million counterbond to answer for

In the meantime the RTC received the evidence for the parties in Civil Case No. Q-92-

whatever damages ABS-CBN might suffer by virtue of such dissolution. However, it

12309. Thereafter, on 28 April 1993, it rendered a decision[20] in favor of RBS and

reduced petitioners injunction bond to P15 million as a condition precedent for the

VIVA and against ABS-CBN disposing as follows:

reinstatement of the writ of preliminary injunction should private respondents be


unable to post a counterbond.

WHEREFORE, under cool reflection and prescinding from the foregoing, judgment is
rendered in favor of defendants and against the plaintiff.

At the pre-trial[12] on 6 August 1992, the parties upon suggestion of the court, agreed
to explore the possibility of an amicable settlement. In the meantime, RBS prayed for

(1) The complaint is hereby dismissed;

and was granted reasonable time within which to put up a P30 million counterbond in
the event that no settlement would be reached.

(2) Plaintiff ABS-CBN is ordered to pay defendant RBS the following:

As the parties failed to enter into an amicable settlement, RBS posted on 1 October

a) P107,727.00 the amount of premium paid by RBS to the surety which issued

1992 a counterbond, which the RTC approved in its Order of 15 October 1992.[13]

defendants RBSs bond to lift the injunction;

On 19 October 1992, ABS-CBN filed a motion for reconsideration[14] of the 3 August

b) P191,843.00 for the amount of print advertisement for Maging Sino Ka Man in

and 15 October 1992 Orders, which RBS opposed.[15]

various newspapers;

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c) Attorneys fees in the amount of P1 million;

In its decision of 31 October 1996, the Court of Appeals agreed with the RTC that the
contract between ABS-CBN and VIVA had not been perfected, absent the approval by

d) P5 million as and by way of moral damages;

the VIVA Board of Directors of whatever Del Rosario, its agent, might have agreed
with Lopez III. The appellate court did not even believe ABS-CBNs evidence that

e) P5 million as and by way of exemplary damages;

Lopez III actually wrote down such an agreement on a napkin, as the same was
never produced in court. It likewise rejected ABS-CBNs insistence on its right of first

(3) For the defendant VIVA, plaintiff ABS-CBN is ordered to pay P212,000.00 by way

refusal and ratiocinated as follows:

of reasonable attorneys fees.


As regards the matter of right of first refusal, it may be true that a Film Exhibition
(4) The cross-claim of defendant RBS against defendant VIVA is dismissed.

Agreement was entered into between Appellant ABS-CBN and appellant VIVA under
Exhibit A in 1990 and that parag. 1.4 thereof provides:

(5) Plaintiff to pay the costs.


1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) VIVA
According to the RTC, there was no meeting of minds on the price and terms of the

films for TV telecast under such terms as may be agreed upon by the parties hereto,

offer. The alleged agreement between Lopez III and Del Rosario was subject to the

provided, however, that such right shall be exercised by ABS-CBN within a period of

approval of the VIVA Board of Directors, and said agreement was disapproved during

fifteen (15) days from the actual offer in writing (Records, p. 14).

the meeting of the Board on 7 April 1992. Hence, there was no basis for ABS-CBNs
demand that VIVA signed the 1992 Film Exhibition Agreement. Furthermore, the right

[H]owever, it is very clear that said right of first refusal in favor of ABS-CBN shall still

of first refusal under the 1990 Film Exhibition Agreement had previously been

be subjected to such terms as may be agreed upon by the parties thereto, and that

exercised per Ms. Concios letter to Del Rosario ticking off ten titles acceptable to

the said right shall be exercised by ABS-CBN within fifteen (15) days from the actual

them, which would have made the 1992 agreement an entirely new contract.

offer in writing.

On 21 June 1993, this Court denied[21] ABS-CBNs petition for review in G.R. No.

Said parag. 1.4 of the agreement Exhibit A on the right of first refusal did not fix the

108363, as no reversible error was committed by the Court of Appeals in its

price of the film right to the twenty-four (24) films, nor did it specify the terms thereof.

challenged decision and the case had become moot and academic in view of the

The same are still left to be agreed upon by the parties.

dismissal of the main action by the court a quo in its decision of 28 April 1993.
In the instant case, ABS-CBNs letter of rejection Exhibit 3 (Records, p. 89) stated that
Aggrieved by the RTCs decision, ABS-CBN appealed to the Court of Appeals

it can only tick off ten (10) films, and the draft contract Exhibit C accepted only

claiming that there was a perfected contract between ABS-CBN and VIVA granting

fourteen (14) films, while parag. 1.4 of Exhibit A speaks of the next twenty-four (24)

ABS-CBN the exclusive right to exhibit the subject films. Private respondents VIVA

films.

and Del Rosario also appealed seeking moral and exemplary damages and additional
attorneys fees.

The offer of VIVA was sometime in December 1991, (Exhibits 2, 2-A, 2-B; Records,
pp. 86-88; Decision, p. 11, Records, p. 1150), when the first list of VIVA films was

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sent by Mr. Del Rosario to ABS-CBN. The Vice President of ABS-CBN, Mrs. Charo

Santos-Concio, sent a letter dated January 6, 1992 (Exhibit 3, Records, p. 89) where

PETITIONER

ABS-CBN exercised its right of refusal by rejecting the offer of VIVA.

PREPONFERANCE OF EVIDENCE ADDUCED BY PETITIONER TO THE

As aptly

observed by the trial court, with the said letter of Mrs. Concio of January 6, 1992,

RULING THAT THERE WAS NO PERFECTED CONTRACT BETWEEN


AND

PRIVATE

RESPONDENT

VIVA

NOTWITHSTANDING

CONTRARY.

ABS-CBN had lost its right of first refusal. And even if We reckon the fifteen (15) day
period from February 27, 1992 (Exhibit 4 to 4-C) when another list was sent to ABS-

II

CBN after the letter of Mrs. Concio, still the fifteen (15) day period within which ABSCBN shall exercise its right of first refusal has already expired.[22]

IN AWARDING ACTUAL AND COMPENSATORY DAMAGES IN FAVOR OF

PRIVATE RESPONDENT RBS.


Accordingly, respondent court sustained the award factual damages consisting in the
cost of print advertisements and the premium payments for the counterbond, there

III

being adequate proof of the pecuniary loss which RBS has suffered as a result of the
filing of the complaint by ABS-CBN. As to the award of moral damages, the Court of

IN AWARDING MORAL AND EXEMPLARY DAMAGES IN FAVOR OF PRIVATE

Appeals found reasonable basis therefor, holding that RBSs reputation was debased

RESPONDENT RBS.

by the filing of the complaint in Civil Case No. Q-92-12309 and by the non-showing of
the film Maging Sino Ka Man. Respondent court also held that exemplary damages

IV

were correctly imposed by way of example or correction for the public good in view of
the filing of the complaint despite petitioners knowledge that the contract with VIVA

IN AWARDING ATORNEYS FEES OF RBS.

had not been perfected. It also upheld the award of attorneys fees, reasoning that
with ABS-CBNs act of instituting Civil Case No. Q-92-12309, RBS was

ABS-CBN claims that it had yet to fully exercise its right of first refusal over twenty-

unnecessarily forced to litigate. The appellate court, however, reduced the awards

four titles under the 1990 Film Exhibition Agreement, as it had chosen only ten titles

of moral damages to P 2 million, exemplary damages to P2 million, and attorneys

from the first list. It insists that we give credence to Lopezs testimony that he and Del

fees to P500,000.00.

Rosario met at the Tamarind Grill Restaurant, discussed the terms and conditions of
the second list (the 1992 Film Exhibition Agreement) and upon agreement thereon,

On the other hand, respondent Court of Appeals denied VIVA and Del Rosarios

wrote the same on a paper napkin. It also asserts that the contract has already been

appeal because it was RBS and not VIVA which was actually prejudiced when the

effective, as the elements thereof, namely, consent, object, and consideration were

complaint was filed by ABS-CBN.

established. It then concludes that the Court of Appeals pronouncements were not
supported by law and jurisprudence, as per our decision of 1 December 1995 in

Its motion for reconsideration having been denied, ABS-CBN filed the petition in this

Limketkai Sons Milling, Inc. v. Court of Appeals,[23] which cited Toyota Shaw, Inc. v.

case, contending that the Court of Appeals gravely erred in

Court of Appeals;[24] Ang Yu Asuncion v. Court of Appeals,[25] and Villonco Realty


Company v. Bormaheco, Inc.[26]

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Anent the actual damages awarded to RBS, ABS-CBN disavows liability therefor.

As regards the award of attorneys fees, ABS-CBN maintains that the same had no

RBS spent for the premium on the counterbond of its own volition in order to negate

factual, legal, or equitable justification. In sustaining the trial courts award, the Court

the injunction issued by the trial court after the parties had ventilated their respective

of Appeals acted in clear disregard of the doctrine laid down in Buan v.

positions during the hearings for the purpose. The filing of the counterbond was an

Camaganacan[32] that the text of the decision should state the reason why attorneys

option available to RBS, but it can hardly be argued that ABS-CBN compelled RBS to

fees are being awarded; otherwise, the award should be disallowed. Besides, no bad

incur such expense. Besides, RBS had another available option, i.e., move for the

faith has been imputed on, much less proved as having been committed by, ABS-

dissolution of the injunction; or if it was determined to put up a counterbond, it could

CBN.

have presented a cash bond. Furthermore under Article 2203 of the Civil Code, the

reflected in a partys persistence in a case other than an erroneous conviction of the

party suffering loss injury is also required to exercise the diligence of a good father of

righteousness of his cause, attorneys fees shall not be recovered as cost.[33]

It has been held that where no sufficient showing of bad faith would be

a family to minimize the damages resulting from the act or omission. As regards the
cost of print advertisements, RBS had not convincingly established that this was a

On the other hand, RBS asserts that there was no perfected contract between ABS-

loss attributable to the non-showing of Maging Sino Ka Man; on the contrary, it was

CBN and VIVA absent meeting of minds between them regarding the object and

brought out during trial that with or without the case or injunction, RBS would have

consideration of the alleged contract. It affirms that ABS-CBNs claim of a right of first

spent such an amount to generate interest in the film.

refusal was correctly rejected by the trial court. RBS insists the premium it had paid
for the counterbond constituted a pecuniary loss upon which it may recover. It was

ABS-CBN further contends that there was no other clear basis for the awards of moral

obliged to put up the counterbond due to the injunction procured by ABS-CBN. Since

and exemplary damages. The controversy involving ABS-CBN and RBS did not in

the trial court found that ABS-CBN had no cause of action or valid claim against RBS

any way originate from business transaction between them. The claims for such

and, therefore not entitled to the writ of injunction, RBS could recover from ABS-CBN

damages did not arise from any contractual dealings or from specific acts committed

the premium paid on the counterbond. Contrary to the claim of ABS-CBN, the cash

by ABS-CBN against RBS that may be characterized as wanton, fraudulent, or

bond would prove to be more expensive, as the loss would be equivalent to the cost of

reckless; they arose by virtue only of the filing of the complaint. An award of moral

money RBS would forego in case the P30 million came from its funds or was

and exemplary damages is not warranted where the record is bereft of any proof that

borrowed from banks.

a party acted maliciously or in bad faith in filing an action.[27] In any case, free resort
to courts for redress of wrongs is a matter of public policy. The law recognizes the

RBS likewise asserts that it was entitled to the cost of advertisements for the

right of every one to sue for that which he honestly believes to be his right without fear

cancelled showing of the film Maging Sino Ka Man because the print advertisements

of standing trial for damages where by lack of sufficient evidence, legal technicalities,

were out to announce the showing on a particular day and hour on Channel 7, i.e., in

or a different interpretation of the laws on the matter, the case would lose ground.[28]

its entirety at one time, not as series to be shown on a periodic basis. Hence, the

One who, makes use of his own legal right does no injury.[29] If damage results from

print advertisements were good and relevant for the particular date of showing, and

filing of the complaint, it is damnum absque injuria.[30] Besides, moral damages are

since the film could not be shown on that particular date and hour because of the

generally not awarded in favor of a juridical person, unless it enjoys a good reputation

injunction, the expenses for the advertisements had gone to waste.

that was debased by the offending party resulting in social humiliation.[31]


As regards moral and exemplary damages, RBS asserts that ABS-CBN filed the case
and secured injunctions purely for the purpose of harassing and prejudicing RBS.

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Pursuant then to Articles 19 and 21 of the Civil Code, ABS-CBN must be held liable
for such damages. Citing Tolentino,[34] damages may be awarded in cases of abuse

The second is that it is a competitor that caused RBS suffer the humiliation. The

of rights even if the done is not illicit, and there is abuse of rights where a plaintiff

humiliation and injury are far greater in degree when caused by an entity whose

institutes an action purely for the purpose of harassing or prejudicing the defendant.

ultimate business objective is to lure customers (viewers in this case) away from the
competition.[36]

In support of its stand that a juridical entity can recover moral and exemplary
damages, private respondent RBS cited People v. Manero,[35] where it was stated

For their part, VIVA and Vicente del Rosario contend that the findings of fact of the

that such entity may recover moral and exemplary damages if it has a good reputation

trial court and the Court of Appeals do not support ABS-CBNs claim that there was a

that is debased resulting in social humiliation. It then ratiocinates; thus:

perfected contract. Such factual findings can no longer be disturbed in this petition for
review under Rule 45, as only questions of law can be raised, not questions of fact.

There can be no doubt that RBS reputation has been debased by ABS-CBNs acts in

On the issue of damages and attorneys fees, they adopted the arguments of RBS.

this case. When RBS was not able to fulfill its commitment to the viewing public to
show the film Maging Sino Ka Man on the scheduled dates and times (and on two

The key issues for our consideration are (1) whether there was a perfected contract

occasions that RBS advertised), it suffered

serious embarrassment and social

between VIVA and ABS-CBN, and (2) whether RBS is entitled to damages and

humiliation. When the showing was cancelled, irate viewers called up RBS offices

attorneys fees. It may be noted that that award of attorneys fees of P212,000 in favor

and subjected RBS to verbal abuse (Announce kayo ng announce, hindi ninyo

of VIVA is not assigned as another error.

naman ilalabas, nanloloko yata kayo) (Exh. 3-RBS, par.3). This alone was not
something RBS brought upon itself. It was exactly what ABS-CBN had planted to

happen.
The first issue should be resolved against ABS-CBN. A contract is a meeting of
The amount of moral and exemplary damages cannot be said to be excessive. Two

minds between two persons whereby one binds himself to give something or render

reasons justify the amount of the award.

some service to another[37] for a consideration. There is no contract unless the


following requisites concur: (1) consent of the contracting parties; (2) object certain

The first is that the humiliation suffered by RBS, is national in extent. RBS operations

which is the subject of the contract; and (3) cause of the obligation, which is

as a broadcasting company is [sic] nationwide. Its clientele, like that of ABS-CBN,

established.[38] A contract undergoes three stages:

consists of those who own and watch television. It is not an exaggeration to state,
and it is a matter of judicial notice that almost every other person in the country

(a) preparation, conception, or generation, which is the period of negotiation and

watches television. The humiliation suffered by RBS is multiplied by the number of

bargaining, ending at the moment of agreement of the parties;

televiewers who had anticipated the showing of the film, Maging Sino Ka Man on
May 28 and November 3, 1992 but did not see it owing to the cancellation. Added to

(b)

this are the advertisers who had placed commercial spots for the telecast and to

agree on the terms of the contract; and

whom RBS had a commitment in consideration of the placement to show the film in
the dates and times specified.

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(c)

consummation or death, which is the fulfillment or performance of the terms

agreed upon in the contract.[39]

On the other hand, in Villonco, cited in Limketkai, the alleged changes in the revised
counter-offer were not material but merely clarificatory of what had previously been

Contracts that are consensual in nature are perfected upon mere meeting of the

agreed upon. It cited the statement in Stuart v. Franklin Life Insurance Co.[44] that a

minds. Once there is concurrence between the offer and the acceptance upon the

vendors change in a phrase of the offer to purchase, which change does not

subject matter, consideration, and terms of payment a contract is produced. The offer

essentially change the terms of the offer, does not amount to a rejection of the offer

must be certain. To convert the offer into a contract, the acceptance must be absolute

and the tender of a counter-offer.[45] However, when any of the elements of the

and must not qualify the terms of the offer; it must be plain, unequivocal,

contract is modified upon acceptance, such alteration amounts to a counter-offer.

unconditional, and without variance of any sort from the proposal.

A qualified

acceptance, or one that involves a new proposal, constitutes a counter-offer and is a

In the case at bar, ABS-CBN made no unqualified acceptance of VIVAs offer hence,

rejection of the original offer. Consequently, when something is desired which is not

they underwent period of bargaining. ABS-CBN then formalized its counter-proposals

exactly what is proposed in the offer, such acceptance is not sufficient to generate

or counter-offer in a draft contract. VIVA through its Board of Directors, rejected such

consent because any modification or variation from the terms of the offer annuls the

counter-offer. Even if it be conceded arguendo that Del Rosario had accepted the

offer.[40]

counter-offer, the acceptance did not bind VIVA, as there was no proof whatsoever
that Del Rosario had the specific authority to do so.

When Mr. Del Rosario of Viva met Mr. Lopez of ABS-CBN at the Tamarind Grill on 2
April 1992 to discuss the package of films, said package of 104 VIVA films was VIVAs

Under the Corporation Code,[46] unless otherwise provided by said Code, corporate

offer to ABS-CBN to enter into a new Film Exhibition Agreement. But ABS-CBN, sent

powers, such as the power to enter into contracts, are exercised by the Board of

through Ms. Concio, counter-proposal in the form a draft contract proposing exhibition

Directors.

of 53 films for a consideration of P35 million. This counter-proposal could be nothing

committee or officials or contracted managers.

less than the counter-offer of Mr. Lopez during his conference with Del Rosario at

executive committee, must be for specific purposes.[47] Delegation to officers makes

Tamarind Grill Restaurant. Clearly, there was no acceptance of VIVAs offer, for it was

the latter agents of the corporation; accordingly, the general rules of agency as to the

met by a counter-offer which substantially varied the terms of the offer.

binding effects of their acts would apply.[48] For such officers to be deemed fully

However, the Board may delegate such powers to either an executive


The delegation, except for the

clothed by the corporation to exercise a power of the Board, the latter must specially
ABS-CBNs reliance in Limketkai Sons Milling, Inc. v. Court of Appeals[41] and

authorize them to do so. that Del Rosario did not have the authority to accept ABS-

Villonco Realty Company v. Bormaheco, Inc.,[42] is misplaced. In these cases, it was

CBNs counter-offer was best evidenced by his submission of the draft contract to

held that an acceptance may contain a request for certain changes in the terms of the

VIVAs Board of Directors for the latters approval. In any event, there was between

offer and yet be a binding acceptance as long as it is clear that the meaning of the

Del Rosario and Lopez III no meeting of minds. The following findings of the trial

acceptance is positively and unequivocally to accept the offer, whether such request is

court are instructive:

granted or not. This ruling was, however, reversed in the resolution of 29 March 1996,
[43] which ruled that the acceptance of an offer must be unqualified and absolute, i.e.,

A number of considerations militate against ABS-CBNs claim that a contract was

it must be identical in all respects with that of the offer so as to produce consent or

perfected at that lunch meeting on April 02, 1992 at the Tamarind Grill.

meetings of the minds.

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FIRST, Mr. Lopez claimed that what was agreed upon at the Tamarind Grill referred to
the price and the number of films, which he wrote on a napkin. However, Exhibit C

contains numerous provisions which were not discussed at the Tamarind Grill, if

and the other 7 Viva movies because the price was broken down accordingly. The

The total price, the breakdown the known Viva movies, the 7 blockbuster movies

Lopez testimony was to be believed nor could they have been physically written on a

none [sic] Viva and the seven other Viva movies and the sharing between the cash

napkin. There was even doubt as to whether it was a paper napkin or cloth napkin. In

portion and the concerned spot portion in the total amount of P35 million pesos.

short what were written in Exhibit C were not discussed, and therefore could not
have been agreed upon, by the parties. How then could this court compel the parties

Now, which is which? P36 million or P35 million? This weakens ABS-CBNs claim.

to sign Exhibit C when the provisions thereof were not previously agreed upon?
FOURTH. Mrs. Concio, testifying for ABS-CBN stated that she transmitted Exhibit C
SECOND, Mr. Lopez claimed that what was agreed upon as the subject matter of the

to Mr. Del Rosario with a handwritten note, describing said Exhibit C as a draft.

contract was 14 films. The complaint in fact prays for delivery of 14 films. But Exhibit

(Exh. 5 Viva; tsn pp. 23-24, June 08, 1992). The said draft has a well defined

C mentions 53 films as its subject matter. Which is which? If Exhibit C reflected

meaning.

the true intent of the parties, then ABS-CBNs claim for 14 films in its complaint is
false or if what it alleged in the complaint is true, then Exhibit C did not reflect what

was agreed upon by the parties. This underscores the fact that there was no meeting
of the minds as to the subject matter of the contract, so as to preclude perfection

Since Exhibit C is only a draft, or a tentative, provisional or preparatory writing

thereof. For settled is the rule that there can be no contract where there is no object

prepared for discussion, the terms and conditions thereof could not have been

certain which is its subject matter (Art. 1318, NCC).

previously agreed upon by ABS-CBN and Viva. Exhibit C could not therefore legally
bind Viva, not having agreed thereto. In fact, Ms. Concio admitted that the terms and

THIRD, Mr. Lopez [sic] answer to question 29 of his affidavit testimony (Exh. D)

conditions embodied in Exhibit C were prepared by ABS-CBNs lawyers and there

States:

was no discussion on said terms and conditions.

We were able to reach an agreement. VIVA gave us the exclusive license to show

As the parties had not yet discussed the proposed terms and conditions in Exhibit C,

these fourteen (14) films, and we agreed to pay Viva the amount of P16,050,000.00

and there was no evidence whatsoever that Viva agreed to the terms and conditions

as well as grant Viva commercial slots worth P19,950,000.00.

thereof, said document cannot be a binding contract. The fact that Viva refused to

We had already

earmarked this P16,050,000.00.

sign Exhibit C reveals only two [sic] well that it did not agree on its terms and
conditions, and this court has no authority to compel Viva to agree thereto.

which gives a total consideration of P36 million (P19,951,000.00 plus P16,050,000.00


equals P36,000,000.00).

FIFTH. Mr. Lopez understand [sic] that what he and Mr. Del Rosario agreed upon at
the Tamarind Grill was only provisional, in the sense that it was subject to approval by

On cross-examination Mr. Lopez testified:


Q

the Board of Directors of Viva. He testified:

What was written in this napkin?

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Now, Mr. Witness, and after that Tamarinf meeting the second meeting

The testimony of Mr. Lopez and the allegations in the complaint are clear admissions

wherein you claimed that you have the meeting of the minds between you and Mr. Vic

that what was supposed to have been agreed upon at the Tamarind Grill between Mr.

del Rosario, what happened?

Lopez and Del Rosario was not a binding agreement. It is as it should be because
corporate power to enter into a contract is lodged in the Board of Directors. (Sec. 23,

Vic Del Rosario was supposed to call us up and tell us specifically the result of the

Corporation Code).

discussion with the Board of Directors.

Without such board approval by the Viva board, whatever

agreement Lopez and Del Rosario arrived at could not ripen into a valid binding upon
Viva (Yao Ka Sin Trading vs. Court of Appeals, 209 SCRA 763).

And you are referring to the so-called agreement which you wrote in [sic] a piece

The evidence

adduced shows that the Board of Directors of Viva rejected Exhibit C and insisted

of paper?

that the film package for 104 films be maintained (Exh. 7-1 Cica).[49]

Yes, sir.

The contention that ABS-CBN had yet to fully exercise its right of first refusal over

So, he was going to forward that to the board of Directors for approval?

twenty-four films under the 1990 Film Exhibition Agreement and that the meeting
between Lopez and Del Rosario was a continuation of said previous contract is
untenable. As observed by the trial court, ABS-CBNs right of first refusal had already
A

Yes, sir (Tsn, pp. 42-43, June 8, 1992)

been exercised when Ms. Concio wrote to Viva ticking off ten films. Thus:

[T]he subsequent negotiation with ABS-CBN two (2) months after this letter was sent,
was for an entirely different package.

Did Mr. Del Rosario tell you that he will submit it to his Board for approval?

Ms. Concio herself admitted on cross-

examination to having used or exercised the right of first refusal. She stated that the
list was not acceptable and was indeed not accepted by ABS-CBN, (Tsn, June 8,

Yes, sir. (Tsn, p. 69, June 8, 1992).

1992, pp. 8-10). Even Mr. Lopez himself admitted that the right of first refusal may
have been already exercised by Ms. Concio (as she had). (TSN, June 8, 1992, pp.

The above testimony of Mr. Lopez shows beyond doubt that he knew Mr. Del Rosario

71-75). Del Rosario himself knew and understand [sic] that ABS-CBN has lost its

had no authority to bind Viva to a contract with ABS-CBN until and unless its Board of

right of first refusal when his list of 36 titles were rejected (Tsn, June 9, 1992, pp. 10-

Directors approved it. The complaint, in fact, alleges that Mr. Del Rosario is the

11).[50]

Executive Producer of defendant Viva which is a corporation. (par. 2, complaint).


As a mere agent of Viva, Del Rosario could not bind Viva unless what he did is ratified

II

by its Directors. (Vicente vs.Geraldez, 52 SCRA 210; Arnold vs. Willets and Paterson,
44 Phil. 634). As a mere agent, recognized as such by plaintiff, Del Rosario could not

However, we find for ABS-CBN on the issue of damages. We shall first take up actual

be held liable jointly and severally with Viva and his inclusion as party defendant has

damages. Chapter 2, Title XVIII, Book IV of the Civil Code is the specific law on

no legal basis. (Salonga vs. Warner Barnes [sic],COLTA, 88 Phil. 125; Salmon vs.

actual or compensatory damages. Except as provided by law or by stipulation, one is

Tan, 36 Phil. 556).

entitled to compensation for actual damages only for such pecuniary loss suffered by
him as he has duly proved.[51] The indemnification shall comprehend not only the

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value of the loss suffered, but also that of the profits that the obligee failed to obtain.

ART. 19. Every person must, in the exercise of hid rights and in the performance of

[52] In contracts and quasi-contracts the damages which may be awarded are

his duties, act with justice, give everyone his due, and observe honesty and good

dependent on whether the obligor acted with good faith or otherwise. In case of good

faith.

faith, the damages recoverable are those which are the natural and probable
consequences of the breach of the obligation and which the parties have foreseen or

ART. 20. Every person who, contrary to law, wilfully or negligently causes damage to

could have reasonably foreseen at the time of the constitution of the obligation. If the

another shall indemnify the latter for the same.

obligor acted with fraud, bad faith, malice, or wanton attitude, he shall be responsible
for all damages which may be reasonably attributed to the non-performance of the

ART. 21. Any person who wilfully causes loss or injury to another in a manner that is

obligation.[53] In crimes and quasi-delicts, the defendants shall be liable for all

contrary to morals, good customs or public policy shall compensate the latter for the

damages which are the natural and probable consequences of the act or omission

damage.

complained of, whether or not such damages have been foreseen or could have
reasonably been foreseen by the defendant.[54]

It may further be observed that in cases where a writ of preliminary injunction is


issued, the damages which the defendant may suffer by reason of the writ are

Actual damages may likewise be recovered for loss or impairment of earning capacity

recoverable from the injunctive bond.[57] In this case, ABS-CBN had not yet filed the

in cases of temporary or permanent personal injury, or for injury to the plaintiffs

required bond; as a matter of fact, it asked for reduction of the bond and even went to

business standing or commercial credit.[55]

the Court of Appeals to challenge the order on the matter. Clearly then, it was not
necessary for RBS to file a counterbond.

The claim of RBS for actual damages did not arise from contract, quasi-contract,

Hence, ABS-CBN cannot be held

responsible for the premium RBS paid for the counterbond.

delict, or quasi-delict. It arose from the fact of filing of the complaint despite ABSCBNs alleged knowledge of lack of cause of action. Thus paragraph 12 of RBSs

Neither could ABS-CBN be liable for the print advertisements for Maging Sino Ka

Answer with Counterclaim and Cross-claim under the heading COUNTERCLAIM

Man for lack of sufficient legal basis. The RTC issued a temporary restraining order

specifically alleges:

and later, a writ of preliminary injunction on the basis of its determination that there
existed sufficient ground for the issuance thereof. Notably, the RTC did not dissolve

12. ABS-CBN filed the complaint knowing fully well that it has no cause of action

the injunction on the ground of lack of legal and factual basis, but because of the plea

against RBS. As a result thereof, RBS suffered actual damages in the amount of

of RBS that it be allowed to put up a counterbond.

P6,621,195.32.[56]
As regards attorneys fees, the law is clear that in the absence of stipulation,
Needless to state the award of actual damages cannot be comprehended under the

attorneys fees may be recovered as actual or compensatory damages under any of

above law on actual damages. RBS could only probably take refuge under Articles

the circumstances provided for in Article 2208 of the Civil Code.[58]

19, 20, and 21 of the Civil Code, which read as follows:


The general rule is that attorneys fees cannot be recovered as part of damages
because of the policy that no premium should be placed on the right to litigate.[59]
They are not to be awarded every time a party wins a suit. The power of the court t

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award attorneys fees under Article 2208 demands factual, legal, and equitable

debased, resulting in social humiliation is an obiter dictum. On this score alone the

justification.[60] Even when a claimant is compelled to litigate with third persons or to

award for damages must be set aside, since RBS is a corporation.

incur expenses to protect his rights, still attorneys fees may not be awarded where no
sufficient showing of bad faith could be reflected in a partys persistence in a case

The basic law on exemplary damages is Section 5 Chapter 3, Title XVIII, Book IV of

other than an erroneous conviction of the righteousness of his cause.[61]

the Civil Code. These are imposed by way of example or correction for the public
good, in addition to moral, temperate, liquidated, or compensatory damages.[68] They

As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book IV of the Civil

are recoverable in criminal cases as part of the civil liability when the crime was

Code. Article 2217 thereof defines what are included in moral damages, while Article

committed with one or more aggravating circumstances;[69] in quasi-delicts, if the

2219 enumerates the cases where they may be recovered. Article 2220 provides that

defendant acted with gross negligence;[70] and in contracts and quasi-contracts, if

moral damages may be recovered in breaches of contract where the defendant acted

the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent

fraudulently or in bad faith. RBSs claim for moral damages could possibly fall only

manner.[71]

under item (10) of Article 2219, thereof which reads:


It may be reiterated that the claim of RBS against ABS-CBN is not based on contract,
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34 and 35.

quasi-contract, delict, or quasi-delict. Hence, the claims for moral and exemplary
damages can only be based on Articles 19, 20, and 21 of the Civil Code.

Moral damages are in the category of an award designed to compensate the claimant
for actual injury suffered and not to impose a penalty on the wrongdoer.[62] The

The elements of abuse of right under Article 19 are the following: (1) the existence of

award is not meant to enrich the complainant at the expense of the defendant, but to

a legal right or duty, (2) which is exercised in bad faith, and (3) for the sole intent of

enable the injured party to obtain means, diversion, or amusements that will serve to

prejudicing or injuring another.

obviate the moral suffering he has undergone. It is aimed at the restoration, within the

provisions of law which do not especially provide for their own sanction; while Article

limits of the possible, of the spiritual status quo ante, and should be proportionate to

21 deals with acts contra bonus mores, and has the following elements: (1) there is an

the suffering inflicted.[63] Trial courts must then guard against the award of exorbitant

act which is legal, (2) but which is contrary to morals, good custom, public order, or

damages; they should exercise balanced restrained and measured objectivity to avoid

public policy, and (3) and it is done with intent to injure.[72]

Article 20 speaks of the general sanction for all

suspicion that it was due to passion, prejudice, or corruption or the part of the trial
court.[64]

Verily then, malice or bad faith is at the core of Articles 19, 20, and 21. Malice or bad
faith implies a conscious and intentional design to do a wrongful act for a dishonest

The award of moral damages cannot be granted in favor of a corporation because,

purpose or moral obliquity.[73] Such must be substantiated by evidence.[74]

being an artificial person and having existence only in legal contemplation, it has no
feelings, no emotions, no senses. It cannot, therefore, experience physical suffering

There is no adequate proof that ABS-CBN was inspired by malice or bad faith. It was

and mental anguish, which can be experienced only by one having a nervous system.

honestly convinced of the merits of its cause after it had undergone serious

[65] The statement in People v. Manero[66] and Mambulao Lumber Co. v. PNB[67]

negotiations culminating in its formal submission of a draft contract. Settled is the rule

that a corporation may recover moral damages if it has a good reputation that is

that the adverse result of an action does not per se make the action wrongful and
subject the actor to damages, for the law could not have meant impose a penalty on

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the right to litigate. If damages result from a persons exercise of a right, it is damnum

P56,908.00 on that date, added to the sum of P738.59 it remitted to the PNB

absque injuria.[75]

thereafter was more than sufficient to liquidate its obligation, thereby rendering the
subsequent foreclosure sale of its chattels unlawful;

WHEREFORE, the instant petition is GRANTED. The challenged decision of the


Court of Appeals in CA-G.R. CV No. 44125 is hereby REVERSED except as to

2. That it is not liable to pay PNB the amount of P5,821.35 for attorney's fees and the

unappealed award of attorneys fees in favor of VIVA Productions, Inc.

additional sum of P298.54 as expenses of the foreclosure sale;

No pronouncement as to costs.
SO ORDERED.
G.R. No. L-22973

3. That the subsequent foreclosure sale of its chattels is null and void, not only
January 30, 1968

because it had already settled its indebtedness to the PNB at the time the sale was
effected, but also for the reason that the said sale was not conducted in accordance

MAMBULAO LUMBER COMPANY, plaintiff-appellant,

with the provisions of the Chattel Mortgage Law and the venue agreed upon by the

vs.

parties in the mortgage contract;

PHILIPPINE NATIONAL BANK and ANACLETO HERALDO Deputy Provincial Sheriff


of Camarines Norte, defendants-appellees.

4. That the PNB, having illegally sold the chattels, is liable to the plaintiff for its value;
and

Ernesto P. Vilar and Arthur Tordesillas for plaintiff-appellant.


Tomas Besa and Jose B. Galang for defendants-appellees.

5. That for the acts of the PNB in proceeding with the sale of the chattels, in utter
disregard of plaintiff's vigorous opposition thereto, and in taking possession thereof

ANGELES, J.:

after the sale thru force, intimidation, coercion, and by detaining its "man-in-charge" of
said properties, the PNB is liable to plaintiff for damages and attorney's fees.

An appeal from a decision, dated April 2, 1964, of the Court of First Instance of Manila
in Civil Case No. 52089, entitled "Mambulao Lumber Company, plaintiff, versus

The antecedent facts of the case, as found by the trial court, are as follows:

Philippine National Bank and Anacleto Heraldo, defendants", dismissing the complaint
against both defendants and sentencing the plaintiff to pay to defendant Philippine

On May 5, 1956 the plaintiff applied for an industrial loan of P155,000 with the Naga

National Bank (PNB for short) the sum of P3,582.52 with interest thereon at the rate

Branch of defendant PNB and the former offered real estate, machinery, logging and

of 6% per annum from December 22, 1961 until fully paid, and the costs of suit.

transportation equipments as collaterals. The application, however, was approved for


a loan of P100,000 only. To secure the payment of the loan, the plaintiff mortgaged to

In seeking the reversal of the decision, the plaintiff advances several propositions in

defendant PNB a parcel of land, together with the buildings and improvements

its brief which may be restated as follows:

existing thereon, situated in the poblacion of Jose Panganiban (formerly Mambulao),


province of Camarines Norte, and covered by Transfer Certificate of Title No. 381 of

1. That its total indebtedness to the PNB as of November 21, 1961, was only

the land records of said province, as well as various sawmill equipment, rolling unit

P56,485.87 and not P58,213.51 as concluded by the court a quo; hence, the

and other fixed assets of the plaintiff, all situated in its compound in the

proceeds of the foreclosure sale of its real property alone in the amount of

aforementioned municipality.

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sum of P57,646.59, plus 6% annual interest therefore from September 23, 1961,
On August 2, 1956, the PNB released from the approved loan the sum of P27,500, for

attorney's fees equivalent to 10% of the amount due and the costs and expenses of

which the plaintiff signed a promissory note wherein it promised to pay to the PNB the

the sale. On the same day, the PNB sent notice to the plaintiff that the former was

said sum in five equal yearly installments at the rate of P6,528.40 beginning July 31,

foreclosing extrajudicially the chattels mortgaged by the latter and that the auction

1957, and every year thereafter, the last of which would be on July 31, 1961.

sale thereof would be held on November 21, 1961, between 9:00 and 12:00 a.m., in
Mambulao, Camarines Norte, where the mortgaged chattels were situated.

On October 19, 1956, the PNB made another release of P15,500 as part of the
approved loan granted to the plaintiff and so on the said date, the latter executed

On November 8, 1961, Deputy Provincial Sheriff Anacleto Heraldo took possession of

another promissory note wherein it agreed to pay to the former the said sum in five

the chattels mortgaged by the plaintiff and made an inventory thereof in the presence

equal yearly installments at the rate of P3,679.64 beginning July 31, 1957, and ending

of a PC Sergeant and a policeman of the municipality of Jose Panganiban. On

on July 31, 1961.

November 9, 1961, the said Deputy Sheriff issued the corresponding notice of public
auction sale of the mortgaged chattels to be held on November 21, 1961, at 10:00

The plaintiff failed to pay the amortization on the amounts released to and received by

a.m., at the plaintiff's compound situated in the municipality of Jose Panganiban,

it. Repeated demands were made upon the plaintiff to pay its obligation but it failed or

Province of Camarines Norte.

otherwise refused to do so. Upon inspection and verification made by employees of


the PNB, it was found that the plaintiff had already stopped operation about the end of

On November 19, 1961, the plaintiff sent separate letters, posted as registered air

1957 or early part of 1958.

mail matter, one to the Naga Branch of the PNB and another to the Provincial Sheriff
of Camarines Norte, protesting against the foreclosure of the real estate and chattel

On September 27, 1961, the PNB sent a letter to the Provincial Sheriff of Camarines

mortgages on the grounds that they could not be effected unless a Court's order was

Norte requesting him to take possession of the parcel of land, together with the

issued against it (plaintiff) for said purpose and that the foreclosure proceedings,

improvements existing thereon, covered by Transfer Certificate of Title No. 381 of the

according to the terms of the mortgage contracts, should be made in Manila. In said

land records of Camarines Norte, and to sell it at public auction in accordance with

letter to the Naga Branch of the PNB, it was intimated that if the public auction sale

the provisions of Act No. 3135, as amended, for the satisfaction of the unpaid

would be suspended and the plaintiff would be given an extension of ninety (90) days,

obligation of the plaintiff, which as of September 22, 1961, amounted to P57,646.59,

its obligation would be settled satisfactorily because an important negotiation was

excluding attorney's fees. In compliance with the request, on October 16, 1961, the

then going on for the sale of its "whole interest" for an amount more than sufficient to

Provincial Sheriff of Camarines Norte issued the corresponding notice of extra-judicial

liquidate said obligation.

sale and sent a copy thereof to the plaintiff. According to the notice, the mortgaged
property would be sold at public auction at 10:00 a.m. on November 21, 1961, at the

The letter of the plaintiff to the Naga Branch of the PNB was construed by the latter as

ground floor of the Court House in Daet, Camarines Norte.

a request for extension of the foreclosure sale of the mortgaged chattels and so it
advised the Sheriff of Camarines Norte to defer it to December 21, 1961, at the same

On November 6, 1961, the PNB sent a letter to the Provincial Sheriff of Camarines

time and place. A copy of said advice was sent to the plaintiff for its information and

Norte requesting him to take possession of the chattels mortgaged to it by the plaintiff

guidance.

and sell them at public auction also on November 21, 1961, for the satisfaction of the

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The foreclosure sale of the parcel of land, together with the buildings and

On December 21, 1961, the foreclosure sale of the mortgaged chattels was held at

improvements thereon, covered by Transfer Certificate of Title No. 381, was, however,

10:00 a.m. and they were awarded to the PNB for the sum of P4,200 and the

held on November 21, 1961, and the said property was sold to the PNB for the sum of

corresponding bill of sale was issued in its favor by Deputy Provincial Sheriff Heraldo.

P56,908.00, subject to the right of the plaintiff to redeem the same within a period of
one year. On the same date, Deputy Provincial Sheriff Heraldo executed a certificate

In a letter dated December 26, 1961, the Manager of the Naga Branch of the PNB

of sale in favor of the PNB and a copy thereof was sent to the plaintiff.

advised the plaintiff giving it priority to repurchase the chattels acquired by the former
at public auction. This offer was reiterated in a letter dated January 3, 1962, of the

In a letter dated December 14, 1961 (but apparently posted several days later), the

Attorney of the Naga Branch of the PNB to the plaintiff, with the suggestion that it

plaintiff sent a bank draft for P738.59 to the Naga Branch of the PNB, allegedly in full

exercise its right of redemption and that it apply for the condonation of the attorney's

settlement of the balance of the obligation of the plaintiff after the application thereto

fees. The plaintiff did not follow the advice but on the contrary it made known of its

of the sum of P56,908.00 representing the proceeds of the foreclosure sale of parcel

intention to file appropriate action or actions for the protection of its interests.

of land described in Transfer Certificate of Title No. 381. In the said letter, the plaintiff
reiterated its request that the foreclosure sale of the mortgaged chattels be

On May 24, 1962, several employees of the PNB arrived in the compound of the

discontinued on the grounds that the mortgaged indebtedness had been fully paid

plaintiff in Jose Panganiban, Camarines Norte, and they informed Luis Salgado, Chief

and that it could not be legally effected at a place other than the City of Manila.

Security Guard of the premises, that the properties therein had been auctioned and
bought by the PNB, which in turn sold them to Mariano Bundok. Upon being advised

In a letter dated December 16, 1961, the plaintiff advised the Provincial Sheriff of

that the purchaser would take delivery of the things he bought, Salgado was at first

Camarines Norte that it had fully paid its obligation to the PNB, and enclosed

reluctant to allow any piece of property to be taken out of the compound of the

therewith a copy of its letter to the latter dated December 14, 1961.

plaintiff. The employees of the PNB explained that should Salgado refuse, he would
be exposing himself to a litigation wherein he could be held liable to pay big sum of

On December 18, 1961, the Attorney of the Naga Branch of the PNB, wrote to the

money by way of damages. Apprehensive of the risk that he would take, Salgado

plaintiff acknowledging the remittance of P738.59 with the advice, however, that as of

immediately sent a wire to the President of the plaintiff in Manila, asking advice as to

that date the balance of the account of the plaintiff was P9,161.76, to which should be

what he should do. In the meantime, Mariano Bundok was able to take out from the

added the expenses of guarding the mortgaged chattels at the rate of P4.00 a day

plaintiff's compound two truckloads of equipment.

beginning December 19, 1961. It was further explained in said letter that the sum of
P57,646.59, which was stated in the request for the foreclosure of the real estate

In the afternoon of the same day, Salgado received a telegram from plaintiff's

mortgage, did not include the 10% attorney's fees and expenses of the sale.

President directing him not to deliver the "chattels" without court order, with the

Accordingly, the plaintiff was advised that the foreclosure sale scheduled on the 21st

information that the company was then filing an action for damages against the PNB.

of said month would be stopped if a remittance of P9,161.76, plus interest thereon

On the following day, May 25, 1962, two trucks and men of Mariano Bundok arrived

and guarding fees, would be made.

but Salgado did not permit them to take out any equipment from inside the compound
of the plaintiff. Thru the intervention, however, of the local police and PC soldiers, the
trucks of Mariano Bundok were able finally to haul the properties originally mortgaged

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by the plaintiff to the PNB, which were bought by it at the foreclosure sale and

from the time the various amortizations of the loan became due until the real estate

subsequently sold to Mariano Bundok.

mortgage executed to secure the loan was extra-judicially foreclosed on November


21, 1961. This is an error. Section 5 of Act No. 2655 expressly provides that in

Upon the foregoing facts, the trial court rendered the decision appealed from which,

computing the interest on any obligation, promissory note or other instrument or

as stated in the first paragraph of this opinion, sentenced the Mambulao Lumber

contract, compound interest shall not be reckoned, except by agreement, or in default

Company to pay to the defendant PNB the sum of P3,582.52 with interest thereon at

thereof, whenever the debt is judicially claimed. This is also the clear mandate of

the rate of 6% per annum from December 22, 1961 (day following the date of the

Article 2212 of the new Civil Code which provides that interest due shall earn legal

questioned foreclosure of plaintiff's chattels) until fully paid, and the costs. Mambulao

interest only from the time it is judicially demanded, and of Article 1959 of the same

Lumber Company interposed the instant appeal.

code which ordains that interest due and unpaid shall not earn interest. Of course, the
parties may, by stipulation, capitalize the interest due and unpaid, which as added

We shall discuss the various points raised in appellant's brief in seriatim.

principal shall earn new interest; but such stipulation is nowhere to be found in the
terms of the promissory notes involved in this case. Clearly therefore, the trial court

The first question Mambulao Lumber Company poses is that which relates to the

fell into error when it awarded interest on accrued interests, without any agreement to

amount of its indebtedness to the PNB arising out of the principal loans and the

that effect and before they had been judicially demanded.

accrued interest thereon. It is contended that its obligation under the terms of the two
promissory notes it had executed in favor of the PNB amounts only to P56,485.87 as

Appellant next assails the award of attorney's fees and the expenses of the

of November 21, 1961, when the sale of real property was effected, and not

foreclosure sale in favor of the PNB. With respect to the amount of P298.54 allowed

P58,213.51 as found by the trial court.

as expenses of the extra-judicial sale of the real property, appellant maintains that the
same has no basis, factual or legal, and should not have been awarded. It likewise

There is merit to this claim. Examining the terms of the promissory note executed by

decries the award of attorney's fees which, according to the appellant, should not be

the appellant in favor of the PNB, we find that the agreed interest on the loan of

deducted from the proceeds of the sale of the real property, not only because there is

P43,000.00 P27,500.00 released on August 2, 1956 as per promissory note of

no express agreement in the real estate mortgage contract to pay attorney's fees in

even date (Exhibit C-3), and P15,500.00 released on October 19, 1956, as per

case the same is extra-judicially foreclosed, but also for the reason that the PNB

promissory note of the same date (Exhibit C-4) was six per cent (6%) per annum

neither spent nor incurred any obligation to pay attorney's fees in connection with the

from the respective date of said notes "until paid". In the statement of account of the

said extra-judicial foreclosure under consideration.

appellant as of September 22, 1961, submitted by the PNB, it appears that in arriving
at the total indebtedness of P57,646.59 as of that date, the PNB had compounded the

There is reason for the appellant to assail the award of P298.54 as expenses of the

principal of the loan and the accrued 6% interest thereon each time the yearly

sale. In this respect, the trial court said:

amortizations became due, and on the basis of these compounded amounts charged
additional delinquency interest on them up to September 22, 1961; and to this

The parcel of land, together with the buildings and improvements existing thereon

erroneously computed total of P57,646.59, the trial court added 6% interest per

covered by Transfer Certificate of Title No. 381, was sold for P56,908. There was,

annum from September 23, 1961 to November 21 of the same year. In effect, the PNB

however, no evidence how much was the expenses of the foreclosure sale although

has claimed, and the trial court has adjudicated to it, interest on accrued interests

from the pertinent provisions of the Rules of Court, the Sheriff's fees would be P1 for

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advertising the sale (par. k, Sec. 7, Rule 130 of the Old Rules) and P297.54 as his

. . . For the purpose of extra-judicial foreclosure, the Mortgagor hereby appoints the

commission for the sale (par. n, Sec. 7, Rule 130 of the Old Rules) or a total of

Mortgagee his attorney-in-fact to sell the property mortgaged under Act 3135, as

P298.54.

amended, to sign all documents and to perform all acts requisite and necessary to
accomplish said purpose and to appoint its substitute as such attorney-in-fact with the

There is really no evidence of record to support the conclusion that the PNB is entitled

same powers as above specified. In case of judicial foreclosure, the Mortgagor hereby

to the amount awarded as expenses of the extra-judicial foreclosure sale. The court

consents to the appointment of the Mortgagee or any of its employees as receiver,

below committed error in applying the provisions of the Rules of Court for purposes of

without any bond, to take charge of the mortgaged property at once, and to hold

arriving at the amount awarded. It is to be borne in mind that the fees enumerated

possession of the same and the rents, benefits and profits derived from the

under paragraphs k and n, Section 7, of Rule 130 (now Rule 141) are demandable,

mortgaged property before the sale, less the costs and expenses of the receivership;

only by a sheriff serving processes of the court in connection with judicial foreclosure

the Mortgagor hereby agrees further that in all cases, attorney's fees hereby fixed at

of mortgages under Rule 68 of the new Rules, and not in cases of extra-judicial

Ten Per cent (10%) of the total indebtedness then unpaid which in no case shall be

foreclosure of mortgages under Act 3135. The law applicable is Section 4 of Act 3135

less than P100.00 exclusive of all fees allowed by law, and the expenses of collection

which provides that the officer conducting the sale is entitled to collect a fee of P5.00

shall be the obligation of the Mortgagor and shall with priority, be paid to the

for each day of actual work performed in addition to his expenses in connection with

Mortgagee out of any sums realized as rents and profits derived from the mortgaged

the foreclosure sale. Admittedly, the PNB failed to prove during the trial of the case,

property or from the proceeds realized from the sale of the said property and this

that it actually spent any amount in connection with the said foreclosure sale. Neither

mortgage shall likewise stand as security therefor. . . .

may expenses for publication of the notice be legally allowed in the absence of
evidence on record to support it. 1 It is true, as pointed out by the appellee bank, that

We find the above stipulation to pay attorney's fees clear enough to cover both cases

courts should take judicial notice of the fees provided for by law which need not be

of foreclosure sale mentioned thereunder, i.e., judicially or extra-judicially. While the

proved; but in the absence of evidence to show at least the number of working days

phrase "in all cases" appears to be part of the second sentence, a reading of the

the sheriff concerned actually spent in connection with the extra-judicial foreclosure

whole context of the stipulation would readily show that it logically refers to extra-

sale, the most that he may be entitled to, would be the amount of P10.00 as a

judicial foreclosure found in the first sentence and to judicial foreclosure mentioned in

reasonable allowance for two day's work one for the preparation of the necessary

the next sentence. And the ambiguity in the stipulation suggested and pointed out by

notices of sale, and the other for conducting the auction sale and issuance of the

the appellant by reason of the faulty sentence construction should not be made to

corresponding certificate of sale in favor of the buyer. Obviously, therefore, the award

defeat the otherwise clear intention of the parties in the agreement.

of P298.54 as expenses of the sale should be set aside.


It is suggested by the appellant, however, that even if the above stipulation to pay
But the claim of the appellant that the real estate mortgage does not provide for

attorney's fees were applicable to the extra-judicial foreclosure sale of its real

attorney's fees in case the same is extra-judicially foreclosed, cannot be favorably

properties, still, the award of P5,821.35 for attorney's fees has no legal justification,

considered, as would readily be revealed by an examination of the pertinent provision

considering the circumstance that the PNB did not actually spend anything by way of

of the mortgage contract. The parties to the mortgage appear to have stipulated under

attorney's fees in connection with the sale. In support of this proposition, appellant

paragraph (c) thereof, inter alia:

cites authorities to the effect: (1) that when the mortgagee has neither paid nor
incurred any obligation to pay an attorney in connection with the foreclosure sale, the

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claim for such fees should be denied; 2 and (2) that attorney's fees will not be allowed

express provision of section 29 of the Code of Civil Procedure, an attorney is not

when the attorney conducting the foreclosure proceedings is an officer of the

entitled in the absence of express contract to recover more than a reasonable

corporation (mortgagee) who receives a salary for all the legal services performed by

compensation for his services; and even when an express contract is made the court

him for the corporation. 3 These authorities are indeed enlightening; but they should

can ignore it and limit the recovery to reasonable compensation if the amount of the

not be applied in this case. The very same authority first cited suggests that said

stipulated fee is found by the court to be unreasonable. This is a very different rule

principle is not absolute, for there is authority to the contrary. As to the fact that the

from that announced in section 1091 of the Civil Code with reference to the obligation

foreclosure proceeding's were handled by an attorney of the legal staff of the PNB, we

of contracts in general, where it is said that such obligation has the force of law

are reluctant to exonerate herein appellant from the payment of the stipulated

between the contracting parties. Had the plaintiff herein made an express contract to

attorney's fees on this ground alone, considering the express agreement between the

pay his attorney an uncontingent fee of P2,115.25 for the services to be rendered in

parties in the mortgage contract under which appellant became liable to pay the

reducing the note here in suit to judgment, it would not have been enforced against

same. At any rate, we find merit in the contention of the appellant that the award of

him had he seen fit to oppose it, as such a fee is obviously far greater than is

P5,821.35 in favor of the PNB as attorney's fees is unconscionable and unreasonable,

necessary to remunerate the attorney for the work involved and is therefore

considering that all that the branch attorney of the said bank did in connection with the

unreasonable. In order to enable the court to ignore an express contract for an

foreclosure sale of the real property was to file a petition with the provincial sheriff of

attorney's fees, it is not necessary to show, as in other contracts, that it is contrary to

Camarines Norte requesting the latter to sell the same in accordance with the

morality or public policy (Art. 1255, Civil Code). It is enough that it is unreasonable or

provisions of Act 3135.

unconscionable. 4

The principle that courts should reduce stipulated attorney's fees whenever it is found

Since then this Court has invariably fixed counsel fees on a quantum meruit basis

under the circumstances of the case that the same is unreasonable, is now deeply

whenever the fees stipulated appear excessive, unconscionable, or unreasonable,

rooted in this jurisdiction to entertain any serious objection to it. Thus, this Court has

because a lawyer is primarily a court officer charged with the duty of assisting the

explained:

court in administering impartial justice between the parties, and hence, the fees
should be subject to judicial control. Nor should it be ignored that sound public policy

But the principle that it may be lawfully stipulated that the legal expenses involved in

demands that courts disregard stipulations for counsel fees, whenever they appear to

the collection of a debt shall be defrayed by the debtor does not imply that such

be a source of speculative profit at the expense of the debtor or mortgagor. 5 And it is

stipulations must be enforced in accordance with the terms, no matter how injurious or

not material that the present action is between the debtor and the creditor, and not

oppressive they may be. The lawful purpose to be accomplished by such a stipulation

between attorney and client. As court have power to fix the fee as between attorney

is to permit the creditor to receive the amount due him under his contract without a

and client, it must necessarily have the right to say whether a stipulation like this,

deduction of the expenses caused by the delinquency of the debtor. It should not be

inserted in a mortgage contract, is valid. 6

permitted for him to convert such a stipulation into a source of speculative profit at the
expense of the debtor.

In determining the compensation of an attorney, the following circumstances should


be considered: the amount and character of the services rendered; the responsibility

Contracts for attorney's services in this jurisdiction stands upon an entirely different

imposed; the amount of money or the value of the property affected by the

footing from contracts for the payment of compensation for any other services. By

controversy, or involved in the employment; the skill and experience called for in the

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performance of the service; the professional standing of the attorney; the results

Total obligation as of Nov. 21, 1961

secured; and whether or not the fee is contingent or absolute, it being a recognized

P57,495.86

rule that an attorney may properly charge a much larger fee when it is to be

B. -

contingent than when it is not. 7 From the stipulation in the mortgage contract earlier

I.

Proceeds of the foreclosure sale of the real estate mortgage on Nov. 21,

quoted, it appears that the agreed fee is 10% of the total indebtedness, irrespective of

1961

P56,908.00

the manner the foreclosure of the mortgage is to be effected. The agreement is

II.

Additional amount remitted to the PNB on Dec. 18, 1961

738.59

perhaps fair enough in case the foreclosure proceedings is prosecuted judicially but,
surely, it is unreasonable when, as in this case, the mortgage was foreclosed extra-

Total amount of Payment made to PNB as of Dec. 18, 1961

judicially, and all that the attorney did was to file a petition for foreclosure with the

P57,646.59

sheriff concerned. It is to be assumed though, that the said branch attorney of the
PNB made a study of the case before deciding to file the petition for foreclosure; but

Deduct: Total obligation to the PNB

even with this in mind, we believe the amount of P5,821.35 is far too excessive a fee

P57,495.86

for such services. Considering the above circumstances mentioned, it is our

Excess Payment to the PNB

considered opinion that the amount of P1,000.00 would be more than sufficient to

P 150.73

compensate the work aforementioned.

========
From the foregoing illustration or computation, it is clear that there was no further

The next issue raised deals with the claim that the proceeds of the sale of the real

necessity to foreclose the mortgage of herein appellant's chattels on December 21,

properties alone together with the amount it remitted to the PNB later was more than

1961; and on this ground alone, we may declare the sale of appellant's chattels on the

sufficient to liquidate its total obligation to herein appellee bank. Again, we find merit in

said date, illegal and void. But we take into consideration the fact that the PNB must

this claim. From the foregoing discussion of the first two errors assigned, and for

have been led to believe that the stipulated 10% of the unpaid loan for attorney's fees

purposes of determining the total obligation of herein appellant to the PNB as of

in the real estate mortgage was legally maintainable, and in accordance with such

November 21, 1961 when the real estate mortgage was foreclosed, we have the

belief, herein appellee bank insisted that the proceeds of the sale of appellant's real

following illustration in support of this conclusion:1wph1.t

property was deficient to liquidate the latter's total indebtedness. Be that as it may,
however, we still find the subsequent sale of herein appellant's chattels illegal and

A. I.

objectionable on other grounds.


Principal Loan

(a) Promissory note dated August 2, 1956

P27,500.00

(1) Interest at 6% per annum from Aug. 2, 1956 to Nov. 21, 1961

That appellant vigorously objected to the foreclosure of its chattel mortgage after the
8,751.78

foreclosure of its real estate mortgage on November 21, 1961, can not be doubted, as

(b) Promissory note dated October 19, 1956 P15,500.00


(1) Interest at 6% per annum from Oct.19, 1956 to Nov. 21, 1961

shown not only by its letter to the PNB on November 19, 1961, but also in its letter to
4,734.08

the provincial sheriff of Camarines Norte on the same date. These letters were

II.

Sheriff's fees [for two (2) day's work]10.00

followed by another letter to the appellee bank on December 14, 1961, wherein herein

III.

Attorney's fee

appellant, in no uncertain terms, reiterated its objection to the scheduled sale of its

1,000.00

chattels on December 21, 1961 at Jose Panganiban, Camarines Norte for the reasons

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therein stated that: (1) it had settled in full its total obligation to the PNB by the sale of

To the foregoing conclusion, We disagree. While the law grants power and authority to

the real estate and its subsequent remittance of the amount of P738.59; and (2) that

the mortgagee to sell the mortgaged property at a public place in the municipality

the contemplated sale at Jose Panganiban would violate their agreement embodied

where the mortgagor resides or where the property is situated, 8 this Court has held

under paragraph (i) in the Chattel Mortgage which provides as follows:

that the sale of a mortgaged chattel may be made in a place other than that where it is
found, provided that the owner thereof consents thereto; or that there is an agreement

(i) In case of both judicial and extra-judicial foreclosure under Act 1508, as amended,

to this effect between the mortgagor and the mortgagee. 9 But when, as in this case,

the parties hereto agree that the corresponding complaint for foreclosure or the

the parties agreed to have the sale of the mortgaged chattels in the City of Manila,

petition for sale should be filed with the courts or the sheriff of the City of Manila, as

which, any way, is the residence of the mortgagor, it cannot be rightly said that

the case may be; and that the Mortgagor shall pay attorney's fees hereby fixed at ten

mortgagee still retained the power and authority to select from among the places

per cent (10%) of the total indebtedness then unpaid but in no case shall it be less

provided for in the law and the place designated in their agreement over the objection

than P100.00, exclusive of all costs and fees allowed by law and of other expenses

of the mortgagor. In providing that the mortgaged chattel may be sold at the place of

incurred in connection with the said foreclosure. [Emphasis supplied]

residence of the mortgagor or the place where it is situated, at the option of the
mortgagee, the law clearly contemplated benefits not only to the mortgagor but to the

Notwithstanding the abovequoted agreement in the chattel mortgage contract, and in

mortgagee as well. Their right arising thereunder, however, are personal to them; they

utter disregard of the objection of herein appellant to the sale of its chattels at Jose

do not affect either public policy or the rights of third persons. They may validly be

Panganiban, Camarines Norte and not in the City of Manila as agreed upon, the PNB

waived. So, when herein mortgagor and mortgagee agreed in the mortgage contract

proceeded with the foreclosure sale of said chattels. The trial court, however, justified

that in cases of both judicial and extra-judicial foreclosure under Act 1508, as

said action of the PNB in the decision appealed from in the following rationale:

amended, the corresponding complaint for foreclosure or the petition for sale should
be filed with the courts or the Sheriff of Manila, as the case may be, they waived their

While it is true that it was stipulated in the chattel mortgage contract that a petition for

corresponding rights under the law. The correlative obligation arising from that

the extra-judicial foreclosure thereof should be filed with the Sheriff of the City of

agreement have the force of law between them and should be complied with in good

Manila, nevertheless, the effect thereof was merely to provide another place where

faith. 10

the mortgage chattel could be sold in addition to those specified in the Chattel
Mortgage Law. Indeed, a stipulation in a contract cannot abrogate much less impliedly

By said agreement the parties waived the legal venue, and such waiver is valid and

repeal a specific provision of the statute. Considering that Section 14 of Act No. 1508

legally effective, because it, was merely a personal privilege they waived, which is not

vests in the mortgagee the choice where the foreclosure sale should be held, hence,

contrary, to public policy or to the prejudice of third persons. It is a general principle

in the case under consideration, the PNB had three places from which to select,

that a person may renounce any right which the law gives unless such renunciation is

namely: (1) the place of residence of the mortgagor; (2) the place of the mortgaged

expressly prohibited or the right conferred is of such nature that its renunciation would

chattels were situated; and (3) the place stipulated in the contract. The PNB selected

be against public policy. 11

the second and, accordingly, the foreclosure sale held in Jose Panganiban,
Camarines Norte, was legal and valid.

On the other hand, if a place of sale is specified in the mortgage and statutory
requirements in regard thereto are complied with, a sale is properly conducted in that
place. Indeed, in the absence of a statute to the contrary, a sale conducted at a place

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other than that stipulated for in the mortgage is invalid, unless the mortgagor consents

who is not a party to this case, that was responsible for the forcible taking of the

to such sale. 12

property; but assuming this to be so, still the PNB cannot escape liability for the
conversion of the mortgaged chattels by parting with its interest in the property.

Moreover, Section 14 of Act 1508, as amended, provides that the officer making the

Neither would its claim that it afterwards gave a chance to herein appellant to

sale should make a return of his doings which shall particularly describe the articles

repurchase or redeem the chattels, improve its position, for the mortgagor is not under

sold and the amount received from each article. From this, it is clear that the law

obligation to take affirmative steps to repossess the chattels that were converted by

requires that sale be made article by article, otherwise, it would be impossible for him

the mortgagee. 15 As a consequence of the said wrongful acts of the PNB and the

to state the amount received for each item. This requirement was totally disregarded

Deputy Sheriff of Camarines Norte, therefore, We have to declare that herein

by the Deputy Sheriff of Camarines Norte when he sold the chattels in question in

appellant is entitled to collect from them, jointly and severally, the full value of the

bulk, notwithstanding the fact that the said chattels consisted of no less than twenty

chattels in question at the time they were illegally sold by them. To this effect was the

different items as shown in the bill of sale. 13 This makes the sale of the chattels

holding of this Court in a similar situation. 16

manifestly objectionable. And in the absence of any evidence to show that the
mortgagor had agreed or consented to such sale in gross, the same should be set

The effect of this irregularity was, in our opinion to make the plaintiff liable to the

aside.

defendant for the full value of the truck at the time the plaintiff thus carried it off to be
sold; and of course, the burden is on the defendant to prove the damage to which he

It is said that the mortgagee is guilty of conversion when he sells under the mortgage

was thus subjected. . . .

but not in accordance with its terms, or where the proceedings as to the sale of
foreclosure do not comply with the statute. 14 This rule applies squarely to the facts of

This brings us to the problem of determining the value of the mortgaged chattels at

this case where, as earlier shown, herein appellee bank insisted, and the appellee

the time of their sale in 1961. The trial court did not make any finding on the value of

deputy sheriff of Camarines Norte proceeded with the sale of the mortgaged chattels

the chattels in the decision appealed from and denied altogether the right of the

at Jose Panganiban, Camarines Norte, in utter disregard of the valid objection of the

appellant to recover the same. We find enough evidence of record, however, which

mortgagor thereto for the reason that it is not the place of sale agreed upon in the

may be used as a guide to ascertain their value. The record shows that at the time

mortgage contract; and the said deputy sheriff sold all the chattels (among which were

herein appellant applied for its loan with the PNB in 1956, for which the chattels in

a skagit with caterpillar engine, three GMC 6 x 6 trucks, a Herring Hall Safe, and

question were mortgaged as part of the security therefore, herein appellant submitted

Sawmill equipment consisting of a 150 HP Murphy Engine, plainer, large circular saws

a list of the chattels together with its application for the loan with a stated value of

etc.) as a single lot in violation of the requirement of the law to sell the same article by

P107,115.85. An official of the PNB made an inspection of the chattels in the same

article. The PNB has resold the chattels to another buyer with whom it appears to

year giving it an appraised value of P42,850.00 and a market value of P85,700.00. 17

have actively cooperated in subsequently taking possession of and removing the

The same chattels with some additional equipment acquired by herein appellant with

chattels from appellant compound by force, as shown by the circumstance that they

part of the proceeds of the loan were reappraised in a re-inspection conducted by the

had to take along PC soldiers and municipal policemen of Jose Panganiban who

same official in 1958, in the report of which he gave all the chattels an appraised

placed the chief security officer of the premises in jail to deprive herein appellant of its

value of P26,850.00 and a market value of P48,200.00. 18 Another re-inspection

possession thereof. To exonerate itself of any liability for the breach of peace thus

report in 1959 gave the appraised value as P19,400.00 and the market value at

committed, the PNB would want us to believe that it was the subsequent buyer alone,

P25,600.00. 19 The said official of the PNB who made the foregoing reports of

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inspection and re-inspections testified in court that in giving the values appearing in

appellant company had thereafter been added to the chattels; and that the real value

the reports, he used a conservative method of appraisal which, of course, is to be

thereof, although depreciated after several years of inoperation, was in a way

expected of an official of the appellee bank. And it appears that the values were

maintained because the depreciation is off-set by the marked increase in the cost of

considerably reduced in all the re-inspection reports for the reason that when he went

heavy equipment in the market, it is our opinion that the market value of the chattels

to herein appellant's premises at the time, he found the chattels no longer in use with

at the time of the sale should be fixed at the original appraised value of P42,850.00.

some of the heavier equipments dismantled with parts thereof kept in the bodega; and
finding it difficult to ascertain the value of the dismantled chattels in such condition, he

Herein appellant's claim for moral damages, however, seems to have no legal or

did not give them anymore any value in his reports. Noteworthy is the fact, however,

factual basis. Obviously, an artificial person like herein appellant corporation cannot

that in the last re-inspection report he made of the chattels in 1961, just a few months

experience physical sufferings, mental anguish, fright, serious anxiety, wounded

before the foreclosure sale, the same inspector of the PNB reported that the heavy

feelings, moral shock or social humiliation which are basis of moral damages. 21 A

equipment of herein appellant were "lying idle and rusty" but were "with a shed free

corporation may have a good reputation which, if besmirched, may also be a ground

from rains" 20 showing that although they were no longer in use at the time, they were

for the award of moral damages. The same cannot be considered under the facts of

kept in a proper place and not exposed to the elements. The President of the

this case, however, not only because it is admitted that herein appellant had already

appellant company, on the other hand, testified that its caterpillar (tractor) alone is

ceased in its business operation at the time of the foreclosure sale of the chattels, but

worth P35,000.00 in the market, and that the value of its two trucks acquired by it with

also for the reason that whatever adverse effects of the foreclosure sale of the

part of the proceeds of the loan and included as additional items in the mortgaged

chattels could have upon its reputation or business standing would undoubtedly be

chattels were worth no less than P14,000.00. He likewise appraised the worth of its

the same whether the sale was conducted at Jose Panganiban, Camarines Norte, or

Murphy engine at P16,000.00 which, according to him, when taken together with the

in Manila which is the place agreed upon by the parties in the mortgage contract.

heavy equipments he mentioned, the sawmill itself and all other equipment forming
part of the chattels under consideration, and bearing in mind the current cost of

But for the wrongful acts of herein appellee bank and the deputy sheriff of Camarines

equipments these days which he alleged to have increased by about five (5) times,

Norte in proceeding with the sale in utter disregard of the agreement to have the

could safely be estimated at P120,000.00. This testimony, except for the appraised

chattels sold in Manila as provided for in the mortgage contract, to which their

and market values appearing in the inspection and re-inspection reports of the PNB

attentions were timely called by herein appellant, and in disposing of the chattels in

official earlier mentioned, stand uncontroverted in the record; but We are not inclined

gross for the miserable amount of P4,200.00, herein appellant should be awarded

to accept such testimony at its par value, knowing that the equipments of herein

exemplary damages in the sum of P10,000.00. The circumstances of the case also

appellant had been idle and unused since it stopped operating its sawmill in 1958 up

warrant the award of P3,000.00 as attorney's fees for herein appellant.

to the time of the sale of the chattels in 1961. We have no doubt that the value of
chattels was depreciated after all those years of inoperation, although from the

WHEREFORE AND CONSIDERING ALL THE FOREGOING, the decision appealed

evidence aforementioned, We may also safely conclude that the amount of P4,200.00

from should be, as hereby, it is set aside. The Philippine National Bank and the

for which the chattels were sold in the foreclosure sale in question was grossly unfair

Deputy Sheriff of the province of Camarines Norte are ordered to pay, jointly and

to the mortgagor. Considering, however, the facts that the appraised value of

severally, to Mambulao Lumber Company the total amount of P56,000.73, broken as

P42,850.00 and the market value of P85,700.00 originally given by the PNB official

follows: P150.73 overpaid by the latter to the PNB, P42,850.00 the value of the

were admittedly conservative; that two 6 x 6 trucks subsequently bought by the

chattels at the time of the sale with interest at the rate of 6% per annum from

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December 21, 1961, until fully paid, P10,000.00 in exemplary damages, and

Sometime in November 1992 a bidding for the supply and installation of the

P3,000.00 as attorney's fees. Costs against both appellees.

generators was held. Several suppliers and dealers were invited to attend a pre-

.R. No. 128066

bidding conference to discuss the conditions, propose scheme and specifications that

June 19, 2000

would best suit the needs of PUREFOODS. Out of the eight (8) prospective bidders
JARDINE DAVIES INC., petitioner,

who attended the pre-bidding conference, only three (3) bidders, namely, respondent

vs.

FAR EAST MILLS SUPPLY CORPORATION (hereafter FEMSCO), MONARK and

COURT

OF APPEALS

and FAR

EAST

MILLS

SUPPLY

CORPORATION,

ADVANCE POWER submitted bid proposals and gave bid bonds equivalent to 5% of

respondents.

their respective bids, as required.

x - - - - - - - - - - - - - - - - - - - - - - -x

Thereafter, in a letter dated 12 December 1992 addressed to FEMSCO President


Alfonso Po, PUREFOODS confirmed the award of the contract to FEMSCO

G.R. No. 128069


Gentlemen:
PURE FOODS CORPORATION, petitioner,
vs.
COURT

This will confirm that Pure Foods Corporation has awarded to your firm the project:
OF APPEALS

and FAR

EAST

MILLS

SUPPLY

CORPORATION,

Supply and Installation of two (2) units of 1500 KW/unit Generator Sets at the

respondents.

Processed Meats Plant, Bo. San Roque, Marikina, based on your proposal number
PC 28-92 dated November 20, 1992, subject to the following basic terms and

BELLOSILLO, J.:

conditions:

This is rather a simple case for specific performance with damages which could have

1. Lump sum contract of P6,137,293.00 (VAT included), for the supply of materials

been resolved through mediation and conciliation during its infancy stage had the

and labor for the local portion and the labor for the imported materials, payable by

parties been earnest in expediting the disposal of this case. They opted however to

progress billing twice a month, with ten percent (10%) retention. The retained amount

resort to full court proceedings and denied themselves the benefits of alternative

shall be released thirty (30) days after acceptance of the completed project and upon

dispute resolution, thus making the process more arduous and long-drawn.

posting of Guarantee Bond in an amount equivalent to twenty percent (20%) of the


contract price. The Guarantee Bond shall be valid for one (1) year from completion

The controversy started in 1992 at the height of the power crisis which the country

and acceptance of project. The contract price includes future increase/s in costs of

was then experiencing. To remedy and curtail further losses due to the series of

materials and labor;

power failures, petitioner PURE FOODS CORPORATION (hereafter PUREFOODS)


decided to install two (2) 1500 KW generators in its food processing plant in San

2. The projects shall be undertaken pursuant to the attached specifications. It is

Roque, Marikina City.

understood that any item required to complete the project, and those not included in
the list of items shall be deemed included and covered and shall be performed;

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3. All materials shall be brand new;


FEMSCO thus wrote PUREFOODS to honor its contract with the former, and to
4. The project shall commence immediately and must be completed within twenty (20)

JARDINE to cease and desist from delivering and installing the two (2) generators at

working days after the delivery of Generator Set to Marikina Plant, penalty equivalent

PUREFOODS. Its demand letters unheeded, FEMSCO sued both PUREFOODS and

to 1/10 of 1% of the purchase price for every day of delay;

JARDINE: PUREFOODS for reneging on its contract, and JARDINE for its
unwarranted interference and inducement. Trial ensued. After FEMSCO presented its

5. The Contractor shall put up Performance Bond equivalent to thirty (30%) of the

evidence, JARDINE filed a Demurrer to Evidence.

contract price, and shall procure All Risk Insurance equivalent to the contract price
upon commencement of the project. The All Risk Insurance Policy shall be endorsed

On 27 June 1994 the Regional Trial Court of Pasig, Br. 68, 1 granted JARDINE's

in favor of and shall be delivered to Pure Foods Corporation;

Demurrer to Evidence. The trial court concluded that "[w]hile it may seem to the
plaintiff that by the actions of the two defendants there is something underhanded

6. Warranty of one (1) year against defective material and/or workmanship.

going on, this is all a matter of perception, and unsupported by hard evidence, mere
suspicions and suppositions would not stand up very well in a court of law." 2

Once finalized, we shall ask you to sign the formal contract embodying the foregoing

Meanwhile trial proceeded as regards the case against PUREFOODS.

terms and conditions.


On 28 July 1994 the trial court rendered a decision ordering PUREFOODS: (a) to
Immediately, FEMSCO submitted the required performance bond in the amount of

indemnify FEMSCO the sum of P2,300,000.00 representing the value of engineering

P1,841,187.90 and contractor's all-risk insurance policy in the amount of

services it rendered; (b) to pay FEMSCO the sum of US$14,000.00 or its peso

P6,137,293.00 which PUREFOODS through its Vice President Benedicto G. Tope

equivalent, and P900,000.00 representing contractor's mark-up on installation work,

acknowledged in a letter dated 18 December 1992. FEMSCO also made

considering that it would be impossible to compel PUREFOODS to honor, perform

arrangements with its principal and started the PUREFOODS project by purchasing

and fulfill its contractual obligations in view of PUREFOOD's contract with JARDINE

the necessary materials. PUREFOODS on the other hand returned FEMSCO's

and noting that construction had already started thereon; (c) to pay attorney's fees in

Bidder's Bond in the amount of P1,000,000.00, as requested.

an amount equivalent to 20% of the total amount due; and, (d) to pay the costs. The
trial court dismissed the counterclaim filed by PUREFOODS for lack of factual and

Later, however, in a letter dated 22 December 1992, PUREFOODS through its Senior

legal basis.

Vice President Teodoro L. Dimayuga unilaterally canceled the award as "significant


factors were uncovered and brought to (their) attention which dictate (the) cancellation

Both FEMSCO and PUREFOODS appealed to the Court of Appeals. FEMSCO

and warrant a total review and re-bid of (the) project." Consequently, FEMSCO

appealed the 27 June 1994 Resolution of the trial court which granted the Demurrer

protested the cancellation of the award and sought a meeting with PUREFOODS.

to Evidence filed by JARDINE resulting in the dismissal of the complaint against it,

However, on 26 March 1993, before the matter could be resolved, PUREFOODS

while PUREFOODS appealed the 28 July 1994 Decision of the same court which

already awarded the project and entered into a contract with JARDINE NELL, a

ordered it to pay FEMSCO.

division of Jardine Davies, Inc. (hereafter JARDINE), which incidentally was not one
of the bidders.1wphi1.nt

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On 14 August 1996 the Court of Appeals affirmed in toto the 28 July 1994 Decision of

granting there existed a perfected contract, whether there is any showing that

the trial court. 3 It also reversed the 27 June 1994 Resolution of the lower court and

JARDINE induced or connived with PUREFOODS to violate the latter's contract with

ordered JARDINE to pay FEMSCO damages for inducing PUREFOODS to violate the

FEMSCO.

latter's contract with FEMSCO. As such, JARDINE was ordered to pay FEMSCO
P2,000,000.00 for moral damages. In addition, PUREFOODS was also directed to

A contract is defined as "a juridical convention manifested in legal form, by virtue of

pay FEMSCO P2,000,000.00 as moral damages and P1,000,000.00 as exemplary

which one or more persons bind themselves in favor of another or others, or

damages as well as 20% of the total amount due as attorney's fees.

reciprocally, to the fulfillment of a prestation to give, to do, or not to do." 4 There can
be no contract unless the following requisites concur: (a) consent of the contracting

On 31 January 1997 the Court of Appeals denied for lack of merit the separate

parties; (b) object certain which is the subject matter of the contract; and, (c) cause of

motions for reconsideration filed by PUREFOODS and JARDINE. Hence, these two

the obligation which is established. 5 A contract binds both contracting parties and

(2) petitions for review filed by PUREFOODS and JARDINE which were subsequently

has the force of law between them.

consolidated.
Contracts are perfected by mere consent, upon the acceptance by the offeree of the
PUREFOODS maintains that the conclusions of both the trial court and the appellate

offer made by the offeror. From that moment, the parties are bound not only to the

court are premised on a misapprehension of facts. It argues that its 12 December

fulfillment of what has been expressly stipulated but also to all the consequences

1992 letter to FEMSCO was not an acceptance of the latter's bid proposal and award

which, according to their nature, may be in keeping with good faith, usage and law. 6

of the project but more of a qualified acceptance constituting a counter-offer which

To produce a contract, the acceptance must not qualify the terms of the offer.

required FEMSCO's express conforme. Since PUREFOODS never received

However, the acceptance may be express or implied. 7 For a contract to arise, the

FEMSCO's conforme, PUREFOODS was very well within reason to revoke its

acceptance must be made known to the offeror. Accordingly, the acceptance can be

qualified acceptance or counter-offer. Hence, no contract was perfected between

withdrawn or revoked before it is made known to the offeror.

PUREFOODS and FEMSCO. PUREFOODS also contends that it was never in bad
faith when it dealt with FEMSCO. Hence moral and exemplary damages should not

In the instant case, there is no issue as regards the subject matter of the contract and

have been awarded.

the cause of the obligation. The controversy lies in the consent whether there was
an acceptance of the offer, and if so, if it was communicated, thereby perfecting the

Corollarily, JARDINE asserts that the records are bereft of any showing that it had

contract.

prior knowledge of the supposed contract between PUREFOODS and FEMSCO, and
that it induced PUREFOODS to violate the latter's alleged contract with FEMSCO.

To resolve the dispute, there is a need to determine what constituted the offer and the

Moreover, JARDINE reasons that FEMSCO, an artificial person, is not entitled to

acceptance. Since petitioner PUREFOODS started the process of entering into the

moral damages. But granting arguendo that the award of moral damages is proper,

contract by conducting a bidding, Art. 1326 of the Civil Code, which provides that

P2,000,000.00 is extremely excessive.

"[a]dvertisements for bidders are simply invitations to make proposals," applies.


Accordingly, the Terms and Conditions of the Bidding disseminated by petitioner

In the main, these consolidated cases present two (2) issues: first, whether there

PUREFOODS constitutes the "advertisement" to bid on the project. The bid proposals

existed a perfected contract between PUREFOODS and FEMSCO; and second,

or quotations submitted by the prospective suppliers including respondent FEMSCO,

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are the offers. And, the reply of petitioner PUREFOODS, the acceptance or rejection

As can be inferred from the actual phrase used in the first portion of the letter, the

of the respective offers.

decision to award the contract has already been made. The letter only serves as a
confirmation of such decision. Hence, to the Court's mind, there is already an

Quite obviously, the 12 December 1992 letter of petitioner. PUREFOODS to FEMSCO

acceptance made of the offer received by Purefoods. Notwithstanding the terms and

constituted acceptance of respondent FEMSCO's offer as contemplated by law. The

conditions enumerated therein, the offer has been accepted and/or amplified the

tenor of the letter, i.e., "This will confirm that Pure Foods has awarded to your firm

details of the terms and conditions contained in the Terms and Conditions of Bidding

(FEMSCO) the project," could not be more categorical. While the same letter

given out by Purefoods to prospective bidders. 9

enumerated certain "basic terms and conditions," these conditions were imposed on
the performance of the obligation rather than on the perfection of the contract. Thus,

But even granting arguendo that the 12 December 1992 letter of petitioner

the first "condition" was merely a reiteration of the contract price and billing scheme

PUREFOODS constituted a "conditional counter-offer," respondent FEMCO's

based on the Terms and Conditions of Bidding and the bid or previous offer of

submission of the performance bond and contractor's all-risk insurance was an

respondent FEMSCO. The second and third "conditions" were nothing more than

implied acceptance, if not a clear indication of its acquiescence to, the "conditional

general statements that all items and materials including those excluded in the list but

counter-offer," which expressly stated that the performance bond and the contractor's

necessary to complete the project shall be deemed included and should be brand

all-risk insurance should be given upon the commencement of the contract.

new. The fourth "condition" concerned the completion of the work to be done, i.e.,

Corollarily, the acknowledgment thereof by petitioner PUREFOODS, not to mention its

within twenty (20) days from the delivery of the generator set, the purchase of which

return of FEMSCO's bidder's bond, was a concrete manifestation of its knowledge that

was part of the contract. The fifth "condition" had to do with the putting up of a

respondent FEMSCO indeed consented to the "conditional counter-offer." After all, as

performance bond and an all-risk insurance, both of which should be given upon

earlier adverted to, an acceptance may either be express or implied, 10 and this can

commencement of the project. The sixth "condition" related to the standard warranty

be inferred from the contemporaneous and subsequent acts of the contracting parties.

of one (1) year. In fine, the enumerated "basic terms and conditions" were
prescriptions on how the obligation was to be performed and implemented. They were

Accordingly, for all intents and purposes, the contract at that point has been perfected,

far from being conditions imposed on the perfection of the contract.

and respondent FEMSCO's conforme would only be a mere surplusage. The


discussion of the price of the project two (2) months after the 12 December 1992 letter

In Babasa v. Court of Appeals 8 we distinguished between a condition imposed on the

can be deemed as nothing more than a pressure being exerted by petitioner

perfection of a contract and a condition imposed merely on the performance of an

PUREFOODS on respondent FEMSCO to lower the price even after the contract had

obligation. While failure to comply with the first condition results in the failure of a

been perfected. Indeed from the facts, it can easily be surmised that petitioner

contract, failure to comply with the second merely gives the other party options and/or

PUREFOODS was haggling for a lower price even after agreeing to the earlier

remedies to protect his interests.

quotation, and was threatening to unilaterally cancel the contract, which it eventually
did. Petitioner PUREFOODS also makes an issue out of the absence of a purchase

We thus agree with the conclusion of respondent appellate court which affirmed the

order (PO). Suffice it to say that purchase orders or POs do not make or break a

trial court

contract. Thus, even the tenor of the subsequent letter of petitioner PUREFOODS,
i.e., "Pure Foods Corporation is hereby canceling the award to your company of the

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project," presupposes that the contract has been perfected. For, there can be no

both petitioner JARDINE and respondent FEMSCO, and the tender of a lower

cancellation if the contract was not perfected in the first place.

quotation by petitioner JARDINE are insufficient to show that petitioner JARDINE


indeed induced petitioner PUREFOODS to violate its contract with respondent

Petitioner PUREFOODS also argues that it was never in bad faith.1avvphi1 On the

FEMSCO.

contrary, it believed in good faith that no such contract was perfected. We are not
convinced. We subscribe to the factual findings and conclusions of the trial court

WHEREFORE, judgment is hereby rendered as follows:

which were affirmed by the appellate court


(a) The petition in G.R. No. 128066 is GRANTED. The assailed Decision of the Court
Hence, by the unilateral cancellation of the contract, the defendant (petitioner PURE

of Appeals reversing the 27 June 1994 resolution of the trial court and ordering

FOODS) has acted with bad faith and this was further aggravated by the subsequent

petitioner JARDINE DAVIES, INC., to pay private respondent FAR EAST MILLS

inking of a contract between defendant Purefoods and erstwhile co-defendant

SUPPLY CORPORATION P2,000,000.00 as moral damages is REVERSED and SET

Jardine. It is very evident that Purefoods thought that by the expedient means of

ASIDE for insufficiency of evidence; and

merely writing a letter would automatically cancel or nullify the existing contract
entered into by both parties after a process of bidding. This, to the Court's mind, is a

(b) The petition in G.R. No. 128069 is DENIED. The assailed Decision of the Court of

flagrant violation of the express provisions of the law and is contrary to fair and just

Appeals ordering petitioner PUREFOODS CORPORATION to pay private respondent

dealings to which every man is due. 11

FAR EAST MILLS SUPPLY CORPORATION the sum of P2,300,000.00 representing


the value of engineering services it rendered, US$14,000.00 or its peso equivalent,

This Court has awarded in the past moral damages to a corporation whose reputation

and P900,000.00 representing the contractor's mark-up on installation work, as well

has been besmirched. 12 In the instant case, respondent FEMSCO has sufficiently

as attorney's fees equivalent to twenty percent (20%) of the total amount due, is

shown that its reputation was tarnished after it immediately ordered equipment from

AFFIRMED. In addition, petitioner PURE FOODS CORPORATION is ordered to pay

its suppliers on account of the urgency of the project, only to be canceled later. We

private respondent FAR EAST MILLS SUPPLY CORPORATION moral damages in

thus sustain respondent appellate court's award of moral damages. We however

the amount of P1,000,000.00 and exemplary damages in the amount of

reduce the award from P2,000,000.00 to P1,000,000.00, as moral damages are never

P1,000,000.00. Costs against petitioner.

intended to enrich the recipient. Likewise, the award of exemplary damages by way of
example for the public good is excessive and should be reduced to P100,000.00.

SO ORDERED.
G.R. No. 131723

December 13, 2007

Petitioner JARDINE maintains on the other hand that respondent appellate court
erred in ordering it to pay moral damages to respondent FEMSCO as it supposedly

MANILA ELECTRIC COMPANY, petitioner,

induced PUREFOODS to violate the contract with FEMSCO. We agree. While it may

vs.

seem that petitioners PUREFOODS and JARDINE connived to deceive respondent

T.E.A.M.

FEMSCO, we find no specific evidence on record to support such perception.

ASSEMBLY

Likewise, there is no showing whatsoever that petitioner JARDINE induced petitioner

ELECTRONICS INSTRUMENTS, INC., respondents.

PUREFOODS. The similarity in the design submitted to petitioner PUREFOODS by

121

ELECTRONICS
and

CORPORATION,

MANAGEMENT

PACIFIC

TECHNOLOGY
CORPORATION;

ELECTRONICS
and

ULTRA

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DECISION
On September 28, 1987, a team of petitioner's inspectors conducted a surprise
NACHURA, J.:

inspection of the electric meters installed at the DCIM building, witnessed by Ultra's6
representative, Mr. Willie Abangan. The two meters covered by account numbers

This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking

09341-1322-16 and 09341-1812-13, were found to be allegedly tampered with and

the reversal of the Decision1 of the Court of Appeals (CA) dated June 18, 1997 and

did not register the actual power consumption in the building. The results of the

its Resolution2 dated December 3, 1997 in CA-G.R. CV No. 40282 denying the

inspection were reflected in the Service Inspection Reports7 prepared by the team.

appeal filed by petitioner Manila Electric Company.


In a letter dated November 25, 1987, petitioner informed TEC of the results of the
The facts of the case, as culled from the records, are as follows:

inspection and demanded from the latter the payment of P7,040,401.01 representing
its unregistered consumption from February 10, 1986 until September 28, 1987, as a

Respondent T.E.A.M. Electronics Corporation (TEC) was formerly known as NS

result of the alleged tampering of the meters.8 TEC received the letters on January 7,

Electronics (Philippines), Inc. before 1982 and National Semi-Conductors (Phils.)

1988. Since Ultra was in possession of the subject building during the covered period,

before 1988. TEC is wholly owned by respondent Technology Electronics Assembly

TEC's Managing Director, Mr. Bobby Tan, referred the demand letter to Ultra9 which,

and Management Pacific Corporation (TPC). On the other hand, petitioner Manila

in turn, informed TEC that its Executive Vice-President had met with petitioner's

Electric Company (Meralco) is a utility company supplying electricity in the Metro

representative. Ultra further intimated that assuming that there was tampering of the

Manila area.

meters, petitioner's assessment was excessive.10 For failure of TEC to pay the
differential billing, petitioner disconnected the electricity supply to the DCIM building

Petitioner and NS Electronics (Philippines), Inc., the predecessor-in-interest of

on April 29, 1988.

respondent TEC, were parties to two separate contracts denominated as Agreements


for the Sale of Electric Energy under the following account numbers: 09341-1322-163

TEC demanded from petitioner the reconnection of electrical service, claiming that it

and 09341-1812-13.4 Under the aforesaid agreements, petitioner undertook to supply

had nothing to do with the alleged tampering but the latter refused to heed the

TEC's building known as Dyna Craft International Manila (DCIM) located at

demand. Hence, TEC filed a complaint on May 27, 1988 before the Energy

Electronics Avenue, Food Terminal Complex, Taguig, Metro Manila, with electric

Regulatory Board (ERB) praying that electric power be restored to the DCIM

power. Another contract was entered into for the supply of electric power to TEC's NS

building.11 The ERB immediately ordered the reconnection of the service but

Building under Account No. 19389-0900-10.

petitioner complied with it only on October 12, 1988 after TEC paid P1,000,000.00,
under protest. The complaint before the ERB was later withdrawn as the parties

In September 1986, TEC, under its former name National Semi-Conductors (Phils.)

deemed it best to have the issues threshed out in the regular courts. Prior to the

entered into a Contract of Lease5 with respondent Ultra Electronics Industries, Inc.

reconnection, or on June 7, 1988, petitioner conducted a scheduled inspection of the

(Ultra) for the use of the former's DCIM building for a period of five years or until

questioned meters and found them to have been tampered anew.12

September 1991. Ultra was, however, ejected from the premises on February 12,
1988 by virtue of a court order, for repeated violation of the terms and conditions of

Meanwhile, on April 25, 1988, petitioner conducted another inspection, this time, in

the lease contract.

TEC's NS Building. The inspection allegedly revealed that the electric meters were not

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registering the correct power consumption. Petitioner, thus, sent a letter dated June

MILLION PESOS with legal rate of interest from the date of the filing of this case on

18, 1988 demanding payment of P280,813.72 representing the differential billing.13

January 19, 1989 until the said amount shall have been fully paid;

TEC denied petitioner's allegations and claim in a letter dated June 29, 1988.14
Petitioner, thus, sent TEC another letter demanding payment of the aforesaid amount,

(2) Ordering defendant Meralco to pay to plaintiff TEC the amount of P280,813.72 as

with a warning that the electric service would be disconnected in case of continued

actual damages with legal rate of interest also from January 19, 1989;

refusal to pay the differential billing.15 To avert the impending disconnection of


electrical service, TEC paid the above amount, under protest.16

(3) Ordering defendant Meralco to pay to plaintiff TPC the amount of P150,000.00 as
actual damages with interest at legal rate from January 19, 1989;

On January 13, 1989, TEC and TPC filed a complaint for damages against petitioner
and Ultra17 before the Regional Trial Court (RTC) of Pasig. The case was raffled to

(4) Condemning defendant Meralco to pay both plaintiffs moral damages in the

Branch 162 and was docketed as Civil Case No. 56851.18 Upon the filing of the

amount pf P500,000.00;

parties' answer to the complaint, pre-trial was scheduled.


(5) Condemning defendant Meralco to pay both plaintiffs corrective and/or exemplary
At the pre-trial, the parties agreed to limit the issues, as follows:

damages in the amount of P200,000.00;

1. Whether or not the defendant Meralco is liable for the plaintiffs' disconnection of

(6) Ordering defendant Meralco to pay attorney's fees in the amount of P200,000.00

electric service at DCIM Building.


Costs against defendant Meralco.
2. Whether or not the plaintiff is liable for (sic) the defendant for the differential billings
in the amount of P7,040,401.01.

SO ORDERED.20

3. Whether or not the plaintiff is liable to defendant for exemplary damages.19

The trial court found the evidence of petitioner insufficient to prove that TEC was
guilty of tampering the meter installations. The deformed condition of the meter seal

For failure of the parties to reach an amicable settlement, trial on the merits ensued.

and the existence of an opening in the wire duct leading to the transformer vault did

On June 17, 1992, the trial court rendered a Decision in favor of respondents TEC

not, in themselves, prove the alleged tampering, especially since access to the

and TPC, and against respondent Ultra and petitioner. The pertinent portion of the

transformer was given only to petitioner's employees.21 The sudden drop in TEC's (or

decision reads:

Ultra's) electric consumption did not, per se, show meter tampering. The delay in the
sending of notice of the results of the inspection was likewise viewed by the court as

WHEREFORE, judgment is hereby rendered in this case in favor of the plaintiffs and

evidence of inefficiency and arbitrariness on the part of petitioner. More importantly,

against the defendants as follows:

petitioner's act of disconnecting the DCIM building's electric supply constituted bad
faith and thus makes it liable for damages.22 The court further denied petitioner's

(1) Ordering both defendants Meralco and ULTRA Electronics Instruments, Inc. to

claim of differential billing primarily on the ground of equitable negligence.23

jointly and severally reimburse plaintiff TEC actual damages in the amount of ONE

Considering that TEC and TPC paid P1,000,000.00 to avert the disconnection of

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electric power; and because Ultra manifested to settle the claims of petitioner, the

2. In not finding that the issue is: whether or not, based on the tampered meters,

court imposed solidary liability on both Ultra and petitioner for the payment of the

whether or not petitioner is entitled to differential billing, and if so, how much.

P1,000,000.00.
3. In declaring that petitioner ME RALCO had the burden of proof to show by clear
Ultra and petitioner appealed to the CA which affirmed the RTC decision, with a

and convincing evidence that with respect to the tampered meters that TEC and/or

modification of the amount of actual damages and interest thereon. The dispositive

TPC authored their tampering.

portion of the CA decision dated June 18, 1997, states:


4. In finding that petitioner Meralco should not have held TEC and/or TPC responsible
WHEREFORE, this Court renders judgment affirming in toto the Decision rendered by

for the acts of Ultra.

the trial court with the slight modification that the interest at legal rate shall be
computed from January 13, 1989 and that Meralco shall pay plaintiff T.E.A.M.

5. In finding that TEC should not be held liable for the tampering of this electric meter

Electronics Corporation and Technology Electronics Assembly and Management

in its DCIM Building.

Pacific Corporation the sum of P150,000.00 per month for five (5) months for actual
damages incurred when it was compelled to lease a generator set with interest at the

6. In finding that there was no notice of disconnection.

legal rate from the above-stated date.


7. In finding that petitioner MERALCO was negligent in informing TEC of the alleged
SO ORDERED.24

tampering.

The appellate court agreed with the RTC's conclusion. In addition, it considered

8. In making the finding that it is difficult to believe that when petitioner MERALCO

petitioner negligent for failing to discover the alleged defects in the electric meters; in

inspected on June 7, 1988 the meter installations, they were found to be tampered.

belatedly notifying TEC and TPC of the results of the inspection; and in disconnecting
the electric power without prior notice.

9. In declaring that petitioner MERALCO estopped from claiming any tampering of the
meters.

Petitioner now comes before this Court in this petition for review on certiorari
contending that:

10. In finding that "the method employed by MERALCO to as certain (sic) the 'correct'
amount of electricity consumed is questionable";

The Court of Appeals committed grievous errors and decided matters of substance
contrary to law and the rulings of this Honorable Court:

11. In declaring that MERALCO all throughout its dealings with TEC took on an
"attitude" which is oppressive, wanton and reckless.

1. In finding that the issue in the case is whether there was deliberate tampering of
the metering installations at the building owned by TEC.

12. In declaring that MERALCO acted arbitrarily in inspecting TEC's DCIM building
and the NS building.

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13. In declaring that respondents TEC and TPC are entitled to the damages which it

The first instance was supposedly discovered on September 28, 1987. The inspector

awarded.

allegedly found the presence of a short circuiting device and saw that the meter seal
was deformed. In addition, petitioner, through the Supervising Engineer of its Special

14. In not declaring that petitioner is entitled to the differential bill.

Billing Analysis Department,27 claimed that there was a sudden and unexplainable
drop in TEC's electrical consumption starting February 10, 1986. On the basis of the

15. In not declaring that respondents are liable to petitioner for exemplary damages,

foregoing, petitioner concluded that the electric meters were tampered with.

attorney's fee and expenses for litigation.25


However, contrary to petitioner's claim that there was a drastic and unexplainable drop
The petition must fail.

in TEC's electric consumption during the affected period, the Pattern of TEC's
Electrical Consumption28 shows that the sudden drop is not peculiar to the said

The issues for resolution can be summarized as follows: 1) whether or not TEC

period. Noteworthy is the observation of the RTC in this wise:

tampered with the electric meters installed at its DCIM and NS buildings; 2) If so,
whether or not it is liable for the differential billing as computed by petitioner; and 3)

In fact, in Account No. 09341-1812-13 (heretofore referred as Account/Meter No. 2),

whether or not petitioner was justified in disconnecting the electric power supply in

as evidenced by Exhibits "35" and "35-A," there was likewise a sudden drop of

TEC's DCIM building.

electrical consumption from the year 1984 which recorded an average 141,300
kwh/month to 1985 which recorded an average kwh/month at 87,600 or a difference-

Petitioner insists that the tampering of the electric meters installed at the DCIM and

drop of 53,700 kwh/month; from 1985's 87,600 recorded consumption, the same

NS buildings owned by respondent TEC has been established by overwhelming

dropped to 18,600 kwh/month or a difference-drop of 69,000 kwh/month. Surely, a

evidence, as specifically shown by the shorting devices found during the inspection.

drop of 53,700 could be equally categorized as a sudden drop amounting to 69,000

Thus, says petitioner, tampering of the meter is no longer an issue.

which, incidentally, the Meralco claimed as "unexplainable. x x x.29

It is obvious that petitioner wants this Court to revisit the factual findings of the lower

The witnesses for petitioner who testified on the alleged tampering of the electric

courts. Well-established is the doctrine that under Rule 45 of the Rules of Court, only

meters, declared that tampering is committed by consumers to prevent the meter from

questions of law, not of fact, may be raised before the Court. We would like to stress

registering the correct amount of electric consumption, and result in a reduced

that this Court is not a trier of facts and may not re-examine and weigh anew the

monthly electric bill, while continuing to enjoy the same power supply. Only the

respective evidence of the parties. Factual findings of the trial court, especially those

registration of actual electric energy consumption, not the supply of electricity, is

affirmed by the Court of Appeals, are binding on this Court.26

affected when a meter is tampered with.30 The witnesses claimed that after the
inspection, the tampered electric meters were corrected, so that they would register

Looking at the record, we note that petitioner claims to have discovered three

the correct consumption of TEC. Logically, then, after the correction of the allegedly

incidences of meter-tampering; twice in the DCIM building on September 28, 1987

tampered meters, the customer's registered consumption would go up.

and June 7, 1988; and once in the NS building on April 24, 1988.
In this case, the period claimed to have been affected by the tampered electric meters
is from February 1986 until September 1987. Based on petitioner's Billing Record31

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(for the DCIM building), TEC's monthly electric consumption on Account No. 9341-

may encourage neglect of public utilities to the detriment of the consuming public.

1322-16 was between 4,500 and 27,000 kwh.32 Account No. 9341-1812-13 showed a

Corollarily, it must be underscored that petitioner has the imperative duty to make a

monthly consumption between 9,600 and 34,200 kwh.33 It is interesting to note that,

reasonable and proper inspection of its apparatus and equipment to ensure that they

after correction of the allegedly tampered meters, TEC's monthly electric consumption

do not malfunction, and the due diligence to discover and repair defects therein.

from October 1987 to February 1988 (the last month that Ultra occupied the DCIM

Failure to perform such duties constitutes negligence.36 By reason of said

building) was between 8,700 and 24,300 kwh in its first account, and 16,200 to 46,800

negligence, public utilities run the risk of forfeiting amounts originally due from their

kwh on the second account.

customers.37

Even more revealing is the fact that TEC's meters registered 9,300 kwh and 19,200

As to the alleged tampering of the electric meter in TEC's NS building, suffice it to

kwh consumption on the first and second accounts, respectively, a month prior to the

state that the allegation was not proven, considering that the meters therein were

inspection. On the first month after the meters were corrected, TEC's electric

enclosed in a metal cabinet the metal seal of which was unbroken, with petitioner

consumption registered at 9,300 kwh and 22,200 kwh on the respective accounts.

having sole access to the said meters.38

These figures clearly show that there was no palpably drastic difference between the
consumption before and after the inspection, casting a cloud of doubt over petitioner's

In view of the negative finding on the alleged tampering of electric meters on TEC's

claim of meter-tampering. Indeed, Ultra's explanation that the corporation was losing;

DCIM and NS buildings, petitioner's claim of differential billing was correctly denied by

thus, it had lesser consumption of electric power appear to be the more plausible

the trial and appellate courts. With greater reason, therefore, could petitioner not

reason for the drop in electric consumption.

exercise the right of immediate disconnection.

Petitioner likewise claimed that when the subject meters were again inspected on

The law in force at the time material to this controversy was Presidential Decree (P.D.)

June 7, 1988, they were found to have been tampered anew. The Court notes that

No. 40139 issued on March 1, 1974.40 The decree penalized unauthorized

prior to the inspection, TEC was informed about it; and months before the inspection,

installation of water, electrical or telephone connections and such acts as the use of

there was an unsettled controversy between TEC and petitioner, brought about by the

tampered electrical meters. It was issued in answer to the urgent need to put an end

disconnection of electric power and the non-payment of differential billing. We are

to illegal activities that prejudice the economic well-being of both the companies

more disposed to accept the trial court's conclusion that it is hard to believe that a

concerned and the consuming public.41 P.D. 401 granted the electric companies the

customer previously apprehended for tampered meters and assessed P7 million

right to conduct inspections of electric meters and the criminal prosecution42 of erring

would further jeopardize itself in the eyes of petitioner.34 If it is true that there was

consumers who were found to have tampered with their electric meters. It did not

evidence of tampering found on September 28, 1987 and again on June 7, 1988, the

expressly provide for more expedient remedies such as the charging of differential

better view would be that the defective meters were not actually corrected after the

billing and immediate disconnection against erring consumers. Thus, electric

first inspection. If so, then Manila Electric Company v. Macro Textile Mills

companies found a creative way of availing themselves of such remedies by inserting

Corporation35 would apply, where we said that we cannot sanction a situation

into their service contracts (or agreements for the sale of electric energy) a provision

wherein the defects in the electric meter are allowed to continue indefinitely until

for differential billing with the option of disconnection upon non-payment by the erring

suddenly, the public utilities demand payment for the unrecorded electricity utilized

consumer. The Court has recognized the validity of such stipulations.43 However,

when they could have remedied the situation immediately. Petitioner's failure to do so

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recourse to differential billing with disconnection was subject to the prior requirement

tampered meter, it is absurd to make the lawful occupant liable. It was petitioner who

of a 48-hour written notice of disconnection.44

received the P1 million; thus, it alone should be held liable for the return of the
amount.

Petitioner, in the instant case, resorted to the remedy of disconnection without prior
notice. While it is true that petitioner sent a demand letter to TEC for the payment of

TEC also sufficiently established its claim for the reimbursement of the amount paid

differential billing, it did not include any notice that the electric supply would be

as rentals for the generator set it was constrained to rent by reason of the illegal

disconnected. In fine, petitioner abused the remedies granted to it under P.D. 401 and

disconnection of electrical service. The official receipts and purchase orders

Revised General Order No. 1 by outrightly depriving TEC of electrical services without

submitted by TEC as evidence sufficiently show that such rentals were indeed made.

first notifying it of the impending disconnection. Accordingly, the CA did not err in

However, the amount of P150,000.00 per month for five months, awarded by the CA,

affirming the RTC decision.

is excessive. Instead, a total sum of P150,000.00, as found by the RTC, is proper.

As to the damages awarded by the CA, we deem it proper to modify the same. Actual

As to the payment of exemplary damages and attorney's fees, we find no cogent

damages are compensation for an injury that will put the injured party in the position

reason to disturb the same. Exemplary damages are imposed by way of example or

where it was before the injury. They pertain to such injuries or losses that are actually

correction for the public good in addition to moral, temperate, liquidated, or

sustained and susceptible of measurement. Except as provided by law or by

compensatory damages.47 In this case, to serve as an example that before a

stipulation, a party is entitled to adequate compensation only for such pecuniary loss

disconnection of electrical supply can be effected by a public utility, the requisites of

as is duly proven. Basic is the rule that to recover actual damages, not only must the

law must be complied with we affirm the award of P200,000.00 as exemplary

amount of loss be capable of proof; it must also be actually proven with a reasonable

damages. With the award of exemplary damages, the award of attorney's fees is

degree of certainty, premised upon competent proof or the best evidence

likewise proper, pursuant to Article 220848 of the Civil Code. It is obvious that TEC

obtainable.45

needed the services of a lawyer to argue its cause through three levels of the judicial
hierarchy. Thus, the award of P200,000.00 is in order.49

Respondent TEC sufficiently established, and petitioner in fact admitted, that the
former paid P1,000,000.00 and P280,813.72 under protest, the amounts representing

We, however, deem it proper to delete the award of moral damages. TEC's claim was

a portion of the latter's claim of differential billing. With the finding that no tampering

premised allegedly on the damage to its goodwill and reputation.50 As a rule, a

was committed and, thus, no differential billing due, the aforesaid amounts should be

corporation is not entitled to moral damages because, not being a natural person, it

returned by petitioner, with interest, as ordered by the Court of Appeals and pursuant

cannot experience physical suffering or sentiments like wounded feelings, serious

to the guidelines set forth by the Court.46

anxiety, mental anguish and moral shock. The only exception to this rule is when the
corporation has a reputation that is debased, resulting in its humiliation in the

However, despite the appellate court's conclusion that no tampering was committed, it

business realm.51 But in such a case, it is imperative for the claimant to present proof

held Ultra solidarily liable with petitioner for P1,000,000.00, only because the former,

to justify the award. It is essential to prove the existence of the factual basis of the

as occupant of the building, promised to settle the claims of the latter. This ruling is

damage and its causal relation to petitioner's acts.52 In the present case, the records

erroneous. Ultra's promise was conditioned upon the finding of defect or tampering of

are bereft of any evidence that the name or reputation of TEC/TPC has been debased

the meters. It did not acknowledge any culpability and liability, and absent any

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as a result of petitioner's acts. Besides, the trial court simply awarded moral damages

Expos is a radio documentary[4] program hosted by Carmelo Mel Rima (Rima)

in the dispositive portion of its decision without stating the basis thereof.

and Hermogenes Jun Alegre (Alegre).[5] Expos is aired every morning over
DZRC-AM which is owned by Filipinas Broadcasting Network, Inc. (FBNI). Expos

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-

is heard over Legazpi City, the Albay municipalities and other Bicol areas.[6]

G.R. CV No. 40282 dated June 18, 1997 and its Resolution dated December 3, 1997
are AFFIRMED with the following MODIFICATIONS: (1) the award of P150,000.00 per

In the morning of 14 and 15 December 1989, Rima and Alegre exposed various

month for five months as reimbursement for the rentals of the generator set is

alleged complaints from students, teachers and parents against Ago Medical and

REDUCED to P150,000.00; and (2) the award of P500,000.00 as moral damages is

Educational

hereby DELETED.

administrators. Claiming that the broadcasts were defamatory, AMEC and Angelita

Center-Bicol

Christian

College

of

Medicine

(AMEC)

and

its

Ago (Ago), as Dean of AMECs College of Medicine, filed a complaint for


SO ORDERED.

damages[7] against FBNI, Rima and Alegre on 27 February 1990. Quoted are

[G.R. No. 141994. January 17, 2005]

portions of the allegedly libelous broadcasts:

FILIPINAS BROADCASTING NETWORK, INC., petitioner, vs. AGO MEDICAL AND

JUN ALEGRE:

EDUCATIONAL CENTER-BICOL CHRISTIAN COLLEGE OF MEDICINE, (AMECBCCM) and ANGELITA F. AGO, respondents.

Let us begin with the less burdensome: if you have children taking medical course at

DECISION

AMEC-BCCM, advise them to pass all subjects because if they fail in any subject they

CARPIO, J.:

will repeat their year level, taking up all subjects including those they have passed
already. Several students had approached me stating that they had consulted with

The Case

the DECS which told them that there is no such regulation. If [there] is no such
regulation why is AMEC doing the same?

This petition for review[1] assails the 4 January 1999 Decision[2] and 26 January
2000 Resolution of the Court of Appeals in CA-G.R. CV No. 40151. The Court of

xxx

Appeals affirmed with modification the 14 December 1992 Decision[3] of the Regional
Trial Court of Legazpi City, Branch 10, in Civil Case No. 8236. The Court of Appeals

Second: Earlier AMEC students in Physical Therapy had complained that the course

held Filipinas Broadcasting Network, Inc. and its broadcasters Hermogenes Alegre

is not recognized by DECS. xxx

and Carmelo Rima liable for libel and ordered them to solidarily pay Ago Medical and
Educational Center-Bicol Christian College of Medicine moral damages, attorneys

Third: Students are required to take and pay for the subject even if the subject does

fees and costs of suit.

not have an instructor - such greed for money on the part of AMECs administration.
Take the subject Anatomy: students would pay for the subject upon enrolment

The Antecedents

because it is offered by the school. However there would be no instructor for such
subject. Students would be informed that course would be moved to a later date
because the school is still searching for the appropriate instructor.

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scholarship in AMEC. She had retired from Bicol University a long time ago but
xxx

AMEC has patiently made use of her.

It is a public knowledge that the Ago Medical and Educational Center has survived

xxx

and has been surviving for the past few years since its inception because of funds
support from foreign foundations. If you will take a look at the AMEC premises youll

MEL RIMA:

find out that the names of the buildings there are foreign soundings. There is a
McDonald Hall. Why not Jose Rizal or Bonifacio Hall? That is a very concrete and

xxx My friends based on the expose, AMEC is a dumping ground for moral and

undeniable evidence that the support of foreign foundations for AMEC is substantial,

physically misfit people. What does this mean? Immoral and physically misfits as

isnt it? With the report which is the basis of the expose in DZRC today, it would be

teachers.

very easy for detractors and enemies of the Ago family to stop the flow of support of
foreign foundations who assist the medical school on the basis of the latters purpose.

May I say Im sorry to Dean Justita Lola. But this is the truth. The truth is this, that

But if the purpose of the institution (AMEC) is to deceive students at cross purpose

your are no longer fit to teach. You are too old. As an aviation, your case is zero

with its reason for being it is possible for these foreign foundations to lift or suspend

visibility. Dont insist.

their donations temporarily.[8]


xxx Why did AMEC still absorb her as a teacher, a dean, and chairman of the
xxx

scholarship committee at that.

The reason is practical cost saving in salaries,

because an old person is not fastidious, so long as she has money to buy the
On the other hand, the administrators of AMEC-BCCM, AMEC Science High School

ingredient of beetle juice. The elderly can get by thats why she (Lola) was taken in

and the AMEC-Institute of Mass Communication in their effort to minimize expenses

as Dean.

in terms of salary are absorbing or continues to accept rejects. For example how
many teachers in AMEC are former teachers of Aquinas University but were removed

xxx

because of immorality? Does it mean that the present administration of AMEC have
the total definite moral foundation from catholic administrator of Aquinas University. I

xxx On our end our task is to attend to the interests of students. It is likely that the

will prove to you my friends, that AMEC is a dumping ground, garbage, not merely of

students would be influenced by evil. When they become members of society outside

moral and physical misfits. Probably they only qualify in terms of intellect. The Dean

of campus will be liabilities rather than assets. What do you expect from a doctor who

of Student Affairs of AMEC is Justita Lola, as the family name implies. She is too old

while studying at AMEC is so much burdened with unreasonable imposition? What

to work, being an old woman.

Is the AMEC administration exploiting the very

do you expect from a student who aside from peculiar problems because not all

[e]nterprising or compromising and undemanding Lola? Could it be that AMEC is just

students are rich in their struggle to improve their social status are even more

patiently making use of Dean Justita Lola were if she is very old. As in atmospheric

burdened with false regulations. xxx[9] (Emphasis supplied)

situation zero visibility the plane cannot land, meaning she is very old, low pay
follows. By the way, Dean Justita Lola is also the chairman of the committee on

The complaint further alleged that AMEC is a reputable learning institution. With the
supposed exposs, FBNI, Rima and Alegre transmitted malicious imputations, and

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as such, destroyed plaintiffs (AMEC and Ago) reputation. AMEC and Ago included
FBNI as defendant for allegedly failing to exercise due diligence in the selection and

WHEREFORE, premises considered, this court finds for the plaintiff. Considering the

supervision of its employees, particularly Rima and Alegre.

degree of damages caused by the controversial utterances, which are not found by
this court to be really very serious and damaging, and there being no showing that

On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil Lozares, filed an

indeed the enrollment of plaintiff school dropped, defendants Hermogenes Jun

Answer[10] alleging that the broadcasts against AMEC were fair and true. FBNI,

Alegre, Jr. and Filipinas Broadcasting Network (owner of the radio station DZRC), are

Rima and Alegre claimed that they were plainly impelled by a sense of public duty to

hereby jointly and severally ordered to pay plaintiff Ago Medical and Educational

report the goings-on in AMEC, [which is] an institution imbued with public interest.

Center-Bicol Christian College of Medicine (AMEC-BCCM) the

amount of

P300,000.00 moral damages, plus P30,000.00 reimbursement of attorneys fees, and


Thereafter, trial ensued. During the presentation of the evidence for the defense, Atty.

to pay the costs of suit.

Edmundo Cea, collaborating counsel of Atty. Lozares, filed a Motion to Dismiss[11] on


FBNIs behalf. The trial court denied the motion to dismiss. Consequently, FBNI filed

SO ORDERED. [13] (Emphasis supplied)

a separate Answer claiming that it exercised due diligence in the selection and
supervision of Rima and Alegre. FBNI claimed that before hiring a broadcaster, the

Both parties, namely, FBNI, Rima and Alegre, on one hand, and AMEC and Ago, on

broadcaster should (1) file an application; (2) be interviewed; and (3) undergo an

the other, appealed the decision to the Court of Appeals. The Court of Appeals

apprenticeship and training program after passing the interview.

FBNI likewise

affirmed the trial courts judgment with modification. The appellate court made Rima

claimed that it always reminds its broadcasters to observe truth, fairness and

solidarily liable with FBNI and Alegre. The appellate court denied Agos claim for

objectivity in their broadcasts and to refrain from using libelous and indecent

damages and attorneys fees because the broadcasts were directed against AMEC,

language. Moreover, FBNI requires all broadcasters to pass the Kapisanan ng mga

and not against her. The dispositive portion of the Court of Appeals decision reads:

Brodkaster sa Pilipinas (KBP) accreditation test and to secure a KBP permit.


WHEREFORE, the decision appealed from is hereby AFFIRMED, subject to the
On 14 December 1992, the trial court rendered a Decision[12] finding FBNI and

modification that broadcaster Mel Rima is SOLIDARILY ADJUDGED liable with FBN[I]

Alegre liable for libel except Rima. The trial court held that the broadcasts are libelous

and Hermo[g]enes Alegre.

per se. The trial court rejected the broadcasters claim that their utterances were the
result of straight reporting because it had no factual basis. The broadcasters did not

SO ORDERED.[14]

even verify their reports before airing them to show good faith. In holding FBNI liable
for libel, the trial court found that FBNI failed to exercise diligence in the selection and

FBNI, Rima and Alegre filed a motion for reconsideration which the Court of Appeals

supervision of its employees.

denied in its 26 January 2000 Resolution.

In absolving Rima from the charge, the trial court ruled that Rimas only participation

Hence, FBNI filed this petition.[15]

was when he agreed with Alegres expos. The trial court found Rimas statement
within the bounds of freedom of speech, expression, and of the press. The

The Ruling of the Court of Appeals

dispositive portion of the decision reads:

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The Court of Appeals upheld the trial courts ruling that the questioned broadcasts are
libelous per se and that FBNI, Rima and Alegre failed to overcome the legal

II.

WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;

III.

WHETHER THE AWARD OF ATTORNEYS FEES IS PROPER; and

presumption of malice. The Court of Appeals found Rima and Alegres claim that they
were actuated by their moral and social duty to inform the public of the students
gripes as insufficient to justify the utterance of the defamatory remarks.
IV.
Finding no factual basis for the imputations against AMECs administrators, the Court

WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND ALEGRE FOR

PAYMENT OF MORAL DAMAGES, ATTORNEYS FEES AND COSTS OF SUIT.

of Appeals ruled that the broadcasts were made with reckless disregard as to
whether they were true or false. The appellate court pointed out that FBNI, Rima and

The Courts Ruling

Alegre failed to present in court any of the students who allegedly complained against
AMEC. Rima and Alegre merely gave a single name when asked to identify the

We deny the petition.

students. According to the Court of Appeals, these circumstances cast doubt on the
veracity of the broadcasters claim that they were impelled by their moral and social

This is a civil action for damages as a result of the allegedly defamatory remarks of

duty to inform the public about the students gripes.

Rima and Alegre against AMEC.[17] While AMEC did not point out clearly the legal
basis for its complaint, a reading of the complaint reveals that AMECs cause of action

The Court of Appeals found Rima also liable for libel since he remarked that (1)

is based on Articles 30 and 33 of the Civil Code. Article 30[18] authorizes a separate

AMEC-BCCM is a dumping ground for morally and physically misfit teachers; (2)

civil action to recover civil liability arising from a criminal offense. On the other hand,

AMEC obtained the services of Dean Justita Lola to minimize expenses on its

Article 33[19] particularly provides that the injured party may bring a separate civil

employees salaries; and (3) AMEC burdened the students with unreasonable

action for damages in cases of defamation, fraud, and physical injuries. AMEC also

imposition and false regulations.[16]

invokes Article 19[20] of the Civil Code to justify its claim for damages. AMEC cites
Articles 2176[21] and 2180[22] of the Civil Code to hold FBNI solidarily liable with

The Court of Appeals held that FBNI failed to exercise due diligence in the selection

Rima and Alegre.

and supervision of its employees for allowing Rima and Alegre to make the radio
broadcasts without the proper KBP accreditation. The Court of Appeals denied Agos

I.

claim for damages and attorneys fees because the libelous remarks were directed

Whether the broadcasts are libelous

against AMEC, and not against her. The Court of Appeals adjudged FBNI, Rima and
Alegre solidarily liable to pay AMEC moral damages, attorneys fees and costs of suit.

A libel[23] is a public and malicious imputation of a crime, or of a vice or defect, real


or imaginary, or any act or omission, condition, status, or circumstance tending to

Issues

cause the dishonor, discredit, or contempt of a natural or juridical person, or to


blacken the memory of one who is dead.[24]

FBNI raises the following issues for resolution:


There is no question that the broadcasts were made public and imputed to AMEC
I.

WHETHER THE BROADCASTS ARE LIBELOUS;

defects or circumstances tending to cause it dishonor, discredit and contempt. Rima

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and Alegres remarks such as greed for money on the part of AMECs

this privilege, a republisher who accurately and disinterestedly reports certain

administrators; AMEC is a dumping ground, garbage of xxx moral and physical

defamatory statements made against public figures is shielded from liability,

misfits; and AMEC students who graduate will be liabilities rather than assets of the

regardless of the republishers subjective awareness of the truth or falsity of the

society are libelous per se. Taken as a whole, the broadcasts suggest that AMEC is a

accusation.[29] Rima and Alegre cannot invoke the privilege of neutral reportage

money-making institution where physically and morally unfit teachers abound.

because unfounded comments abound in the broadcasts. Moreover, there is no


existing controversy involving AMEC when the broadcasts were made. The privilege

However, FBNI contends that the broadcasts are not malicious. FBNI claims that

of neutral reportage applies where the defamed person is a public figure who is

Rima and Alegre were plainly impelled by their civic duty to air the students gripes.

involved in an existing controversy, and a party to that controversy makes the

FBNI alleges that there is no evidence that ill will or spite motivated Rima and Alegre

defamatory statement.[30]

in making the broadcasts. FBNI further points out that Rima and Alegre exerted
efforts to obtain AMECs side and gave Ago the opportunity to defend AMEC and its

However, FBNI argues vigorously that malice in law does not apply to this case.

administrators. FBNI concludes that since there is no malice, there is no libel.

Citing Borjal v. Court of Appeals,[31] FBNI contends that the broadcasts fall within
the coverage of qualifiedly privileged communications for being commentaries on

FBNIs contentions are untenable.

matters of public interest. Such being the case, AMEC should prove malice in fact or
actual malice. Since AMEC allegedly failed to prove actual malice, there is no libel.

Every defamatory imputation is presumed malicious.[25] Rima and Alegre failed to


show adequately their good intention and justifiable motive in airing the supposed

FBNIs reliance on Borjal is misplaced. In Borjal, the Court elucidated on the doctrine

gripes of the students. As hosts of a documentary or public affairs program, Rima and

of fair comment, thus:

Alegre should have presented the public issues free from inaccurate and misleading
information.[26] Hearing the students alleged complaints a month before the expos,

[F]air commentaries on matters of public interest are privileged and constitute a valid

[27] they had sufficient time to verify their sources and information. However, Rima

defense in an action for libel or slander. The doctrine of fair comment means that

and Alegre hardly made a thorough investigation of the students alleged gripes.

while in general every discreditable imputation publicly made is deemed false,

Neither did they inquire about nor confirm the purported irregularities in AMEC from

because every man is presumed innocent until his guilt is judicially proved, and every

the Department of Education, Culture and Sports. Alegre testified that he merely went

false imputation is deemed malicious, nevertheless, when the discreditable imputation

to AMEC to verify his report from an alleged AMEC official who refused to disclose

is directed against a public person in his public capacity, it is not necessarily

any information. Alegre simply relied on the words of the students because they

actionable. In order that such discreditable imputation to a public official may be

were many and not because there is proof that what they are saying is true.[28] This

actionable, it must either be a false allegation of fact or a comment based on a false

plainly shows Rima and Alegres reckless disregard of whether their report was true or

supposition. If the comment is an expression of opinion, based on established facts,

not.

then it is immaterial that the opinion happens to be mistaken, as long as it might


reasonably be inferred from the facts.[32] (Emphasis supplied)

Contrary to FBNIs claim, the broadcasts were not the result of straight reporting.
Significantly, some courts in the United States apply the privilege of neutral

True, AMEC is a private learning institution whose business of educating students is

reportage in libel cases involving matters of public interest or public figures. Under

genuinely imbued with public interest.

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AMECs students in particular is a matter which the public has the right to know.

plaintiffs religion, as explained by Dr. Lita Ago. Contrary to the claim of defendants

Thus, similar to the newspaper articles in Borjal, the subject broadcasts dealt with

over the air, not a single centavo appears to be received by plaintiff school from the

matters of public interest. However, unlike in Borjal, the questioned broadcasts are

aforementioned McDonald Foundation which does not exist.

not based on established facts. The record supports the following findings of the trial
court:

Defendants did not even also bother to prove their claim, though denied by Dra. Ago,
that when medical students fail in one subject, they are made to repeat all the other

xxx Although defendants claim that they were motivated by consistent reports of

subject[s], even those they have already passed, nor their claim that the school

students and parents against plaintiff, yet, defendants have not presented in court, nor

charges laboratory fees even if there are no laboratories in the school. No evidence

even gave name of a single student who made the complaint to them, much less

was presented to prove the bases for these claims, at least in order to give semblance

present written complaint or petition to that effect.

of good faith.

To accept this defense of

defendants is too dangerous because it could easily give license to the media to
malign people and establishments based on flimsy excuses that there were reports to

As for the allegation that plaintiff is the dumping ground for misfits, and immoral

them although they could not satisfactorily establish it. Such laxity would encourage

teachers, defendant[s] singled out Dean Justita Lola who is said to be so old, with

careless and irresponsible broadcasting which is inimical to public interests.

zero visibility already. Dean Lola testified in court last Jan. 21, 1991, and was found
to be 75 years old. xxx Even older people prove to be effective teachers like Supreme

Secondly, there is reason to believe that defendant radio broadcasters, contrary to the

Court Justices who are still very much in demand as law professors in their late years.

mandates of their duties, did not verify and analyze the truth of the reports before they

Counsel for defendants is past 75 but is found by this court to be still very sharp and

aired it, in order to prove that they are in good faith.

effective. So is plaintiffs counsel.

Alegre contended that plaintiff school had no permit and is not accredited to offer

Dr. Lola was observed by this court not to be physically decrepit yet, nor mentally

Physical Therapy courses. Yet, plaintiff produced a certificate coming from DECS that

infirmed, but is still alert and docile.

as of Sept. 22, 1987 or more than 2 years before the controversial broadcast,
accreditation to offer Physical Therapy course had already been given the plaintiff,

The contention that plaintiffs graduates become liabilities rather than assets of our

which certificate is signed by no less than the Secretary of Education and Culture

society is a mere conclusion. Being from the place himself, this court is aware that

herself, Lourdes R. Quisumbing (Exh. C-rebuttal).

majority of the medical graduates of plaintiffs pass the board examination easily and

known this were they careful enough to verify.

Defendants could have easily


And yet, defendants were very

become prosperous and responsible professionals.[33]

categorical and sounded too positive when they made the erroneous report that
plaintiff had no permit to offer Physical Therapy courses which they were offering.

Had the comments been an expression of opinion based on established facts, it is


immaterial that the opinion happens to be mistaken, as long as it might reasonably be

The allegation that plaintiff was getting tremendous aids from foreign foundations like

inferred from the facts.[34] However, the comments of Rima and Alegre were not

Mcdonald Foundation prove not to be true also. The truth is there is no Mcdonald

backed up by facts. Therefore, the broadcasts are not privileged and remain libelous

Foundation existing. Although a big building of plaintiff school was given the name

per se.

Mcdonald building, that was only in order to honor the first missionary in Bicol of

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The broadcasts also violate the Radio Code[35] of the Kapisanan ng mga Brodkaster

also provides the standards for determining whether a person who willfully causes

sa Pilipinas, Ink. (Radio Code). Item I(B) of the Radio Code provides:

loss or injury to another has acted in a manner contrary to morals or good customs
under Article 21[38] of the Civil Code.

B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES


II.
1.
4.

xxx

Whether AMEC is entitled to moral damages

Public affairs program shall present public issues free from personal bias,

FBNI contends that AMEC is not entitled to moral damages because it is a

prejudice and inaccurate and misleading information. x x x Furthermore, the station

corporation.[39]

shall strive to present balanced discussion of issues. x x x.


A juridical person is generally not entitled to moral damages because, unlike a natural
xxx

person, it cannot experience physical suffering or such sentiments as wounded


feelings, serious anxiety, mental anguish or moral shock.[40] The Court of Appeals

7.

The station shall be responsible at all times in the supervision of public affairs,

cites Mambulao Lumber Co. v. PNB, et al.[41] to justify the award of moral damages.

public issues and commentary programs so that they conform to the provisions and

However, the Courts statement in Mambulao that a corporation may have a good

standards of this code.

reputation which, if besmirched, may also be a ground for the award of moral
damages is an obiter dictum.[42]

8.

It shall be the responsibility of the newscaster, commentator, host and

announcer to protect public interest, general welfare and good order in the

Nevertheless, AMECs claim for moral damages falls under item 7 of Article 2219[43]

presentation of public affairs and public issues.[36] (Emphasis supplied)

of the Civil Code. This provision expressly authorizes the recovery of moral damages
in cases of libel, slander or any other form of defamation. Article 2219(7) does not

The broadcasts fail to meet the standards prescribed in the Radio Code, which lays

qualify whether the plaintiff is a natural or juridical person. Therefore, a juridical

down the code of ethical conduct governing practitioners in the radio broadcast

person such as a corporation can validly complain for libel or any other form of

industry.

defamation and claim for moral damages.[44]

The Radio Code is a voluntary code of conduct imposed by the radio

broadcast industry on its own members. The Radio Code is a public warranty by the
radio broadcast industry that radio broadcast practitioners are subject to a code by

Moreover, where the broadcast is libelous per se, the law implies damages.[45] In

which their conduct are measured for lapses, liability and sanctions.

such a case, evidence of an honest mistake or the want of character or reputation of


the party libeled goes only in mitigation of damages.[46] Neither in such a case is the

The public has a right to expect and demand that radio broadcast practitioners live up

plaintiff required to introduce evidence of actual damages as a condition precedent to

to the code of conduct of their profession, just like other professionals. A professional

the recovery of some damages.[47] In this case, the broadcasts are libelous per se.

code of conduct provides the standards for determining whether a person has acted

Thus, AMEC is entitled to moral damages.

justly, honestly and with good faith in the exercise of his rights and performance of his
duties as required by Article 19[37] of the Civil Code. A professional code of conduct

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However, we find the award of P300,000 moral damages unreasonable. The record

for moral damages, attorneys fees

shows that even though the broadcasts were libelous per se, AMEC has not suffered

and costs of suit

any substantial or material damage to its reputation. Therefore, we reduce the award
of moral damages from P300,000 to P150,000.

FBNI contends that it is not solidarily liable with Rima and Alegre for the payment of
damages and attorneys fees because it exercised due diligence in the selection and

III.

supervision of its employees, particularly Rima and Alegre. FBNI maintains that its

Whether the award of attorneys fees is proper

broadcasters, including Rima and Alegre, undergo a very regimented process before
they are allowed to go on air. Those who apply for broadcaster are subjected to

FBNI contends that since AMEC is not entitled to moral damages, there is no basis for

interviews, examinations and an apprenticeship program.

the award of attorneys fees. FBNI adds that the instant case does not fall under the
enumeration in Article 2208[48] of the Civil Code.

FBNI further argues that Alegres age and lack of training are irrelevant to his
competence as a broadcaster. FBNI points out that the minor deficiencies in the KBP

The award of attorneys fees is not proper because AMEC failed to justify satisfactorily

accreditation of Rima and Alegre do not in any way prove that FBNI did not exercise

its claim for attorneys fees. AMEC did not adduce evidence to warrant the award of

the diligence of a good father of a family in selecting and supervising them. Rimas

attorneys fees. Moreover, both the trial and appellate courts failed to explicitly state in

accreditation lapsed due to his non-payment of the KBP annual fees while Alegres

their respective decisions the rationale for the award of attorneys fees.[49] In Inter-

accreditation card was delayed allegedly for reasons attributable to the KBP Manila

Asia Investment Industries, Inc. v. Court of Appeals,[50] we held that:

Office. FBNI claims that membership in the KBP is merely voluntary and not required
by any law or government regulation.

[I]t is an accepted doctrine that the award thereof as an item of damages is the
exception rather than the rule, and counsels fees are not to be awarded every time a

FBNIs arguments do not persuade us.

party wins a suit. The power of the court to award attorneys fees under Article 2208
of the Civil Code demands factual, legal and equitable justification, without which the

The basis of the present action is a tort. Joint tort feasors are jointly and severally

award is a conclusion without a premise, its basis being improperly left to speculation

liable for the tort which they commit.[52] Joint tort feasors are all the persons who

and conjecture. In all events, the court must explicitly state in the text of the decision,

command, instigate, promote, encourage, advise, countenance, cooperate in, aid or

and not only in the decretal portion thereof, the legal reason for the award of

abet the commission of a tort, or who approve of it after it is done, if done for their

attorneys fees.[51] (Emphasis supplied)

benefit.[53] Thus, AMEC correctly anchored its cause of action against FBNI on
Articles 2176 and 2180 of the Civil Code.

While it mentioned about the award of attorneys fees by stating that it lies within the
discretion of the court and depends upon the circumstances of each case, the Court

As operator of DZRC-AM and employer of Rima and Alegre, FBNI is solidarily liable to

of Appeals failed to point out any circumstance to justify the award.

pay for damages arising from the libelous broadcasts. As stated by the Court of
Appeals, recovery for defamatory statements published by radio or television may be

IV.

had from the owner of the station, a licensee, the operator of the station, or a person

Whether FBNI is solidarily liable with Rima and Alegre

who procures, or participates in, the making of the defamatory statements.[54] An

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employer and employee are solidarily liable for a defamatory statement by the

WHEREFORE, we DENY the instant petition. We AFFIRM the Decision of 4 January

employee within the course and scope of his or her employment, at least when the

1999 and Resolution of 26 January 2000 of the Court of Appeals in CA-G.R. CV No.

employer authorizes or ratifies the defamation.[55] In this case, Rima and Alegre were

40151 with the MODIFICATION that the award of moral damages is reduced from

clearly performing their official duties as hosts of FBNIs radio program Expos when

P300,000 to P150,000 and the award of attorneys fees is deleted. Costs against

they aired the broadcasts. FBNI neither alleged nor proved that Rima and Alegre

petitioner.

went beyond the scope of their work at that time. There was likewise no showing that
FBNI did not authorize and ratify the defamatory broadcasts.

SO ORDERED.

Moreover, there is insufficient evidence on record that FBNI exercised due diligence in
the selection and supervision of its employees, particularly Rima and Alegre. FBNI
merely showed that it exercised diligence in the selection of its broadcasters without
introducing any evidence to prove that it observed the same diligence in the
supervision of Rima and Alegre. FBNI did not show how it exercised diligence in
supervising its broadcasters. FBNIs alleged constant reminder to its broadcasters to
observe truth, fairness and objectivity and to refrain from using libelous and indecent
language is not enough to prove due diligence in the supervision of its broadcasters.

EN BANC

Adequate training of the broadcasters on the industrys code of conduct, sufficient

DANTE V. LIBAN,

information on libel laws, and continuous evaluation of the broadcasters performance

REYNALDO M. BERNARDO,

are but a few of the many ways of showing diligence in the supervision of

and SALVADOR M. VIARI,Petitioners,- versus -RICHARD J. GORDON,

broadcasters.

Respondent.
G.R. No. 175352

FBNI claims that it has taken all the precaution in the selection of Rima and Alegre as

Promulgated:

broadcasters, bearing in mind their qualifications. However, no clear and convincing

July 15, 2009

evidence shows that Rima and Alegre underwent FBNIs regimented process of

The Case

application. Furthermore, FBNI admits that Rima and Alegre had deficiencies in their
This is a petition to declare Senator Richard J. Gordon (respondent) as having

KBP accreditation,[56] which is one of FBNIs requirements before it hires a

forfeited his seat in the Senate.

broadcaster. Significantly, membership in the KBP, while voluntary, indicates the


broadcasters strong commitment to observe the broadcast industrys rules and

The Facts

regulations. Clearly, these circumstances show FBNIs lack of diligence in selecting


and supervising Rima and Alegre. Hence, FBNI is solidarily liable to pay damages

Petitioners Dante V. Liban, Reynaldo M. Bernardo, and Salvador M. Viari (petitioners)

together with Rima and Alegre.

filed with this Court a Petition to Declare Richard J. Gordon as Having Forfeited His
Seat in the Senate. Petitioners are officers of the Board of Directors of the Quezon

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City Red Cross Chapter while respondent is Chairman of the Philippine National Red

Rules of Civil Procedure, the action should be commenced within one year after the

Cross (PNRC) Board of Governors.

cause of the public officers forfeiture of office. In this case, respondent has been
working as a Red Cross volunteer for the past 40 years. Respondent was already
Chairman of the PNRC Board of Governors when he was elected Senator in May

During respondents incumbency as a member of the Senate of the Philippines,

2004, having been elected Chairman in 2003 and re-elected in 2005.

[1] he was elected Chairman of the PNRC during the 23 February 2006 meeting of the
PNRC Board of Governors. Petitioners allege that by accepting the chairmanship of
the PNRC Board of Governors, respondent has ceased to be a member of the Senate

Respondent contends that even if the present petition is treated as a taxpayers

as provided in Section 13, Article VI of the Constitution, which reads:

suit, petitioners cannot be allowed to raise a constitutional question in the absence of


any claim that they suffered some actual damage or threatened injury as a result of
the allegedly illegal act of respondent. Furthermore, taxpayers are allowed to sue only

SEC. 13. No Senator or Member of the House of Representatives may hold any

when there is a claim of illegal disbursement of public funds, or that public money is

other office or employment in the Government, or any subdivision, agency, or

being diverted to any improper purpose, or where petitioners seek to restrain

instrumentality thereof, including government-owned or controlled corporations or

respondent from enforcing an invalid law that results in wastage of public funds.

their subsidiaries, during his term without forfeiting his seat. Neither shall he be
appointed to any office which may have been created or the emoluments thereof
increased during the term for which he was elected.

Respondent also maintains that if the petition is treated as one for declaratory

\Petitioners cite Camporedondo v. NLRC,[2] which held that the PNRC is a

relief, this Court would have no jurisdiction since original jurisdiction for declaratory

government-owned or controlled corporation. Petitioners claim that in accepting and

relief lies with the Regional Trial Court.

holding the position of Chairman of the PNRC Board of Governors, respondent has
automatically forfeited his seat in the Senate, pursuant to Flores v. Drilon,[3] which
Respondent further insists that the PNRC is not a government-owned or

held that incumbent national legislators lose their elective posts upon their

controlled corporation and that the prohibition under Section 13, Article VI of the

appointment to another government office.

Constitution does not apply in the present case since volunteer service to the PNRC
is neither an office nor an employment.
In his Comment, respondent asserts that petitioners have no standing to file

In their Reply, petitioners claim that their petition is neither an action for quo

this petition which appears to be an action for quo warranto, since the petition alleges

warranto nor an action for declaratory relief. Petitioners maintain that the present

that respondent committed an act which, by provision of law, constitutes a ground for

petition is a taxpayers suit questioning the unlawful disbursement of funds,

forfeiture of his public office. Petitioners do not claim to be entitled to the Senate office

considering that respondent has been drawing his salaries and other compensation

of respondent. Under Section 5, Rule 66 of the Rules of Civil Procedure, only a

as a Senator even if he is no longer entitled to his office. Petitioners point out that this

person claiming to be entitled to a public office usurped or unlawfully held by another

Court has jurisdiction over this petition since it involves a legal or constitutional issue

may bring an action for quo warranto in his own name. If the petition is one for quo

which is of transcendental importance.

warranto, it is already barred by prescription since under Section 11, Rule 66 of the

The Issues

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Section 1. Action by Government against individuals. An action for the


Petitioners raise the following issues:

usurpation of a public office, position or franchise may be commenced by a verified


petition brought in the name of the Republic of the Philippines against:

1. Whether the Philippine National Red Cross (PNRC) is a government-

owned or

(a) A person who usurps, intrudes into, or unlawfully holds or exercises a

controlled corporation;

public office, position or franchise;


(b) A public officer who does or suffers an act which by provision of law,

2. Whether Section 13, Article VI of the Philippine Constitution applies to the case of

constitutes a ground for the forfeiture of his office; or

respondent who is Chairman of the PNRC and at the same time a Member of the

(c) An association which acts as a corporation within the Philippines without

Senate;
3.

being legally incorporated or without lawful authority so to act. (Emphasis supplied)

Whether respondent should be automatically removed as a Senator pursuant to

Section 13, Article VI of the Philippine Constitution; and


4.

Petitioners allege in their petition that:

Whether petitioners may legally institute this petition against respondent.[4]

4. Respondent became the Chairman of the PNRC when he was elected as


such during the First Regular Luncheon-Meeting of the Board of Governors of the
PNRC held on February 23, 2006, the minutes of which is hereto attached and made
integral part hereof as Annex A.

The substantial issue boils down to whether the office of the PNRC Chairman is

5. Respondent was elected as Chairman of the PNRC Board of Governors,

a government office or an office in a government-owned or controlled corporation for

during his incumbency as a Member of the House of Senate of the Congress of the

purposes of the prohibition in Section 13, Article VI of the Constitution.

Philippines, having been elected as such during the national elections last May 2004.
6. Since his election as Chairman of the PNRC Board of Governors, which

The Courts Ruling

position he duly accepted, respondent has been exercising the powers and
discharging the functions and duties of said office, despite the fact that he is still a

We find the petition without merit.

senator.
7. It is the respectful submission of the petitioner[s] that by accepting the

Petitioners Have No Standing to File this Petition

chairmanship of the Board of Governors of the PNRC, respondent has ceased to be a


Member of the House of Senate as provided in Section 13, Article VI of the Philippine

A careful reading of the petition reveals that it is an action for quo warranto.

Constitution, x x x

Section 1, Rule 66 of the Rules of Court provides:

xxxx
10. It is respectfully submitted that in accepting the position of Chairman of the
Board of Governors of the PNRC on February 23, 2006, respondent has automatically
forfeited his seat in the House of Senate and, therefore, has long ceased to be a

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Senator, pursuant to the ruling of this Honorable Court in the case of FLORES, ET AL.
On 22 March 1947, President Manuel A. Roxas signed Republic Act No. 95,[7]

VS. DRILON AND GORDON, G.R. No. 104732, x x x


11. Despite the fact that he is no longer a senator, respondent continues to

otherwise known as the PNRC Charter. The PNRC is a non-profit, donor-funded,

act as such and still performs the powers, functions and duties of a senator, contrary

voluntary, humanitarian organization, whose mission is to bring timely, effective, and

to the constitution, law and jurisprudence.

compassionate humanitarian assistance for the most vulnerable without consideration

12. Unless restrained, therefore, respondent will continue to falsely act and

of nationality, race, religion, gender, social status, or political affiliation.[8] The PNRC

represent himself as a senator or member of the House of Senate, collecting the

provides six major services: Blood Services, Disaster Management, Safety Services,

salaries, emoluments and other compensations, benefits and privileges appertaining

Community Health and Nursing, Social Services and Voluntary Service.[9]

and due only to the legitimate senators, to the damage, great and irreparable injury of
The Republic of the Philippines, adhering to the Geneva Conventions,

the Government and the Filipino people.[5] (Emphasis supplied)

established the PNRC as a voluntary organization for the purpose contemplated in the
Geneva Convention of 27 July 1929.[10] The Whereas clauses of the PNRC Charter
Thus, petitioners are alleging that by accepting the position of Chairman of the

read:

PNRC Board of Governors, respondent has automatically forfeited his seat in the
Senate. In short, petitioners filed an action for usurpation of public office against

WHEREAS, there was developed at Geneva, Switzerland, on August 22,

respondent, a public officer who allegedly committed an act which constitutes a

1864, a convention by which the nations of the world were invited to join together in

ground for the forfeiture of his public office. Clearly, such an action is for quo

diminishing, so far lies within their power, the evils inherent in war;
WHEREAS, more than sixty nations of the world have ratified or adhered to

warranto, specifically under Section 1(b), Rule 66 of the Rules of Court.

the subsequent revision of said convention, namely the Convention of Geneva of July
Quo warranto is generally commenced by the Government as the proper party

29 [sic], 1929 for the Amelioration of the Condition of the Wounded and Sick of

plaintiff. However, under Section 5, Rule 66 of the Rules of Court, an individual may

Armies in the Field (referred to in this Charter as the Geneva Red Cross Convention);

commence such an action if he claims to be entitled to the public office allegedly

WHEREAS, the Geneva Red Cross Convention envisages the establishment in

usurped by another, in which case he can bring the action in his own name. The

each country of a voluntary organization to assist in caring for the wounded and sick

person instituting quo warranto proceedings in his own behalf must claim and be able

of the armed forces and to furnish supplies for that purpose;

to show that he is entitled to the office in dispute, otherwise the action may be

WHEREAS, the Republic of the Philippines became an independent nation on

dismissed at any stage.[6] In the present case, petitioners do not claim to be entitled

July 4, 1946 and proclaimed its adherence to the Geneva Red Cross Convention on

to the Senate office of respondent. Clearly, petitioners have no standing to file the

February 14, 1947, and by that action indicated its desire to participate with the

present petition.

nations of the world in mitigating the suffering caused by war and to establish in the
Philippines a voluntary organization for that purpose as contemplated by the Geneva

Even if the Court disregards the infirmities of the petition and treats it as a

Red Cross Convention;

taxpayers suit, the petition would still fail on the merits.

WHEREAS, there existed in the Philippines since 1917 a Charter of the


American National Red Cross which must be terminated in view of the independence

PNRC is a Private Organization Performing Public Functions

of the Philippines; and

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WHEREAS, the volunteer organizations established in the other countries

5.

VOLUNTARY SERVICE It is a voluntary relief movement not prompted in any

which have ratified or adhered to the Geneva Red Cross Convention assist in

manner by desire for gain.

promoting the health and welfare of their people in peace and in war, and through

6. UNITY There can be only one Red Cross or one Red Crescent Society in any

their mutual assistance and cooperation directly and through their international

one country. It must be open to all. It must carry on its humanitarian work throughout

organizations promote better understanding and sympathy among the peoples of the

its territory.

world. (Emphasis supplied)

7. UNIVERSALITY The International Red Cross and Red Crescent Movement, in


which all Societies have equal status and share equal responsibilities and duties in
helping each other, is worldwide. (Emphasis supplied)

The PNRC is a member National Society of the International Red Cross and
Red Crescent Movement (Movement), which is composed of the International
Committee of the Red Cross (ICRC), the International Federation of Red Cross and
Red Crescent Societies (International Federation), and the National Red Cross and

The Fundamental Principles provide a universal standard of reference for all

Red Crescent Societies (National Societies). The Movement is united and guided by

members of the Movement. The PNRC, as a member National Society of the

its seven Fundamental Principles:

Movement, has the duty to uphold the Fundamental Principles and ideals of the
Movement. In order to be recognized as a National Society, the PNRC has to be

1. HUMANITY The International Red Cross and Red Crescent Movement, born of a

autonomous and must operate in conformity with the Fundamental Principles of the

desire to bring assistance without discrimination to the wounded on the battlefield,

Movement.[11]

endeavors, in its international and national capacity, to prevent and alleviate human

The reason for this autonomy is fundamental. To be accepted by warring

suffering wherever it may be found. Its purpose is to protect life and health and to

belligerents as neutral workers during international or internal armed conflicts, the

ensure respect for the human being. It promotes mutual understanding, friendship,

PNRC volunteers must not be seen as belonging to any side of the armed conflict. In

cooperation and lasting peace amongst all peoples.

the Philippines where there is a communist insurgency and a Muslim separatist

2.

IMPARTIALITY It makes no discrimination as to nationality, race, religious

rebellion, the PNRC cannot be seen as government-owned or controlled, and neither

beliefs, class or political opinions. It endeavors to relieve the suffering of individuals,

can the PNRC volunteers be identified as government personnel or as instruments of

being guided solely by their needs, and to give priority to the most urgent cases of

government policy. Otherwise, the insurgents or separatists will treat PNRC

distress.

volunteers as enemies when the volunteers tend to the wounded in the battlefield or

3.

NEUTRALITY

In order to continue to enjoy the confidence of all, the

the displaced civilians in conflict areas.

Movement may not take sides in hostilities or engage at any time in controversies of a
Thus, the PNRC must not only be, but must also be seen to be, autonomous,

political, racial, religious or ideological nature.


4. INDEPENDENCE The Movement is independent. The National Societies, while

neutral and independent in order to conduct its activities in accordance with the

auxiliaries in the humanitarian services of their governments and subject to the laws

Fundamental Principles. The PNRC must not appear to be an instrument or agency

of their respective countries, must always maintain their autonomy so that they may

that implements government policy; otherwise, it cannot merit the trust of all and

be able at all times to act in accordance with the principles of the Movement.

cannot effectively carry out its mission as a National Red Cross Society.[12] It is

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imperative that the PNRC must be autonomous, neutral, and independent in relation

already chosen a select group where the private sector members have three-

to the State.

fourths majority. Clearly, an overwhelming majority of four-fifths of the PNRC Board


are elected or chosen by the private sector members of the PNRC.

To ensure and maintain its autonomy, neutrality, and independence, the PNRC
cannot be owned or controlled by the government. Indeed, the Philippine government

The PNRC Board of Governors, which exercises all corporate powers of the

does not own the PNRC. The PNRC does not have government assets and does not

PNRC, elects the PNRC Chairman and all other officers of the PNRC.

The

receive any appropriation from the Philippine Congress.[13] The PNRC is financed

incumbent Chairman of PNRC, respondent Senator Gordon, was elected, as all

primarily by contributions from private individuals and private entities obtained through

PNRC Chairmen are elected, by a private sector-controlled PNRC Board four-fifths of

solicitation campaigns organized by its Board of Governors, as provided under

whom are private sector members of the PNRC.

Section 11 of the PNRC Charter:

appointed by the President or by any subordinate government official.

The PNRC Chairman is not

SECTION 11. As a national voluntary organization, the Philippine National Red

Under Section 16, Article VII of the Constitution,[14] the President appoints all

Cross shall be financed primarily by contributions obtained through solicitation

officials and employees in the Executive branch whose appointments are vested in the

campaigns throughout the year which shall be organized by the Board of Governors

President by the Constitution or by law. The President also appoints those whose

and conducted by the Chapters in their respective jurisdictions. These fund raising

appointments are not otherwise provided by law. Under this Section 16, the law may

campaigns shall be conducted independently of other fund drives by other

also authorize the heads of departments, agencies, commissions, or boards to

organizations. (Emphasis supplied)

appoint officers lower in rank than such heads of departments, agencies,


commissions or boards.[15]

In Rufino v. Endriga,[16] the Court explained

appointments under Section 16 in this wise:


The government does not control the PNRC. Under the PNRC Charter, as
amended, only six of the thirty members of the PNRC Board of Governors are
appointed by the President of the Philippines. Thus, twenty-four members, or four-

Under Section 16, Article VII of the 1987 Constitution, the President appoints

fifths (4/5), of the PNRC Board of Governors are not appointed by the President.

three groups of officers. The first group refers to the heads of the Executive

Section 6 of the PNRC Charter, as amended, provides:

departments, ambassadors, other public ministers and consuls, officers of the armed
forces from the rank of colonel or naval captain, and other officers whose

SECTION 6. The governing powers and authority shall be vested in a Board

appointments are vested in the President by the Constitution. The second group

of Governors composed of thirty members, six of whom shall be appointed by the

refers to those whom the President may be authorized by law to appoint. The third

President of the Philippines, eighteen shall be elected by chapter delegates in biennial

group refers to all other officers of the Government whose appointments are not

conventions and the remaining six shall be selected by the twenty-four members of

otherwise provided by law.

the Board already chosen. x x x.


Under the same Section 16, there is a fourth group of lower-ranked officers
Thus, of the twenty-four members of the PNRC Board, eighteen are elected by the

whose appointments Congress may by law vest in the heads of departments,

chapter delegates of the PNRC, and six are elected by the twenty-four members

agencies, commissions, or boards. x x x

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In Rufino v. Endriga,[18] the Court explained the Presidents power of control over all
xxx

government offices as follows:


In a department in the Executive branch, the head is the Secretary. The law

Every government office, entity, or agency must fall under the Executive,

may not authorize the Undersecretary, acting as such Undersecretary, to appoint

Legislative, or Judicial branches, or must belong to one of the independent

lower-ranked officers in the Executive department. In an agency, the power is vested

constitutional bodies, or must be a quasi-judicial body or local government unit.

in the head of the agency for it would be preposterous to vest it in the agency itself. In

Otherwise, such government office, entity, or agency has no legal and constitutional

a commission, the head is the chairperson of the commission. In a board, the head is

basis for its existence.

also the chairperson of the board. In the last three situations, the law may not also
authorize officers other than the heads of the agency, commission, or board to appoint

The CCP does not fall under the Legislative or Judicial branches of

lower-ranked officers.

government. The CCP is also not one of the independent constitutional bodies.
Neither is the CCP a quasi-judicial body nor a local government unit. Thus, the CCP

xxx

must fall under the Executive branch. Under the Revised Administrative Code of 1987,
any agency not placed by law or order creating them under any specific department
The Constitution authorizes Congress to vest the power to appoint lower-

falls under the Office of the President.

ranked officers specifically in the heads of the specified offices, and in no other
person. The word heads refers to the chairpersons of the commissions or boards

Since the President exercises control over all the executive departments,

and not to their members, for several reasons.

bureaus, and offices, the President necessarily exercises control over the CCP which
is an office in the Executive branch. In mandating that the President shall have
control of all executive . . . offices, Section 17, Article VII of the 1987 Constitution

The President does not appoint the Chairman of the PNRC. Neither does the

does not exempt any executive office one performing executive functions outside of

head of any department, agency, commission or board appoint the PNRC Chairman.

the independent constitutional bodies from the Presidents power of control. There

Thus, the PNRC Chairman is not an official or employee of the Executive branch

is no dispute that the CCP performs executive, and not legislative, judicial, or quasi-

since his appointment does not fall under Section 16, Article VII of the Constitution.

judicial functions.

Certainly, the PNRC Chairman is not an official or employee of the Judiciary or


Legislature. This leads us to the obvious conclusion that the PNRC Chairman is not

The Presidents power of control applies to the acts or decisions of all officers

an official or employee of the Philippine Government. Not being a government official

in the Executive branch. This is true whether such officers are appointed by the

or employee, the PNRC Chairman, as such, does not hold a government office or

President or by heads of departments, agencies, commissions, or boards. The power

employment.

of control means the power to revise or reverse the acts or decisions of a subordinate
officer involving the exercise of discretion.

Under Section 17, Article VII of the Constitution,[17] the President exercises
control over all government offices in the Executive branch. If an office is legally not

In short, the President sits at the apex of the Executive branch, and exercises

under the control of the President, then such office is not part of the Executive branch.

control of all the executive departments, bureaus, and offices. There can be no

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instance under the Constitution where an officer of the Executive branch is outside the

be members of the PNRC.

Section 5 of the PNRC Charter, as amended by

control of the President. The Executive branch is unitary since there is only one

Presidential Decree No. 1264,[21] reads:

President vested with executive power exercising control over the entire Executive
Any office in the Executive branch that is not under the control of the

SEC. 5. Membership in the Philippine National Red Cross shall be open to the

President is a lost command whose existence is without any legal or constitutional

entire population in the Philippines regardless of citizenship. Any contribution to the

basis. (Emphasis supplied)

Philippine National Red Cross Annual Fund Campaign shall entitle the contributor to

branch.

membership for one year and said contribution shall be deductible in full for taxation
purposes.
An overwhelming four-fifths majority of the PNRC Board are private sector
individuals elected to the PNRC Board by the private sector members of the PNRC.

Thus, the PNRC is a privately owned, privately funded, and privately run charitable

The PNRC Board exercises all corporate powers of the PNRC.

organization. The PNRC is not a government-owned or controlled corporation.

The PNRC is

controlled by private sector individuals. Decisions or actions of the PNRC Board are
The President cannot reverse or modify the

Petitioners anchor their petition on the 1999 case of Camporedondo v. NLRC,

decisions or actions of the PNRC Board. Neither can the President reverse or modify

[22] which ruled that the PNRC is a government-owned or controlled corporation. In

the decisions or actions of the PNRC Chairman.

not reviewable by the President.

It is the PNRC Board that can

ruling that the PNRC is a government-owned or controlled corporation, the simple test

review, reverse or modify the decisions or actions of the PNRC Chairman. This proves

used was whether the corporation was created by its own special charter for the

again that the office of the PNRC Chairman is a private office, not a government

exercise of a public function or by incorporation under the general corporation law.

office.

Since the PNRC was created under a special charter, the Court then ruled that it is a
government corporation. However, the Camporedondo ruling failed to consider the
Although the State is often represented in the governing bodies of a National

definition of a government-owned or controlled corporation as provided under Section

Society, this can be justified by the need for proper coordination with the public

2(13) of the Introductory Provisions of the Administrative Code of 1987:

authorities, and the government representatives may take part in decision-making


within a National Society. However, the freely-elected representatives of a National
Societys active members must remain in a large majority in a National Societys
SEC. 2. General Terms Defined. x x x

governing bodies.[19]

(13) Government-owned or controlled corporation refers to any agency


The PNRC is not government-owned but privately owned. The vast majority of

organized as a stock or non-stock corporation, vested with functions relating to public

the thousands of PNRC members are private individuals, including students. Under

needs whether governmental or proprietary in nature, and owned by the Government

the PNRC Charter, those who contribute to the annual fund campaign of the PNRC

directly or through its instrumentalities either wholly, or where applicable as in the

are entitled to membership in the PNRC for one year. Thus, any one between 6 and

case of stock corporations, to the extent of at least fifty-one (51) percent of its capital

65 years of age can be a PNRC member for one year upon contributing P35, P100,

stock: Provided, That government-owned or controlled corporations may be further

P300, P500 or P1,000 for the year.[20] Even foreigners, whether residents or not, can

categorized by the Department of the Budget, the Civil Service Commission, and the
Commission on Audit for purposes of the exercise and discharge of their respective

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powers, functions and responsibilities with respect to such corporations.(Boldfacing

Cross Society. The national headquarters of this Corporation shall be located in

and underscoring supplied)

Metropolitan Manila. (Emphasis supplied)

A government-owned or controlled corporation must be owned by the

In Feliciano v. Commission on Audit,[23] the Court explained the constitutional

government, and in the case of a stock corporation, at least a majority of its capital

provision prohibiting Congress from creating private corporations in this wise:

stock must be owned by the government. In the case of a non-stock corporation, by


analogy at least a majority of the members must be government officials holding such

We begin by explaining the general framework under the fundamental law. The

membership by appointment or designation by the government. Under this criterion,

Constitution recognizes two classes of corporations. The first refers to private

and as discussed earlier, the government does not own or control PNRC.

corporations created under a general law. The second refers to government-owned or


controlled corporations created by special charters. Section 16, Article XII of the

The PNRC Charter is Violative of the Constitutional Proscription against the Creation

Constitution provides:

of Private Corporations by Special Law


Sec. 16. The Congress shall not, except by general law, provide for the formation,
The 1935 Constitution, as amended, was in force when the PNRC was

organization, or regulation of private corporations. Government-owned or controlled

created by special charter on 22 March 1947. Section 7, Article XIV of the 1935

corporations may be created or established by special charters in the interest of the

Constitution, as amended, reads:

common good and subject to the test of economic viability.

SEC. 7. The Congress shall not, except by general law, provide for the formation,

The Constitution emphatically prohibits the creation of private corporations

organization, or regulation of private corporations, unless such corporations are

except by general law applicable to all citizens. The purpose of this constitutional

owned or controlled by the Government or any subdivision or instrumentality thereof.

provision is to ban private corporations created by special charters, which historically


gave certain individuals, families or groups special privileges denied to other citizens.
In short, Congress cannot enact a law creating a private corporation with a special

The subsequent 1973 and 1987 Constitutions contain similar provisions prohibiting

charter. Such legislation would be unconstitutional. Private corporations may exist

Congress from creating private corporations except by general law. Section 1 of the

only under a general law. If the corporation is private, it must necessarily exist under a

PNRC Charter, as amended, creates the PNRC as a body corporate and politic,

general law. Stated differently, only corporations created under a general law can

thus:

qualify as private corporations. Under existing laws, the general law is the Corporation
Code, except that the Cooperative Code governs the incorporation of cooperatives.
SECTION 1. There is hereby created in the Republic of the Philippines a body

corporate and politic to be the voluntary organization officially designated to assist the

The Constitution authorizes Congress to create government-owned or controlled

Republic of the Philippines in discharging the obligations set forth in the Geneva

corporations through special charters. Since private corporations cannot have special

Conventions and to perform such other duties as are inherent upon a National Red

charters, it follows that Congress can create corporations with special charters only if
such corporations are government-owned or controlled.[24] (Emphasis supplied)

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7,[34] 8,[35] 9,[36] 10,[37] 11,[38] 12,[39] and 13[40]

of the PNRC Charter, as

In Feliciano, the Court held that the Local Water Districts are government-owned or

amended, are void.

controlled corporations since they exist by virtue of Presidential Decree No. 198,

The other provisions[41] of the PNRC Charter remain valid as they can be considered

which constitutes their special charter. The seed capital assets of the Local Water

as a recognition by the State that the unincorporated PNRC is the local National

Districts, such as waterworks and sewerage facilities, were public property which

Society of the International Red Cross and Red Crescent Movement, and thus entitled

were managed, operated by or under the control of the city, municipality or province

to the benefits, exemptions and privileges set forth in the PNRC Charter. The other

before the assets were transferred to the Local Water Districts. The Local Water

provisions of the PNRC Charter implement the Philippine Governments treaty

Districts also receive subsidies and loans from the Local Water Utilities Administration

obligations under Article 4(5) of the Statutes of the International Red Cross and Red

(LWUA). In fact, under the 2009 General Appropriations Act,[25] the LWUA has a

Crescent Movement, which provides that to be recognized as a National Society, the

budget amounting to P400,000,000 for its subsidy requirements.[26] There is no

Society must be duly recognized by the legal government of its country on the basis

private capital invested in the Local Water Districts. The capital assets and operating

of the Geneva Conventions and of the national legislation as a voluntary aid society,

funds of the Local Water Districts all come from the government, either through

auxiliary to the public authorities in the humanitarian field.

transfer of assets, loans, subsidies or the income from such assets or funds.

In sum, we hold that the office of the PNRC Chairman is not a government office or
an office in a government-owned or controlled corporation for purposes of the

The government also controls the Local Water Districts because the municipal

prohibition in Section 13, Article VI of the 1987 Constitution. However, since the

or city mayor, or the provincial governor, appoints all the board directors of the Local

PNRC Charter is void insofar as it creates the PNRC as a private corporation, the

Water Districts. Furthermore, the board directors and other personnel of the Local

PNRC should incorporate under the Corporation Code and register with the Securities

Water Districts are government employees subject to civil service laws and anti-graft

and Exchange Commission if it wants to be a private corporation.

laws. Clearly, the

Local Water Districts are considered government-owned or

controlled corporations not only because of their creation by special charter but also

WHEREFORE, we declare that the office of the Chairman of the Philippine

because the government in fact owns and controls the Local Water Districts.

National Red Cross is not a government office or an office in a government-owned or

Just like the Local Water Districts, the PNRC was created through a special
charter. However, unlike the

controlled corporation for purposes of the prohibition in Section 13, Article VI of the

Local Water Districts, the elements of government

1987 Constitution. We also declare that Sections 1, 2, 3, 4(a), 5, 6, 7, 8, 9, 10, 11, 12,

ownership and control are clearly lacking in the PNRC. Thus, although the PNRC is

and 13 of the Charter of the Philippine National Red Cross, or Republic Act No. 95, as

created by a special charter, it cannot be considered a

amended by Presidential Decree Nos. 1264 and 1643, are VOID because they create

government-owned or

controlled corporation in the absence of the essential elements of ownership and

the PNRC as a private corporation or grant it corporate powers.

control by the government. In creating the PNRC as a corporate entity, Congress was
in fact creating a private corporation. However, the constitutional prohibition against

SO ORDERED.

the creation of private corporations by special charters provides no exception even for
non-profit or charitable corporations. Consequently, the PNRC Charter, insofar as it
creates the PNRC as a private corporation and grants it corporate powers,[27] is void
for being unconstitutional.

ANTONIO M. CARANDANG,

Thus, Sections 1,[28] 2,[29] 3,[30] 4(a),[31] 5,[32] 6,[33]

Petitioner,
-versus -

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HONORABLE ANIANO A. DESIERTO, OFFICE OF THE OMBUDSMAN,

(PCGG) entered into a compromise agreement with Benedicto, whereby he ceded to

Respondent.

the Government, through the PCGG, all his shares of stock in RPN. Consequently,

x-----------------------------------------x

upon motion of the PCGG, the Sandiganbayan (Second Division) directed the

ANTONIO M. CARANDANG,

president and corporate secretary of RPN to transfer to the PCGG Benedictos shares

Petitioner,

representing 72.4% of the total issued and outstanding capital stock of RPN.

-versusHowever, Benedicto moved for a reconsideration, contending that his RPN shares

SANDIGANBAYAN (FIFTH DIVISION),

ceded to the Government, through the PCGG, represented only 32.4% of RPNs

Respondent.
G.R. No. 148076

outstanding capital stock, not 72.4%. Benedictos motion for reconsideration has

January 12, 2011

remained unresolved to this date.[7]

BERSAMIN, J.:
Administrative Complaint for Grave Misconduct
Petitioner Antonio M. Carandang (Carandang) challenges the jurisdiction over him of
the Ombudsman and of the Sandiganbayan on the ground that he was being held to

On July 28, 1998, Carandang assumed office as general manager and chief operating

account for acts committed while he was serving as general manager and chief

officer of RPN.[8]

operating officer of Radio Philippines Network, Inc. (RPN), which was not a
government-owned or -controlled corporation; hence, he was not a public official or

On April 19, 1999, Carandang and other RPN officials were charged with grave

employee.

misconduct before the Ombudsman. The charge alleged that Carandang, in his

In G.R. No. 148076, Carandang seeks the reversal of the decision[1] and resolution[2]

capacity as the general manager of RPN, had entered into a contract with AF

promulgated by the Court of Appeals (CA) affirming the decision[3] of the

Broadcasting Incorporated despite his being an incorporator, director, and stockholder

Ombudsman dismissing him from the service for grave misconduct.

of that corporation; that he had thus held financial and material interest in a contract
that had required the approval of his office; and that the transaction was prohibited

In G.R. No. 153161, Carandang assails on certiorari the resolutions dated October

under Section 7 (a) and Section 9 of Republic Act No. 6713 (Code of Conduct and

17, 2001[4] and March 14, 2002[5] of the Sandiganbayan (Fifth Division) that

Ethical Standards for Public Officials and Employees), thereby rendering him

sustained the Sandiganbayans jurisdiction over the criminal complaint charging him

administratively liable for grave misconduct.

with violation of Republic Act No. 3019 (Anti-Graft and Corrupt Practices Act).
Carandang sought the dismissal of the administrative charge on the ground that the
Ombudsman had no jurisdiction over him because RPN was not a government-owned

Antecedents

or -controlled corporation.[9]
Roberto S. Benedicto (Benedicto) was a stockholder of RPN, a private corporation
On May 7, 1999, the Ombudsman suspended Carandang from his positions in RPN.

duly registered with the Securities and Exchange Commission (SEC).[6] In March
1986, the Government ordered the sequestration of RPNs properties, assets, and
business. On November 3, 1990, the Presidential Commission on Good Government

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On September 8, 1999, Carandang manifested that he was no longer interested and

Republic Act No. 3019 as amended. Unless the powers conferred are of this nature,

had no further claim to his positions in RPN. He was subsequently replaced by Edgar

the individual is not a public officer.

San Luis.[10]
With these time-honored definitions and the substantial findings of the Ombudsman,
In its decision dated January 26, 2000,[11] the Ombudsman found Carandang guilty

We are constrained to conclude that, indeed, the herein petitioner (Antonio M.

of grave misconduct and ordered his dismissal from the service.

Carandang) is a public officer. Precisely, since he (Antonio M. Carandang) was


appointed by then President Joseph Ejercito Estrada as general manager and chief

Carandang moved for reconsideration on two grounds: (a) that the Ombudsman had

operating officer of RPN-9 (page 127 of the Rollo). As a presidential appointee, the

no jurisdiction over him because RPN was not a government-owned or -controlled

petitioner derives his authority from the Philippine Government. It is luce clarius that

corporation; and (b) that he had no financial and material interest in the contract that

the function of the herein petitioner (as a presidential appointee), relates to public

required the approval of his office.[12]

duty, i.e., to represent the interest of the Philippine Government in RPN-9 and not
purely personal matter, thus, the matter transcends the petitioners personal pique or

The Ombudsman denied Carandangs motion for reconsideration on March 15, 2000.

pride.

[13]
xxx
On appeal (CA G.R. SP No. 58204),[14] the CA affirmed the decision of the
Ombudsman on February 12, 2001, stating:

Having declared earlier that the herein petitioner is a public officer, it follows therefore
that, that jurisdiction over him is lodged in the Office of the Ombudsman.

The threshold question to be resolved in the present case is whether or not the Office
of the Ombudsman has jurisdiction over the herein petitioner.

It is worth remembering that as protector of the people, the Ombudsman has the
power, function and duty to act promptly on complaints filed in any form or manner

It is therefore of paramount importance to consider the definitions of the following

against officers or employees of the Government, or of any, subdivision, agency or

basic terms, to wit: A public office is the right, authority and duty, created and

instrumentality thereof, including government-owned or controlled corporations, and

conferred by law, by which for a given period, either fixed by law or enduring at the

enforce their administrative, civil and criminal liability in every case where the

pleasure of the creating power, an individual is invested with some portion of the

evidence warrants in order to promote efficient service by the Government to the

sovereign functions of the state to be exercised by him for the benefit of the public.

people. (Section 13 of Republic Act No. 6770).

(San Andres, Catanduanes vs. Court of Appeals, 284 SCRA 276: Chapter I, Section
1, Mechem, A Treatise on Law of Public Offices and Officers). The individual so

xxx

invested is called the public officer which includes elective and appointive officials
and employees, permanent or temporary, whether in the classified or unclassified or

Accordingly, the Office of the Ombudsman is, therefore, clothed with the proper armor

exemption service receiving compensation, even nominal, from the government as

when it assumed jurisdiction over the case filed against the herein petitioner. x x x

defined in xxx [Sec. 2 (a) of Republic Act No. 3019 as amended]. (Sec. 2 (b) of
xxx

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irrefutable that RPN-9 also performs governmental roles in the interest of health,
It appears that RPN-9 is a private corporation established to install, operate and

safety and for the advancement of public good and welfare, affecting the public in

manage radio broadcasting and/or television stations in the Philippines (pages 59-79

general.

of the Rollo). On March 2, 1986, when RPN-9 was sequestered by the Government
on ground that the same was considered as an illegally obtained property (page 3 of

xxx

the Petition for Review; page 2 of the Respondents Comment; pages 10 and 302 of
the Rollo), RPN-9 has shed-off its private status. In other words, there can be no

Coming now to the last assignment of error- While it may be considered in substance

gainsaying that as of the date of its sequestration by the Government, RPN-9, while

that the latest GIS clearly shows that petitioner was no longer a stockholder of record

retaining its own corporate existence, became a government-owned or controlled

of AF Broadcasting Corporation at the time of his assumption of Office in RPN 9 x x x

corporation within the Constitutional precept.

(Petitioners Reply [to Comment]; page 317 of the Rollo), still severing ties from AF
Broadcasting Corporation does not convince this Court fully well to reverse the finding

Be it noted that a government-owned or controlled corporation refers to any agency

of the Ombudsman that Antonio Carandang appears to be liable for Grave

organized as a stock or non-stock corporation, vested with functions relating to public

Misconduct (page 10 of the Assailed Decision; page 36 of the Rollo). Note that, as a

needs whether government or proprietary in nature, and owned by the Government

former stockholder of AF Broadcasting Corporation, it is improbable that the herein

directly or through its instrumentalities either wholly, or, where applicable as in the

petitioner was completely oblivious of the developments therein and unaware of the

case of stock corporations, to the extent of at least fifty-one (51) percent of its capital

contracts it (AF Broadcasting Corporation) entered into. By reason of his past

stock; Provided, That government-owned or controlled corporations may be further

(Antonio Carandang) association with the officers of the AF Broadcasting Corporation,

categorized by the department of Budget, the Civil Service, and the Commission on

it is unbelievable that herein petitioner could simply have ignored the contract entered

Audit for purposes of the exercise and discharge of their respective powers, functions

into between RPN-9 and AF Broadcasting Corporation and not at all felt to reap the

and responsibilities with respect to such corporations. (Section 2 [13], Executive

benefits thereof. Technically, it is true that herein petitioner did not directly act on

Order No. 292).

behalf of AF Broadcasting Corporation, however, We doubt that he (herein petitioner)


had no financial and/or material interest in that particular transaction requiring the

Contrary to the claim of the petitioner, this Court is of the view and so holds that RPN-

approval of his officea fact that could not have eluded Our attention.

9 perfectly falls under the foregoing definition. For one, the governments interest to
RPN-9 amounts to 72.4% of RPNs capital stock with an uncontested portion of

xxx

32.4% and a contested or litigated portion of 40%. (page 3 of the Petition for Review;
pages 8-9 of the Respondents Comment). On this score, it ought to be pointed out

WHEREFORE, premises considered and pursuant to applicable laws and

that while the forty percent (40%) of the seventy two point four percent (72.4%) is still

jurisprudence on the matter, the present Petition for Review is hereby DENIED for lack

contested and litigated, until the matter becomes formally settled, the government, for

of merit. The assailed decision (dated January 26, 2000) of the Office of the

all interests and purposes still has the right over said portion, for the law is on its side.

Ombudsman

Hence, We can safely say that for the moment, RPN-9 is a government owned and

pronouncement as to costs.

in

controlled corporation. Another thing, RPN 9, though predominantly tackles


SO ORDERED.[15]

proprietary functionsthose intended for private advantage and benefit, still, it is

148

OMB-ADM-0-99-0349

is

hereby

AFFIRMED

in

toto.

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After the denial of his motion for reconsideration,[16] Carandang commenced G.R.

After the denial by the Sandiganbayan of his motion for reconsideration,[20]

No. 148076.

Carandang initiated G.R. No. 153161.[21]

Violation of Section 3 (g), Republic Act No. 3019

On May 27, 2002, Carandang moved to defer his arraignment and pre-trial, citing the
pendency of G.R. No. 153161.[22]

On January 17, 2000, the Ombudsman formally charged Carandang in the

On July 29, 2002, the Court directed the parties in G.R. No. 153161 to maintain the

Sandiganbayan with a violation of Section 3 (g) of RA 3019 by alleging in the following

status quo until further orders.[23]

information, [17] viz:


On November 20, 2006, G.R. No. 148076 was consolidated with G.R. No. 153161.
That sometime on September 8, 1998 or thereabouts, in Quezon City, Philippines and

[24]

within the jurisdiction of this Honorable Court, accused ANTONIO M. CARANDANG, a


high ranking officer (HRO) being then the General Manager of Radio Philippines

Issue

Network, Inc. (RPN-9), then a government owned and controlled corporation, did then
and there willfully, unlawfully and criminally give unwarranted benefits to On Target

Carandang insists that he was not a public official considering that RPN was not a

Media Concept, Inc. (OTMCI) through manifest partiality and gross inexcusable

government-owned

negligence and caused the government undue injury, by pre-terminating the existing

Ombudsman and the Sandiganbayan had no jurisdiction over him. He prays that the

block time contract between RPN 9 and OTMCI for the telecast of Isumbong Mo Kay

administrative and criminal complaints filed against him should be dismissed.

Tulfo which assured the government an income of Sixty Four Thousand and Nine

Accordingly, decisive is whether or not RPN was a government-owned or -controlled

Pesos (P 64,009.00) per telecast and substituting the same with a more onerous co-

corporation.

or

-controlled

corporation;

and

that,

consequently,

the

production agreement without any prior study as to the profitability thereof, by which
Ruling

agreement RPN-9 assumed the additional obligation of taking part in the promotions,
sales and proper marketing of the program, with the end result in that in a period of

We find the petitions to be meritorious.

five (5) months RPN-9 was able to realize an income of only Seventy One Thousand
One Hundred Eighty Five Pesos (P 71,185.00), and further, by waiving RPN-9s
collectible from OTMCI for August 1-30, 1998 in the amount of Three Hundred Twenty

It is not disputed that the Ombudsman has jurisdiction over administrative cases

Thousand and Forty Five Pesos (P 320,045.00).

involving grave misconduct committed by the officials and employees of governmentowned or -controlled corporations; and that the Sandiganbayan has jurisdiction to try

Carandang moved to quash the information,[18] arguing that Sandiganbayan had no

and decide criminal actions involving violations of R.A. 3019 committed by public

jurisdiction because he was not a public official due to RPN not being a government-

officials and employees, including presidents, directors and managers of government-

owned or -controlled corporation.

owned or -controlled corporations. The respective jurisdictions of the respondents are

The Sandiganbayan denied Carandangs motion to quash on October 17, 2001.[19]

expressly defined and delineated by the law.[25]

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without resorting to the definition of government owned or controlled corporation


Similarly, the law defines what are government-owned or -controlled corporations. For

contained in par. (13), Sec.2, Introductory Provisions of the Administrative Code of

one, Section 2 of Presidential Decree No. 2029 (Defining Government Owned or

1987, i.e., any agency organized as a stock or non-stock corporation vested with

Controlled Corporations and Identifying Their Role in National Development) states:

functions relating to public needs whether governmental or proprietary in nature, and


owned by the government directly or indirectly through its instrumentalities either

Section 2. A government-owned or controlled corporation is a stock or a non-stock

wholly, or where applicable as in the case of stock corporations to the extent of at

corporation, whether performing governmental or proprietary functions, which is

least fifty-one (51) percent of its capital stock. The definition mentions three (3)

directly chartered by a special law or if organized under the general corporation law is

requisites, namely, first, any agency organized as a stock or non-stock corporation;

owned or controlled by the government directly, or indirectly through a parent

second, vested with functions relating to public needs whether governmental or

corporation or subsidiary corporation, to the extent of at least a majority of its

proprietary in nature; and, third, owned by the Government directly or through its

outstanding capital stock or of its outstanding voting capital stock.

instrumentalities either wholly, or, where applicable as in the case of stock


corporations, to the extent of at least fifty-one (51) of its capital stock.

Section 2 (13) of Executive Order No. 292 (Administrative Code of 1987)[26] renders
a similar definition of government-owned or -controlled corporations:

In the present case, all three (3) corporations comprising the CIIF companies were
organized as stock corporations. The UCPB-CIIF owns 44.10% of the shares of

Section 2. General Terms Defined. Unless the specific words of the text or the

LEGASPI OIL, xxx. Obviously, the below 51% shares of stock in LEGASPI OIL

context as a whole or a particular statute, shall require a different meaning:

removes this firm from the definition of a government owned or controlled corporation.
x x x The Court thus concludes that the CIIF are, as found by public respondent,

xxx

private corporations not within the scope of its jurisdiction.[28]

(13) government-owned or controlled corporations refer to any agency organized as a


stock or non-stock corporation vested with functions relating to public needs whether

Consequently, RPN was neither a government-owned nor a controlled corporation

governmental or proprietary in nature, and owned by the government directly or

because of the Governments total share in RPNs capital stock being only 32.4%.

indirectly through its instrumentalities either wholly, or where applicable as in the case
of stock corporations to the extent of at least 51% of its capital stock.

Parenthetically, although it is true that the Sandiganbayan (Second Division) ordered


the transfer to the PCGG of Benedictos shares that represented 72.4% of the total

It is clear, therefore, that a corporation is considered a government-owned or

issued and outstanding capital stock of RPN, such quantification of Benedictos

-controlled corporation only when the Government directly or indirectly owns or

shareholding cannot be controlling in view of Benedictos timely filing of a motion for

controls at least a majority or 51% share of the capital stock. Applying this statutory

reconsideration whereby he clarified and insisted that the shares ceded to the PCGG

criterion, the Court ruled in Leyson, Jr. v. Office of the Ombudsman:[27]

had accounted for only 32.4%, not 72.4%, of RPNs outstanding capital stock. With
the extent of Benedictos holdings in RPN remaining unresolved with finality,

But these jurisprudential rules invoked by petitioner in support of his claim that the

concluding that the Government held the majority of RPNs capital stock as to make

CIIF companies are government owned and/or controlled corporations are incomplete

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RPN a government-owned or -controlled corporation would be bereft of any factual


Accordingly, the Sandiganbayan (Second Division), on motion of the government

and legal basis.

through PCGG, ordered the president and corporate secretary of the RPN-9 to effect
Even the PCGG and the Office of the President (OP) have recognized RPNs status

the immediate cancellation and transfer of the 9,494,327.50 shares corresponding to

as being neither a government-owned nor -controlled corporation.

Benedictos proprietary interest in RPN-9 to the Republic of the Philippines c/o


PCGG (Sandiganbayans Resolution of February 3, 1998 in Civil Case No. 0034, RP

In its Opinion/Clarification dated August 18, 1999, the PCGG communicated to San

vs. Roberto Benedicto, et. al.) Benedicto, however, filed a motion for reconsideration

Luis as the president and general manager of RPN regarding a case involving RPN

of said Resolution, contending that the number of RPN-9 shares ceded by him

and Carandang:[29]

embraces only his personal holdings and those of his immediate family and nominees
totaling 4,161,207.5 shares but excluding the RPN-9 shares in the name of Far East

MR. EDGAR S. SAN LUIS

Managers and Investors, Inc. (FEMIE), which is about 40%, as they are corporate

President & General Manager

properties/assets of FEMIE and not his personal holdings. Said motion for

Radio Philippines Network, Inc.

reconsideration is still pending resolution by the Sandiganbayan.

Broadcast City, Capitol Hills


Diliman, Quezon City

xxx

Sir:

We agree with your x x x view that RPN-9 is not a government owned or controlled
corporation within the contemplation of the Administrative Code of 1987, for

This refers to your letter dated August 4, 1999, seeking PCGGs position on the

admittedly, RPN-9 was organized for private needs and profits, and not for public

following:

needs and was not specifically vested with functions relating to public needs.

1. Whether RPN-9 is a GOCC x x x or a private corporation outside the scope of

Neither could RPN-9 be considered a government-owned or controlled corporation

OGCC and COAs control given 32% Government ownership x x x.

under Presidential Decree (PD) No. 2029 dated February 4, 1986, which defines said
terms as follows:

xxx
Sec.2. Definition. A government owned- or controlled corporation is a stock or nonIt appears that under the RP-Benedicto Compromise Agreement dated November 3,

stock corporation, whether performing governmental or proprietary functions which is

1990 validity of which has been sustained by the Supreme Court in G.R. No. 96087,

directly chartered by special law or organized under the general corporation law is

March 31, 1992, (Guingona, Jr. vs. PCGG, 207 SCRA 659) Benedicto ceded all his

owned or controlled by the government directly, or indirectly through a parent

rights, interest and/or participation, if he has any, in RPN-9, among others, to the

corporation or subsidiary corporation, to the extent of at least a majority of its

government which rights, interest and/or participation per PCGGs understanding,

outstanding capital stock or of its outstanding voting capital stock;

include 9,494,327.50 shares of stock, i.e, about 72.4% of the total issued and
outstanding capital stock of RPN-9.

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Provided, that a corporation organized under the general corporation law under

2.

said 32.4% shares of stock, together with the contested/litigated 40%, were not

private ownership at least a majority of the shares of stock of which were conveyed to

conveyed to a government corporation or the government in satisfaction of debts

a government corporation in satisfaction of debts incurred with a government financial

incurred with government financial institution, whether by foreclosure or otherwise;

institution, whether by foreclosure or otherwise, or a subsidiary corporation of a


government corporation organized exclusively to own and manage, or lease, or

3.

operate specific physical assets acquired by a government financial institution in

corporation organized exclusively to own and manage, or lease, or operate specific

RPN-9 was not organized as a subsidiary corporation of a government

satisfaction of debts incurred therewith, and which in any case by enunciated policy of

physical assets acquired by a government financial institution in satisfaction of debts

the government is required to be disposed of to private ownership within a specified

incurred therewith.

period of time, shall not be considered a government-owned or controlled corporation


before such disposition and even if the ownership or control thereof is subsequently

It should be parenthetically noted that the 32.4% or 72.4% shares of stocks were

transferred to another government-owned or controlled corporation.

turned over to the government by virtue of a compromise agreement between the


government and Benedicto in Civil Case No. 0034 which is a civil action against

A government-owned or controlled corporation is either parent corporation, i.e., one

Defendants Roberto S. Benedicto, Ferdinand E. Marcos, Imelda R. Marcos and

created by special law (Sec. 3 (a), PD 2029) or a subsidiary corporation, i.e, one

others, to recover from them ill-gotten wealth (Amended Complaint, Aug. 12, 1987,

created pursuant to law where at least a majority of the outstanding voting capital

Civil Case No. 0034, p. 2.) As the case between the government and Benedicto, his

stock of which is owned by parent government corporation and/or other government-

family and nominees was compromised, no judicial pronouncement was made as to

owned subsidiaries. (Sec. 3 (b), PD 2029).

the character or nature of the assets and properties turned over by Benedicto to the
government whether they are ill-gotten wealth or not.[30]

RPN-9 may not likewise be considered as an acquired asset corporation which is


one organized under the general corporation law (1) under private ownership at least
a majority of the shares of stock of which were conveyed to a government corporation

The PCGGs Opinion/Clarification was affirmed by the OP itself on February 10, 2000:

in satisfaction of debts incurred with a government financial institution, whether by

[31]

foreclosure or otherwise, or (2) as a subsidiary corporation of a government


corporation organized exclusively to own and manage, or lease, or operate specific
February 10, 2000

physical assets acquired by a government financial institution in satisfaction of debts


incurred therewith, and which in any case by enunciated policy of the government is
required to be disposed of to private ownership within a specified period of time (Sec
Mr. Edgar S. San Luis

3 c, PD 2029), for the following reasons:

President and General Manager


1. as noted above, the uncontested (not litigated) RPN-9 shares of the government is

Radio Philippines Network Inc.

only 32.4% (not a majority) of its capital stock;

Broadcasting City, Capitol Hills, Diliman


Quezon City

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Dear President San Luis,

Lastly, the conclusion that Carandang was a public official by virtue of his having been
appointed as general manager and chief operating officer of RPN by President

xxx

Estrada deserves no consideration. President Estradas intervention was merely to


recommend Carandangs designation as general manager and chief operating officer

Relative thereto, please be informed that we affirm the PCGGs opinion that RPNI is

of RPN to the PCGG, which then cast the vote in his favor vis--vis said positions.[36]

not a government-owned and/or controlled corporation (GOCC). Section 2 (13),

Under the circumstances, it was RPNs Board of Directors that appointed Carandang

Introductory Provisions of the Administrative Code of 1987 defines a GOCC as an

to his positions pursuant to RPNs By-Laws.[37]

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

In fine, Carandang was correct in insisting that being a private individual he was not

government directly or indirectly through its instrumentalities either wholly, or where

subject to the administrative authority of the Ombudsman and to the criminal

applicable as in the case of stock corporations to the extent of at least 51% of its

jurisdiction of the Sandiganbayan.[38]

capital stock. As government ownership over RPNI is only 32.4% of its capital stock,
pending the final judicial determination of the true and legal ownership of RPNI, the

WHEREFORE, we grant the petitions in G.R. No. 148076 and G.R. No. 153161.

corporation is deemed private.[32]


We reverse and set aside the decision promulgated on February 12, 2001 by the
Court of Appeals in C.A.-G.R. SP No. 58204, and dismiss the administrative charge
Even earlier, a similar construction impelled the Ombudsman to dismiss a criminal

for grave misconduct against the petitioner.

complaint for violation of R.A. 3019 filed against certain


RPN officials, as the Ombudsmans resolution dated December 15, 1997 indicates,

We annul and set aside the resolutions dated October 17, 2001 and March 14, 2002,

[33] a pertinent portion of which is quoted thus:

as well as the order dated March 15, 2002, all issued by the Sandiganbayan (Fifth
Division) in Criminal Case No. 25802, and dismiss Criminal Case No. 25802 as

This is not to mention the fact that the other respondents, the RPN officials, are

against the petitioner.

outside the jurisdiction of this Office (Office of the Ombudsman); they are employed
by a private corporation registered with the Securities and Exchange Commission, the

SO ORDERED.

RPN, which is not a government owned or controlled corporation x x x[34]

G.R. No. 193462

February 4, 2014

DENNIS A.B. FUNA, Petitioner,


vs.
Considering that the construction of a statute given by administrative agencies

MANILA ECONOMIC AND CULTURAL OFFICE and the COMMISSION ON AUDIT,

deserves respect,[35] the uniform administrative constructions of the relevant

Respondents.

aforequoted laws defining what are government-owned or -controlled corporations as


applied to RPN is highly persuasive.

DECISION

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PEREZ, J.:
The Philippines formally ended its official diplomatic relations with the government in
This is a petition for mandamus1 to compel:

Taiwan on 9 June 1975, when the country and the PROC expressed mutual
recognition thru the Joint Communiqu of the Government of the Republic of the

1.) the Commission on Audit (COA) to audit and examine the funds of the Manila

Philippines and the Government of the Peoples Republic of China (Joint

Economic and Cultural Office (MECO), and

Communiqu).8

2.) the MECO to submit to such audit and examination.

Under the Joint Communiqu, the Philippines categorically stated its adherence to the
One China policy of the PROC. The pertinent portion of the Joint Communiqu

The antecedents:

reads:9

Prelude

The Philippine Government recognizes the Government of the Peoples Republic of


China as the sole legal government of China, fully understands and respects the

The aftermath of the Chinese civil war2 left the country of China with two (2)

position of the Chinese Government that there is but one China and that Taiwan is an

governments in a stalemate espousing competing assertions of sovereignty.3 On one

integral part of Chinese territory, and decides to remove all its official representations

hand is the communist Peoples Republic of China (PROC) which controls the

from Taiwan within one month from the date of signature of this communiqu.

mainland territories, and on the other hand is the nationalist Republic of China (ROC)

(Emphasis supplied)

which controls the island of Taiwan. For a better part of the past century, both the
PROC and ROC adhered to a policy of "One China" i.e., the view that there is only

The Philippines commitment to the One China policy of the PROC, however, did not

one legitimate government in China, but differed in their respective interpretation as to

preclude the country from keeping unofficial relations with Taiwan on a "people-to-

which that government is.4

people" basis.10 Maintaining ties with Taiwan that is permissible by the terms of the
Joint Communiqu, however, necessarily required the Philippines, and Taiwan, to

With the existence of two governments having conflicting claims of sovereignty over

course any such relations thru offices outside of the official or governmental organs.

one country, came the question as to which of the two is deserving of recognition as
that countrys legitimate government. Even after its relocation to Taiwan, the ROC

Hence, despite ending their diplomatic ties, the people of Taiwan and of the

used to enjoy diplomatic recognition from a majority of the worlds states, partly due to

Philippines maintained an unofficial relationship facilitated by the offices of the Taipei

being a founding member of the United Nations (UN).5 The number of states partial to

Economic and Cultural Office, for the former, and the MECO, for the latter.11

the PROCs version of the One China policy, however, gradually increased in the
1960s and 70s, most notably after the UN General Assembly adopted the

The MECO12 was organized on 16 December 1997 as a non-stock, non-profit

monumental Resolution 2758 in 1971.6 Since then, almost all of the states that had

corporation under Batas Pambansa Blg. 68 or the Corporation Code.13 The purposes

erstwhile recognized the ROC as the legitimate government of China, terminated their

underlying the incorporation of MECO, as stated in its articles of incorporation,14 are

official relations with the said government, in favor of establishing diplomatic relations

as follows:

with the PROC.7 The Philippines is one of such states.

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1. To establish and develop the commercial and industrial interests of Filipino

the request on the belief that the MECO, being under the "operational supervision" of

nationals here and abroad, and assist on all measures designed to promote and

the Department of Trade and Industry (DTI), is a government owned and controlled

maintain the trade relations of the country with the citizens of other foreign countries;

corporation (GOCC) and thus subject to the audit jurisdiction of the COA.19

2. To receive and accept grants and subsidies that are reasonably necessary in

Petitioners letter was received by COA Assistant Commissioner Jaime P. Naranjo, the

carrying out the corporate purposes provided they are not subject to conditions

following day.

defeatist for or incompatible with said purpose;


On 25 August 2010, Assistant Commissioner Naranjo issued a memorandum20
3. To acquire by purchase, lease or by any gratuitous title real and personal properties

referring the petitioners request to COA Assistant Commissioner Emma M. Espina for

as may be necessary for the use and need of the corporation, and to dispose of the

"further disposition." In this memorandum, however, Assistant Commissioner Naranjo

same in like manner when they are no longer needed or useful; and

revealed that the MECO was "not among the agencies audited by any of the three
Clusters of the Corporate Government Sector."21

4. To do and perform any and all acts which are deemed reasonably necessary to
carry out the purposes. (Emphasis supplied)

On 7 September 2010, petitioner learned about the 25 August 2010 memorandum


and its contents.

From the moment it was incorporated, the MECO became the corporate entity
"entrusted" by the Philippine government with the responsibility of fostering "friendly"

Mandamus Petition

and "unofficial" relations with the people of Taiwan, particularly in the areas of trade,
economic cooperation, investment, cultural, scientific and educational exchanges.15

Taking the 25 August 2010 memorandum as an admission that the COA had never

To enable it to carry out such responsibility, the MECO was "authorized" by the

audited and examined the accounts of the MECO, the petitioner filed the instant

government to perform certain "consular and other functions" that relates to the

petition for mandamus on 8 September 2010. Petitioner filed the suit in his capacities

promotion, protection and facilitation of Philippine interests in Taiwan.16

as "taxpayer, concerned citizen, a member of the Philippine Bar and law book
author."22 He impleaded both the COA and the MECO.

At present, it is the MECO that oversees the rights and interests of Overseas Filipino
Workers (OFWs) in Taiwan; promotes the Philippines as a tourist and investment

Petitioner posits that by failing to audit the accounts of the MECO, the COA is

destination for the Taiwanese; and facilitates the travel of Filipinos and Taiwanese

neglecting its duty under Section 2(1), Article IX-D of the Constitution to audit the

from Taiwan to the Philippines, and vice versa.17

accounts of an otherwise bona fide GOCC or government instrumentality. It is the


adamant claim of the petitioner that the MECO is a GOCC without an original charter

Facts Leading to the Mandamus Petition

or, at least, a government instrumentality, the funds of which partake the nature of
public funds.23

On 23 August 2010, petitioner sent a letter18 to the COA requesting for a "copy of the
latest financial and audit report" of the MECO invoking, for that purpose, his

According to petitioner, the MECO possesses all the essential characteristics of a

"constitutional right to information on matters of public concern." The petitioner made

GOCC and an instrumentality under the Executive Order No. (EO) 292, s. 1987 or the

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Administrative Code: it is a non-stock corporation vested with governmental functions

the case of Wood, Jr., ex rel. United States of America v. The American Institute in

relating to public needs; it is controlled by the government thru a board of directors

Taiwan, et al.32

appointed by the President of the Philippines; and while not integrated within the
executive departmental framework, it is nonetheless under the operational and policy

The Position of the MECO

supervision of the DTI.24 As petitioner substantiates:


The MECO prays for the dismissal of the mandamus petition on procedural and
1. The MECO is vested with government functions. It performs functions that are

substantial grounds.

equivalent to those of an embassy or a consulate of the Philippine government.25 A


reading of the authorized functions of the MECO as found in EO No. 15, s. 2001,

On procedure, the MECO argues that the mandamus petition was prematurely

reveals that they are substantially the same functions performed by the Department of

filed.33

Foreign Affairs (DFA), through its diplomatic and consular missions, per the
Administrative Code.26

The MECO posits that a cause of action for mandamus to compel the performance of
a ministerial duty required by law only ripens once there has been a refusal by the

2. The MECO is controlled by the government. It is the President of the Philippines

tribunal, board or officer concerned to perform such a duty.34 The MECO claims that

that actually appoints the directors of the MECO, albeit indirectly, by way of "desire

there was, in this case, no such refusal either on its part or on the COAs because the

letters" addressed to the MECOs board of directors.27 An illustration of this exercise

petitioner never made any demand for it to submit to an audit by the COA or for the

is the assumption by Mr. Antonio Basilio as chairman of the board of directors of the

COA to perform such an audit, prior to filing the instant mandamus petition.35 The

MECO in 2001, which was accomplished when former President Gloria Macapagal-

MECO further points out that the only "demand" that the petitioner made was his

Arroyo, through a memorandum28 dated 20 February 2001, expressed her "desire" to

request to the COA for a copy of the MECOs latest financial and audit report which

the board of directors of the MECO for the election of Mr. Basilio as chairman.29

request was not even finally disposed of by the time the instant petition was filed.36

3. The MECO is under the operational and policy supervision of the DTI. The MECO

On the petitions merits, the MECO denies the petitioners claim that it is a GOCC or a

was placed under the operational supervision of the DTI by EO No. 328, s. of 2004,

government instrumentality.37 While performing public functions, the MECO

and again under the policy supervision of the same department by EO No. 426, s.

maintains that it is not owned or controlled by the government, and its funds are

2005.30

private funds.38 The MECO explains:

To further bolster his position that the accounts of the MECO ought to be audited by

1. It is not owned or controlled by the government. Contrary to the allegations of the

the COA, the petitioner calls attention to the practice, allegedly prevailing in the United

petitioner, the President of the Philippines does not appoint its board of directors.39

States of America, wherein the American Institute in Taiwan (AIT)the counterpart

The "desire letter" that the President transmits is merely recommendatory and not

entity of the MECO in the United Statesis supposedly audited by that countrys

binding on the corporation.40 As a corporation organized under the Corporation

Comptroller General.31 Petitioner claims that this practice had been confirmed in a

Code, matters relating to the election of its directors and officers, as well as its

decision of the United States Court of Appeals for the District of Columbia Circuit, in

membership, are governed by the appropriate provisions of the said code, its articles
of incorporation and its by-laws.41 Thus, it is the directors who elect the corporations

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officers; the members who elect the directors; and the directors who admit the
members by way of a unanimous resolution. All of its officers, directors, and members

At any rate, the COA argues that the instant petition already became moot when COA

are private individuals and are not government officials.42

Chairperson Maria Gracia M. Pulido-Tan (Pulido-Tan) issued Office Order No. 201169850 on 6 October 2011.51 The COA notes that under Office Order No. 2011-698,

2. The government merely has policy supervision over it. Policy supervision is a lesser

Chairperson Pulido-Tan already directed a team of auditors to proceed to Taiwan,

form of supervision wherein the governments oversight is limited only to ensuring that

specifically for the purpose of auditing the accounts of, among other government

the corporations activities are in tune with the countrys commitments under the One

agencies based therein, the MECO.52

China policy of the PROC.43 The day-to-day operations of the corporation, however,
remain to be controlled by its duly elected board of directors.44

In conceding that it has audit jurisdiction over the accounts of the MECO, however,
the COA clarifies that it does not consider the former as a GOCC or a government

The MECO emphasizes that categorizing it as a GOCC or a government

instrumentality. On the contrary, the COA maintains that the MECO is a non-

instrumentality can potentially violate the countrys commitment to the One China

governmental entity.53

policy of the PROC.45 Thus, the MECO cautions against applying to the present
mandamus petition the pronouncement in the Wood decision regarding the alleged

The COA argues that, despite being a non-governmental entity, the MECO may still

auditability of the AIT in the United States.46

be audited with respect to the "verification fees" for overseas employment documents
that it collects from Taiwanese employers on behalf of the DOLE.54 The COA claims

The Position of the COA

that, under Joint Circular No. 3-99,55 the MECO is mandated to remit to the
Department of Labor and Employment (DOLE) a portion of such "verification fees."56

The COA, on the other hand, advances that the mandamus petition ought to be

The COA, therefore, classifies the MECO as a non-governmental entity "required to

dismissed on procedural grounds and on the ground of mootness.

pay xxx government share" subject to a partial audit of its accounts under Section 26
of the Presidential Decree No. 1445 or the State Audit Code of the Philippines (Audit

The COA argues that the mandamus petition suffers from the following procedural

Code).57

defects:
OUR RULING
1. The petitioner lacks locus standi to bring the suit. The COA claims that the
petitioner has not shown, at least in a concrete manner, that he had been aggrieved or

We grant the petition in part. We declare that the MECO is a non-governmental entity.

prejudiced by its failure to audit the accounts of the MECO.47

However, under existing laws, the accounts of the MECO pertaining to the "verification
fees" it collects on behalf of the DOLE as well as the fees it was authorized to collect

2. The petition was filed in violation of the doctrine of hierarchy of courts. The COA

under Section 2(6) of EO No. 15, s. 2001, are subject to the audit jurisdiction of the

faults the filing of the instant mandamus petition directly with this Court, when such

COA. Such fees pertain to the government and should be audited by the COA.

petition could have very well been presented, at the first instance, before the Court of
Appeals or any Regional Trial Court.48 The COA claims that the petitioner was not

able to provide compelling reasons to justify a direct resort to the Supreme Court.49

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We begin with the preliminary issues.

COA to audit the accounts of the MECO would certainly be a mere superfluity, when
the former had already obliged itself to do the same.

Mootness of Petition
Be that as it may, this Court refrains from dismissing outright the petition. We believe
The first preliminary issue relates to the alleged mootness of the instant mandamus

that the mandamus petition was able to craft substantial issues presupposing the

petition, occasioned by the COAs issuance of Office Order No. 2011-698. The COA

commission of a grave violation of the Constitution and involving paramount public

claims that by issuing Office Order No. 2011-698, it had already conceded its

interest, which need to be resolved nonetheless:

jurisdiction over the accounts of the MECO and so fulfilled the objective of the instant
petition.58 The COA thus urges that the instant petition be dismissed for being moot

First. The petition makes a serious allegation that the COA had been remiss in its

and academic.59

constitutional or legal duty to audit and examine the accounts of an otherwise


auditable entity in the MECO.

We decline to dismiss the mandamus petition on the ground of mootness.


Second. There is paramount public interest in the resolution of the issue concerning
A case is deemed moot and academic when, by reason of the occurrence of a

the failure of the COA to audit the accounts of the MECO. The propriety or impropriety

supervening event, it ceases to present any justiciable controversy.60 Since they lack

of such a refusal is determinative of whether the COA was able to faithfully fulfill its

an actual controversy otherwise cognizable by courts, moot cases are, as a rule,

constitutional role as the guardian of the public treasury, in which any citizen has an

dismissible.61

interest.

The rule that requires dismissal of moot cases, however, is not absolute. It is subject

Third. There is also paramount public interest in the resolution of the issue regarding

to exceptions. In David v. Macapagal-Arroyo,62 this Court comprehensively captured

the legal status of the MECO; a novelty insofar as our jurisprudence is concerned. We

these exceptions scattered throughout our jurisprudence:

find that the status of the MECOwhether it may be considered as a government


agency or nothas a direct bearing on the countrys commitment to the One China

The "moot and academic" principle is not a magical formula that can automatically

policy of the PROC.67

dissuade the courts in resolving a case. Courts will decide cases, otherwise moot and
academic, if: first, there is a grave violation of the Constitution;63 second, the

An allegation as serious as a violation of a constitutional or legal duty, coupled with

exceptional character of the situation and the paramount public interest is involved;64

the pressing public interest in the resolution of all related issues, prompts this Court to

third, when constitutional issue raised requires formulation of controlling principles to

pursue a definitive ruling thereon, if not for the proper guidance of the government or

guide the bench, the bar, and the public;65 and fourth, the case is capable of

agency concerned, then for the formulation of controlling principles for the education

repetition yet evading review.66

of the bench, bar and the public in general.68 For this purpose, the Court invokes its
symbolic function.69

In this case, We find that the issuance by the COA of Office Order No. 2011-698
indeed qualifies as a supervening event that effectively renders moot and academic

If the foregoing reasons are not enough to convince, We still add another:

the main prayer of the instant mandamus petition. A writ of mandamus to compel the

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Assuming that the allegations of neglect on the part of the COA were true, Office

The rules regarding legal standing in bringing public suits, or locus standi, are already

Order No. 2011-698 does not offer the strongest certainty that they would not be

well-defined in our case law. Again, We cite David, which summarizes jurisprudence

replicated in the future. In the first place, Office Order No. 2011-698 did not state any

on this point:73

legal justification as to why, after decades of not auditing the accounts of the MECO,
the COA suddenly decided to do so. Neither does it state any determination regarding

By way of summary, the following rules may be culled from the cases decided by this

the true status of the MECO. The justifications provided by the COA, in fact, only

Court.1a\^/phi1 Taxpayers, voters, concerned citizens, and legislators may be

appears in the memorandum70 it submitted to this Court for purposes of this case.

accorded standing to sue, provided that the following requirements are met:

Thus, the inclusion of the MECO in Office Order No. 2011-698 appears to be entirely

(1) the cases involve constitutional issues;

dependent upon the judgment of the incumbent chairperson of the COA; susceptible
of being undone, with or without reason, by her or even her successor. Hence, the

(2) for taxpayers, there must be a claim of illegal disbursement of public funds or that

case now before this Court is dangerously capable of being repeated yet evading

the tax measure is unconstitutional;

review.
(3) for voters, there must be a showing of obvious interest in the validity of the election
Verily, this Court should not dismiss the mandamus petition on the ground of

law in question;

mootness.
(4) for concerned citizens, there must be a showing that the issues raised are of
Standing of Petitioner

transcendental importance which must be settled early; and

The second preliminary issue is concerned with the standing of the petitioner to file

(5) for legislators, there must be a claim that the official action complained of infringes

the instant mandamus petition. The COA claims that petitioner has none, for the latter

upon their prerogatives as legislators.

was not able to concretely establish that he had been aggrieved or prejudiced by its
failure to audit the accounts of the MECO.71

We rule that the instant petition raises issues of transcendental importance, involved
as they are with the performance of a constitutional duty, allegedly neglected, by the

Related to the issue of lack of standing is the MECOs contention that petitioner has

COA. Hence, We hold that the petitioner, as a concerned citizen, has the requisite

no cause of action to file the instant mandamus petition. The MECO faults petitioner

legal standing to file the instant mandamus petition.

for not making any demand for it to submit to an audit by the COA or for the COA to
perform such an audit, prior to filing the instant petition.72

To be sure, petitioner does not need to make any prior demand on the MECO or the
COA in order to maintain the instant petition. The duty of the COA sought to be

We sustain petitioners standing, as a concerned citizen, to file the instant petition.

compelled by mandamus, emanates from the Constitution and law, which explicitly
require, or "demand," that it perform the said duty. To the mind of this Court, petitioner
already established his cause of action against the COA when he alleged that the
COA had neglected its duty in violation of the Constitution and the law.

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3. GOCCs without original charters;


Principle of Hierarchy of Courts
4. Constitutional bodies, commissions and offices that have been granted fiscal
The last preliminary issue is concerned with the petitions non-observance of the

autonomy under the Constitution; and

principle of hierarchy of courts. The COA assails the filing of the instant mandamus
petition directly with this Court, when such petition could have very well been

5. Non-governmental entities receiving subsidy or equity, directly or indirectly, from or

presented, at the first instance, before the Court of Appeals or any Regional Trial

through the government, which are required by law or the granting institution to submit

Court.74 The COA claims that the petitioner was not able to provide compelling

to the COA for audit as a condition of subsidy or equity.78

reasons to justify a direct resort to the Supreme Court.75


The term "accounts" mentioned in the subject constitutional provision pertains to the
In view of the transcendental importance of the issues raised in the mandamus

"revenue," "receipts," "expenditures" and "uses of funds and property" of the foregoing

petition, as earlier mentioned, this Court waives this last procedural issue in favor of a

entities.79

resolution on the merits.76


Complementing the constitutional power of the COA to audit accounts of "nonII

governmental entities receiving subsidy or equity xxx from or through the government"
is Section 29(1)80 of the Audit Code, which grants the COA visitorial authority over

To the merits of this petition, then.

the following non-governmental entities:

The single most crucial question asked by this case is whether the COA is, under

1. Non-governmental entities "subsidized by the government";

prevailing law, mandated to audit the accounts of the MECO. Conversely, are the
accounts of the MECO subject to the audit jurisdiction of the COA?

2. Non-governmental entities "required to pay levy or government share";

Law, of course, identifies which accounts of what entities are subject to the audit

3. Non-governmental entities that have "received counterpart funds from the

jurisdiction of the COA.

government"; and

Under Section 2(1) of Article IX-D of the Constitution,77 the COA was vested with the

4. Non-governmental entities "partly funded by donations through the government."

"power, authority and duty" to "examine, audit and settle" the "accounts" of the
following entities:

Section 29(1) of the Audit Code, however, limits the audit of the foregoing nongovernmental entities only to "funds xxx coming from or through the government."81

1. The government, or any of its subdivisions, agencies and instrumentalities;

This section of the Audit Code is, in turn, substantially reproduced in Section 14(1),
Book V of the Administrative Code.82

2. GOCCs with original charters;

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In addition to the foregoing, the Administrative Code also empowers the COA to

Government instrumentalities are agencies of the national government that, by reason

examine and audit "the books, records and accounts" of public utilities "in connection

of some "special function or jurisdiction" they perform or exercise, are allotted

with the fixing of rates of every nature, or in relation to the proceedings of the proper

"operational autonomy" and are "not integrated within the department framework."88

regulatory agencies, for purposes of determining franchise tax."83

Subsumed under the rubric "government instrumentality" are the following entities:89

Both petitioner and the COA claim that the accounts of the MECO are within the audit

1. regulatory agencies,

jurisdiction of the COA, but vary on the extent of the audit and on what type of
auditable entity the MECO is. The petitioner posits that all accounts of the MECO are

2. chartered institutions,

auditable as the latter is a bona fide GOCC or government instrumentality.84 On the


other hand, the COA argues that only the accounts of the MECO that pertain to the

3. government corporate entities or government instrumentalities with corporate

"verification fees" it collects on behalf of the DOLE are auditable because the former

powers (GCE/GICP),90 and

is merely a non-governmental entity "required to pay xxx government share" per the
Audit Code.85

4. GOCCs

We examine both contentions.

The Administrative Code defines a GOCC:91

The MECO Is Not a GOCC or

(13) Government-owned or controlled corporation refers to any agency organized as a

Government Instrumentality

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

We start with the petitioners contention.

through its instrumentalities either wholly, or, where applicable as in the case of stock
corporations, to the extent of at least fifty-one (51) per cent of its capital stock: x x x.

Petitioner claims that the accounts of the MECO ought to be audited by the COA
because the former is a GOCC or government instrumentality. Petitioner points out

The above definition is, in turn, replicated in the more recent Republic Act No. 10149

that the MECO is a non-stock corporation "vested with governmental functions

or the GOCC Governance Act of 2011, to wit:92

relating to public needs"; it is "controlled by the government thru a board of directors


appointed by the President of the Philippines"; and it operates "outside of the

(o) Government-Owned or -Controlled Corporation (GOCC) refers to any agency

departmental framework," subject only to the "operational and policy supervision of

organized as a stock or non-stock corporation, vested with functions relating to public

the DTI."86 The MECO thus possesses, petitioner argues, the essential

needs whether governmental or proprietary in nature, and owned by the Government

characteristics of a bona fide GOCC and government instrumentality.87

of the Republic of the Philippines directly or through its instrumentalities either wholly
or, where applicable as in the case of stock corporations, to the extent of at least a

We take exception to petitioners characterization of the MECO as a GOCC or

majority of its outstanding capital stock: x x x.

government instrumentality. The MECO is not a GOCC or government instrumentality.

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GOCCs, therefore, are "stock or non-stock" corporations "vested with functions


relating to public needs" that are "owned by the Government directly or through its

4. To do and perform any and all acts which are deemed reasonably necessary to

instrumentalities."93 By definition, three attributes thus make an entity a GOCC: first,

carry out the purposes. (Emphasis supplied)

its organization as stock or non-stock corporation;94 second, the public character of


its function; and third, government ownership over the same.

The purposes for which the MECO was organized are somewhat analogous to those
of a trade, business or industry chamber,98 but only on a much larger scale i.e.,

Possession of all three attributes is necessary to deem an entity a GOCC.

instead of furthering the interests of a particular line of business or industry within a


local sphere, the MECO seeks to promote the general interests of the Filipino people

In this case, there is not much dispute that the MECO possesses the first and second

in a foreign land.

attributes. It is the third attribute, which the MECO lacks.


Finally, it is not disputed that none of the income derived by the MECO is distributable
The MECO Is Organized as a Non-Stock Corporation

as dividends to any of its members, directors or officers.

The organization of the MECO as a non-stock corporation cannot at all be denied.

Verily, the MECO is organized as a non-stock corporation.

Records disclose that the MECO was incorporated as a non-stock corporation under
the Corporation Code on 16 December 1977.95 The incorporators of the MECO were

The MECO Performs Functions with a Public Aspect.

Simeon R. Roxas, Florencio C. Guzon, Manuel K. Dayrit, Pio K. Luz and Eduardo B.
Ledesma, who also served as the corporations original members and directors.96

The public character of the functions vested in the MECO cannot be doubted either.
Indeed, to a certain degree, the functions of the MECO can even be said to partake of

The purposes for which the MECO was organized also establishes its non-profit

the nature of governmental functions. As earlier intimated, it is the MECO that, on

character, to wit:97

behalf of the people of the Philippines, currently facilitates unofficial relations with the
people in Taiwan.

1. To establish and develop the commercial and industrial interests of Filipino


nationals here and abroad and assist on all measures designed to promote and

Consistent with its corporate purposes, the MECO was "authorized" by the Philippine

maintain the trade relations of the country with the citizens of other foreign countries;

government to perform certain "consular and other functions" relating to the


promotion, protection and facilitation of Philippine interests in Taiwan.99 The full

2. To receive and accept grants and subsidies that are reasonably necessary in

extent of such authorized functions are presently detailed in Sections 1 and 2 of EO

carrying out the corporate purposes provided they are not subject to conditions

No. 15, s. 2001:

defeatist for or incompatible with said purpose;


SECTION 1. Consistent with its corporate purposes and subject to the conditions
3. To acquire by purchase, lease or by any gratuitous title real and personal properties

stated in Section 3 hereof, MECO is hereby authorized to assist in the performance of

as may be necessary for the use and need of the corporation, and in like manner

the following functions:

when they are

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1. Formulation and implementation of a program to attract and promote investments

1. Issuance of temporary visitors visas and transit and crew list visas, and such other

from Taiwan to Philippine industries and businesses, especially in manufacturing,

visa services as may be authorized by the Department of Foreign Affairs;

tourism, construction and other preferred areas of investments;


2. Issuance, renewal, extension or amendment of passports of Filipino citizens in
2. Promotion of the export of Philippine products and Filipino manpower services,

accordance with existing regulations, and provision of such other passport services as

including Philippine management services, to Taiwan;

may be required under the circumstances;

3. Negotiation and/or assistance in the negotiation and conclusion of agreements or

3. Certification or affirmation of the authenticity of documents submitted for

other arrangements concerning trade, investment, economic cooperation, technology

authentication;

transfer, banking and finance, scientific, cultural, educational and other modes of
cooperative endeavors between the Philippines and Taiwan, on a people-to-people

4. Providing translation services;

basis, in accordance with established rules and regulations;


5. Assistance and protection to Filipino nationals and other legal/juridical persons
4. Reporting on, and identification of, employment and business opportunities in

working or residing in Taiwan, including making representations to the extent allowed

Taiwan for the promotion of Philippine exports, manpower and management services,

by local and international law on their behalf before civil and juridical authorities of

and tourism;

Taiwan; and

5. Dissemination in Taiwan of information on the Philippines, especially in the fields of

6. Collection of reasonable fees on the first four (4) functions enumerated above to

trade, tourism, labor, economic cooperation, and cultural, educational and scientific

defray the cost of its operations.

endeavors;
A perusal of the above functions of the MECO reveals its uncanny similarity to some
6. Conduct of periodic assessment of market conditions in Taiwan, including

of the functions typically performed by the DFA itself, through the latters diplomatic

submission of trade statistics and commercial reports for use of Philippine industries

and consular missions.100 The functions of the MECO, in other words, are of the kind

and businesses; and

that would otherwise be performed by the Philippines own diplomatic and consular
organs, if not only for the governments acquiescence that they instead be exercised

7. Facilitation, fostering and cultivation of cultural, sports, social, and educational

by the MECO.

exchanges between the peoples of the Philippines and Taiwan.


Evidently, the functions vested in the MECO are impressed with a public aspect.
SECTION 2. In addition to the above-mentioned authority and subject to the
conditions stated in Section 3 hereof, MECO, through its branch offices in Taiwan, is

The MECO Is Not Owned or Controlled by the Government Organization as a non-

hereby authorized to perform the following functions:

stock corporation and the mere performance of functions with a public aspect,
however, are not by themselves sufficient to consider the MECO as a GOCC. In order

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to qualify as a GOCC, a corporation must also, if not more importantly, be owned by

The fact of the incorporation of the MECO under the Corporation Code is key. The

the government.

MECO was correct in postulating that, as a corporation organized under the


Corporation Code, it is governed by the appropriate provisions of the said code, its

The government owns a stock or non-stock corporation if it has controlling interest in

articles of incorporation and its by-laws. In this case, it is the by-laws109 of the MECO

the corporation. In a stock corporation, the controlling interest of the government is

that stipulates that its directors are elected by its members; its officers are elected by

assured by its ownership of at least fifty-one percent (51%) of the corporate capital

its directors; and its members, other than the original incorporators, are admitted by

stock.101 In a non-stock corporation, like the MECO, jurisprudence teaches that the

way of a unanimous board resolution, to wit:

controlling interest of the government is affirmed when "at least majority of the
members are government officials holding such membership by appointment or

SECTION II. MEMBERSHIP

designation"102 or there is otherwise "substantial participation of the government in


the selection" of the corporations governing board.103

Article 2. Members shall be classified as (a) Regular and (b) Honorary.

In this case, the petitioner argues that the government has controlling interest in the

(a) Regular members shall consist of the original incorporators and such other

MECO because it is the President of the Philippines that indirectly appoints the

members who, upon application for membership, are unanimously admitted by the

directors of the corporation.104 The petitioner claims that the President appoints

Board of Directors.

directors of the MECO thru "desire letters" addressed to the corporations board.105
As evidence, the petitioner cites the assumption of one Mr. Antonio Basilio as

(b) Honorary member A person of distinction in business who as sympathizer of the

chairman of the board of directors of the MECO in 2001, which was allegedly

objectives of the corporation, is invited by the Board to be an honorary member.

accomplished when former President Macapagal-Arroyo, through a memorandum


dated 20 February 2001, expressed her "desire" to the board of directors of the

SECTION III. BOARD OF DIRECTORS

MECO for the election of Mr. Basilio as chairman.106


Article 3. At the first meeting of the regular members, they shall organize and
The MECO, however, counters that the "desire letters" that the President transmits are

constitute themselves as a Board composed of five (5) members, including its

merely recommendatory and not binding on it.107 The MECO maintains that, as a

Chairman, each of whom as to serve until such time as his own successor shall have

corporation organized under the Corporation Code, matters relating to the election of

been elected by the regular members in an election called for the purpose. The

its directors and officers, as well as its membership, are ultimately governed by the

number of members of the Board shall be increased to seven (7) when circumstances

appropriate provisions of the said code, its articles of incorporation and its by-

so warrant and by means of a majority vote of the Board members and appropriate

laws.108

application to and approval by the Securities and Exchange Commission. Unless


otherwise provided herein or by law, a majority vote of all Board members present

As between the contrasting arguments, We find the contention of the MECO to be the

shall be necessary to carry out all Board resolutions.

one more consistent with the law.


During the same meeting, the Board shall also elect its own officers, including the
designation of the principal officer who shall be the Chairman. In line with this, the

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Chairman shall also carry the title Chief Executive Officer. The officer who shall head

strictly legal perspective, it appears that the presidential "desire letters" pointed out by

the branch or office for the agency that may be established abroad shall have the title

petitionerif such letters even exist outside of the case of Mr. Basilioare, no matter

of Director and Resident Representative. He will also be the Vice-Chairman. All other

how strong its persuasive effect may be, merely recommendatory.

members of the Board shall have the title of Director.


The MECO Is Not a Government Instrumentality; It Is a Sui Generis Entity.
xxxx
The categorical exclusion of the MECO from a GOCC makes it easier to exclude the
SECTION IV. EXECUTIVE COMMITTEE

same from any other class of government instrumentality. The other government
instrumentalities i.e., the regulatory agencies, chartered institutions and GCE/GICP

Article 5. There shall be established an Executive Committee composed of at least

are all, by explicit or implicit definition, creatures of the law.110 The MECO cannot be

three (3) members of the Board. The members of the Executive Committee shall be

any other instrumentality because it was, as mentioned earlier, merely incorporated

elected by the members of the Board among themselves.

under the Corporation Code.

xxxx

Hence, unless its legality is questioned, and in this case it was not, the fact that the
MECO is operating under the policy supervision of the DTI is no longer a relevant

SECTION VI. OFFICERS: DUTIES, COMPENSATION

issue to be reckoned with for purposes of this case.

Article 8. The officers of the corporation shall consist of a Chairman of the Board,

For whatever it is worth, however, and without justifying anything, it is easy enough for

Vice-Chairman, Chief Finance Officer, and a Secretary. Except for the Secretary, who

this Court to understand the rationale, or necessity even, of the executive branch

is appointed by the Chairman of the Board, other officers and employees of the

placing the MECO under the policy supervision of one of its agencies.

corporation shall be appointed by the Board.


It is evident, from the peculiar circumstances surrounding its incorporation, that the
The Deputy Representative and other officials and employees of a branch office or

MECO was not intended to operate as any other ordinary corporation. And it is not.

agency abroad are appointed solely by the Vice Chairman and Resident

Despite its private origins, and perhaps deliberately so, the MECO was "entrusted"111

Representative concerned. All such appointments however are subject to ratification

by the government with the "delicate and precarious"112 responsibility of pursuing

by the Board.

"unofficial"113 relations with the people of a foreign land whose government the
Philippines is bound not to recognize. The intricacy involved in such undertaking is the

It is significant to note that none of the original incorporators of the MECO were

possibility that, at any given time in fulfilling the purposes for which it was

shown to be government officials at the time of the corporations organization. Indeed,

incorporated, the MECO may find itself engaged in dealings or activities that can

none of the members, officers or board of directors of the MECO, from its

directly contradict the Philippines commitment to the One China policy of the PROC.

incorporation up to the present day, were established as government appointees or

Such a scenario can only truly be avoided if the executive department exercises some

public officers designated by reason of their office. There is, in fact, no law or

form of oversight, no matter how limited, over the operations of this otherwise private

executive order that authorizes such an appointment or designation. Hence, from a

entity.

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In its comment,117 the MECO admitted that roughly 9% of its income is derived from
Indeed, from hindsight, it is clear that the MECO is uniquely situated as compared

its share in the "verification fees" for overseas employment documents it collects on

with other private corporations. From its over-reaching corporate objectives, its special

behalf of the DOLE.

duty and authority to exercise certain consular functions, up to the oversight by the
executive department over its operationsall the while maintaining its legal status as

The "verification fees" mentioned here refers to the "service fee for the verification of

a non-governmental entitythe MECO is, for all intents and purposes, sui generis.

overseas employment contracts, recruitment agreement or special powers of


attorney" that the DOLE was authorized to collect under Section 7 of EO No.

Certain Accounts of the MECO May

1022,118 which was issued by President Ferdinand E. Marcos on 1 May 1985. These

Be Audited By the COA.

fees are supposed to be collected by the DOLE from the foreign employers of OFWs
and are intended to be used for "the promotion of overseas employment and for

We now come to the COAs contention.

welfare services to Filipino workers within the area of jurisdiction of [concerned]


foreign missions under the administration of the [DOLE]."119

The COA argues that, despite being a non-governmental entity, the MECO may still
be audited with respect to the "verification fees" for overseas employment documents

Joint Circular 3-99 was issued by the DOLE, DFA, the Department of Budget

that the latter collects from Taiwanese employers on behalf of the DOLE.114 The

Management, the Department of Finance and the COA in an effort to implement

COA claims that, under Joint Circular No. 3-99, the MECO is mandated to remit to the

Section 7 of Executive Order No. 1022.120 Thus, under Joint Circular 3-99, the

national government a portion of such "verification fees."115 The COA, therefore,

following officials have been tasked to be the "Verification Fee Collecting Officer" on

classifies the MECO as a non-governmental entity "required to pay xxx government

behalf of the DOLE:121

share" per the Audit Code.116


1. The labor attach or duly authorized overseas labor officer at a given foreign post,
We agree that the accounts of the MECO pertaining to its collection of "verification

as duly designated by the DOLE Secretary;

fees" is subject to the audit jurisdiction of the COA. However, We digress from the
view that such accounts are the only ones that ought to be audited by the COA. Upon

2. In foreign posts where there is no labor attach or duly authorized overseas labor

careful evaluation of the information made available by the records vis--vis the spirit

officer, the finance officer or collecting officer of the DFA duly deputized by the DOLE

and the letter of the laws and executive issuances applicable, We find that the

Secretary as approved by the DFA Secretary;

accounts of the MECO pertaining to the fees it was authorized to collect under
Section 2(6) of EO No. 15, s. 2001, are likewise subject to the audit jurisdiction of the

3. In the absence of such finance officer or collecting officer, the alternate duly

COA.

designated by the head of the foreign post.

Verification Fees Collected by the MECO

Since the Philippines does not maintain an official post in Taiwan, however, the DOLE
entered into a "series" of Memorandum of Agreements with the MECO, which made
the latter the formers collecting agent with respect to the "verification fees" that may
be due from Taiwanese employers of OFWs.122 Under the 27 February 2004

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Memorandum of Agreement between DOLE and the MECO, the "verification fees" to
be collected by the latter are to be allocated as follows: (a) US$ 10 to be retained by

The "consular fees," although held and expended by the MECO by virtue of EO No.

the MECO as administrative fee, (b) US $10 to be remitted to the DOLE, and (c) US$

15, s. 2001, are, without question, derived from the exercise by the MECO of consular

10 to be constituted as a common fund of the MECO and DOLE.123

functionsfunctions it performs by and only through special authority from the


government. There was never any doubt that the visas, passports and other

Evidently, the entire "verification fees" being collected by the MECO are receivables of

documents that the MECO issues pursuant to its authorized functions still emanate

the DOLE.124 Such receipts pertain to the DOLE by virtue of Section 7 of EO No.

from the Philippine government itself.

1022.
Such fees, therefore, are received by the MECO to be used strictly for the purpose set
Consular Fees Collected by the MECO

out under EO No. 15, s. 2001. They must be reasonable as the authorization requires.
It is the government that has ultimate control over the disposition of the "consular

Aside from the DOLE "verification fees," however, the MECO also collects "consular

fees," which control the government did exercise when it provided in Section 2(6) of

fees," or fees it collects from the exercise of its delegated consular functions.

EO No. 15, s. 2001 that such funds may be kept by the MECO "to defray the cost of
its operations."

The authority behind "consular fees" is Section 2(6) of EO No. 15, s. 2001. The said
section authorizes the MECO to collect "reasonable fees" for its performance of the

The Accounts of the MECO Pertaining to the Verification Fees and Consular Fees

following consular functions:

May Be Audited by the COA.

1. Issuance of temporary visitors visas and transit and crew list visas, and such other

Section 14(1), Book V of the Administrative Code authorizes the COA to audit

visa services as may be authorized by the DFA;

accounts of non-governmental entities "required to pay xxx or have government


share" but only with respect to "funds xxx coming from or through the government."

2. Issuance, renewal, extension or amendment of passports of Filipino citizens in

This provision of law perfectly fits the MECO:

accordance with existing regulations, and provision of such other passport services as
may be required under the circumstances;

First. The MECO receives the "verification fees" by reason of being the collection
agent of the DOLEa government agency. Out of its collections, the MECO is

3. Certification or affirmation of the authenticity of documents submitted for

required, by agreement, to remit a portion thereof to the DOLE. Hence, the MECO is

authentication; and

accountable to the government for its collections of such "verification fees" and, for
that purpose, may be audited by the COA.

4. Providing translation services.


Second. Like the "verification fees," the "consular fees" are also received by the
Evidently, and just like the peculiarity that attends the DOLE "verification fees," there

MECO through the government, having been derived from the exercise of consular

is no consular office for the collection of the "consular fees." Thus, the authority for the

functions entrusted to the MECO by the government. Hence, the MECO remains

MECO to collect the "reasonable fees," vested unto it by the executive order.

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accountable to the government for its collections of "consular fees" and, for that
purpose, may be audited by the COA.

[G.R. No. L-8451. December 20, 1957.]


THE ROMAN CATHOLIC APOSTOLIC ADMINISTRATOR OF DAVAO, INC.,

Tersely put, the 27 February 2008 Memorandum of Agreement between the DOLE

Petitioner, v. THE LAND REGISTRATION COMMISSION and THE REGISTER OF

and the MECO and Section 2(6) of EO No. 15, s. 2001, vis--vis, respectively, the

DEEDS OF DAVAO CITY, Respondents.

"verification fees" and the "consular fees," grant and at the same time limit the

Teodoro Padilla for Petitioner.

authority of the MECO to collect such fees. That grant and limit require the audit by

Solicitor General Ambrosio Padilla, Assistant Solicitor General Jose G. Bautista and

the COA of the collections thereby generated.

Solicitor Troadio T. Quianzon, Jr. for Respondents.

Conclusion
SYLLABUS
The MECO is not a GOCC or government instrumentality. It is a sui generis private

1. CORPORATIONS SOLE; COMPONENTS AND PURPOSE OF; POWER TO HOLD

entity especially entrusted by the government with the facilitation of unofficial relations

AND TRANSMIT CHURCH PROPERTIES TO HIS SUCCESSOR IN OFFICE. A

with the people in Taiwan without jeopardizing the countrys faithful commitment to the

corporation sole is a special form of corporation usually associated with clergy . . .

One China policy of the PROC. However, despite its non-governmental character, the

designed to facilitate the exercise of the functions of ownership of the church which

MECO handles government funds in the form of the "verification fees" it collects on

was regarded as the property owner (I Bouviers Law Dictionary, p. 682-683). It

behalf of the DOLE and the "consular fees" it collects under Section 2(6) of EO No.

consists of one person only, and his successors (who will always be one at a time), in

15, s. 2001. Hence, under existing laws, the accounts of the MECO pertaining to its

some particular, who are incorporated by law in order to give them some legal

collection of such "verification fees" and "consular fees" should be audited by the

advantages particularly that of perpetuity which in their natural persons they could not

COA.

have . . . (Reid v. Barry, 93 Fla. 849 112 So. 846). Through this legal fiction, church
properties acquired by the incumbent of a corporation sole pass, by operation of law,

WHEREFORE, premises considered, the petition is PARTIALLY GRANTED. The

upon his death not to his personal heirs but to his successor in office. A corporation

Manila Economic and Cultural Office is hereby declared a non-governmental entity.

sole, therefore, is created not only to administer the temporalities of the church or

However, the accounts of the Manila Economic and Cultural Office pertaining to: the

religious society where he belongs, but also to hold and transmit the same to his

verification fees contemplated by Section 7 of Executive Order No. 1022 issued 1 May

successor in said office.

1985, that the former collects on behalf of the Department of Labor and Employment,
and the fees it was authorized to collect under Section 2(6) of Executive Order No. 15

2. ID.; PERSONALITY OF SEPARATE AND DISTINCT FROM THAT OF ROMAN

issued 16 May 2001, are subject to the audit jurisdiction of the COA.

PONTIFF. Although a branch of the Universal Roman Catholic Apostolic Church,

No costs.

every Roman Catholic Church in different countries, if it exercises its mission and is

SO ORDERED.

lawfully incorporated in accordance with laws of the country where it is located, is


considered an entity or person with all the rights and privileges granted to such
artificial being under laws of that country, separate and distinct from the personality of

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the Roman Pontiff or the Holy See, without prejudice to its religious relations with the

form of operation have no designed owner of its temporalities, although by the terms

latter which are governed by the Common Law or their rules and regulations.

of the law it can be safely implied that they ordinarily hold them in trust for the benefit
of the Roman Catholic faithful of their respective locality or diocese. They can not be

3. ID.; ID.; POWER AND QUALIFICATION TO PURCHASE IN ITS NAME PRIVATE

considered as aliens because they have no nationality at all. In determining, therefore,

LANDS; 60 PER CENTUM REQUIREMENT NOT INTENDED TO CORPORATION

whether the constitutional provision requiring 60 per centum Filipino capital is

SOLE. Under the circumstances of the present case, it is safe to state that even

applicable to corporations sole, the nationality of the constituents of the diocese, and

before the establishment of the Philippine Commonwealth and of the Republic of the

not the nationality of the actual incumbent of the parish, must be taken into

Philippines every corporation sole then organized and registered had by express

consideration. In the present case, even if the question of nationality be considered,

provision of law (Corporation Law, Public Act. 1459) the necessary power and

the aforesaid constitutional requirement is fully met and satisfied, considering that the

qualification to purchase in its name private lands located in the territory in which it

corporation sole in question is composed of an overwhelming majority of Filipinos.

exercised its functions or ministry and for which it was created, independently of the
nationality of its incumbent unique and single number and head, the bishop of the
diocese. It can be also maintained without fear of being gainsaid that the Roman

DECISION

Catholic Apostolic Church in the Philippines has no nationality and that the frames of
the Constitution did not have in mind the religious corporation sole when they
provided that 60 per centum of the capital thereof be owned by Filipino citizens. Thus,

FELIX, J.:

if this constitutional provision were not intended for corporation sole, it is obvious that
this could not be regulated or restricted by said provision.
This is a petition for mandamus filed by the Roman Catholic Apostolic Administrator of
4. ID.; ID.; ID.; ID.; CONSTITUTIONAL REQUIREMENT LIMITED TO OWNERSHIP

Davao seeking the reversal of a resolution issued by the Land Registration

NOT TO CONTROL. But the Corporation Law and the Canon Law are explicit in

Commissioner in L.R.C. Consulta No. 14. The facts of the case are as

their provisions that a corporation sole or "ordinary" is not the owner of the properties

follows:chanrob1es virtual 1aw library

that he may acquire but merely the administrator thereof and holds the same in trust
for the church to which the corporation is an organized and constituents part. Being

On October 4, 1954, Mateo L. Rodis, a Filipino citizen and resident of the City of

mere administrator of the temporalities or properties titled in his name, the

Davao, executed a deed of sale of a parcel of land located in the same city covered by

constitutional provision requiring 60 per centum Filipino ownership is not applicable.

Transfer Certificate of Title No. 2263, in favor of the Roman Catholic Administrator of

The said constitutional provision is limited by it terms to ownership alone and does not

Davao, Inc., a corporation sole organized and existing in accordance with Philippine

extend to control unless the control over the property affected has been devised to

laws, with Msgr. Clovis Thibault, a Canadian citizen, as actual incumbent. When the

circumvent the real purpose of the constitution.

deed of sale was presented to the Register of Deeds of Davao for registration, the
latter

5. ID.; CORPORATION SOLE WITHOUT NATIONALITY; NATIONALITY OF


CONSTITUENTS DETERMINES WHETHER CONSTITUTIONAL REQUIREMENTS

having in mind a previous resolution of the Fourth Branch of the Court of First

IS APPLICABLE. The corporation sole by reason of their peculiar constitution and

Instance of Manila wherein the Carmelite Nuns of Davao were made to prepare an

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affidavit to the effect that 60 per cent of the members of their corporation were Filipino
citizens when they sought to register in favor of their congregation a deed of donation

After the motion to reconsider said resolution was denied, an action for mandamus

of a parcel of land

was instituted with this Court by said corporation sole, alleging that under the
Corporation Law, the Canon Law as well as the settled jurisprudence on the matter,

required said corporation sole to submit a similar affidavit declaring that 60 per cent of

the deed of sale executed by Mateo L. Rodis in favor of petitioner is actually a deed of

the members thereof were Filipino citizens.

sale in favor of the Catholic Church which is qualified to acquire private agricultural
lands for the establishment and maintenance of places of worship, and prayed that

The vendee in a letter dated June 28, 1954, expressed willingness to submit an

judgment be rendered reserving and setting aside the resolution of the Land

affidavit, but not in the same tenor as that made by the Prioress of the Carmelite Nuns

Registration Commissioner in question. In its resolution of November 15, 1954, this

because the two cases were not similar, for whereas the congregation of the

Court gave due course to this petition providing that the procedure prescribed for

Carmelite Nuns had five incorporators, the corporation sole has only one; that

appeals from the Public Service Commission or the Securities and Exchange

according to their articles of incorporation, the organization of the Carmelite Nuns

Commission (Rule 43), be followed.

became the owner of properties donated to it, whereas the case at bar, the totality of
the Catholic population of Davao would become the owner of the property sought to

Section 5 of Article XIII of the Philippine Constitution reads as follows:chanrob1es

be registered.

virtual 1aw library

As the Register of Deeds entertained some doubts as to the registerability of the

SEC. 5. Save in cases of hereditary succession, no private agricultural land shall be

document, the matter was referred to the Land Registration Commissioner en

transferred or assigned except to individuals, corporations, or associations qualified to

consulta for resolution in accordance with section 4 of Republic Act No. 1151. Proper

acquire or hold lands of the public domain in the Philippines.

hearing on the matter was conducted by the Commissioner and after the petitioner
corporation had filed its memorandum, a resolution was rendered on September 21,

Section 1 of the same Article also provides the following:chanrob1es virtual 1aw

1954, holding that in view of the provisions of Sections 1 and 5 of Article XIII of the

library

Philippine Constitution, the vendee was not qualified to acquire private lands in the
Philippines in the absence of proof that at least 60 per centum of the capital, property,

SECTION 1. All agricultural, timber, and mineral lands of the public domain, waters,

or assets of the Roman Catholic Administrator of Davao, Inc., was actually owned or

minerals, coal, petroleum, and other mineral oils, all forces of potential energy, and

controlled by Filipino citizens, there being no question that the present incumbent of

other natural resources of the Philippines belong to the State, and their disposition,

the corporation sole was a Canadian citizen. It was also the opinion of the Land

exploitation, development, or utilization shall be limited to citizens of the Philippines,

Registration Commissioner that section 159 of the Corporation Law relied upon by the

or to corporations or associations at least sixty per centum of the capital of which is

vendee was rendered inoperative by the aforementioned provisions of the Constitution

owned by such citizens, SUBJECT TO ANY EXISTING RIGHT, grant, lease, or

with respect to real estate, unless the precise condition set therein that at least 60

concession AT THE TIME OF THE INAUGURATION OF THE GOVERNMENT

per cent of its capital is owned by Filipino citizens be present, and, therefore,

ESTABLISHED UNDER THIS CONSTITUTION. Natural resources, with the exception

ordered the Register of Deeds of Davao to deny registration of the deed of sale in the

of public agricultural land, shall not be alienated, and no license, concession, or lease

absence of proof of compliance with such condition.

for the exploitation, development, or utilization of any of the natural resources shall be

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granted for a period exceeding twenty-five years, renewable for another twenty-five

Respondents, on the other hand, averred that although it might be true that petitioner

years, except as to water rights for irrigation, water supply, fisheries, or industrial uses

is not the owner of the land purchased, yet he has control over the same, with full

other than the development of water power, in which cases beneficial use may be the

power to administer, take possession of, alienate, transfer, encumber, sell or dispose

measure and limit of the grant.

of any or all lands and their improvements registered in the name of the corporation
sole and can collect, receive, demand or sue for all money or values of any kind that

In virtue of the foregoing mandates of the Constitution, who are considered "qualified"

may become due or owing to said corporation, and vested with authority to enter into

to acquire and hold agricultural lands in the Philippines? What is the effect of these

agreements with any persons, concerns or entities in connection with said real

constitutional prohibition on the right of a religious corporation recognized by our

properties, or in other words, actually exercising all rights of ownership over the

Corporation Law and registered as a corporation sole, to possess, acquire and

properties. It was their stand that the theory that properties registered in the name of

register real estates in its name when the Head, Manager, Administrator or actual

the corporation sole are held in trust for the benefit of the Catholic population of a

incumbent is an alien?

place, as of Davao in the case at bar, should not be sustained because a


conglomeration of persons cannot just be pointed out as the cestui que trust or

Petitioner consistently maintained that a corporation sole, irrespective of the

recipient of the benefits from the property allegedly administered in their behalf.

citizenship of its incumbent, is not prohibited or disqualified to acquire and hold real

Neither can it be said that the mass of people referred to as such beneficiary exercise

properties. The Corporation Law and the Canon Law are explicit in their provisions

any right of ownership over the same. This set-up, respondents argued, falls short of

that a corporation sole or "ordinary" is not the owner of the properties that he may

a trust. Respondents instead tried to prove that in reality, the beneficiary of

acquire but merely the administrator thereof. The Canon Law also specified that

ecclesiastical properties are not the members or faithful of the church but someone

church temporalities are owned by the Catholic Church as a "moral person" or by the

else, by quoting a portion of the oath of fidelity subscribed by a bishop upon his

dioceses as minor "moral persons" with the ordinary or bishop as administrator.

elevation to the episcopacy wherein he promises to render to the Pontifical Father or


his successors an account of his pastoral office and of all things appertaining to the

And elaborating on the composition of the Catholic Church in the Philippines,

state of this church.

petitioner explained that as a religious society or organization, it is made up of 2


elements or divisions the clergy or religious members and the faithful or lay

Respondents likewise advanced the opinion that in construing the constitutional

members. The 1948 figures of the Bureau of Census and Statistics showed that there

provision calling for 60 per cent Filipino citizenship, the criterion is not membership in

were 277,551 Catholics in Davao and aliens residing therein numbered 3,465. Even

the society but ownership of the properties or assets thereof.

granting that all these foreigners are Catholics, petitioner contends that Filipino
citizens form more than 80 per cent of the entire Catholics population of that area. As

In solving the problem thus submitted to our consideration, We can say the following:

to its clergy and religious composition, counsel for petitioner presented the Catholic

A corporation sole is a special form of corporation usually associated with the clergy.

Directory of the Philippines for 1954 (Annex A) which revealed that as of that year,

Conceived and introduced into the common law by sheer necessity, this legal creation

Filipino clergy and women novices comprise already 60.5 per cent of the group. It

which was referred to as "that unhappy freak of English law" was designed to facilitate

was, therefore, alleged that the constitutional requirement was fully met and satisfied.

the exercise of the functions of ownership carried on by the clerics for and on behalf
of the church which was regarded as the property owner (See I Bouviers Law
Dictionary, p. 682-683).

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of his religious denomination, society, or church within its territorial jurisdiction,


A corporation sole consists of one person only, and his successors (who will always

describing it;

be one at a time), in some particular station, who are incorporated by law in order to
give them some legal capacities and advantages, particularly that of perpetuity, which

in their natural persons they could not have had. In this sense, the king is a sole
corporation; so is a bishop, or deans, distinct from their several chapters (Reid v.
Barry, 93 Fla. 849, 112 So. 846).

(As amended by Commonwealth Act No. 287).

The provisions of our Corporation law on religious corporations are illuminating and

SEC. 157. From and after the filing with the Securities & Exchange Commissioner of

sustain the stand of petitioner. Section 154 thereof provides:chanrob1es virtual 1aw

the said articles of incorporation, verified by affidavit or affirmation as aforesaid and

library

accompanied by the copy of the commission, certificate of election, or letters of


appointment of the bishop, chief priest, or presiding elder, duly certified as prescribed

SEC 154. For the administration of the temporalities of any religious denomination,

in the section immediately preceding such bishop, chief priest, or presiding elder, as

society or church and the management of the estates and properties thereof, it shall

the case may be, shall become a corporation sole, and all temporalities, estates, and

be lawful for the bishop, chief priest, or presiding elder of any such religious

properties of the religious denomination, society, or church therefore administered or

denomination, society or church to become a corporation sole, unless inconsistent

managed by him as such bishop, chief priest, or presiding elder shall be held in trust

with the rules, regulations or discipline of his religious denomination, society, or

by him as a corporation sole, for the use, purpose, behoof, and sole benefit of his

church or forbidden by competent authority thereof.

religious denomination, society, or church, including hospitals, schools, colleges,


orphan asylums; parsonages, and cemeteries thereof. For the filing of such articles of

See also the pertinent provisions of the succeeding sections of the same Corporation

incorporation, the Securities & Exchange Commissioner shall collect twenty-five

Law copied hereunder:chanrob1es virtual 1aw library

pesos. (As amended by Commonwealth Act No. 287); and

SEC. 155. In order to become a corporation sole the bishop, chief priest, or presiding

SEC. 163. The right to administer all temporalities and all property held or owned by a

elder of any religious denomination, society, or church must file with the Securities

religious order or society, or by the diocese, synod, or district organization of any

and Exchange Commissioner articles of incorporation setting forth the following

religious denomination or church shall, on its incorporation, pass to the corporation

facts:chanrob1es virtual 1aw library

and shall be held in trust for the use, purpose, behoof, and benefit of the religious
society, or order so incorporated or of the church of which the diocese, synod, or

district organization is an organized and constituent part.


The Canon Law contains similar provisions regarding the duties of the corporation

(3)

That as such bishop, chief priest, or presiding elder he is charged with the

sole

administration of the temporalities and the management of the estates, and properties

or

ordinary

as

follows:jgc:chanrobles.com.ph

172

administrator

of

the

church

properties,

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"Al Ordinario local pertenence vigilar diligentemente sobre la administracion de todos

owner of all church property; but merely that he is the supreme guardian" (Bouscaren

los bienes eclesiasticos que se hallan en su territorio y no estuvieren sustraidos de su

and Ellis, Canon Law, A Text and Commentary, p. 764).

jurisdiccio n, salvas las prescripciones legitimas que le concedan mas amplios


dsrechos.

And this Court, citing Campos y Pulido, Legislacion y Jurisprudencia Canonica, ruled
in the case of Trinidad v. Roman Catholic Archbishop of Manila, 63 Phil. 881,

"Teniendo en cuenta los derechos y las legitimas costumbres y circunstancias,

that:jgc:chanrobles.com.ph

procuraran los Ordinarios regular todo lo concerniente a la administracion de los


bienes eclesiasticos, dando las oportunas instrucciones particulares dentro del marco

"The second question to be decided is in whom the ownership of the properties

del derecho comun." (Title XXVIII, Codigo da Derecho Canonico, Lib. III, Canon

constituting the endowment of the ecclesiastical or collative chaplaincies is vested.

1519). *
Canonists entertain different opinions as to the person in whom the ownership of the
That leaves no room for doubt that the bishops or archbishops, as the case may be,

ecclesiastical properties is vested, with respect to which we shall, for our purpose,

as corporations sole are merely administrators of the church properties that come to

confine ourselves to stating with Donoso that, while many doctors cited by Fagnano

their possession, and which they hold in trust for the church. It can also be said that

believe that it resides in the Roman Pontiff as Head of the Universal Church, it is more

while it is true that church properties could be administered by a natural person,

probable that ownership, strictly speaking, does not reside in the latter, and,

problems regarding succession to said properties can not be avoided to rise upon his

consequently, ecclesiastical properties are owned by churches, institutions and

death. Through this legal fiction, however, church properties acquired by the

canonically established private corporations to which said properties have been

incumbent of a corporation sole pass, by operation of law, upon his death not to his

donated."cralaw virtua1aw library

personal heirs but to his successor in office. It could be seen, therefore, that a
corporation sole is created not only to administer the temporalities of the church or

Considering that nowhere can We find any provision conferring ownership of church

religious society where he belongs but also to hold and transmit the same to his

properties on the Pope although he appears to be the supreme administrator or

successor in said office. If the ownership or title to the properties do not pass to the

guardian of his flock, nor on the corporations sole or heads of dioceses as they are

administrators, who are the owners of church properties?

admittedly mere administrators of said properties, ownership of these temporalities


logically fall and devolve upon the church, diocese or congregation acquiring the

Bouscaren

and

Elis,

S.

J.,

authorities

on

canon

law,

on

their

treatise

same. Although this question of ownership of ecclesiastical properties has off and on

comment:jgc:chanrobles.com.ph

been mentioned in several decisions of this Court yet in no instance was the subject
of citizenship of this religious society been passed upon.

"In matters regarding property belonging to the Universal Church and to the Apostolic
See, the Supreme Pontiff exercises his office of supreme administrator through the

We are not unaware of the opinion expressed by the late Justice Perfecto in his

Roman Curia; in matters regarding other church property, through the administrators

dissent in the case of Agustines v. Court of First Instance of Bulacan, 80 Phil. 565, to

of the individual moral persons in the Church according to that norms, laid down in the

the effect that "the Roman Catholic Archbishop of Manila is only a branch of a

Code of Cannon Law. This does not mean, however, that the Roman Pontiff is the

universal church by the Pope, with permanent residence in Rome, Italy." There is no
question that the Roman Catholic Church existing in the Philippines is a tributary and

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part of that international religious organization, for the word "Roman" clearly

independent from one another in jurisdiction, governed by different laws under which

expresses its unity with and recognizes the authority of the Pope in Rome. However,

they are incorporated, and entirely independent of the others in the management and

lest We become hasty in drawing conclusions, We have to analyze and take note of

ownership of their temporalities. To allow theory that the Roman Catholic Churches all

the nature of the government established in the Vatican City, of which it was

over the world follow the citizenship of their Supreme Head, the Pontifical Father,

said:jgc:chanrobles.com.ph

would lead to the absurdity of finding the citizens of a country who embrace the
Catholic faith and become members of that religious society, likewise citizens of the

"GOVERNMENT. In the Roman Catholic Church supreme authority and jurisdiction

Vatican or of Italy. And this is more so if We consider that the Pope himself may be an

over clergy and laity alike is held by the pope who (since the Middle Ages) is elected

Italian or national of any other country of the world. The same thing may be said with

by the cardinals assembled in conclave, and holds office until his death or legitimate

regard to the nationality or citizenship of the corporation sole created under the laws

abdication. . . . While the pope is obviously independent of the laws made, and the

of the Philippines, which is not altered by the change of citizenship of the incumbent

officials appointed, by himself or his predecessors, he usually exercises his

bishops or heads of said corporations sole.

administrative authority according to the code of canon law and through the
congregations, tribunals and offices of the Curia Romana. In their respective territories

We must, therefore, declare that although a branch of the Universal Roman Catholic

(called generally dioceses) and over their respective subjects, the patriarchs,

Apostolic Church, every Roman Catholic Church in different countries, if it exercises

metropolitans or archbishops and bishops exercise a jurisdiction which is called

its mission and is lawfully incorporated in accordance with the laws of the country

ordinary (as attached by law to an office and so distinguished from delegated

where it is located, is considered an entity or person with all the rights and privileges

jurisdiction which is given to a person. . . . ." (Colliers Encyclopedia, Vol. 17, p. 93.)

granted to such artificial being under the laws of that country, separate and distinct
from the personality of the Roman Pontiff or the Holy See, without prejudice to its

While it is true and We have to concede that in the profession of their faith, the Roman

religious relations with the latter which are governed by the Canon Law or their rules

Pontiff is the supreme head; that in religious matters, in the exercise of their belief, the

and regulations.

Catholic congregation of the faithful throughout world seeks the guidance and
direction of their Spiritual Father in the Vatican, yet it cannot be said that there is a

We certainly are conscious of the fact that whatever conclusion We may draw on this

merger of personalities resultant therein. Neither can it be said that the political and

matter will have a far reaching influence, nor can We overlook the pages of history

civil rights of the faithful, inherent or acquired under the laws of their country, are

that arouse indignation and criticisms against church landholdings. This nurtured

affected by that relationship with the Pope. The fact that the Roman Catholic Church

feeling that showballed into a strong nationalistic sentiment manifested itself when the

in almost every country springs from that society that saw its beginning in Europe and

provisions on natural resources to be embodied in the Philippines Constitution were

the fact that the clergy of this faith derive their authorities and receive orders from the

framed, but all that has been said on this regard referred more particularly to

Holy See do not give or bestow the citizenship of the Pope upon these branches.

landholdings of religious corporations known as "Friar Estates" which have already

Citizenship is a political right which cannot be acquired by a sort of "radiation." We

been acquired by our Government, and not to properties held corporations sole

have to realize that although there is a fraternity among all the catholic countries and

which, We repeat, are properties held in trust for the benefit of the faithful residing

the dioceses therein all over the globe, this universality that the word "catholic"

within its territorial jurisdiction. Though that same feeling probably precipitated and

implies, merely characterize their faith, a uniformity in the practice and interpretation

influenced to a large extent the doctrine laid down in the celebrated Krivenko decision,

of their dogma and in the exercise of their belief, but certainly they are separate and

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We have to take this matter in the light of legal provisions and jurisprudence actually

"temporalities" is meant estates and properties not used exclusively for religious

obtaining, irrespective of sentiments.

worship. The successors in office of such religious head or chief priest incorporated
as a corporation sole shall become the corporation sole on ascension to office, and

The question now left for our determination is whether the Roman Catholic Apostolic

shall be permitted to transact business as such on filing with the Securities and

Church in the Philippines, or better still, the corporation sole named the Roman

Exchange Commission a copy of his commission, certificate of election or letter of

Catholic Apostolic Administrator of Davao, Inc., is qualified to acquire private

appointment duly certified by any notary public or clerk of court of record (Guevaras

agricultural lands in the Philippines pursuant to the provisions of Article XIII of the

The Philippine Corporation Law, p. 223).

Constitution.
The Corporation Law also contains the following provisions:chanrob1es virtual 1aw
We see from sections 1 and 5 of said Article quoted before, that only persons or

library

corporations qualified to acquire or hold lands of the public domain in the Philippines
may acquire or be assigned and hold private agricultural lands. Consequently, the

SECTION 159. Any corporation sole may purchase and hold real estate and personal

decisive factor in the present controversy hinges on the proposition of whether or not

property for its church, charitable, benevolent, or educational purposes, and may

the petitioner in this case can acquire agricultural lands of the public domain.

receive bequests or gifts for such purposes. Such corporation may mortgage or sell
real property held by it upon obtaining an order for that purpose from the Court of

From the data secured from the Securities and Exchange Commission, We find that

First Instance of the province in which the property is situated; but before making the

the Roman Catholic Bishop of Zamboanga was incorporated as a corporation sole) in

order proof must be made to the satisfaction of the Court that notice of the application

September, 1912, principally to administer its temporalities and manage its properties.

for leave to mortgage or sell has been given by publication or otherwise in such

Probably due to the ravages of the last war, its articles of incorporation were

manner and for such time as said Court or the Judge thereof may have directed, and

reconstructed in the Securities and Exchange Commission on April 8, 1948. At first,

that it is to the interest of the corporation that leave to mortgage or sell should be

this corporation sole administered all the temporalities of the church existing or

granted. The application for leave to mortgage or sell must be made by petition, duly

located in the island of Mindanao. Later on, however, new dioceses were formed and

verified by the bishop, chief priest, or presiding elder, acting as corporation sole, and

new corporations sole were created to correspond with the territorial jurisdiction of the

may be opposed by any member of the religious denomination, society or church

new dioceses, one of them being petitioner herein, the Roman Catholic Apostolic

represented by the corporation sole: Provided, however, That in cases where the

Administrator of Davao, Inc., which was registered with the Securities and Exchange

rules, regulations, and discipline of the religious denomination, society or church

Commission on September 12, 1950, and succeeded in the administration of all the

concerned represented by such corporation sole regulate the methods of acquiring,

"temporalities" of the Roman Catholic Church existing in Davao.

holding, selling and mortgaging real estate and personal property, such rules,
regulations, and discipline shall control and the intervention of the Courts shall not be

According to our Corporation Law, Public Act No. 1459, approved April 1, 1906, a

necessary.

corporation sole
It can, therefore, be noticed that the power of a corporation sole to purchase real
is organized and composed of a single individual, the head of any religious society or

property, like the power exercised in the case at bar, is not restricted although the

church, for the ADMINISTRATION of the temporalities of such society of church. By

power to sell or mortgage sometimes is, depending upon the rules, regulations, and

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discipline of the church concerned represented by said corporation sole. If

Corporation Law). In outlining the general powers of a corporation, Public Act No.

corporations sole can purchase and sell real estate for its church, charitable,

1459 provides among others:chanrob1es virtual 1aw library

benevolent, or educational purposes, can they register said real properties? As


provided by law, lands held in trust for specific purposes may be subject of registration

SEC. 13. Every corporation has the power:chanrob1es virtual 1aw library

(section 69, Act 496), and the capacity of a corporation sole, like petitioner herein, to
register lands belonging to it is acknowledged, and title thereto may be issued in its

name (Bishop of Nueva Segovia v. Insular Government, 26 Phil. 300-1913). Indeed it


is absurd to conceive that while the corporations sole that might be in need of
acquiring lands for the erection of temples where the faithful can pray, or schools and

(5)

To purchase, hold, convey, sell, lease, let, mortgage, encumber, and

cemeteries which they are expressly authorized by law to acquire in connection with

otherwise deal with such real and personal property as the purposes for which the

the propagation of the Roman Catholic Apostolic faith or in furtherance of their

corporation was formed may permit, and the transaction of the lawful business of the

freedom of religion, they could not register said properties in their name. As professor

corporation may reasonably and necessarily require, unless otherwise prescribed in

Javier J. Nepomuceno very well says "Man in his search for the immortal and

this Act: . . . .

imponderable, has, even before the dawn of recorded history, erected temples to the
Unknown God, and there is no doubt that he will continue to do so for all time to

In implementation of the same and specifically made applicable to a form of

come, as long as he continues imploring the aid of Divine Providence"

corporation recognized by the same law, Section 159 aforequoted expressly allowed

(Nepomucenos Corporation Sole, VI Ateneo Law Journal, No. 1, p. 41, September,

the corporation sole to purchase and hold real as well as personal properties

1956). Under the circumstances of this case, We might safely state that even before

necessary for the promotion of the objects for which said corporation sole is created.

the establishment of the Philippine Commonwealth and of the Republic of the

Respondent Land Registration Commissioner, however, maintained that since the

Philippines every corporation sole then organized and registered had by express

Philippine Constitution is a later enactment than Public Act No. 1459, the provisions of

provision of law the necessary power and qualification to purchase in its name private

Section 159 in amplification of Section 13 thereof, as regard real properties, should be

lands located in the territory in which it exercised its functions or ministry and for

considered repealed by the former.

which it was created, independently of the nationality of its incumbent unique and
single member and head, the bishop of the diocese. It can be also maintained without

There is reason to believe that when the specific provision of the Constitution invoked

fear of being gainsaid that the Roman Catholic Apostolic Church in the Philippines

by respondent Commissioner was under consideration, the framers of the same did

has no nationality and that the framers of the Constitution, as will be hereunder

not have in mind or overlooked this particular form of corporation. It is undeniable that

explained, did not have in mind the religious corporations sole when they provided

the nationalization and conservation of our natural resources was one of the

that 60 per centum of the capital thereof be owned by Filipino citizens.

dominating objectives of the Convention and in drafting the present Article XIII of the
Constitution, the delegates were goaded by the desire (1) to insure their conservation

There could be no controversy as to the fact that a duly registered corporation sole is

for Filipino posterity; (2) to serve as an instrument of national defense, helping prevent

an artificial being having the right of succession and the power, attributes, and

the extension into the country of foreign control through peaceful economic

properties expressly authorized by law or incident to its existence (section 1,

penetration; and (3) to prevent making the Philippines a source of international


conflicts with the consequent danger to its internal security and independence (See

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The Framing of the Philippine Constitution by Professor Jose M. Aruego, a Delegate

provision allowing the Government to break big landed estates to put an end to

to the Constitutional Convention, Vol. II. P. 592-604). In the same book Delegate

absentee landlordism.

Aruego,

explaining

the

reason

behind

the

first

consideration,

wrote:jgc:chanrobles.com.ph

But let us suppose, for the sake of argument, that the above referred to inhibitory
clause of Section 1 of Article XIII of the Constitution does have bearing on the

"At the time of the framing of the Philippine Constitution. Filipino capital had been

petitioners case; even so the clause requiring that at least 60 per centum of the

known to be rather shy. Filipinos hesitated as a general rule to invest a considerable

capital of the corporation be owned by Filipinos is subordinated to the petitioners

sum of their capital for the development, exploitation and utilization of the natural

aforesaid right already existing at the time of the inauguration of the Commonwealth

resources of the country. They had not as yet been so used to corporate enterprises

and the Republic of the Philippines. In the language of Mr. Justice Jose P. Laurel (a

as the peoples of the west. This general apathy, the delegates knew, would mean the

Delegate to the Constitutional Convention), in his concurring opinion in the case of

retardation of the development of the natural resources, unless foreign capital would

Gold Creek Mining Corporation petitioner v. Eulogio Rodriguez, Secretary of

be encouraged to come and help in that development. They knew that the

Agriculture and Commerce, and Quirico Abadilla, Director of the Bureau of Mines,

nationalization of the natural resources would certainly not encourage the

respondent, 66 Phil. 259:jgc:chanrobles.com.ph

INVESTMENT OF FOREIGN CAPITAL, into them. But there was a general feeling in
the Convention that it was better to have such a development retarded or even

"The saving clause in the section involved of the Constitution was originally embodied

postponed together until such time when the Filipinos would be ready and willing to

in the report submitted by the Committee on Nationalization and Preservation of

undertake it rather than permit the natural resources to be placed under the

Lands and Other Natural Resources to the Constitutional Convention on September

ownership or control of foreigners in order that they might be immediately developed,

17, 1934. It was later inserted in the first draft of the Constitution as section 13 of

with the Filipinos of the future serving not as owners but utmosts as tenants or

Article XIII thereof, and finally incorporated as we find it now. Slight have been the

workers under foreign masters. By all means, the delegates believed, the natural

changes undergone by the proviso from the time when it came out of the committee

resources should be conserved for Filipino posterity."

until it was finally adopted. When first submitted and as inserted in the first draft of the
Constitution it reads: subject to any right, grant, lease or concession existing in

It could be distilled from the foregoing that the framers of the Constitution intended

respect thereto as the date of the adoption of the Constitution. As finally adopted, the

said provisions as barrier for foreigners or corporations financed by such foreigners to

proviso reads: subject to any existing right, grant, lease or concession at the time of

acquire, exploit and develop our natural resources, saving these undeveloped wealth

the inauguration of the Government established under this Constitution. This

for our people to clear and enrich when they are already prepared and capable of

recognition is not mere graciousness but springs from the just character of the

doing so. But that is not the case of corporations sole in the Philippines, for, We

government established. The framers of the Constitution were not obscured by the

repeat, they are mere administrators of the "temporalities" or properties titled in their

rhetoric of democracy or swayed to hostility by an intense spirit of nationalism. They

name and for the benefit of the members of their respective religion composed of an

well knew that conservation of our natural resources did not mean destruction or

overwhelming majority of Filipinos. No mention nor allusion whatsoever is made in the

annihilation of acquired property rights. Withal, they erected a government neither

Constitution as to the prohibition against or the ability of the Roman Catholic Church

episodic nor stationary but well-nigh conservative in the protection of property rights.

in the Philippines to acquire and hold agricultural lands. Although there were some

This notwithstanding nationalistic and socialistic traits discoverable upon even a

discussions on landholdings, they were mostly confined in the inclusion of the

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sudden dip into a variety of the provisions embodied in the instrument."cralaw

to purchases or acquisitions made prior to the effectivity of the Constitution and not to

virtua1aw library

later transactions. This argument would imply that even assuming that petitioner had
at the time of the enactment of the Constitution the right to purchase real property,

The writer of this decision wishes to state at this juncture that during the deliberation

that power or right could not be exercised after the effectivity of our Constitution,

of this case he submitted to the consideration of the Court the question that may be

because said power or right of corporations sole, like the herein petitioner, conferred

termed the "vested right saving clause" contained in Section 1, Article XIII of the

in virtue of the aforequoted provisions of the Corporation Law, could no longer be

Constitution, but some of the members of this Court either did not agree with the

exercised in view of the requisite therein prescribed that at least 60 per centum of the

theory of the writer, or were not ready to take a definite stand on the particular point I

capital of the corporation had to be Filipino. It has been shown before that: (1) the

am now to discuss deferring our ruling on such debatable question for a better

corporation sole, unlike the ordinary corporations which are formed by no less than 5

occasion, inasmuch as the determination thereof is not absolutely necessary for the

incorporators, is composed of only one person, usually the head or bishop of the

solution of the problem involved in this case. In his desire to face the issues squarely,

diocese, a unit which is not subject to expansion for the purpose of determining any

the writer will endeavour, at least as a digression, to explain and develop his theory,

percentage whatsoever; (2) the corporation sole is only the administrator and not the

not as a lucubration of the Court, but of his own, for he deems it better and convenient

owner of the temporalities located in the territory comprised by said corporation sole;

to go over the cycle of reasons that are linked to one another and that step by step

(3) such temporalities are administered for and on behalf of the faithful residing in the

lead Us to conclude as We do in the dispositive part of this decision.

diocese or territory of the corporation sole; and (4) the latter, as such, has no
nationality and the citizenship of the incumbent Ordinary has nothing to do with the

It will be noticed that Section 1 of Article XIII of the Constitution provides, among other

operation, management or administration of the corporation sole, nor affects the

things, that "all agricultural lands of the public domain and their disposition shall be

citizenship of the faithful connected with their respective diocese or corporation sole.

limited to citizens of Philippines or to corporations at least 60 per centum of the capital


of which is owned by such citizens, SUBJECT TO ANY EXISTING RIGHT AT THE

In view of these peculiarities of the corporation sole, it would seem obvious that when

TIME OF THE INAUGURATION OF THE GOVERNMENT ESTABLISHED UNDER

the specific provision of the Constitution invoked by respondent Commissioner

THIS CONSTITUTION."cralaw virtua1aw library

(section 1, Art. XIII), was under consideration, the framers of the same did not have in
mind or overlooked this particular form of corporation. If this were so, as the facts and

As recounted by Mr. Justice Laurel in the aforementioned case of Gold Creek Mining

circumstances already indicated tend to prove it to be so, then the inescapable

Corporation v. Rodriguez Et. Al., 66 Phil. 259, "this recognition (in the clause already

conclusion would be that this requirement of at least 60 per cent of Filipino capital was

quoted), is not mere graciousness but springs from the just character of the

never intended to apply to corporations sole, and the existence or not of a vested right

government established. The framers of the Constitution were not obscured by the

becomes unquestionably immaterial.

rhetoric of democracy or swayed to hostility by an intense spirit of nationalism. They


well knew that conservation of our natural resources did not mean destruction or

But let us assume that the questioned proviso is material, yet We might say that a

annihilation of ACQUIRED PROPERTY RIGHTS."

reading of said Section 1 will show that it does not refer to any actual acquisition of
land but to the right, qualification or power to acquire and hold private real property.

But respondents counsel may argue that the preexisting right of acquisition of public

The population of the Philippines, Catholic to a high percentage, is ever increasing. In

or private lands by a corporation which does not fulfill this 60 per cent requisite, refers

the practice of religion of their faithful the corporation sole may be in need of more

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temples where to pray, more schools where the children of the congregation could be

In that case respondent-appellant Ung Siu Si Temple was not a corporation sole but a

taught in the principles of their religion, more hospitals where their sick could be

corporation aggregate, i.e., an unregistered organization operating through 3 trustees,

treated, more hallow or consecrated grounds or cemeteries where Catholics could be

all of Chinese nationality, and that is why this Court laid down the doctrine just quoted.

buried, many more than those actually existing at the time of the enactment of our

With regard to petitioner, the Roman Catholic Administrator of Davao, Inc., which

Constitution. This being the case, could it be logically maintained that because the

likewise is a non-stock corporation, the case is different, because it is a registered

corporation sole which, by express provision of law, has the power to hold and acquire

corporation sole, evidently of no nationality and registered mainly to administer the

real estate and personal property for its churches, charitable benevolent, or

temporalities and manage the properties belonging to the faithful of said church

educational purposes (section 159, Corporation Law) it has to stop its growth and

residing in Davao. But even if we were to go over the record to inquire into the

restrain its necessities just because the corporation sole is a non-stock corporation

composing membership to determine whether the citizenship requirement is satisfied

composed of only one person who in his unity does not admit of any percentage,

or not, we would find undeniable proof that the members of the Roman Catholic

especially when that person is not the owner but merely an administrator of the

Apostolic faith within the territory of Davao are predominantly Filipino citizens. As

temporalities of the corporation sole? The writer leaves the answer to whoever may

indicated before, petitioner has presented evidence to establish that the clergy and lay

read and consider this portion of the decision.

members of this religion fully covers the percentage of Filipino citizens required by the
Constitution. These facts are not controverted by respondents and our conclusion in

Anyway, as stated before, this question is not a decisive factor in disposing this case,

this point is sensibly obvious.

for even if We were to disregard such saving clause of the Constitution, which reads:
subject to any existing right, grant, etc., at the time of the inauguration of the

Dissenting Opinion Discussed. After having developed our theory in this case

Government established under this Constitution, yet We would have, under the

and arrived at the findings and conclusions already expressed in this decision. We

evidence on record, sufficient grounds to uphold petitioners contention on this matter.

now deem it proper to analyze and delve into the basic foundation on which the
dissenting opinion stands up. Being aware of the transcendental and far-reaching

In this case of the Register of Deeds of Rizal v. Ung Sui Si Temple, * G. R. No. L-

effects that Our ruling on the matter might have, this case was thoroughly considered

6776, promulgated May 21, 1955, wherein this question was considered from a

from all points of view, the Court sparing no effort to solve the delicate problems

different

involved herein.

angle,

this

Court,

through

Mr.

Justice

J.

B.

L.

Reyes,

said:jgc:chanrobles.com.ph
At the deliberations had to attain this end, two ways were open to a prompt dispatch
"The fact that the appellant religious organization has no capital stock does not suffice

of the case: (1) the reversal of the doctrine We laid down in the celebrated Krivenko

to escape the Constitutional inhibition, since it is admitted that its members are of

case by excluding urban lots and properties from the grasp of the term "private

foreign nationality. The purpose of the sixty per centum requirement is obviously to

agricultural lands" used in section 5, Article XIII of the Constitution; and (2) by driving

ensure that corporation or associations allowed to acquired agricultural land or to

Our reasons to a point that might indirectly cause the appointment of Filipino bishops

exploit natural resources shall be controlled by Filipinos; and the spirit of the

or Ordinary to head the corporations sole created to administer the temporalities of

Constitution demands that in the absence of capital stock, the controlling membership

the Roman Catholic Church in the Philippines. With regard to the first way, a great

should be composed of Filipino citizens."cralaw virtua1aw library

majority of the members of this Court were not yet prepared nor agreeable to follow
that course, for reasons that are obvious. As to the second way, it seems to be

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misleading because the nationality of the head of a diocese constituted as a

conjunction with Section 159 of the same law which provides that a corporation sole

corporation sole has no material bearing on the functions of the latter, which are

may only "purchase and hold real estate and personal properties for its church,

limited to the administration of the temporalities of the Roman Catholic Apostolic

charitable, benevolent or educational purposes", the above mentioned fear of

Church in the Philippines.

revitalization of religious landholdings in the Philippines is absolutely dispelled. The


fact that the law thus expressly authorizes the corporations sole to receive bequests

Upon going over the grounds on which the dissenting opinion is based, it may be

or gifts of real properties (which were the main source that the friars had to acquire

noticed that its author lingered on the outskirts of the issues, thus throwing the main

their big haciendas during the Spanish regime), is a clear indication that the requisite

points in controversy out of focus. Of course We fully agree, as stated by Professor

that bequests or gifts of real estate be for charitable, benevolent, or educational

Aruego, that the framers of our Constitution had at heart to insure the conservation of

purposes, was, in the opinion of the legislators, considered sufficient and adequate

the natural resources of Our motherland for Filipino posterity; to serve them as an

protection against the revitalization of religious landholdings.

instrument of national defense, helping prevent the extension into the country of
foreign control through peaceful economic penetration; and to prevent making the

Finally, and as previously stated, We have reason to believe that when the Delegates

Philippines a source of international conflicts with the consequent danger to its

to the Constitutional Convention drafted and approved Article XIII of the Constitution,

internal security and independence. But all these precautions adopted by the

they did not have in mind the corporation sole. We come to this finding because the

Delegates to Our Constitutional Assembly could not have been intended for or

Constitutional Assembly, composed as it was by a great number of eminent lawyers

directed against cases like the one at bar. The emphasis and wanderings on the

and jurists, was like any other legislative body empowered to enact either the

statement that once the capacity of a corporation sole to acquire private agricultural

Constitution of the country or any public statute, presumed to know the conditions

lands is admitted there will be no limit to the areas that it may hold and that this will

existing as to particular subject matter when it enacted a statute (Board of Comrs of

pave the way for the "revival or revitalization of religious landholdings that proved so

Orange County v. Bain, 92 S. E. 176; 173 N. C. 377).

troublesome in our past", cannot even furnish the "penumbra" of a threat to the future
of the Filipino people. In the first place, the right of Filipino citizens, including those of

"Immemorial customs are presumed to have been always in the mind of the

foreign extraction, and Philippine corporations, to acquire private lands is not subject

Legislature in enacting legislation." (In re Krugers Estate, 121 A. 109; 277 Pa. 326).

to any restriction or limit as to quantity or area, and We certainly do not see any wrong
in that. The right of Filipino citizens and corporations to acquire public agricultural

"The Legislative is presumed to have a knowledge of the state of the law on the

lands is already limited by law. In the second place, corporations sole cannot be

subjects upon which it legislates." (Clover Valley Land & Stock Co. v. Lamb Et. Al.,

considered as aliens because they have no nationality at all. Corporations sole are,

187, p. 723, 726.)

under the law, mere administrators of the temporalities of the Roman Catholic Church
in the Philippines. In the third place, every corporation, be it aggregate or sole, is only

"The Court in construing a statute, will assume that the legislators acted with full

entitled to purchase, convey, sell, lease, let, mortgage, encumber and otherwise deal

knowledge of the prior legislation on the subject and its construction by the courts."

with real properties when it is pursuant to or in consonance with the purposes for

(Johns v. Town of Sheridan, 89 N. E. 899, 44 Ind. App. 620.)

which the corporation was formed, and when the transactions of the lawful business
of the corporation reasonably and necessarily require such dealing section 13-(5)

"The Legislature is presumed to have been familiar with the subject with which it was

of the Corporation Law, Public Act No. 1459 and considering these provisions in

dealing . . . ." (Landers v. Commonwealth, 101 S. E. 778, 781.)

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6. That in approving our Magna Carta the Delegates to the Constitutional Convention,
"The Legislature is presumed to know principles of statutory construction" (People v.

almost all of whom were Roman Catholics, could not have intended to curtail all the

Lowell, 230 N. W. 202, 250 Mich. 349, followed in P. v. Woodworth, 230 N. W. 211,

propagation of the Roman Catholic faith or the expansion of the activities of their

250 Mich. 436.)

church, knowing pretty well that with the growth of our population more places of
worship, more schools where our youth could be taught and trained; more hallow

"It is not to be presumed that a provision was inserted in a constitution or statute

grounds where to bury our dead would be needed in the course of time.

without reason, or that a result was intended inconsistent with the judgment of men of
common sense guided by reason." (Mitchell v. Lawden, 123 N. E. 566, 288 Ill. 326.)

Long before the enactment of our Constitution the law authorized the corporations

See City of Decatur v. German, 142 N. E. 252, 310 Ill. 591, and many other authorities

sole even to receive bequests or gifts of real estates send this Court could not,

that can be cited in support hereof.

without any clear and specific provision of the Constitution, declare that any real
property donated, let us say this year, could no longer be registered in the name of the

Consequently, the Constitutional Assembly must have known:chanrob1es virtual 1aw

corporation sole to which it was conveyed. That would be an absurdity that should not

library

receive our sanction on the pretext that corporations sole which have no nationality
and are non-stock corporations composed of only one person in the capacity of

1. That a corporation sole is organized by and composed of a single individual, the

administrator, have to establish first that at least sixty per centum of their capital

head of any religious society or church operating within the zone, area or jurisdiction

belong to Filipino citizens. The new Civil Code even provides:jgc:chanrobles.com.ph

covered by said corporation sole (Article 155, Public Act No. 1459);
"ART. 10. In case of doubt in the interpretation or application of laws, it is presumed
2. That a corporation sole is a non-stock corporation;

that the lawmaking body intended right and justice to prevail."cralaw virtua1aw library

3. That the Ordinary (the corporation sole proper) does not own the temporalities

Moreover, under the laws of the Philippines, the administrator of the properties of a

which he merely administers;

Filipino can acquire, in the name of the latter, private lands without any limitation
whatsoever, and that is so because the properties thus acquired are not for and would

4. That under the law the nationality of said Ordinary or of any administrator has

not belong to the administrator but to the Filipino whom he represents. But the

absolutely no bearing on the nationality of the person desiring to acquire real property

dissenting Justice inquires: If the Ordinary is only the administrator, for whom does he

in the Philippines by purchase or other lawful means other than by hereditary

administer? And who can alter or overrule his acts? We will forthwith proceed to

succession, who, according to the Constitution must be a Filipino (sections 1 and 5,

answer these questions. The corporations sole by reason of their peculiar constitution

Article XIII);

and form of operation have no designed owner of its temporalities, although by the
terms of the law it can be safely implied that the Ordinary holds them in trust for the

5. That section 159 of the Corporation Law expressly authorized the corporation sole

benefit of the Roman Catholic faithful of their respective locality or diocese. Borrowing

to purchase and hold real estate for its church, charitable, benevolent or educational

the very words of the law, We may say that the temporalities of every corporation sole

purposes, and to receive bequests or gifts for such purposes;

are held in trust for the use, purpose, behoof and benefit of the religious society, or
order so incorporated or of the church to which the diocese, synod, or district

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organization is an organized and constituent part (section 163 of the Corporation

American authorities have these to say:chanrob1es virtual 1aw library

Law).
It has been held that the courts have jurisdiction over an action brought by persons
In connection with the powers of the Ordinary over the temporalities of the corporation

claiming to be members of a church, who allege a wrongful and fraudulent diversion

sole, let us see now what is the meaning and scope of the word "control." According

of the church property to uses foreign to the purposes of the church, since no

to the Merriam-Websters New International Dictionary, 2nd ed., p. 580, one of the

ecclesiastical question is involved and equity will protect from wrongful diversion of

acceptations of the word "control" is:jgc:chanrobles.com.ph

the property (Hendryx v. Peoples United Church, 42 Wash. 336, 4 L.R.A. n.s.
-1154).

"4. To exercise restraining or directing influence over; to dominate; regulate; hence, to


hold from action; to curb; subject, also, Obs. to overpower.

The courts of the State have no general jurisdiction and control over the officers of
such corporations in respect to the performance of their official duties; but as in

"SYN:

restrain, rule, govern, guide, direct; check, subdue."cralaw virtua1aw library

respect to the property which they hold for the corporation, they stand in position of
TRUSTEES and the courts may exercise the same supervision as in other cases of

It is true that under section 159 of the Corporation Law, the intervention of the courts

trust (Ramsey v. Hicks, 174 Ind. 428, 91 N. E. 344, 92 N. E. 164, 30 L.R.A. n.s.

is not necessary, to mortgage or sell real property held by the corporation sole where

-665; Hendryx v. Peoples United Church, supra.)

the rules, regulations and discipline of the religious denomination, society or church
concerned represented by such corporation sole regulate the methods of acquiring,

Courts of the state do not interfere with the administration of church rules or discipline

holding, selling and mortgaging real estate, and that the Roman Catholic faithful

unless civil rights become involved and which must be protected (Morris St., Baptist

residing in the jurisdiction of the corporation sole has no say either in the manner of

Church v. Dart, 67 S. C. 338, 45 S. E. 753, and others). (All cited in Vol. II, Cooleys

acquiring or of selling real property. It may be also admitted that the faithful of the

Constitutional Limitations, p. 960-964.)

diocese cannot govern or overrule the acts of the Ordinary, but all this does not mean
that the latter can administer the temporalities of the corporation sole without check or

If the Constitutional Assembly was aware of all the facts above enumerated and of the

restraint. We must not forget that when a corporation sole is incorporated under

provisions of law relative to existing conditions as to management and operation of

Philippine laws, the head and only member thereof subjects himself to the jurisdiction

corporations sole in the Philippines, and if, on the other hand, almost all of the

of the Philippine courts of justice and these tribunals can thus entertain grievances

Delegates thereto embraced the Roman Catholic faith, can it be imagined even for an

arising out of or with respect to the temporalities of the church which came into the

instant that when Article XIII of the Constitution was approved the framers thereof

possession of the corporation sole as administrator. It may be alleged that the courts

intended to prevent or curtail from then on the acquisition by corporations sole, either

cannot intervene as to the matters of doctrine or teachings of the Roman Catholic

by purchase or donation, of real properties that they might need for the propagation of

Church. That is correct, but the courts may step in, at the instance of the faithful for

the faith and for other religious and Christian activities such as the moral education of

whom the temporalities are being held in trust, to check undue exercise by the

the youth, the care, attention and treatment of the sick and the burial of the dead of

corporation sole of its powers as administrator to insure that they are used for the

the Roman Catholic faithful residing in the jurisdiction of the respective corporations

purpose or purposes for which the corporation sole was created.

sole? The mere indulgence in said thought would impress upon Us a feeling of

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apprehension and absurdity. And that is precisely the leit motiv that permeates the

of the statute the courts rationalize a restricted meaning of the latter. A restricted

whole fabric of the dissenting opinion.

interpretation is usually applied where the effect of a literal interpretation will make for
injustice and absurdity or, in the words of one court, the language must be so

It seems from the foregoing that the main problem We are confronted With in this

unreasonable as to shock general common sense." (Vol. 3, Sutherland on Statutory

appeal, hinges around the necessity of a proper and adequate interpretation of

Construction, 3rd ed., 150.)

sections 1 and 5 of Article XIII of the Constitution. Let Us then be guided by the
principles

of

statutory

construction

laid

down

by

the

authorities

on

the

"A constitution is not intended to be a limitation on the development of a country nor

matter:jgc:chanrobles.com.ph

an obstruction to its progress and foreign relations" (Moscow Fire Inc. Co. of Moscow,
Russia v. Bank of New York & Trust Co., 294 N. Y. S. 648; 56 N. E. 2d 745, 293 N. Y.

"The most important single factor in determining the intention of the people from

749).

whom the constitution emanated is the language in which it is expressed. The words
employed are to be taken in their natural sense, except that legal or technical terms

"Although the meaning or principles of a constitution remain fixed and unchanged

are to be given their technical meaning. The imperfections of language as a vehicle

from the time of its adoption, a constitution must be construed as if intended to stand

for conveying meanings result in ambiguities that must be resolved by resort to

for a great length of time, and it is progressive and not static. Accordingly, it should not

extraneous aids for discovering the intent of the framers. Among the more important

receive too narrow or literal an interpretation but rather the meaning given it should be

of these are a consideration of the history of the times when the provision was

applied in such manner as to meet new or changed conditions as they arise" (U.S. v.

adopted and of the purposes aimed at in its adoption. The debates of constitutional

Classic, 313 U.S. 299, 85 L. Ed., 1368).

conventions, contemporaneous construction, and practical construction by the


legislative and executive departments, especially if long continued, may be resorted to

"Effect should be given to the purpose indicated by a fair interpretation of the

to resolve, but not to create, ambiguities. . . . . Consideration of the consequences

language used and that construction which effectuates, rather than that which

flowing from alternative constructions of doubtful provisions constitutes an important

destroys a plain intent or purpose of a constitutional provision, is not only favored but

interpretative device. . . . The purposes of many of the broadly phrased constitutional

will be adopted" (State ex rel. Randolph Country v. Walden, 206 S. W. 2d 979).

limitations were the promotion of policies that do not lend themselves to definite and
specific formulation. The courts have had to define those policies and have often

"It is quite generally held that in arriving at the intent and purpose the Construction

drawn on natural law and natural rights theories in doing so. The interpretation of

should be broad or liberal or equitable, as the better method of ascertaining that

constitutions tends to respond to changing conceptions of political and social values.

intent, rather than technical" (Great Southern Life Ins. Co. v. City of Austin, 243 S.W.

The extent to which these extraneous aids affect the judicial construction of

778).

constitutions cannot be formulated in precise rules, but their influence cannot be


ignored in describing the essentials of the process" (Rottschaeffer on Constitutional

All these authorities uphold our conviction that the framers of the constitution had not

Law, 1939 ed., p. 18-19).

in mind the corporations sole, nor intended to apply them the provisions of sections 1
and 5 of said Article XIII when they passed and approved the same. And if it were so

"There are times when even the literal expression of legislation may be inconsistent

as We think it is, herein petitioner, the Roman Catholic Apostolic Administrator of

with the general objectives of policy behind it, and on the basis of the equity or spirit

Davao, Inc., could not be deprived of the right to acquire by purchase or donation real

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properties for charitable, benevolent and educational purposes, nor of the right to

Company v. Eulogio Rodriguez Et. Al., 66 Phil. 269. Anyway the majority of the Court

register the same in its name with the Register of Deeds of Davao, an indispensable

did not deem necessary to pass upon said "vested right saving clause" for the final

requisite prescribed by the Land Registration Act for lands covered by the Torrens

determination of this case.

system.
JUDGMENT
We leave as the last theme for discussion the much debated question above referred
to as "the vested right saving clause" contained in section 1, Article XIII of the

Wherefore, the Resolution of the respondent Land Registration Commission of

Constitution. The dissenting Justice hurls upon the personal opinion expressed on the

September 21, 1954, holding that in view of the provisions of sections 1 and 5 of

matter by the writer of the decision the most pointed darts of his severe criticism. We

Article XIII of the Philippine Constitution the vendee (petitioner) is not qualified to

think, however, that this strong dissent should have been spared, because as clearly

acquire lands in the Philippines in the absence of proof that at least 60 per centum of

indicated before, some members of this Court either did not agree with the theory of

the capital, properties or assets of the Roman Catholic Apostolic Administrator of

the writer or were not ready to take a definite stand on that particular point, so that

Davao, Inc., is actually owned or controlled by Filipino citizens, and denying the

there being no majority opinion thereon there was no need of any dissension

registration of the deed of sale in the absence of proof of compliance with such

therefrom. But as the criticism has been made the writer deems it necessary to say a

requisite, is hereby reversed. Consequently, the respondent Register of Deeds of the

few words of explanation.

City of Davao is ordered to register the deed of sale executed by Mateo L. Rodis in
favor of the Roman Catholic Apostolic Administrator of Davao, Inc., which is the

The writer fully agrees with the dissenting Justice that ordinarily "a capacity to acquire

subject of the present litigation. No pronouncement is made as to costs. It is so

(property) in futuro, is not in itself a vested or existing property right that the

ordered.

Constitution protects from impairment. For a property right to be vested (or acquired)
there must be a transition from the potential or contingent to the actual, and the

Bautista Angelo and Endencia, JJ., concur.

proprietary interest must have attached to a thing; it must have become fixed and

G.R. No. L-6055

June 12, 1953

established" (Balboa v. Farrales, 51 Phil. 498). But the case at bar has to be
considered as an exception to the rule because among the rights granted by section

THE PEOPLE OF THE PHILIPPINES, plaintiff-appellee,

159 of the Corporation Law was the right to receive bequests or gifts of real properties

vs.

for charitable, benevolent and educational purposes. And this right to receive such

WILLIAM H. QUASHA, defendant-appellant.

bequests or gifts (which implies donations in futuro), is not a mere potentiality that
could be impaired without any specific provision in the Constitution to that effect,

Jose P. Laurel for appellant and William H. Quasha in his own behalf.

especially when the impairment would disturbingly affect the propagation of the

Office of the Solicitor General Juan R. Liwag and Assistant Solicitor General

religious faith of the immense majority of the Filipino people and the curtailment of the

Francisco Carreon for appellee.

activities of their Church. That is why the writer gave as a basis of his contention what
Professor Aruego said in his book "The Framing of the Philippine Constitution" and

REYES, J.:

the enlightening opinion of Mr. Justice Jose P. Laurel, another Delegate to the
Constitutional Convention, in his concurring opinion in the case of Goldcreek Mining

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William H. Quasha, a member of the Philippine bar, was charged in the Court of First

59,000 common shares, of the total par value of P59,000; and that Baylon and the

Instance of Manila with the crime of falsification of a public and commercial document

American subscribers had already paid 25 per cent of their respective subscriptions.

in that, having been entrusted with the preparation and registration of the article of

Ostensibly the owner of, or subscriber to, 60.005 per cent of the subscribed capital

incorporation of the Pacific Airways Corporation, a domestic corporation organized for

stock of the corporation, Baylon nevertheless did not have the controlling vote

the purpose of engaging in business as a common carrier, he caused it to appear in

because of the difference in voting power between the preferred shares and the

said article of incorporation that one Arsenio Baylon, a Filipino citizen, had subscribed

common shares. Still, with the capital structure as it was, the article of incorporation

to and was the owner of 60.005 per cent of the subscribed capital stock of the

were accepted for registration and a certificate of incorporation was issued by the

corporation when in reality, as the accused well knew, such was not the case, the

Securities and Exchange Commission.

truth being that the owner of the portion of the capital stock subscribed to by Baylon
and the money paid thereon were American citizen whose name did not appear in the

There is no question that Baylon actually subscribed to 60.005 per cent of the

article of incorporation, and that the purpose for making this false statement was to

subscribed capital stock of the corporation. But it is admitted that the money paid on

circumvent the constitutional mandate that no corporation shall be authorize to

his subscription did not belong to him but to the Americans subscribers to the

operate as a public utility in the Philippines unless 60 per cent of its capital stock is

corporate stock. In explanation, the accused testified, without contradiction, that in the

owned by Filipinos.

process of organization Baylon was made a trustee for the American incorporators,
and that the reason for making Baylon such trustee was as follows:

Found guilty after trial and sentenced to a term of imprisonment and a fine, the
accused has appealed to this Court.

Q. According to this article of incorporation Arsenio Baylon subscribed to 1,135


preferred shares with a total value of P1,135. Do you know how that came to be?

The essential facts are not in dispute. On November 4,1946, the Pacific Airways
Corporation registered its articles of incorporation with the Securities and Exchanged

A. Yes.

Commission. The article were prepared and the registration was effected by the
accused, who was in fact the organizer of the corporation. The article stated that the

The people who were desirous of forming the corporation, whose names are listed on

primary purpose of the corporation was to carry on the business of a common carrier

page 7 of this certified copy came to my house, Messrs. Shannahan, Onstott,

by air, land or water; that its capital stock was P1,000,000, represented by 9,000

O'Bannon, Caven, Perry and Anastasakas one evening. There was considerable

preferred and 100,000 common shares, each preferred share being of the par value of

difficulty to get them all together at one time because they were pilots. They had

p100 and entitled to 1/3 vote and each common share, of the par value of P1 and

difficulty in deciding what their respective share holdings would be. Onstott had

entitled to one vote; that the amount capital stock actually subscribed was P200,000,

invested a certain amount of money in airplane surplus property and they had

and the names of the subscribers were Arsenio Baylon, Eruin E. Shannahan, Albert

obtained a considerable amount of money on those planes and as I recall they were

W. Onstott, James O'Bannon, Denzel J. Cavin, and William H. Quasha, the first being

desirous of getting a corporation formed right away. And they wanted to have their

a Filipino and the other five all Americans; that Baylon's subscription was for 1,145

respective shares holdings resolved at a latter date. They stated that they could get

preferred shares, of the total value of P114,500, and for 6,500 common shares, of the

together that they feel that they had no time to settle their respective share holdings.

total par value of P6,500, while the aggregate subscriptions of the American

We discussed the matter and finally it was decided that the best way to handle the

subscribers were for 200 preferred shares, of the total par value of P20,000, and

things was not to put the shares in the name of anyone of the interested parties and to

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have someone act as trustee for their respective shares holdings. So we looked

vs. Lopez (15 Phil., 515), the same author further maintains that even if such wrongful

around for a trustee. And he said "There are a lot of people whom I trust." He said, "Is

intent is proven, still the untruthful statement will not constitute the crime of

there someone around whom we could get right away?" I said, "There is Arsenio. He

falsification if there is no legal obligation on the part of the narrator to disclose the

was my boy during the liberation and he cared for me when i was sick and i said i

truth. Wrongful intent to injure a third person and obligation on the part of the narrator

consider him my friend." I said. They all knew Arsenio. He is a very kind man and that

to disclose the truth are thus essential to a conviction for a crime of falsification under

was what was done. That is how it came about.

the above article of the Revised Penal Code.

Defendant is accused under article 172 paragraph 1, in connection with article 171,

Now, as we see it, the falsification imputed in the accused in the present case

paragraph 4, of the Revised Penal Code, which read:

consists in not disclosing in the articles of incorporation that Baylon was a mere
trustee ( or dummy as the prosecution chooses to call him) of his American co-

ART. 171. Falsification by public officer, employee, or notary or ecclesiastic minister.

incorporators, thus giving the impression that Baylon was the owner of the shares

The penalty of prision mayor and a fine not to exceed 5,000 pesos shall be

subscribed to by him which, as above stated, amount to 60.005 per cent of the sub-

imposed upon any public officer, employee, or notary who, taking advantage of his

scribed capital stock. This, in the opinion of the trial court, is a malicious perversion of

official position, shall falsify a document by committing any of the following acts:

the truth made with the wrongful intent circumventing section 8, Article XIV of the
Constitution, which provides that " no franchise, certificate, or any other form of

xxx

xxx

xxx

authorization for the operation of a public utility shall be granted except to citizens of
the Philippines or to corporation or other entities organized under the law of the

4. Making untruthful statements in a narration of facts.

Philippines, sixty per centum of the capital of which is owned by citizens of the
Philippines . . . ." Plausible though it may appear at first glance, this opinion loses

ART. 172. Falsification by private individuals and use of falsified documents. The

validity once it is noted that it is predicated on the erroneous assumption that the

penalty of prision correccional in its medium and maximum period and a fine of not

constitutional provision just quoted was meant to prohibit the mere formation of a

more than 5,000 pesos shall be imposed upon:

public utility corporation without 60 per cent of its capital being owned by the Filipinos,
a mistaken belief which has induced the lower court to that the accused was under

xxx

xxx

xxx

obligation to disclose the whole truth about the nationality of the subscribed capital
stock of the corporation by revealing that Baylon was a mere trustee or dummy of his

1. Any private individual who shall commit any of the falsifications enumerated in the

American co-incorporators, and that in not making such disclosure defendant's

next preceding article in any public or official document or letter of exchange or any

intention was to circumvent the Constitution to the detriment of the public interests.

other kind of commercial document.

Contrary to the lower court's assumption, the Constitution does not prohibit the mere
formation of a public utility corporation without the required formation of Filipino

Commenting on the above provision, Justice Albert, in his well-known work on the

capital. What it does prohibit is the granting of a franchise or other form of

Revised Penal Code ( new edition, pp. 407-408), observes, on the authority of U.S.

authorization for the operation of a public utility to a corporation already in existence

vs. Reyes, (1 Phil., 341), that the perversion of truth in the narration of facts must be

but without the requisite proportion of Filipino capital. This is obvious from the context,

made with the wrongful intent of injuring a third person; and on the authority of U.S.

for the constitutional provision in question qualifies the terms " franchise", "certificate",

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or "any other form of authorization" with the phrase "for the operation of a public

And at that moment, the corporation must show that it has complied not only with the

utility," thereby making it clear that the franchise meant is not the "primary franchise"

requirement of the Constitution as to the nationality of its capital, but also with the

that invest a body of men with corporate existence but the "secondary franchise" or

requirements of the Civil Aviation Law if it is a common carrier by air, the Revised

the privilege to operate as a public utility after the corporation has already come into

Administrative Code if it is a common carrier by water, and the Public Service Law if it

being.

is a common carrier by land or other kind of public service.

If the Constitution does not prohibit the mere formation of a public utility corporation

Equally untenable is the suggestion that defendant should at least be held guilty of an

with the alien capital, then how can the accused be charged with having wrongfully

"impossible crime" under article 59 of the Revised Penal Code. It not being possible to

intended to circumvent that fundamental law by not revealing in the articles of

suppose that defendant had intended to commit a crime for the simple reason that the

incorporation that Baylon was a mere trustee of his American co-incorporation and

alleged constitutional prohibition which he is charged for having tried to circumvent

that for that reason the subscribed capital stock of the corporation was wholly

does not exist, conviction under that article is out of the question.

American? For the mere formation of the corporation such revelation was not
essential, and the Corporation Law does not require it. Defendant was, therefore,

The foregoing consideration can not but lead to the conclusion that the defendant can

under no obligation to make it. In the absence of such obligation and of the allege

not be held guilty of the crime charged. The majority of the court, however, are also of

wrongful intent, defendant cannot be legally convicted of the crime with which he is

the opinion that, even supposing that the act imputed to the defendant constituted

charged.

falsification at the time it was perpetrated, still with the approval of the Party
Amendment to the Constitution in March, 1947, which placed Americans on the same

It is urged, however, that the formation of the corporation with 60 per cent of its

footing as Filipino citizens with respect to the right to operate public utilities in the

subscribed capital stock appearing in the name of Baylon was an indispensable

Philippines, thus doing away with the prohibition in section 8, Article XIV of the

preparatory step to the subversion of the constitutional prohibition and the laws

Constitution in so far as American citizens are concerned, the said act has ceased to

implementing the policy expressed therein. This view is not correct. For a corporation

be an offense within the meaning of the law, so that defendant can no longer be held

to be entitled to operate a public utility it is not necessary that it be organized with 60

criminally liable therefor.

per cent of its capital owned by Filipinos from the start. A corporation formed with
capital that is entirely alien may subsequently change the nationality of its capital

In view of the foregoing, the judgment appealed from is reversed and the defendant

through transfer of shares to Filipino citizens. conversely, a corporation originally

William H. Quasha acquitted, with costs de oficio.

formed with Filipino capital may subsequently change the national status of said

G.R. No. 114222 April 6, 1995

capital through transfer of shares to foreigners. What need is there then for a
corporation that intends to operate a public utility to have, at the time of its formation,

FRANCISCO S. TATAD, JOHN H. OSMENA and RODOLFO G. BIAZON, petitioners,

60 per cent of its capital owned by Filipinos alone? That condition may anytime be

vs.

attained thru the necessary transfer of stocks. The moment for determining whether a

HON. JESUS B. GARCIA, JR., in his capacity as the Secretary of the Department of

corporation is entitled to operate as a public utility is when it applies for a franchise,

Transportation and Communications, and EDSA LRT CORPORATION, LTD.,

certificate, or any other form of authorization for that purpose. And that can be done

respondents.

after the corporation has already come into being and not while it is still being formed.

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On July 9, 1990, Republic Act No. 6957 entitled "An Act Authorizing the Financing,
Construction, Operation and Maintenance of Infrastructure Projects by the Private
QUIASON, J.:

Sector, and For Other Purposes," was signed by President Corazon C. Aquino.
Referred to as the Build-Operate-Transfer (BOT) Law, it took effect on October 9,

This is a petition under Rule 65 of the Revised Rules of Court to prohibit respondents

1990.

from further implementing and enforcing the "Revised and Restated Agreement to
Build, Lease and Transfer a Light Rail Transit System for EDSA" dated April 22, 1992,

Republic Act No. 6957 provides for two schemes for the financing, construction and

and the "Supplemental Agreement to the 22 April 1992 Revised and Restated

operation of government projects through private initiative and investment: Build-

Agreement To Build, Lease and Transfer a Light Rail Transit System for EDSA" dated

Operate-Transfer (BOT) or Build-Transfer (BT).

May 6, 1993.
In accordance with the provisions of R.A. No. 6957 and to set the EDSA LRT III
Petitioners Francisco S. Tatad, John H. Osmena and Rodolfo G. Biazon are members

project underway, DOTC, on January 22, 1991 and March 14, 1991, issued

of the Philippine Senate and are suing in their capacities as Senators and as

Department

taxpayers. Respondent Jesus B. Garcia, Jr. is the incumbent Secretary of the

Prequalification Bids and Awards Committee (PBAC) and the Technical Committee.

Orders

Nos.

91-494

and

91-496,

respectively

creating

the

Department of Transportation and Communications (DOTC), while private respondent


EDSA LRT Corporation, Ltd. is a private corporation organized under the laws of

After its constitution, the PBAC issued guidelines for the prequalification of contractors

Hongkong.

for the financing and implementation of the project The notice, advertising the
prequalification of bidders, was published in three newspapers of general circulation

once a week for three consecutive weeks starting February 21, 1991.

In 1989, DOTC planned to construct a light railway transit line along EDSA, a major

The deadline set for submission of prequalification documents was March 21, 1991,

thoroughfare in Metropolitan Manila, which shall traverse the cities of Pasay, Quezon,

later extended to April 1, 1991. Five groups responded to the invitation namely, ABB

Mandaluyong and Makati. The plan, referred to as EDSA Light Rail Transit III (EDSA

Trazione of Italy, Hopewell Holdings Ltd. of Hongkong, Mansteel International of

LRT III), was intended to provide a mass transit system along EDSA and alleviate the

Mandaue, Cebu, Mitsui & Co., Ltd. of Japan, and EDSA LRT Consortium, composed

congestion and growing transportation problem in the metropolis.

of ten foreign and domestic corporations: namely, Kaiser Engineers International, Inc.,
ACER Consultants (Far East) Ltd. and Freeman Fox, Tradeinvest/CKD Tatra of the

On March 3, 1990, a letter of intent was sent by the Eli Levin Enterprises, Inc.,

Czech and Slovak Federal Republics, TCGI Engineering All Asia Capital and Leasing

represented by Elijahu Levin to DOTC Secretary Oscar Orbos, proposing to construct

Corporation, The Salim Group of Jakarta, E. L. Enterprises, Inc., A.M. Oreta & Co.

the EDSA LRT III on a Build-Operate-Transfer (BOT) basis.

Capitol Industrial Construction Group, Inc, and F. F. Cruz & co., Inc.

On March 15, 1990, Secretary Orbos invited Levin to send a technical team to discuss

On the last day for submission of prequalification documents, the prequalification

the project with DOTC.

criteria proposed by the Technical Committee were adopted by the PBAC. The criteria
totalling 100 percent, are as follows: (a) Legal aspects 10 percent; (b)

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Management/Organizational capability 30 percent; and (c) Financial capability

In a letter dated March 13, 1992, Executive Secretary Franklin Drilon, who replaced

30 percent; and (d) Technical capability 30 percent (Rollo, p. 122).

Executive Secretary Orbos, informed Secretary Prado that the President could not
grant the requested approval for the following reasons: (1) that DOTC failed to

On April 3, 1991, the Committee, charged under the BOT Law with the formulation of

conduct actual public bidding in compliance with Section 5 of the BOT Law; (2) that

the Implementation Rules and Regulations thereof, approved the same.

the law authorized public bidding as the only mode to award BOT projects, and the
prequalification proceedings was not the public bidding contemplated under the law;

After evaluating the prequalification, bids, the PBAC issued a Resolution on May 9,

(3) that Item 14 of the Implementing Rules and Regulations of the BOT Law which

1991 declaring that of the five applicants, only the EDSA LRT Consortium "met the

authorized negotiated award of contract in addition to public bidding was of doubtful

requirements of garnering at least 21 points per criteria [sic], except for Legal Aspects,

legality; and (4) that congressional approval of the list of priority projects under the

and obtaining an over-all passing mark of at least 82 points" (Rollo, p. 146). The Legal

BOT or BT Scheme provided in the law had not yet been granted at the time the

Aspects referred to provided that the BOT/BT contractor-applicant meet the

contract was awarded (Rollo, pp. 178-179).

requirements specified in the Constitution and other pertinent laws (Rollo, p. 114).
In view of the comments of Executive Secretary Drilon, the DOTC and private
Subsequently, Secretary Orbos was appointed Executive Secretary to the President of

respondents re-negotiated the agreement. On April 22, 1992, the parties entered into

the Philippines and was replaced by Secretary Pete Nicomedes Prado. The latter sent

a "Revised and Restated Agreement to Build, Lease and Transfer a Light Rail Transit

to President Aquino two letters dated May 31, 1991 and June 14, 1991, respectively

System for EDSA" (Rollo, pp. 47-78) inasmuch as "the parties [are] cognizant of the

recommending the award of the EDSA LRT III project to the sole complying bidder,

fact the DOTC has full authority to sign the Agreement without need of approval by the

the EDSA LRT Consortium, and requesting for authority to negotiate with the said firm

President pursuant to the provisions of Executive Order No. 380 and that certain

for the contract pursuant to paragraph 14(b) of the Implementing Rules and

events [had] supervened since November 7, 1991 which necessitate[d] the revision of

Regulations of the BOT Law (Rollo, pp. 298-302).

the Agreement" (Rollo, p. 51). On May 6, 1992, DOTC, represented by Secretary


Jesus Garcia vice Secretary Prado, and private respondent entered into a

In July 1991, Executive Secretary Orbos, acting on instructions of the President,

"Supplemental Agreement to the 22 April 1992 Revised and Restated Agreement to

issued a directive to the DOTC to proceed with the negotiations. On July 16, 1991, the

Build, Lease and Transfer a Light Rail Transit System for EDSA" so as to "clarify their

EDSA LRT Consortium submitted its bid proposal to DOTC.

respective rights and responsibilities" and to submit [the] Supplemental Agreement to


the President, of the Philippines for his approval" (Rollo, pp. 79-80).

Finding this proposal to be in compliance with the bid requirements, DOTC and
respondent EDSA LRT Corporation, Ltd., in substitution of the EDSA LRT

Secretary Garcia submitted the two Agreements to President Fidel V. Ramos for his

Consortium, entered into an "Agreement to Build, Lease and Transfer a Light Rail

consideration and approval. In a Memorandum to Secretary Garcia on May 6, 1993,

Transit System for EDSA" under the terms of the BOT Law (Rollo, pp. 147-177).

approved the said Agreements, (Rollo, p. 194).

Secretary Prado, thereafter, requested presidential approval of the contract.

According to the agreements, the EDSA LRT III will use light rail vehicles from the
Czech and Slovak Federal Republics and will have a maximum carrying capacity of
450,000 passengers a day, or 150 million a year to be achieved-through 54 such

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vehicles operating simultaneously. The EDSA LRT III will run at grade, or street level,
on the mid-section of EDSA for a distance of 17.8 kilometers from F.B. Harrison,

II

Pasay City to North Avenue, Quezon City. The system will have its own power facility
(Revised and Restated Agreement, Sec. 2.3 (ii); Rollo p. 55). It will also have thirteen

In their petition, petitioners argued that:

(13) passenger stations and one depot in 16-hectare government property at North
Avenue (Supplemental Agreement, Sec. 11; Rollo, pp. 91-92).

(1)

THE AGREEMENT OF APRIL 22, 1992, AS AMENDED BY THE

SUPPLEMENTAL AGREEMENT OF MAY 6, 1993, INSOFAR AS IT GRANTS EDSA


Private respondents shall undertake and finance the entire project required for a

LRT CORPORATION, LTD., A FOREIGN CORPORATION, THE OWNERSHIP OF

complete operational light rail transit system (Revised and Restated Agreement, Sec.

EDSA LRT III, A PUBLIC UTILITY, VIOLATES THE CONSTITUTION AND, HENCE,

4.1; Rollo, p. 58). Target completion date is 1,080 days or approximately three years

IS UNCONSTITUTIONAL;

from the implementation date of the contract inclusive of mobilization, site works,
initial and final testing of the system (Supplemental Agreement, Sec. 5; Rollo, p. 83).

(2)

Upon full or partial completion and viability thereof, private respondent shall deliver

AGREEMENTS IS NOT DEFINED NOR RECOGNIZED IN R.A. NO. 6957 OR ITS

THE

BUILD-LEASE-TRANSFER

SCHEME

PROVIDED

IN

THE

the use and possession of the completed portion to DOTC which shall operate the

IMPLEMENTING RULES AND REGULATIONS AND, HENCE, IS ILLEGAL;

same (Supplemental Agreement, Sec. 5; Revised and Restated Agreement, Sec. 5.1;
Rollo, pp. 61-62, 84). DOTC shall pay private respondent rentals on a monthly basis

(3)

THE AWARD OF THE CONTRACT ON A NEGOTIATED BASIS VIOLATES

through an Irrevocable Letter of Credit. The rentals shall be determined by an

R; A. NO. 6957 AND, HENCE, IS UNLAWFUL;

independent and internationally accredited inspection firm to be appointed by the


parties (Supplemental Agreement, Sec. 6; Rollo, pp. 85-86) As agreed upon, private

(4)

THE AWARD OF THE CONTRACT IN FAVOR OF RESPONDENT EDSA

respondent's capital shall be recovered from the rentals to be paid by the DOTC

LRT CORPORATION, LTD. VIOLATES THE REQUIREMENTS PROVIDED IN THE

which, in turn, shall come from the earnings of the EDSA LRT III (Revised and

IMPLEMENTING RULES AND REGULATIONS OF THE BOT LAW AND, HENCE, IS

Restated Agreement, Sec. 1, p. 5; Rollo, p. 54). After 25 years and DOTC shall have

ILLEGAL;

completed payment of the rentals, ownership of the project shall be transferred to the
latter for a consideration of only U.S. $1.00 (Revised and Restated Agreement, Sec.

(5)

THE AGREEMENTS VIOLATE EXECUTIVE ORDER NO 380 FOR THEIR

11.1; Rollo, p. 67).

FAILURE TO BEAR PRESIDENTIAL APPROVAL AND, HENCE, ARE ILLEGAL AND


INEFFECTIVE; AND

On May 5, 1994, R.A. No. 7718, an "Act Amending Certain Sections of Republic Act
No. 6957, Entitled "An Act Authorizing the Financing, Construction, Operation and

(6)

Maintenance of Infrastructure Projects by the Private Sector, and for Other Purposes"

GOVERNMENT (Rollo, pp. 15-16).

THE AGREEMENTS ARE GROSSLY DISADVANTAGEOUS TO THE

was signed into law by the President. The law was published in two newspapers of
general circulation on May 12, 1994, and took effect 15 days thereafter or on May 28,

Secretary Garcia and private respondent filed their comments separately and claimed

1994. The law expressly recognizes BLT scheme and allows direct negotiation of BLT

that:

contracts.

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(1)

Petitioners are not the real parties-in-interest and have no legal standing to

involved (Bugnay Construction and Development Corporation v. Laron, 176 SCRA.

institute the present petition;

240 [1989]).

(2)

For as long as the ruling in Kilosbayan on locus standi is not reversed, we have no

The writ of prohibition is not the proper remedy and the petition requires

ascertainment of facts;

choice but to follow it and uphold the legal standing of petitioners as taxpayers to
institute the present action.

(3)

The scheme adopted in the Agreements is actually a build-transfer scheme

allowed by the BOT Law;

IV

(4)

In the main, petitioners asserted that the Revised and Restated Agreement of April

The nationality requirement for public utilities mandated by the Constitution

does not apply to private respondent;

22, 1992 and the Supplemental Agreement of May 6, 1993 are unconstitutional and
invalid for the following reasons:

(5)

The Agreements executed by and between respondents have been approved

by President Ramos and are not disadvantageous to the government;

(1)

the EDSA LRT III is a public utility, and the ownership and operation thereof

is limited by the Constitution to Filipino citizens and domestic corporations, not foreign
(6)

The award of the contract to private respondent through negotiation and not

corporations like private respondent;

public bidding is allowed by the BOT Law; and


(2)
(7)

Granting that the BOT Law requires public bidding, this has been amended

the Build-Lease-Transfer (BLT) scheme provided in the agreements is not the

BOT or BT Scheme under the law;

by R.A No. 7718 passed by the Legislature On May 12, 1994, which provides for
direct negotiation as a mode of award of infrastructure projects.

(3)

the contract to construct the EDSA LRT III was awarded to private

respondent not through public bidding which is the only mode of awarding
III

infrastructure projects under the BOT law; and

Respondents claimed that petitioners had no legal standing to initiate the instant

(4)

the agreements are grossly disadvantageous to the government.

1.

Private respondent EDSA LRT Corporation, Ltd. to whom the contract to

action. Petitioners, however, countered that the action was filed by them in their
capacity as Senators and as taxpayers.

construct the EDSA LRT III was awarded by public respondent, is admittedly a foreign
The prevailing doctrines in taxpayer's suits are to allow taxpayers to question

corporation "duly incorporated and existing under the laws of Hongkong" (Rollo, pp.

contracts entered into by the national government or government-owned or controlled

50, 79). There is also no dispute that once the EDSA LRT III is constructed, private

corporations allegedly in contravention of the law (Kilosbayan, Inc. v. Guingona, 232

respondent, as lessor, will turn it over to DOTC, as lessee, for the latter to operate the

SCRA 110 [1994]) and to disallow the same when only municipal contracts are

system and pay rentals for said use.

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The question posed by petitioners is:


The exercise of the rights encompassed in ownership is limited by law so that a
Can respondent EDSA LRT Corporation, Ltd., a foreign corporation own EDSA LRT

property cannot be operated and used to serve the public as a public utility unless the

III; a public utility? (Rollo, p. 17).

operator has a franchise. The operation of a rail system as a public utility includes the
transportation of passengers from one point to another point, their loading and

The phrasing of the question is erroneous; it is loaded. What private respondent owns

unloading at designated places and the movement of the trains at pre-scheduled

are the rail tracks, rolling stocks like the coaches, rail stations, terminals and the

times (cf. Arizona Eastern R.R. Co. v. J.A.. Matthews, 20 Ariz 282, 180 P.159, 7

power plant, not a public utility. While a franchise is needed to operate these facilities

A.L.R. 1149 [1919] ;United States Fire Ins. Co. v. Northern P.R. Co., 30 Wash 2d.

to serve the public, they do not by themselves constitute a public utility. What

722, 193 P. 2d 868, 2 A.L.R. 2d 1065 [1948]).

constitutes a public utility is not their ownership but their use to serve the public (Iloilo
Ice & Cold Storage Co. v. Public Service Board, 44 Phil. 551, 557 558 [1923]).

The right to operate a public utility may exist independently and separately from the
ownership of the facilities thereof. One can own said facilities without operating them

The Constitution, in no uncertain terms, requires a franchise for the operation of a

as a public utility, or conversely, one may operate a public utility without owning the

public utility. However, it does not require a franchise before one can own the facilities

facilities used to serve the public. The devotion of property to serve the public may be

needed to operate a public utility so long as it does not operate them to serve the

done by the owner or by the person in control thereof who may not necessarily be the

public.

owner thereof.

Section 11 of Article XII of the Constitution provides:

This dichotomy between the operation of a public utility and the ownership of the
facilities used to serve the public can be very well appreciated when we consider the

No franchise, certificate or any other form of authorization for the operation of a public

transportation industry. Enfranchised airline and shipping companies may lease their

utility shall be granted except to citizens of the Philippines or to corporations or

aircraft and vessels instead of owning them themselves.

associations organized under the laws of the Philippines at least sixty per centum of
whose capital is owned by such citizens, nor shall such franchise, certificate or

While private respondent is the owner of the facilities necessary to operate the EDSA.

authorization be exclusive character or for a longer period than fifty years . . .

LRT III, it admits that it is not enfranchised to operate a public utility (Revised and

(Emphasis supplied).

Restated Agreement, Sec. 3.2; Rollo, p. 57). In view of this incapacity, private
respondent and DOTC agreed that on completion date, private respondent will

In law, there is a clear distinction between the "operation" of a public utility and the

immediately deliver possession of the LRT system by way of lease for 25 years,

ownership of the facilities and equipment used to serve the public.

during which period DOTC shall operate the same as a common carrier and private
respondent shall provide technical maintenance and repair services to DOTC

Ownership is defined as a relation in law by virtue of which a thing pertaining to one

(Revised and Restated Agreement, Secs. 3.2, 5.1 and 5.2; Rollo, pp. 57-58, 61-62).

person is completely subjected to his will in everything not prohibited by law or the

Technical maintenance consists of providing (1) repair and maintenance facilities for

concurrence with the rights of another (Tolentino, II Commentaries and Jurisprudence

the depot and rail lines, services for routine clearing and security; and (2) producing

on the Civil Code of the Philippines 45 [1992]).

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and distributing maintenance manuals and drawings for the entire system (Revised
and Restated Agreement, Annex F).

In sum, private respondent will not run the light rail vehicles and collect fees from the
riding public. It will have no dealings with the public and the public will have no right to

Private respondent shall also train DOTC personnel for familiarization with the

demand any services from it.

operation, use, maintenance and repair of the rolling stock, power plant, substations,
electrical, signaling, communications and all other equipment as supplied in the

It is well to point out that the role of private respondent as lessor during the lease

agreement (Revised and Restated Agreement, Sec. 10; Rollo, pp. 66-67). Training

period must be distinguished from the role of the Philippine Gaming Management

consists of theoretical and live training of DOTC operational personnel which includes

Corporation (PGMC) in the case of Kilosbayan Inc. v. Guingona, 232 SCRA 110

actual driving of light rail vehicles under simulated operating conditions, control of

(1994). Therein, the Contract of Lease between PGMC and the Philippine Charity

operations, dealing with emergencies, collection, counting and securing cash from the

Sweepstakes Office (PCSO) was actually a collaboration or joint venture agreement

fare collection system (Revised and Restated Agreement, Annex E, Secs. 2-3).

prescribed under the charter of the PCSO. In the Contract of Lease; PGMC, the

Personnel of DOTC will work under the direction and control of private respondent

lessor obligated itself to build, at its own expense, all the facilities necessary to

only during training (Revised and Restated Agreement, Annex E, Sec. 3.1). The

operate and maintain a nationwide on-line lottery system from whom PCSO was to

training objectives, however, shall be such that upon completion of the EDSA LRT III

lease the facilities and operate the same. Upon due examination of the contract, the

and upon opening of normal revenue operation, DOTC shall have in their employ

Court found that PGMC's participation was not confined to the construction and

personnel capable of undertaking training of all new and replacement personnel

setting up of the on-line lottery system. It spilled over to the actual operation thereof,

(Revised and Restated Agreement, Annex E Sec. 5.1). In other words, by the end of

becoming indispensable to the pursuit, conduct, administration and control of the

the three-year construction period and upon commencement of normal revenue

highly technical and sophisticated lottery system. In effect, the PCSO leased out its

operation, DOTC shall be able to operate the EDSA LRT III on its own and train all

franchise to PGMC which actually operated and managed the same.

new personnel by itself.


Indeed, a mere owner and lessor of the facilities used by a public utility is not a public
Fees for private respondent' s services shall be included in the rent, which likewise

utility (Providence and W.R. Co. v. United States, 46 F. 2d 149, 152 [1930]; Chippewa

includes the project cost, cost of replacement of plant equipment and spare parts,

Power Co. v. Railroad Commission of Wisconsin, 205 N.W. 900, 903, 188 Wis. 246

investment and financing cost, plus a reasonable rate of return thereon (Revised and

[1925]; Ellis v. Interstate Commerce Commission, Ill 35 S. Ct. 645, 646, 237 U.S. 434,

Restated Agreement, Sec. 1; Rollo, p. 54).

59 L. Ed. 1036 [1914]). Neither are owners of tank, refrigerator, wine, poultry and beer
cars who supply cars under contract to railroad companies considered as public

Since DOTC shall operate the EDSA LRT III, it shall assume all the obligations and

utilities (Crystal Car Line v. State Tax Commission, 174 p. 2d 984, 987 [1946]).

liabilities of a common carrier. For this purpose, DOTC shall indemnify and hold
harmless private respondent from any losses, damages, injuries or death which may

Even the mere formation of a public utility corporation does not ipso facto characterize

be claimed in the operation or implementation of the system, except losses, damages,

the corporation as one operating a public utility. The moment for determining the

injury or death due to defects in the EDSA LRT III on account of the defective

requisite Filipino nationality is when the entity applies for a franchise, certificate or any

condition of equipment or facilities or the defective maintenance of such equipment

other form of authorization for that purpose (People v. Quasha, 93 Phil. 333 [1953]).

facilities (Revised and Restated Agreement, Secs. 12.1 and 12.2; Rollo, p. 68).

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2.

Petitioners further assert that the BLT scheme under the Agreements in

question is not recognized in the BOT Law and its Implementing Rules and

(b)

Regulations.

contractor undertakes the construction including financing, of a given infrastructure

Build-and-transfer scheme "A contractual arrangement whereby the

facility, and its turnover after completion to the government agency or local
Section 2 of the BOT Law defines the BOT and BT schemes as follows:

government unit concerned which shall pay the contractor its total investment
expended on the project, plus a reasonable rate of return thereon. This arrangement

(a)

Build-operate-and-transfer scheme A contractual arrangement whereby

may be employed in the construction of any infrastructure project including critical

the contractor undertakes the construction including financing, of a given

facilities which for security or strategic reasons, must be operated directly by the

infrastructure facility, and the operation and maintenance thereof. The contractor

government (Emphasis supplied).

operates the facility over a fixed term during which it is allowed to charge facility users
appropriate tolls, fees, rentals and charges sufficient to enable the contractor to

The BOT scheme is expressly defined as one where the contractor undertakes the

recover its operating and maintenance expenses and its investment in the project plus

construction and financing in infrastructure facility, and operates and maintains the

a reasonable rate of return thereon. The contractor transfers the facility to the

same. The contractor operates the facility for a fixed period during which it may

government agency or local government unit concerned at the end of the fixed term

recover its expenses and investment in the project plus a reasonable rate of return

which shall not exceed fifty (50) years. For the construction stage, the contractor may

thereon. After the expiration of the agreed term, the contractor transfers the ownership

obtain financing from foreign and/or domestic sources and/or engage the services of

and operation of the project to the government.

a foreign and/or Filipino constructor [sic]: Provided, That the ownership structure of
the contractor of an infrastructure facility whose operation requires a public utility

In the BT scheme, the contractor undertakes the construction and financing of the

franchise must be in accordance with the Constitution: Provided, however, That in the

facility, but after completion, the ownership and operation thereof are turned over to

case of corporate investors in the build-operate-and-transfer corporation, the

the government. The government, in turn, shall pay the contractor its total investment

citizenship of each stockholder in the corporate investors shall be the basis for the

on the project in addition to a reasonable rate of return. If payment is to be effected

computation of Filipino equity in the said corporation: Provided, further, That, in the

through amortization payments by the government infrastructure agency or local

case of foreign constructors [sic], Filipino labor shall be employed or hired in the

government unit concerned, this shall be made in accordance with a scheme

different phases of the construction where Filipino skills are available: Provided,

proposed in the bid and incorporated in the contract (R.A. No. 6957, Sec. 6).

furthermore, that the financing of a foreign or foreign-controlled contractor from


Philippine government financing institutions shall not exceed twenty percent (20%) of

Emphasis must be made that under the BOT scheme, the owner of the infrastructure

the total cost of the infrastructure facility or project: Provided, finally, That financing

facility must comply with the citizenship requirement of the Constitution on the

from foreign sources shall not require a guarantee by the Government or by

operation of a public utility. No such a requirement is imposed in the BT scheme.

government-owned or controlled corporations. The build-operate-and-transfer scheme


shall include a supply-and-operate situation which is a contractual agreement

There is no mention in the BOT Law that the BOT and BT schemes bar any other

whereby the supplier of equipment and machinery for a given infrastructure facility, if

arrangement for the payment by the government of the project cost. The law must not

the interest of the Government so requires, operates the facility providing in the

be read in such a way as to rule out or unduly restrict any variation within the context

process technology transfer and training to Filipino nationals.

of the two schemes. Indeed, no statute can be enacted to anticipate and provide all

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the fine points and details for the multifarious and complex situations that may be

therefore, outside the application of the Uniform Currency Act (R.A. No. 529), which

encountered in enforcing the law (Director of Forestry v. Munoz, 23 SCRA 1183

reads as follows:

[1968]; People v. Exconde, 101 Phil. 1125 [1957]; United States v. Tupasi Molina, 29
Phil. 119 [1914]).

Sec. 1. Every provision contained in, or made with respect to, any domestic
obligation to wit, any obligation contracted in the Philippines which provisions purports

The BLT scheme in the challenged agreements is but a variation of the BT scheme

to give the obligee the right to require payment in gold or in a particular kind of coin or

under the law.

currency other than Philippine currency or in an amount of money of the Philippines


measured thereby, be as it is hereby declared against public policy, and null, void, and

As a matter of fact, the burden on the government in raising funds to pay for the

of no effect, and no such provision shall be contained in, or made with respect to, any

project is made lighter by allowing it to amortize payments out of the income from the

obligation hereafter incurred. The above prohibition shall not apply to (a) . . .; (b)

operation of the LRT System.

transactions affecting high-priority economic projects for agricultural, industrial and


power development as may be determined by

In form and substance, the challenged agreements provide that rentals are to be paid

the National Economic Council which are financed by or through foreign funds; . . . .

on a monthly basis according to a schedule of rates through and under the terms of a
confirmed Irrevocable Revolving Letter of Credit (Supplemental Agreement, Sec. 6;

3.

Rollo, p. 85). At the end of 25 years and when full payment shall have been made to

awarded through negotiation and before congressional approval on January 22 and

The fact that the contract for the construction of the EDSA LRT III was

and received by private respondent, it shall transfer to DOTC, free from any lien or

23, 1992 of the List of National Projects to be undertaken by the private sector

encumbrances, all its title to, rights and interest in, the project for only U.S. $1.00

pursuant to the BOT Law (Rollo, pp. 309-312) does not suffice to invalidate the award.

(Revised and Restated Agreement, Sec. 11.1; Supplemental Agreement, Sec; 7;


Rollo, pp. 67, .87).

Subsequent congressional approval of the list including "rail-based projects packaged


with commercial development opportunities" (Rollo, p. 310) under which the EDSA

A lease is a contract where one of the parties binds himself to give to another the

LRT III projects falls, amounts to a ratification of the prior award of the EDSA LRT III

enjoyment or use of a thing for a certain price and for a period which may be definite

contract under the BOT Law.

or indefinite but not longer than 99 years (Civil Code of the Philippines, Art. 1643).
There is no transfer of ownership at the end of the lease period. But if the parties

Petitioners insist that the prequalifications process which led to the negotiated award

stipulate that title to the leased premises shall be transferred to the lessee at the end

of the contract appears to have been rigged from the very beginning to do away with

of the lease period upon the payment of an agreed sum, the lease becomes a lease-

the usual open international public bidding where qualified internationally known

purchase agreement.

applicants could fairly participate.

Furthermore, it is of no significance that the rents shall be paid in United States

The records show that only one applicant passed the prequalification process. Since

currency, not Philippine pesos. The EDSA LRT III Project is a high priority project

only one was left, to conduct a public bidding in accordance with Section 5 of the BOT

certified by Congress and the National Economic and Development Authority as

Law for that lone participant will be an absurb and pointless exercise (cf. Deloso v.

falling under the Investment Priorities Plan of Government (Rollo, pp. 310-311). It is,

Sandiganbayan, 217 SCRA 49, 61 [1993]).

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or intervened in this case before us (cf. Malayan Integrated Industries Corp. v. Court
Contrary to the comments of the Executive Secretary Drilon, Section 5 of the BOT

of Appeals, 213 SCRA 640 [1992]; Bureau Veritas v. Office of the President, 205

Law in relation to Presidential Decree No. 1594 allows the negotiated award of

SCRA 705 [1992]).

government infrastructure projects.


The challenged agreements have been approved by President Ramos himself.
Presidential Decree No. 1594, "Prescribing Policies, Guidelines, Rules and

Although then Executive Secretary Drilon may have disapproved the "Agreement to

Regulations for Government Infrastructure Contracts," allows the negotiated award of

Build, Lease and Transfer a Light Rail Transit System for EDSA," there is nothing in

government projects in exceptional cases. Sections 4 of the said law reads as follows:

our laws that prohibits parties to a contract from renegotiating and modifying in good
faith the terms and conditions thereof so as to meet legal, statutory and constitutional

Bidding. Construction projects shall generally be undertaken by contract after

requirements. Under the circumstances, to require the parties to go back to step one

competitive public bidding. Projects may be undertaken by administration or force

of the prequalification process would just be an idle ceremony. Useless bureaucratic

account or by negotiated contract only in exceptional cases where time is of the

"red tape" should be eschewed because it discourages private sector participation,

essence, or where there is lack of qualified bidders or contractors, or where there is

the "main engine" for national growth and development (R.A. No. 6957, Sec. 1), and

conclusive evidence that greater economy and efficiency would be achieved through

renders the BOT Law nugatory.

this arrangement, and in accordance with provision of laws and acts on the matter,
subject to the approval of the Minister of Public Works and Transportation and

Republic Act No. 7718 recognizes and defines a BLT scheme in Section 2 thereof as:

Communications, the Minister of Public Highways, or the Minister of Energy, as the


case may be, if the project cost is less than P1 Million, and the President of the

(e)

Philippines, upon recommendation of the Minister, if the project cost is P1 Million or

proponent is authorized to finance and construct an infrastructure or development

Build-lease-and-transfer A contractual arrangement whereby a project

more (Emphasis supplied).

facility and upon its completion turns it over to the government agency or local
government unit concerned on a lease arrangement for a fixed period after which

xxx

xxx

xxx

ownership of the facility is automatically transferred to the government unit concerned.

Indeed, where there is a lack of qualified bidders or contractors, the award of

Section 5-A of the law, which expressly allows direct negotiation of contracts,

government infrastructure contracts may he made by negotiation. Presidential Decree

provides:

No. 1594 is the general law on government infrastructure contracts while the BOT
Law governs particular arrangements or schemes aimed at encouraging private

Direct Negotiation of Contracts. Direct negotiation shall be resorted to when there

sector participation in government infrastructure projects. The two laws are not

is only one complying bidder left as defined hereunder.

inconsistent with each other but are in pari materia and should be read together
accordingly.

(a)

If, after advertisement, only one contractor applies for prequalification and it

meets the prequalification requirements, after which it is required to submit a bid


In the instant case, if the prequalification process was actually tainted by foul play, one

proposal which is subsequently found by the agency/local government unit (LGU) to

wonders why none of the competing firms ever brought the matter before the PBAC,

be complying.

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Republic Act No. 7718 is a curative statute. It is intended to provide financial


(b)

If, after advertisement, more than one contractor applied for prequalification

incentives and "a climate of minimum government regulations and procedures and

but only one meets the prequalification requirements, after which it submits

specific government undertakings in support of the private sector" (Sec. 1). A curative

bid/proposal which is found by the agency/local government unit (LGU) to be

statute makes valid that which before enactment of the statute was invalid. Thus,

complying.

whatever doubts and alleged procedural lapses private respondent and DOTC may
have engendered and committed in entering into the questioned contracts, these have

(c)

If, after prequalification of more than one contractor only one submits a bid

now been cured by R.A. No. 7718 (cf. Development Bank of the Philippines v. Court

which is found by the agency/LGU to be complying.

of Appeals, 96 SCRA 342 [1980]; Santos V. Duata, 14 SCRA 1041 [1965]; Adong V.
Cheong Seng Gee, 43 Phil. 43 [1922].

(d)

If, after prequalification, more than one contractor submit bids but only one is

found by the agency/LGU to be complying. Provided, That, any of the disqualified

4.

Lastly, petitioners claim that the agreements are grossly disadvantageous to

prospective bidder [sic] may appeal the decision of the implementing agency,

the government because the rental rates are excessive and private respondent's

agency/LGUs prequalification bids and awards committee within fifteen (15) working

development rights over the 13 stations and the depot will rob DOTC of the best terms

days to the head of the agency, in case of national projects or to the Department of

during the most productive years of the project.

the Interior and Local Government, in case of local projects from the date the
disqualification was made known to the disqualified bidder: Provided, furthermore,

It must be noted that as part of the EDSA LRT III project, private respondent has been

That the implementing agency/LGUs concerned should act on the appeal within forty-

granted, for a period of 25 years, exclusive rights over the depot and the air space

five (45) working days from receipt thereof.

above the stations for development into commercial premises for lease, sublease,
transfer, or advertising (Supplemental Agreement, Sec. 11; Rollo, pp. 91-92). For and

Petitioners' claim that the BLT scheme and direct negotiation of contracts are not

in consideration of these development rights, private respondent shall pay DOTC in

contemplated by the BOT Law has now been rendered moot and academic by R.A.

Philippine currency guaranteed revenues generated therefrom in the amounts set

No. 7718. Section 3 of this law authorizes all government infrastructure agencies,

forth in the Supplemental Agreement (Sec. 11; Rollo, p. 93). In the event that DOTC

government-owned and controlled corporations and local government units to enter

shall be unable to collect the guaranteed revenues, DOTC shall be allowed to deduct

into contract with any duly prequalified proponent for the financing, construction,

any shortfalls from the monthly rent due private respondent for the construction of the

operation and maintenance of any financially viable infrastructure or development

EDSA LRT III (Supplemental Agreement, Sec. 11; Rollo, pp. 93-94). All rights, titles,

facility through a BOT, BT, BLT, BOO (Build-own-and-operate), CAO (Contract-add-

interests and income over all contracts on the commercial spaces shall revert to

operate),

DOTC upon expiration of the 25-year period. (Supplemental Agreement, Sec. 11;

DOT

(Develop-operate-and-transfer),

ROT

(Rehabilitate-operate-and-

transfer), and ROO (Rehabilitate-own-operate) (R.A. No. 7718, Sec. 2 [b-j]).

Rollo, pp. 91-92).

From the law itself, once and applicant has prequalified, it can enter into any of the

The terms of the agreements were arrived at after a painstaking study by DOTC. The

schemes enumerated in Section 2 thereof, including a BLT arrangement, enumerated

determination by the proper administrative agencies and officials who have acquired

and defined therein (Sec. 3).

expertise, specialized skills and knowledge in the performance of their functions


should be accorded respect absent any showing of grave abuse of discretion (Felipe

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Ysmael, Jr. & Co. v. Deputy Executive Secretary, 190 SCRA 673 [1990]; Board of

CHRISTERN, HUENEFELD and CO., INC., respondent.

Medical Education v. Alfonso, 176 SCRA 304 [1989]).


Ramirez and Ortigas for petitioner.
Government officials are presumed to perform their functions with regularity and

Ewald Huenefeld for respondent.

strong evidence is necessary to rebut this presumption. Petitioners have not


presented evidence on the reasonable rentals to be paid by the parties to each other.

PARAS, C.J.:

The matter of valuation is an esoteric field which is better left to the experts and which
this Court is not eager to undertake.

On October 1, 1941, the respondent corporation, Christern Huenefeld, & Co., Inc.,
after payment of corresponding premium, obtained from the petitioner ,Filipinas Cia.

That the grantee of a government contract will profit therefrom and to that extent the

de Seguros, fire policy No. 29333 in the sum of P1000,000, covering merchandise

government is deprived of the profits if it engages in the business itself, is not worthy

contained in a building located at No. 711 Roman Street, Binondo Manila. On

of being raised as an issue. In all cases where a party enters into a contract with the

February 27, 1942, or during the Japanese military occupation, the building and

government, he does so, not out of charity and not to lose money, but to gain

insured merchandise were burned. In due time the respondent submitted to the

pecuniarily.

petitioner its claim under the policy. The salvage goods were sold at public auction
and, after deducting their value, the total loss suffered by the respondent was fixed at

5.

Definitely, the agreements in question have been entered into by DOTC in

P92,650. The petitioner refused to pay the claim on the ground that the policy in favor

the exercise of its governmental function. DOTC is the primary policy, planning,

of the respondent had ceased to be in force on the date the United States declared

programming, regulating and administrative entity of the Executive branch of

war against Germany, the respondent Corporation (though organized under and by

government in the promotion, development and regulation of dependable and

virtue of the laws of the Philippines) being controlled by the German subjects and the

coordinated networks of transportation and communications systems as well as in the

petitioner being a company under American jurisdiction when said policy was issued

fast, safe, efficient and reliable postal, transportation and communications services

on October 1, 1941. The petitioner, however, in pursuance of the order of the Director

(Administrative Code of 1987, Book IV, Title XV, Sec. 2). It is the Executive

of Bureau of Financing, Philippine Executive Commission, dated April 9, 1943, paid to

department, DOTC in particular that has the power, authority and technical expertise

the respondent the sum of P92,650 on April 19, 1943.

determine whether or not a specific transportation or communication project is


necessary, viable and beneficial to the people. The discretion to award a contract is

The present action was filed on August 6, 1946, in the Court of First Instance of

vested in the government agencies entrusted with that function (Bureau Veritas v.

Manila for the purpose of recovering from the respondent the sum of P92,650 above

Office of the President, 205 SCRA 705 [1992]).

mentioned. The theory of the petitioner is that the insured merchandise were burned

WHEREFORE, the petition is DISMISSED.

up after the policy issued in 1941 in favor of the respondent corporation has ceased to

SO ORDERED

be effective because of the outbreak of the war between the United States and

G.R. No. L-2294

May 25, 1951

Germany on December 10, 1941, and that the payment made by the petitioner to the
respondent corporation during the Japanese military occupation was under pressure.

FILIPINAS COMPAIA DE SEGUROS, petitioner,

After trial, the Court of First Instance of Manila dismissed the action without

vs.

pronouncement as to costs. Upon appeal to the Court of Appeals, the judgment of the

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Court of First Instance of Manila was affirmed, with costs. The case is now before us
on appeal by certiorari from the decision of the Court of Appeals.

World War II revived the problem again. It was known that German and other enemy
interests were cloaked by domestic corporation structure. It was not only by legal

The Court of Appeals overruled the contention of the petitioner that the respondent

ownership of shares that a material influence could be exercised on the management

corporation became an enemy when the United States declared war against

of the corporation but also by long term loans and other factual situations. For that

Germany, relying on English and American cases which held that a corporation is a

reason, legislation on enemy property enacted in various countries during World War

citizen of the country or state by and under the laws of which it was created or

II adopted by statutory provisions to the control test and determined, to various

organized. It rejected the theory that nationality of private corporation is determine by

degrees, the incidents of control. Court decisions were rendered on the basis of such

the character or citizenship of its controlling stockholders.

newly enacted statutory provisions in determining enemy character of domestic


corporation.

There is no question that majority of the stockholders of the respondent corporation


were German subjects. This being so, we have to rule that said respondent became

The United States did not, in the amendments of the Trading with the Enemy Act

an enemy corporation upon the outbreak of the war between the United States and

during the last war, include as did other legislations the applications of the control test

Germany. The English and American cases relied upon by the Court of Appeals have

and again, as in World War I, courts refused to apply this concept whereby the enemy

lost their force in view of the latest decision of the Supreme Court of the United States

character of an American or neutral-registered corporation is determined by the

in Clark vs. Uebersee Finanz Korporation, decided on December 8, 1947, 92 Law. Ed.

enemy nationality of the controlling stockholders.

Advance Opinions, No. 4, pp. 148-153, in which the controls test has been adopted.
In "Enemy Corporation" by Martin Domke, a paper presented to the Second

Measures of blocking foreign funds, the so called freezing regulations, and other

International Conference of the Legal Profession held at the Hague (Netherlands) in

administrative practice in the treatment of foreign-owned property in the United States

August. 1948 the following enlightening passages appear:

allowed to large degree the determination of enemy interest in domestic corporations


and thus the application of the control test. Court decisions sanctioned such

Since World War I, the determination of enemy nationality of corporations has been

administrative practice enacted under the First War Powers Act of 1941, and more

discussion in many countries, belligerent and neutral. A corporation was subject to

recently, on December 8, 1947, the Supreme Court of the United States definitely

enemy legislation when it was controlled by enemies, namely managed under the

approved of the control theory. In Clark vs. Uebersee Finanz Korporation, A. G.,

influence of individuals or corporations, themselves considered as enemies. It was the

dealing with a Swiss corporation allegedly controlled by German interest, the Court:

English courts which first the Daimler case applied this new concept of "piercing the

"The property of all foreign interest was placed within the reach of the vesting power

corporate veil," which was adopted by the peace of Treaties of 1919 and the Mixed

(of the Alien Property Custodian) not to appropriate friendly or neutral assets but to

Arbitral established after the First World War.

reach enemy interest which masqueraded under those innocent fronts. . . . The power
of seizure and vesting was extended to all property of any foreign country or national

The United States of America did not adopt the control test during the First World War.

so that no innocent appearing device could become a Trojan horse."

Courts refused to recognized the concept whereby American-registered corporations


could be considered as enemies and thus subject to domestic legislation and

It becomes unnecessary, therefore, to dwell at length on the authorities cited in

administrative measures regarding enemy property.

support of the appealed decision. However, we may add that, in Haw Pia vs. China

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Banking Corporation,* 45 Off Gaz., (Supp. 9) 299, we already held that China
Banking Corporation came within the meaning of the word "enemy" as used in the

The respondent having become an enemy corporation on December 10, 1941, the

Trading with the Enemy Acts of civilized countries not only because it was

insurance policy issued in its favor on October 1, 1941, by the petitioner (a Philippine

incorporated under the laws of an enemy country but because it was controlled by

corporation) had ceased to be valid and enforcible, and since the insured goods were

enemies.

burned after December 10, 1941, and during the war, the respondent was not entitled
to any indemnity under said policy from the petitioner. However, elementary rules of

The Philippine Insurance Law (Act No. 2427, as amended,) in section 8, provides that

justice (in the absence of specific provision in the Insurance Law) require that the

"anyone except a public enemy may be insured." It stands to reason that an insurance

premium paid by the respondent for the period covered by its policy from December

policy ceases to be allowable as soon as an insured becomes a public enemy.

11, 1941, should be returned by the petitioner.

Effect of war, generally. All intercourse between citizens of belligerent powers

The Court of Appeals, in deciding the case, stated that the main issue hinges on the

which is inconsistent with a state of war is prohibited by the law of nations. Such

question of whether the policy in question became null and void upon the declaration

prohibition includes all negotiations, commerce, or trading with the enemy; all acts

of war between the United States and Germany on December 10, 1941, and its

which will increase, or tend to increase, its income or resources; all acts of voluntary

judgment in favor of the respondent corporation was predicated on its conclusion that

submission to it; or receiving its protection; also all acts concerning the transmission

the policy did not cease to be in force. The Court of Appeals necessarily assumed

of money or goods; and all contracts relating thereto are thereby nullified. It further

that, even if the payment by the petitioner to the respondent was involuntary, its action

prohibits insurance upon trade with or by the enemy, upon the life or lives of aliens

is not tenable in view of the ruling on the validity of the policy. As a matter of fact, the

engaged in service with the enemy; this for the reason that the subjects of one

Court of Appeals held that "any intimidation resorted to by the appellee was not unjust

country cannot be permitted to lend their assistance to protect by insurance the

but the exercise of its lawful right to claim for and received the payment of the

commerce or property of belligerent, alien subjects, or to do anything detrimental too

insurance policy," and that the ruling of the Bureau of Financing to the effect that "the

their country's interest. The purpose of war is to cripple the power and exhaust the

appellee was entitled to payment from the appellant was, well founded." Factually,

resources of the enemy, and it is inconsistent that one country should destroy its

there can be no doubt that the Director of the Bureau of Financing, in ordering the

enemy's property and repay in insurance the value of what has been so destroyed, or

petitioner to pay the claim of the respondent, merely obeyed the instruction of the

that it should in such manner increase the resources of the enemy, or render it aid,

Japanese Military Administration, as may be seen from the following: "In view of the

and the commencement of war determines, for like reasons, all trading intercourse

findings and conclusion of this office contained in its decision on Administrative Case

with the enemy, which prior thereto may have been lawful. All individuals therefore,

dated February 9, 1943 copy of which was sent to your office and the concurrence

who compose the belligerent powers, exist, as to each other, in a state of utter

therein of the Financial Department of the Japanese Military Administration, and

exclusion, and are public enemies. (6 Couch, Cyc. of Ins. Law, pp. 5352-5353.)

following the instruction of said authority, you are hereby ordered to pay the claim of
Messrs. Christern, Huenefeld & Co., Inc. The payment of said claim, however, should

In the case of an ordinary fire policy, which grants insurance only from year, or for

be made by means of crossed check." (Emphasis supplied.)

some other specified term it is plain that when the parties become alien enemies, the
contractual tie is broken and the contractual rights of the parties, so far as not vested.

It results that the petitioner is entitled to recover what paid to the respondent under the

lost. (Vance, the Law on Insurance, Sec. 44, p. 112.)

circumstances on this case. However, the petitioner will be entitled to recover only the

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equivalent, in actual Philippines currency of P92,650 paid on April 19, 1943, in

petroleum exploration concessions covering an area of a little less than 1,000,000

accordance with the rate fixed in the Ballantyne scale.

hectares, located in the provinces of Pangasinan, Tarlac, Nueva Ecija, La Union, Iloilo,
Cotabato, Davao and Agusan. It was the express condition of the sale that every

Wherefore, the appealed decision is hereby reversed and the respondent corporation

purchaser of the securities shall not receive a stock certificate, but a registered or

is ordered to pay to the petitioner the sum of P77,208.33, Philippine currency, less the

bearer-voting-trust certificate from the voting trustees named therein James L.

amount of the premium, in Philippine currency, that should be returned by the

Buckley and Austin G.E. Taylor, the first residing in Connecticut, U.S.A., and the

petitioner for the unexpired term of the policy in question, beginning December 11,

second in New York City. While this application for registration was pending

1941. Without costs. So ordered.

consideration by the Securities and Exchange Commission, SAN JOSE PETROLEUM


filed an amended Statement on June 20, 1958, for registration of the sale in the
Philippines of its shares of capital stock, which was increased from 2,000,000 to
5,000,000, at a reduced offering price of from P1.00 to P0.70 per share. At this time
the par value of the shares has also been reduced from $.35 to $.01 per share.1
Pedro R. Palting and others, allegedly prospective investors in the shares of SAN
JOSE PETROLEUM, filed with the Securities and Exchange Commission an

G.R. No. L-14441

December 17, 1966

opposition to registration and licensing of the securities on the grounds that (1) the tie-

PEDRO R. PALTING, petitioner, vs.SAN JOSE PETROLEUM INCORPORATED,

up between the issuer, SAN JOSE PETROLEUM, a Panamanian corporation and

respondent.

SAN JOSE OIL, a domestic corporation, violates the Constitution of the Philippines,

BARRERA, J.:

the Corporation Law and the Petroleum Act of 1949; (2) the issuer has not been

This is a petition for review of the order of August 29, 1958, later supplemented and

licensed to transact business in the Philippines; (3) the sale of the shares of the issuer

amplified by another dated September 9, 1958, of the Securities and Exchange

is fraudulent, and works or tends to work a fraud upon Philippine purchasers; and (4)

Commission denying the opposition to, and instead, granting the registration, and

the issuer as an enterprise, as well as its business, is based upon unsound business

licensing the sale in the Philippines, of 5,000,000 shares of the capital stock of the

principles. Answering the foregoing opposition of Palting, et al., the registrant SAN

respondent-appellee San Jose Petroleum, Inc. (hereafter referred to as SAN JOSE

JOSE PETROLEUM claimed that it was a "business enterprise" enjoying parity rights

PETROLEUM), a corporation organized and existing in the Republic of Panama.

under the Ordinance appended to the Constitution, which parity right, with respect to
mineral resources in the Philippines, may be exercised, pursuant to the Laurel-

On September 7, 1956, SAN JOSE PETROLEUM filed with the Philippine Securities

Langley Agreement, only through the medium of a corporation organized under the

and Exchange Commission a sworn registration statement, for the registration and

laws of the Philippines. Thus, registrant which is allegedly qualified to exercise rights

licensing for sale in the Philippines Voting Trust Certificates representing 2,000,000

under the Parity Amendment, had to do so through the medium of a domestic

shares of its capital stock of a par value of $0.35 a share, at P1.00 per share. It was

corporation, which is the SAN JOSE OIL. It refused the contention that the

alleged that the entire proceeds of the sale of said securities will be devoted or used

Corporation Law was being violated, by alleging that Section 13 thereof applies only

exclusively to finance the operations of San Jose Oil Company, Inc. (a domestic

to foreign corporations doing business in the Philippines, and registrant was not doing

mining corporation hereafter to be referred to as SAN JOSE OIL) which has 14

business here. The mere fact that it was a holding company of SAN JOSE OIL and

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that registrant undertook the financing of and giving technical assistance to said

"interested" person who may properly maintain the suit. Citing a 1931 ruling of Utah

corporation did not constitute transaction of business in the Philippines. Registrant

State Supreme Court2 it is claimed that the phrase "party aggrieved" used in the

also denied that the offering for sale in the Philippines of its shares of capital stock

Securities Act3 and the Rules of Court4 as having the right to appeal should refer only

was fraudulent or would work or tend to work fraud on the investors. On August 29,

to issuers, dealers and salesmen of securities.

1958, and on September 9, 1958 the Securities and Exchange Commissioner issued
the orders object of the present appeal.

It is true that in the cited case, it was ruled that the phrase "person aggrieved" is that
party "aggrieved by the judgment or decree where it operates on his rights of property

The issues raised by the parties in this appeal are as follows:

or bears directly upon his interest", that the word "aggrieved" refers to "a substantial
grievance, a denial of some personal property right or the imposition upon a party of a

1. Whether or not petitioner Pedro R. Palting, as a "prospective investor" in

burden or obligation." But a careful reading of the case would show that the appeal

respondent's securities, has personality to file the present petition for review of the

therein was dismissed because the court held that an order of registration was not

order of the Securities and Exchange Commission;

final and therefore not appealable. The foregoing pronouncement relied upon by
herein respondent was made in construing the provision regarding an order of

2. Whether or not the issue raised herein is already moot and academic;

revocation which the court held was the one appealable. And since the law provides
that in revoking the registration of any security, only the issuer and every registered

3. Whether or not the "tie-up" between the respondent SAN JOSE PETROLEUM, a

dealer of the security are notified, excluding any person or group of persons having no

foreign corporation, and SAN JOSE OIL COMPANY, INC., a domestic mining

such interest in the securities, said court concluded that the phrase "interested

corporation, is violative of the Constitution, the Laurel-Langley Agreement, the

person" refers only to issuers, dealers or salesmen of securities.

Petroleum Act of 1949, and the Corporation Law; and


We cannot consider the foregoing ruling by the Utah State Court as controlling on the
4. Whether or not the sale of respondent's securities is fraudulent, or would work or

issue in this case. Our Securities Act in Section 7(c) thereof, requires the publication

tend to work fraud to purchasers of such securities in the Philippines.

and notice of the registration statement. Pursuant thereto, the Securities and
Exchange Commissioner caused the publication of an order in part reading as

1. In answer to the notice and order of the Securities and Exchange Commissioner,

follows:

published in 2 newspapers of general circulation in the Philippines, for "any person


who is opposed" to the petition for registration and licensing of respondent's

. . . Any person who is opposed with this petition must file his written opposition with

securities, to file his opposition in 7 days, herein petitioner so filed an opposition. And,

this Commission within said period (2 weeks). . . .

the Commissioner, having denied his opposition and instead, directed the registration
of the securities to be offered for sale, oppositor Palting instituted the present

In other words, as construed by the administrative office entrusted with the

proceeding for review of said order.

enforcement of the Securities Act, any person (who may not be "aggrieved" or
"interested" within the legal acceptation of the word) is allowed or permitted to file an

Respondent raises the question of the personality of petitioner to bring this appeal,

opposition to the registration of securities for sale in the Philippines. And this is in

contending that as a mere "prospective investor", he is not an "Aggrieved" or

consonance with the generally accepted principle that Blue Sky Laws are enacted to

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protect investors and prospective purchasers and to prevent fraud and preclude the
sale of securities which are in fact worthless or worth substantially less than the

2.

asking price. It is for this purpose that herein petitioner duly filed his opposition giving

dated September 9, 1958 took effect 30 days from September 3, 1958, and since no

Respondent likewise contends that since the order of Registration/Licensing

grounds therefor. Respondent SAN JOSE PETROLEUM was required to reply to the

stay order has been issued by the Supreme Court, respondent's shares became

opposition. Subsequently both the petition and the opposition were set for hearing

registered and licensed under the law as of October 3, 1958. Consequently, it is

during which the petitioner was allowed to actively participate and did so by cross-

asserted, the present appeal has become academic. Frankly we are unable to follow

examining the respondent's witnesses and filing his memorandum in support of his

respondent's argumentation. First it claims that the order of August 29 and that of

opposition. He therefore to all intents and purposes became a party to the

September 9, 1958 are not final orders and therefor are not appealable. Then when

proceedings. And under the New Rules of Court,5 such a party can appeal from a

these orders, according to its theory became final and were implemented, it argues

final order, ruling or decision of the Securities and Exchange Commission. This new

that the orders can no longer be appealed as the question of registration and

Rule eliminating the word "aggrieved" appearing in the old Rule, being procedural in

licensing became moot and academic.

nature,6 and in view of the express provision of Rule 144 that the new rules made
effective on January 1, 1964 shall govern not only cases brought after they took effect

But the fact is that because of the authority to sell, the securities are, in all

but all further proceedings in cases then pending, except to the extent that in the

probabilities, still being traded in the open market. Consequently the issue is much

opinion of the Court their application would not be feasible or would work injustice, in

alive as to whether respondent's securities should continue to be the subject of sale.

which event the former procedure shall apply, we hold that the present appeal is

The purpose of the inquiry on this matter is not fully served just because the securities

properly within the appellate jurisdiction of this Court.

had passed out of the hands of the issuer and its dealers. Obviously, so long as the
securities are outstanding and are placed in the channels of trade and commerce,

The order allowing the registration and sale of respondent's securities is clearly a final

members of the investing public are entitled to have the question of the worth or

order that is appealable. The mere fact that such authority may be later suspended or

legality of the securities resolved one way or another.

revoked, depending on future developments, does not give it the character of an


interlocutory or provisional ruling. And the fact that seven days after the publication of

But more fundamental than this consideration, we agree with the late Senator Claro

the order, the securities are deemed registered (Sec. 7, Com. Act 83, as amended),

M. Recto, who appeared as amicus curiae in this case, that while apparently the

points to the finality of the order. Rights and obligations necessarily arise therefrom if

immediate issue in this appeal is the right of respondent SAN JOSE PETROLEUM to

not reviewed on appeal.

dispose of and sell its securities to the Filipino public, the real and ultimate
controversy here would actually call for the construction of the constitutional

Our position on this procedural matter that the order is appealable and the appeal

provisions governing the disposition, utilization, exploitation and development of our

taken here is proper is strengthened by the intervention of the Solicitor General,

natural resources. And certainly this is neither moot nor academic.

under Section 23 of Rule 3 of the Rules of Court, as the constitutional issues herein
presented affect the validity of Section 13 of the Corporation Law, which, according to

3. We now come to the meat of the controversy the "tie-up" between SAN JOSE

the respondent, conflicts with the Parity Ordinance and the Laurel-Langley Agreement

OIL on the one hand, and the respondent SAN JOSE PETROLEUM and its

recognizing, it is claimed, its right to exploit our petroleum resources notwithstanding

associates, on the other. The relationship of these corporations involved or affected in

said provisions of the Corporation Law.

this case is admitted and established through the papers and documents which are

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parts of the records: SAN JOSE OIL, is a domestic mining corporation, 90% of the

owned by such citizens, subject to any existing right, grant, lease or concession at the

outstanding capital stock of which is owned by respondent SAN JOSE PETROLEUM,

time of the inauguration of this Government established under this Constitution. . . .

a foreign (Panamanian) corporation, the majority interest of which is owned by OIL

(Emphasis supplied)

INVESTMENTS, Inc., another foreign (Panamanian) company. This latter corporation


in turn is wholly (100%) owned by PANTEPEC OIL COMPANY, C.A., and

In the 1946 Ordinance Appended to the Constitution, this right (to utilize and exploit

PANCOASTAL PETROLEUM COMPANY, C.A., both organized and existing under the

our natural resources) was extended to citizens of the United States, thus:

laws of Venezuela. As of September 30, 1956, there were 9,976 stockholders of


PANCOASTAL PETROLEUM found in 49 American states and U.S. territories, holding

Notwithstanding the provisions of section one, Article Thirteen, and section eight,

3,476,988 shares of stock; whereas, as of November 30, 1956, PANTEPEC OIL

Article Fourteen, of the foregoing Constitution, during the effectivity of the Executive

COMPANY was said to have 3,077,916 shares held by 12,373 stockholders scattered

Agreement entered into by the President of the Philippines with the President of the

in 49 American state. In the two lists of stockholders, there is no indication of the

United States on the fourth of July, nineteen hundred and forty-six, pursuant to the

citizenship of these stockholders,7 or of the total number of authorized stocks of each

provisions of Commonwealth Act Numbered Seven hundred and thirty-three, but in no

corporation, for the purpose of determining the corresponding percentage of these

case to extend beyond the third of July, nineteen hundred and seventy-four, the

listed stockholders in relation to the respective capital stock of said corporation.

disposition, exploitation, development, and utilization of all agricultural, timber, and


mineral lands of the public domain, waters, minerals, coal, petroleum, and other

Petitioner, as well as the amicus curiae and the Solicitor General8 contend that the

mineral oils, all forces of potential energy, and other natural resources of the

relationship between herein respondent SAN JOSE PETROLEUM and its subsidiary,

Philippines, and the operation of public utilities shall, if open to any person, be open to

SAN JOSE OIL, violates the Petroleum Law of 1949, the Philippine Constitution, and

citizens of the United States, and to all forms of business enterprises owned or

Section 13 of the Corporation Law, which inhibits a mining corporation from acquiring

controlled, directly or indirectly, by citizens of the United States in the same manner as

an interest in another mining corporation. It is respondent's theory, on the other hand,

to, and under the same conditions imposed upon, citizens of the Philippines or

that far from violating the Constitution; such relationship between the two corporations

corporations or associations owned or controlled by citizens of the Philippines

is in accordance with the Laurel-Langley Agreement which implemented the

(Emphasis supplied.)

Ordinance Appended to the Constitution, and that Section 13 of the Corporation Law
is not applicable because respondent is not licensed to do business, as it is not doing

In the 1954 Revised Trade Agreement concluded between the United States and the

business, in the Philippines.

Philippines, also known as the Laurel-Langley Agreement, embodied in Republic Act


1355, the following provisions appear:

Article XIII, Section 1 of the Philippine Constitution provides:


ARTICLE VI
SEC. 1. All agricultural, timber, and mineral lands of the public domain, waters,
minerals, coal, petroleum, and other mineral oils, all forces of potential energy, and

1. The disposition, exploitation, development and utilization of all agricultural, timber,

other natural resources of the Philippines belong to the State, and their disposition,

and mineral lands of the public domain, waters, minerals, coal, petroleum and other

exploitation, development, or utilization shall be limited to citizens of the Philippines,

mineral oils, all forces and sources of potential energy, and other natural resources of

or to corporations or associations at least sixty per centum of the capital of which is

either Party, and the operation of public utilities, shall, if open to any person, be open

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to citizens of the other Party and to all forms of business enterprise owned or

law, "citizen" has been defined as "one who, under the constitution and laws of the

controlled, directly or indirectly, by citizens of such other Party in the same manner as

United States, has a right to vote for representatives in congress and other public

to and under the same conditions imposed upon citizens or corporations or

officers, and who is qualified to fill offices in the gift of the people. (1 Bouvier's Law

associations owned or controlled by citizens of the Party granting the right.

Dictionary, p. 490.) A citizen is

2. The rights provided for in Paragraph 1 may be exercised, . . . in the case of citizens

One of the sovereign people. A constituent member of the sovereignty, synonymous

of the United States, with respect to natural resources in the public domain in the

with the people." (Scott v. Sandford, 19 Ho. [U.S.] 404, 15 L. Ed. 691.)

Philippines, only through the medium of a corporation organized under the laws of the
Philippines and at least 60% of the capital stock of which is owned or controlled by

A member of the civil state entitled to all its privileges. (Cooley, Const. Lim. 77. See

citizens of the United States. . . .

U.S. v. Cruikshank 92 U.S. 542, 23 L. Ed. 588; Minor v. Happersett 21 Wall. [U.S.]
162, 22 L. Ed. 627.)

3. The United States of America reserves the rights of the several States of the United
States to limit the extent to which citizens or corporations or associations owned or

These concepts clarified, is herein respondent SAN JOSE PETROLEUM an American

controlled by citizens of the Philippines may engage in the activities specified in this

business enterprise entitled to parity rights in the Philippines? The answer must be in

Article. The Republic of the Philippines reserves the power to deny any of the rights

the negative, for the following reasons:

specified in this Article to citizens of the United States who are citizens of States, or to
corporations or associations at least 60% of whose capital stock or capital is owned or

Firstly It is not owned or controlled directly by citizens of the United States,

controlled by citizens of States, which deny like rights to citizens of the Philippines, or

because it is owned and controlled by a corporation, the OIL INVESTMENTS, another

to corporations or associations which are owned or controlled by citizens of the

foreign (Panamanian) corporation.

Philippines. . . . (Emphasis supplied.)


Secondly Neither can it be said that it is indirectly owned and controlled by
Re-stated, the privilege to utilize, exploit, and develop the natural resources of this

American citizens through the OIL INVESTMENTS, for this latter corporation is in turn

country was granted, by Article XIII of the Constitution, to Filipino citizens or to

owned and controlled, not by citizens of the United States, but still by two foreign

corporations or associations 60% of the capital of which is owned by such citizens.

(Venezuelan) corporations, the PANTEPEC OIL COMPANY and PANCOASTAL

With the Parity Amendment to the Constitution, the same right was extended to

PETROLEUM.

citizens of the United States and business enterprises owned or controlled directly or
indirectly, by citizens of the United States.

Thirdly Although it is claimed that these two last corporations are owned and
controlled respectively by 12,373 and 9,979 stockholders residing in the different

There could be no serious doubt as to the meaning of the word "citizens" used in the

American states, there is no showing in the certification furnished by respondent that

aforementioned provisions of the Constitution. The right was granted to 2 types of

the stockholders of PANCOASTAL or those of them holding the controlling stock, are

persons: natural persons (Filipino or American citizens) and juridical persons

citizens of the United States.

(corporations 60% of which capital is owned by Filipinos and business enterprises


owned or controlled directly or indirectly, by citizens of the United States). In American

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Fourthly Granting that these individual stockholders are American citizens, it is yet

in any other corporation (domestic or foreign) organized for the purpose of engaging

necessary to establish that the different states of which they are citizens, allow Filipino

in agriculture or in mining," in the Philippines or whether an American citizen owning

citizens or corporations or associations owned or controlled by Filipino citizens, to

stock in more than one corporation organized for the purpose of engaging in

engage in the exploitation, etc. of the natural resources of these states (see

agriculture or in mining, may own more than 15% of the capital stock then outstanding

paragraph 3, Article VI of the Laurel-Langley Agreement, supra). Respondent has

and entitled to vote, of each of such corporations, in view of the express prohibition

presented no proof to this effect.

contained in Section 13 of the Philippine Corporation Law. The petitioner in this case
contends that the provisions of the Corporation Law must be applied to American

Fifthly But even if the requirements mentioned in the two immediately preceding

citizens and business enterprise otherwise entitled to exercise the parity privileges,

paragraphs are satisfied, nevertheless to hold that the set-up disclosed in this case,

because both the Laurel-Langley Agreement (Art. VI, par. 1) and the Petroleum Act of

with a long chain of intervening foreign corporations, comes within the purview of the

1948 (Art. 31), specifically provide that the enjoyment by them of the same rights and

Parity Amendment regarding business enterprises indirectly owned or controlled by

obligations granted under the provisions of both laws shall be "in the same manner as

citizens of the United States, is to unduly stretch and strain the language and intent of

to, and under the same conditions imposed upon, citizens of the Philippines or

the law. For, to what extent must the word "indirectly" be carried? Must we trace the

corporations or associations owned or controlled by citizens of the Philippines." The

ownership or control of these various corporations ad infinitum for the purpose of

petitioner further contends that, as the enjoyment of the privilege of exploiting mineral

determining whether the American ownership-control-requirement is satisfied? Add to

resources in the Philippines by Filipino citizens or corporations owned or controlled by

this the admitted fact that the shares of stock of the PANTEPEC and PANCOASTAL

citizens of the Philippines (which corporation must necessarily be organized under the

which are allegedly owned or controlled directly by citizens of the United States, are

Corporation Law), is made subject to the limitations provided in Section 13 of the

traded in the stock exchange in New York, and you have a situation where it becomes

Corporation Law, so necessarily the exercise of the parity rights by citizens of the

a practical impossibility to determine at any given time, the citizenship of the

United States or business enterprise owned or controlled, directly or indirectly, by

controlling stock required by the law. In the circumstances, we have to hold that the

citizens of the United States, must equally be subject to the same limitations

respondent SAN JOSE PETROLEUM, as presently constituted, is not a business

contained in the aforesaid Section 13 of the Corporation Law.

enterprise that is authorized to exercise the parity privileges under the Parity
Ordinance, the Laurel-Langley Agreement and the Petroleum Law. Its tie-up with SAN

In view of the conclusions we have already arrived at, we deem it not indispensable

JOSE OIL is, consequently, illegal.

for us to pass upon this legal question, especially taking into account the statement of
the respondent (SAN JOSE PETROLEUM) that it is essentially a holding company,

What, then, would be the Status of SAN JOSE OIL, about 90% of whose stock is

and as found by the Securities and Exchange Commissioner, its principal activity is

owned by SAN JOSE PETROLEUM? This is a query which we need not resolve in

limited to the financing and giving technical assistance to SAN JOSE OIL.

this case as SAN JOSE OIL is not a party and it is not necessary to do so to dispose
of the present controversy. But it is a matter that probably the Solicitor General would

4.

Respondent SAN JOSE PETROLEUM, whose shares of stock were allowed

want to look into.

registration for sale in the Philippines, was incorporated under the laws of Panama in
April, 1956 with an authorized capital stock of $500,000.00, American currency,

There is another issue which has been discussed extensively by the parties. This is

divided into 50,000,000 shares at par value of $0.01 per share. By virtue of a 3-party

whether or not an American mining corporation may lawfully "be in anywise interested

Agreement of June 14, 1956, respondent was supposed to have received from OIL

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INVESTMENTS 8,000,000 shares of the capital stock of SAN JOSE OIL (at par value

valuation other than belief by the board of directors of respondent that "should San

of $0.01 per share), plus a note for $250,000.00 due in 6 months, for which

Jose Oil Company be granted the bulk of the concessions applied for upon

respondent issued in favor of OIL INVESTMENTS 16,000,000 shares of its capital

reasonable terms, that it would have a reasonable value of approximately

stock, at $0.01 per share or with a value of $160,000.00, plus a note for $230,297.97

$10,000,000." 10 Then, of this amount, the subscription price of $800,000.00 was

maturing in 2 years at 6% per annum interest,9 and the assumption of payment of the

deducted and called it "difference between the (above) valuation and the subscription

unpaid price of 7,500,000 (of the 8,000,000 shares of SAN JOSE OIL).

price for the 8,000,000 shares." Of this $800,000.00 subscription price, they deducted
the sum of $480,297.97 and the difference was placed as the unpaid portion of the

On June 27, 1956, the capitalization of SAN JOSE PETROLEUM was increased from

subscription price. In other words, it was made to appear that they paid in

$500,000.00 to $17,500,000.00 by increasing the par value of the same 50,000,000

$480,297.97 for the 8,000,000 shares of SAN JOSE OIL. This amount ($480,297.97)

shares, from $0.01 to $0.35. Without any additional consideration, the 16,000,000

was supposedly that $250,000.00 paid by OIL INVESMENTS for 7,500,000 shares of

shares of $0.01 previously issued to OIL INVESTMENTS with a total value of

SAN JOSE OIL, embodied in the June 14 Agreement, and a sum of $230,297.97 the

$160,000.00 were changed with 16,000,000 shares of the recapitalized stock at $0.35

amount expended or advanced by OIL INVESTMENTS to SAN JOSE OIL. And yet,

per share, or valued at $5,600,000.00. And, to make it appear that cash was received

there is still an item among respondent's liabilities, for $230,297.97 appearing as note

for these re-issued 16,000,000 shares, the board of directors of respondent

payable to Oil Investments, maturing in two (2) years at six percent (6%) per annum.

corporation placed a valuation of $5,900,000.00 on the 8,000,000 shares of SAN

11 As far as it appears from the records, for the 16,000,000 shares at $0.35 per share

JOSE OIL (still having par value of $0.10 per share) which were received from OIL

issued to OIL INVESTMENTS, respondent SAN JOSE PETROLEUM received from

INVESTMENTS as part-consideration for the 16,000,000 shares at $0.01 per share.

OIL INVESTMENTS only the note for $250,000.00 plus the 8,000,000 shares of SAN
JOSE OIL, with par value of $0.10 per share or a total of $1,050,000.00 the only

In the Balance Sheet of respondent, dated July 12, 1956, from the $5,900,000.00,

assets of the corporation. In other words, respondent actually lost $4,550,000.00,

supposedly the value of the 8,000,000 shares of SAN JOSE OIL, the sum of

which was received by OIL INVESTMENTS.

$5,100,000.00 was deducted, corresponding to the alleged difference between the


"value" of the said shares and the subscription price thereof which is $800,000.00 (at

But this is not all. Some of the provisions of the Articles of Incorporation of respondent

$0.10 per share). From this $800,000.00, the subscription price of the SAN JOSE OIL

SAN JOSE PETROLEUM are noteworthy; viz:

shares, the amount of $319,702.03 was deducted, as allegedly unpaid subscription


price, thereby giving a difference of $480,297.97, which was placed as the amount

(1)

the directors of the Company need not be shareholders;

Then, by adding thereto the note receivable from OIL INVESTMENTS, for

(2)

that in the meetings of the board of directors, any director may be

$250,000.00 (part-consideration for the 16,000,000 SAN JOSE PETROLEUM

represented and may vote through a proxy who also need not be a director or

shares), and the sum of $6,516.21, as deferred expenses, SAN JOSE PETROLEUM

stockholder; and

allegedly paid in on the subscription price of the 8,000,000 SAN JOSE OIL shares.

appeared to have assets in the sum of $736,814.18.


(3)

that no contract or transaction between the corporation and any other

These figures are highly questionable. Take the item $5,900,000.00 the valuation

association or partnership will be affected, except in case of fraud, by the fact that any

placed on the 8,000,000 shares of SAN JOSE OIL. There appears no basis for such

of the directors or officers of the corporation is interested in, or is a director or officer

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of, such other association or partnership, and that no such contract or transaction of

from responsibility by reason of such acts. This and the other provision which

the corporation with any other person or persons, firm, association or partnership

authorizes the election of non-stockholders as directors, completely disassociate the

shall be affected by the fact that any director or officer of the corporation is a party to

stockholders from the government and management of the business in which they

or has an interest in, such contract or transaction, or has in anyway connected with

have invested.

such other person or persons, firm, association or partnership; and finally, that all and
any of the persons who may become director or officer of the corporation shall be

To cap it all on April 17, 1957, admittedly to assure continuity of the management and

relieved from all responsibility for which they may otherwise be liable by reason of any

stability of SAN JOSE PETROLEUM, OIL INVESTMENTS, as holder of the only

contract entered into with the corporation, whether it be for his benefit or for the

subscribed stock of the former corporation and acting "on behalf of all future holders

benefit of any other person, firm, association or partnership in which he may be

of voting trust certificates," entered into a voting trust agreement12 with James L.

interested.

Buckley and Austin E. Taylor, whereby said Trustees were given authority to vote the
shares represented by the outstanding trust certificates (including those that may

These provisions are in direct opposition to our corporation law and corporate

henceforth be issued) in the following manner:

practices in this country. These provisions alone would outlaw any corporation locally
organized or doing business in this jurisdiction. Consider the unique and unusual

(a) At all elections of directors, the Trustees will designate a suitable proxy or proxies

provision that no contract or transaction between the company and any other

to vote for the election of directors designated by the Trustees in their own discretion,

association or corporation shall be affected except in case of fraud, by the fact that

having in mind the best interests of the holders of the voting trust certificates, it being

any of the directors or officers of the company may be interested in or are directors or

understood that any and all of the Trustees shall be eligible for election as directors;

officers of such other association or corporation; and that none of such contracts or
transactions of this company with any person or persons, firms, associations or

(b) On any proposition for removal of a director, the Trustees shall designate a

corporations shall be affected by the fact that any director or officer of this company is

suitable proxy or proxies to vote for or against such proposition as the Trustees in their

a party to or has an interest in such contract or transaction or has any connection with

own discretion may determine, having in mind the best interest of the holders of the

such person or persons, firms associations or corporations; and that any and all

voting trust certificates;

persons who may become directors or officers of this company are hereby relieved of
all responsibility which they would otherwise incur by reason of any contract entered

(c) With respect to all other matters arising at any meeting of stockholders, the

into which this company either for their own benefit, or for the benefit of any person,

Trustees will instruct such proxy or proxies attending such meetings to vote the shares

firm, association or corporation in which they may be interested.

of stock held by the Trustees in accordance with the written instructions of each holder
of voting trust certificates. (Emphasis supplied.)

The impact of these provisions upon the traditional judiciary relationship between the
directors and the stockholders of a corporation is too obvious to escape notice by

It was also therein provided that the said Agreement shall be binding upon the parties

those who are called upon to protect the interest of investors. The directors and

thereto, their successors, and upon all holders of voting trust certificates.

officers of the company can do anything, short of actual fraud, with the affairs of the
corporation even to benefit themselves directly or other persons or entities in which

And these are the voting trust certificates that are offered to investors as authorized

they are interested, and with immunity because of the advance condonation or relief

by Security and Exchange Commissioner. It can not be doubted that the sale of

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respondent's securities would, to say the least, work or tend to work fraud to

COMMISSION, and PRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK

Philippine investors.

EXCHANGE,
Respondents.

FOR ALL THE FOREGOING CONSIDERATIONS, the motion of respondent to

CORONA, C.J.,

dismiss this appeal, is denied and the orders of the Securities and Exchange
Commissioner, allowing the registration of Respondent's securities and licensing their

June 28, 2011

sale in the Philippines are hereby set aside. The case is remanded to the Securities

The Case

and Exchange Commission for appropriate action in consonance with this decision.

This is an original petition for prohibition, injunction, declaratory relief and declaration

With costs. Let a copy of this decision be furnished the Solicitor General for whatever

of nullity of the sale of shares of stock of Philippine Telecommunications Investment

action he may deem advisable to take in the premises. So ordered.

Corporation (PTIC) by the government of the Republic of the Philippines to Metro


Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company Limited
(First Pacific).
The Antecedents
The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine Long
Distance Telephone Company (PLDT), are as follows:1
On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which
granted PLDT a franchise and the right to engage in telecommunications business. In
1969, General Telephone and Electronics Corporation (GTE), an American company

WILSON P. GAMBOA,Petitioner,

and a major PLDT stockholder, sold 26 percent of the outstanding common shares of

G.R. No. 176579

PLDT to PTIC. In 1977, Prime Holdings, Inc. (PHI) was incorporated by several

Present:

persons, including Roland Gapud and Jose Campos, Jr. Subsequently, PHI became

- versus -

the owner of 111,415 shares of stock of PTIC by virtue of three Deeds of Assignment

FINANCE SECRETARY MARGARITO B. TEVES, FINANCE UNDERSECRETARY

executed by PTIC stockholders Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the

JOHN P. SEVILLA, AND COMMISSIONER RICARDO ABCEDE OF THE

111,415 shares of stock of PTIC held by PHI were sequestered by the Presidential

PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT (PCGG) IN THEIR

Commission on Good Government (PCGG). The 111,415 PTIC shares, which

CAPACITIES

represent about 46.125 percent of the outstanding capital stock of PTIC, were later

AS

CHAIR

AND

MEMBERS,

RESPECTIVELY,

OF

THE

PRIVATIZATION COUNCIL,

declared by this Court to be owned by the Republic of the Philippines.2

CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC CO., LTD. IN HIS CAPACITY AS

In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm,

DIRECTOR OF METRO PACIFIC ASSET HOLDINGS INC., CHAIRMAN MANUEL V.

acquired the remaining 54 percent of the outstanding capital stock of PTIC. On 20

PANGILINAN OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY (PLDT) IN

November 2006, the Inter-Agency Privatization Council (IPC) of the Philippine

HIS CAPACITY AS MANAGING DIRECTOR OF FIRST PACIFIC CO., LTD.,

Government announced that it would sell the 111,415 PTIC shares, or 46.125 percent

PRESIDENT NAPOLEON L. NAZARENO OF PHILIPPINE LONG DISTANCE

of the outstanding capital stock of PTIC, through a public bidding to be conducted on

TELEPHONE COMPANY, CHAIR FE BARIN OF THE SECURITIES EXCHANGE

4 December 2006. Subsequently, the public bidding was reset to 8 December 2006,

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and only two bidders, Parallax Venture Fund XXVII (Parallax) and Pan-Asia Presidio

The Philippine Government decided to sell the 111,415 PTIC shares, which represent

Capital, submitted their bids. Parallax won with a bid of P25.6 billion or US$510

6.4 percent of the outstanding common shares of stock of PLDT, and designated the

million.

Inter-Agency Privatization Council (IPC), composed of the Department of Finance and

Thereafter, First Pacific announced that it would exercise its right of first refusal as a

the PCGG, as the disposing entity. An invitation to bid was published in seven

PTIC stockholder and buy the 111,415 PTIC shares by matching the bid price of

different newspapers from 13 to 24 November 2006. On 20 November 2006, a pre-bid

Parallax. However, First Pacific failed to do so by the 1 February 2007 deadline set by

conference was held, and the original deadline for bidding scheduled on 4 December

IPC and instead, yielded its right to PTIC itself which was then given by IPC until 2

2006 was reset to 8 December 2006. The extension was published in nine different

March 2007 to buy the PTIC shares. On 14 February 2007, First Pacific, through its

newspapers.

subsidiary, MPAH, entered into a Conditional Sale and Purchase Agreement of the

During the 8 December 2006 bidding, Parallax Capital Management LP emerged as

111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC, with

the highest bidder with a bid of P25,217,556,000. The government notified First

the Philippine Government for the price of P25,217,556,000 or US$510,580,189. The

Pacific, the majority owner of PTIC shares, of the bidding results and gave First

sale was completed on 28 February 2007.

Pacific until 1 February 2007 to exercise its right of first refusal in accordance with

Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of 46.125

PTICs Articles of Incorporation. First Pacific announced its intention to match

percent of PTIC shares is actually an indirect sale of 12 million shares or about 6.3

Parallaxs bid.

percent of the outstanding common shares of PLDT. With the sale, First Pacifics

On 31 January 2007, the House of Representatives (HR) Committee on Good

common shareholdings in PLDT increased from 30.7 percent to 37 percent, thereby

Government conducted a public hearing on the particulars of the then impending sale

increasing the common shareholdings of foreigners in PLDT to about 81.47 percent.

of the 111,415 PTIC shares. Respondents Teves and Sevilla were among those who

This violates Section 11, Article XII of the 1987 Philippine Constitution which limits

attended the public hearing. The HR Committee Report No. 2270 concluded that: (a)

foreign ownership of the capital of a public utility to not more than 40 percent.3

the auction of the governments 111,415 PTIC shares bore due diligence,

On the other hand, public respondents Finance Secretary Margarito B. Teves,

transparency and conformity with existing legal procedures; and (b) First Pacifics

Undersecretary John P. Sevilla, and PCGG Commissioner Ricardo Abcede allege the

intended acquisition of the governments 111,415 PTIC shares resulting in First

following relevant facts:

Pacifics 100% ownership of PTIC will not violate the 40 percent constitutional limit on

On 9 November 1967, PTIC was incorporated and had since engaged in the business

foreign ownership of a public utility since PTIC holds only 13.847 percent of the total

of investment holdings. PTIC held 26,034,263 PLDT common shares, or 13.847

outstanding common shares of PLDT.5 On 28 February 2007, First Pacific completed

percent of the total PLDT outstanding common shares. PHI, on the other hand, was

the acquisition of the 111,415 shares of stock of PTIC.

incorporated in 1977, and became the owner of 111,415 PTIC shares or 46.125

Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted a

percent of the outstanding capital stock of PTIC by virtue of three Deeds of

public bidding for the sale of 111,415 PTIC shares or 46 percent of the outstanding

Assignment executed by Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the

capital stock of PTIC (the remaining 54 percent of PTIC shares was already owned by

111,415 PTIC shares held by PHI were sequestered by the PCGG, and subsequently

First Pacific and its affiliates); (b) Parallax offered the highest bid amounting to

declared by this Court as part of the ill-gotten wealth of former President Ferdinand

P25,217,556,000; (c) pursuant to the right of first refusal in favor of PTIC and its

Marcos. The sequestered PTIC shares were reconveyed to the Republic of the

shareholders granted in PTICs Articles of Incorporation, MPAH, a First Pacific

Philippines in accordance with this Courts decision4 which became final and

affiliate, exercised its right of first refusal by matching the highest bid offered for PTIC

executory on 8 August 2006.

shares on 13 February 2007; and (d) on 28 February 2007, the sale was

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consummated when MPAH paid IPC P25,217,556,000 and the government delivered

On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for Leave

the certificates for the 111,415 PTIC shares. Respondent Pangilinan denies the other

to Intervene and Admit Attached Petition-in-Intervention. In the Resolution of 28

allegations of facts of petitioner.

August 2007, the Court granted the motion and noted the Petition-in-Intervention.

On 28 February 2007, petitioner filed the instant petition for prohibition, injunction,

Petitioners-in-intervention join petitioner Wilson Gamboa x x x in seeking, among

declaratory relief, and declaration of nullity of sale of the 111,415 PTIC shares.

others, to enjoin and/or nullify the sale by respondents of the 111,415 PTIC shares to

Petitioner claims, among others, that the sale of the 111,415 PTIC shares would

First Pacific or assignee. Petitioners-in-intervention claim that, as PLDT subscribers,

result in an increase in First Pacifics common shareholdings in PLDT from 30.7

they have a stake in the outcome of the controversy x x x where the Philippine

percent to 37 percent, and this, combined with Japanese NTT DoCoMos common

Government is completing the sale of government owned assets in [PLDT],

shareholdings in PLDT, would result to a total foreign common shareholdings in PLDT

unquestionably a public utility, in violation of the nationality restrictions of the

of 51.56 percent which is over the 40 percent constitutional limit.6 Petitioner asserts:

Philippine Constitution.
The Issue

If and when the sale is completed, First Pacifics equity in PLDT will go up from 30.7
percent to 37.0 percent of its common or voting- stockholdings, x x x. Hence, the

This Court is not a trier of facts. Factual questions such as those raised by petitioner,9

consummation of the sale will put the two largest foreign investors in PLDT First

which indisputably demand a thorough examination of the evidence of the parties, are

Pacific and Japans NTT DoCoMo, which is the worlds largest wireless

generally beyond this Courts jurisdiction. Adhering to this well-settled principle, the

telecommunications firm, owning 51.56 percent of PLDT common equity. x x x With

Court shall confine the resolution of the instant controversy solely on the threshold

the completion of the sale, data culled from the official website of the New York Stock

and purely legal issue of whether the term capital in Section 11, Article XII of the

Exchange (www.nyse.com) showed that those foreign entities, which own at least five

Constitution refers to the total common shares only or to the total outstanding capital

percent of common equity, will collectively own 81.47 percent of PLDTs common

stock (combined total of common and non-voting preferred shares) of PLDT, a public

equity. x x x

utility.

x x x as the annual disclosure reports, also referred to as Form 20-K reports x x x


which PLDT submitted to the New York Stock Exchange for the period 2003-2005,
revealed that First Pacific and several other foreign entities breached the

The Ruling of the Court

constitutional limit of 40 percent ownership as early as 2003. x x x7

The petition is partly meritorious.

Petitioner raises the following issues: (1) whether the consummation of the then

Petition for declaratory relief treated as petition for mandamus

impending sale of 111,415 PTIC shares to First Pacific violates the constitutional limit

At the outset, petitioner is faced with a procedural barrier. Among the remedies

on foreign ownership of a public utility; (2) whether public respondents committed

petitioner seeks, only the petition for prohibition is within the original jurisdiction of this

grave abuse of discretion in allowing the sale of the 111,415 PTIC shares to First

court, which however is not exclusive but is concurrent with the Regional Trial Court

Pacific; and (3) whether the sale of common shares to foreigners in excess of 40

and the Court of Appeals. The actions for declaratory relief,10 injunction, and

percent of the entire subscribed common capital stock violates the constitutional limit

annulment of sale are not embraced within the original jurisdiction of the Supreme

on foreign ownership of a public utility.8

Court. On this ground alone, the petition could have been dismissed outright.

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While direct resort to this Court may be justified in a petition for prohibition,11 the

thirteenth (13th) month pay x x x ? The Constitutional principle involved therein

Court shall nevertheless refrain from discussing the grounds in support of the petition

affected all government employees, clearly justifying a relaxation of the technical rules

for prohibition since on 28 February 2007, the questioned sale was consummated

of procedure, and certainly requiring the interpretation of the assailed presidential

when MPAH paid IPC P25,217,556,000 and the government delivered the certificates

decree.

for the 111,415 PTIC shares.


However, since the threshold and purely legal issue on the definition of the term
capital in Section 11, Article XII of the Constitution has far-reaching implications to
the national economy, the Court treats the petition for declaratory relief as one for

In short, it is well-settled that this Court may treat a petition for declaratory relief as

mandamus.12

one for mandamus if the issue involved has far-reaching implications. As this Court

In Salvacion v. Central Bank of the Philippines,13 the Court treated the petition for

held in Salvacion:

declaratory relief as one for mandamus considering the grave injustice that would
result in the interpretation of a banking law. In that case, which involved the crime of

The Court has no original and exclusive jurisdiction over a petition for declaratory

rape committed by a foreign tourist against a Filipino minor and the execution of the

relief. However, exceptions to this rule have been recognized. Thus, where the petition

final judgment in the civil case for damages on the tourists dollar deposit with a local

has far-reaching implications and raises questions that should be resolved, it may be

bank, the Court declared Section 113 of Central Bank Circular No. 960, exempting

treated as one for mandamus.15 (Emphasis supplied)

foreign currency deposits from attachment, garnishment or any other order or process

In the present case, petitioner seeks primarily the interpretation of the term capital in

of any court, inapplicable due to the peculiar circumstances of the case. The Court

Section 11, Article XII of the Constitution. He prays that this Court declare that the

held that injustice would result especially to a citizen aggrieved by a foreign guest like

term capital refers to common shares only, and that such shares constitute the sole

accused x x x that would negate Article 10 of the Civil Code which provides that in

basis in determining foreign equity in a public utility. Petitioner further asks this Court

case of doubt in the interpretation or application of laws, it is presumed that the

to declare any ruling inconsistent with such interpretation unconstitutional.

lawmaking body intended right and justice to prevail. The Court therefore required
respondents Central Bank of the Philippines, the local bank, and the accused to

The interpretation of the term capital in Section 11, Article XII of the Constitution

comply with the writ of execution issued in the civil case for damages and to release

has far-reaching implications to the national economy. In fact, a resolution of this issue

the dollar deposit of the accused to satisfy the judgment.

will determine whether Filipinos are masters, or second class citizens, in their own
country. What is at stake here is whether Filipinos or foreigners will have effective

In Alliance of Government Workers v. Minister of Labor,14 the Court similarly brushed

control of the national economy. Indeed, if ever there is a legal issue that has far-

aside the procedural infirmity of the petition for declaratory relief and treated the same

reaching implications to the entire nation, and to future generations of Filipinos, it is

as one for mandamus. In Alliance, the issue was whether the government unlawfully

the threshhold legal issue presented in this case.

excluded petitioners, who were government employees, from the enjoyment of rights
to which they were entitled under the law. Specifically, the question was: Are the

The Court first encountered the issue on the definition of the term capital in Section

branches, agencies, subdivisions, and instrumentalities of the Government, including

11, Article XII of the Constitution in the case of Fernandez v. Cojuangco, docketed as

government owned or controlled corporations included among the four employers

G.R. No. 157360.16 That case involved the same public utility (PLDT) and

under Presidential Decree No. 851 which are required to pay their employees x x x a

substantially the same private respondents. Despite the importance and novelty of the

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constitutional issue raised therein and despite the fact that the petition involved a

There is no dispute that petitioner is a stockholder of PLDT. As such, he has the right

purely legal question, the Court declined to resolve the case on the merits, and

to question the subject sale, which he claims to violate the nationality requirement

instead denied the same for disregarding the hierarchy of courts.17 There, petitioner

prescribed in Section 11, Article XII of the Constitution. If the sale indeed violates the

Fernandez assailed on a pure question of law the Regional Trial Courts Decision of

Constitution, then there is a possibility that PLDTs franchise could be revoked, a dire

21 February 2003 via a petition for review under Rule 45. The Courts Resolution,

consequence directly affecting petitioners interest as a stockholder.

denying the petition, became final on 21 December 2004.

More importantly, there is no question that the instant petition raises matters of
transcendental importance to the public. The fundamental and threshold legal issue in

The instant petition therefore presents the Court with another opportunity to finally

this case, involving the national economy and the economic welfare of the Filipino

settle this purely legal issue which is of transcendental importance to the national

people, far outweighs any perceived impediment in the legal personality of the

economy and a fundamental requirement to a faithful adherence to our Constitution.

petitioner to bring this action.

The Court must forthwith seize such opportunity, not only for the benefit of the

In Chavez v. PCGG,24 the Court upheld the right of a citizen to bring a suit on matters

litigants, but more significantly for the benefit of the entire Filipino people, to ensure, in

of transcendental importance to the public, thus:

the words of the Constitution, a self-reliant and independent national economy

In Taada v. Tuvera, the Court asserted that when the issue concerns a public right

effectively controlled by Filipinos.18 Besides, in the light of vague and confusing

and the object of mandamus is to obtain the enforcement of a public duty, the people

positions taken by government agencies on this purely legal issue, present and future

are regarded as the real parties in interest; and because it is sufficient that petitioner

foreign investors in this country deserve, as a matter of basic fairness, a categorical

is a citizen and as such is interested in the execution of the laws, he need not show

ruling from this Court on the extent of their participation in the capital of public utilities

that he has any legal or special interest in the result of the action. In the aforesaid

and other nationalized businesses.

case, the petitioners sought to enforce their right to be informed on matters of public
concern, a right then recognized in Section 6, Article IV of the 1973 Constitution, in
connection with the rule that laws in order to be valid and enforceable must be
published in the Official Gazette or otherwise effectively promulgated. In ruling for the

Despite its far-reaching implications to the national economy, this purely legal issue

petitioners legal standing, the Court declared that the right they sought to be enforced

has remained unresolved for over 75 years since the 1935 Constitution. There is no

is a public right recognized by no less than the fundamental law of the land.

reason for this Court to evade this ever recurring fundamental issue and delay again
defining the term capital, which appears not only in Section 11, Article XII of the

Legaspi v. Civil Service Commission, while reiterating Taada, further declared that

Constitution, but also in Section 2, Article XII on co-production and joint venture

when a mandamus proceeding involves the assertion of a public right, the

agreements for the development of our natural resources,19 in Section 7, Article XII

requirement of personal interest is satisfied by the mere fact that petitioner is a citizen

on ownership of private lands,20 in Section 10, Article XII on the reservation of certain

and, therefore, part of the general public which possesses the right.

investments to Filipino citizens,21 in Section 4(2), Article XIV on the ownership of


educational institutions,22 and in Section 11(2), Article XVI on the ownership of

Further, in Albano v. Reyes, we said that while expenditure of public funds may not

advertising companies.23

have been involved under the questioned contract for the development, management

Petitioner has locus standi

and operation of the Manila International Container Terminal, public interest [was]
definitely involved considering the important role [of the subject contract] . . . in the

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economic development of the country and the magnitude of the financial

certificate, or authorization be exclusive in character or for a longer period than fifty

consideration involved. We concluded that, as a consequence, the disclosure

years. Neither shall any such franchise or right be granted except under the condition

provision in the Constitution would constitute sufficient authority for upholding the

that it shall be subject to amendment, alteration, or repeal by the National Assembly

petitioners standing. (Emphasis supplied)

when the public interest so requires. The State shall encourage equity participation in
public utilities by the general public. The participation of foreign investors in the
governing body of any public utility enterprise shall be limited to their proportionate
share in the capital thereof. (Emphasis supplied)

Clearly, since the instant petition, brought by a citizen, involves matters of

The foregoing provision in the 1973 Constitution reproduced Section 8, Article XIV of

transcendental public importance, the petitioner has the requisite locus standi.

the 1935 Constitution, viz:

Definition of the Term Capital in

Section 8. No franchise, certificate, or any other form of authorization for the operation

Section 11, Article XII of the 1987 Constitution

of a public utility shall be granted except to citizens of the Philippines or to


corporations or other entities organized under the laws of the Philippines sixty per
centum of the capital of which is owned by citizens of the Philippines, nor shall such

Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution

franchise, certificate, or authorization be exclusive in character or for a longer period

mandates the Filipinization of public utilities, to wit:

than fifty years. No franchise or right shall be granted to any individual, firm, or

Section 11. No franchise, certificate, or any other form of authorization for the

corporation, except under the condition that it shall be subject to amendment,

operation of a public utility shall be granted except to citizens of the Philippines or to

alteration, or repeal by the Congress when the public interest so requires. (Emphasis

corporations or associations organized under the laws of the Philippines, at least sixty

supplied

per centum of whose capital is owned by such citizens; nor shall such franchise,

Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional

certificate, or authorization be exclusive in character or for a longer period than fifty

Commission, reminds us that the Filipinization provision in the 1987 Constitution is

years. Neither shall any such franchise or right be granted except under the condition

one of the products of the spirit of nationalism which gripped the 1935 Constitutional

that it shall be subject to amendment, alteration, or repeal by the Congress when the

Convention.25 The 1987 Constitution provides for the Filipinization of public utilities

common good so requires. The State shall encourage equity participation in public

by requiring that any form of authorization for the operation of public utilities should be

utilities by the general public. The participation of foreign investors in the governing

granted only to citizens of the Philippines or to corporations or associations organized

body of any public utility enterprise shall be limited to their proportionate share in its

under the laws of the Philippines at least sixty per centum of whose capital is owned

capital, and all the executive and managing officers of such corporation or association

by such citizens. The provision is [an express] recognition of the sensitive and vital

must be citizens of the Philippines. (Emphasis supplied)

position of public utilities both in the national economy and for national security.26

The above provision substantially reiterates Section 5, Article XIV of the 1973

The evident purpose of the citizenship requirement is to prevent aliens from assuming

Constitution, thus:

control of public utilities, which may be inimical to the national interest.27 This specific

Section 5. No franchise, certificate, or any other form of authorization for the operation

provision explicitly reserves to Filipino citizens control of public utilities, pursuant to an

of a public utility shall be granted except to citizens of the Philippines or to

overriding economic goal of the 1987 Constitution: to conserve and develop our

corporations or associations organized under the laws of the Philippines at least sixty

patrimony28 and ensure a self-reliant and independent national economy effectively

per centum of the capital of which is owned by such citizens, nor shall such franchise,

controlled by Filipinos.29

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In particular, respondent Nazarenos Memorandum, consisting of 73 pages, harps


mainly on the procedural infirmities of the petition and the supposed violation of the
due process rights of the affected foreign common shareholders. Respondent
Any citizen or juridical entity desiring to operate a public utility must therefore meet the

Nazareno does not deny petitioners allegation of foreigners dominating the common

minimum nationality requirement prescribed in Section 11, Article XII of the

shareholdings of PLDT. Nazareno stressed mainly that the petition seeks to divest

Constitution. Hence, for a corporation to be granted authority to operate a public

foreign common shareholders purportedly exceeding 40% of the total common

utility, at least 60 percent of its capital must be owned by Filipino citizens.

shareholdings in PLDT of their ownership over their shares. Thus, the foreign natural

The crux of the controversy is the definition of the term capital. Does the term

and juridical PLDT shareholders must be impleaded in this suit so that they can be

capital in Section 11, Article XII of the Constitution refer to common shares or to the

heard.34 Essentially, Nazareno invokes denial of due process on behalf of the foreign

total outstanding capital stock (combined total of common and non-voting preferred

common shareholders.

shares)?

While Nazareno does not introduce any definition of the term capital, he states that

Petitioner submits that the 40 percent foreign equity limitation in domestic public

among the factual assertions that need to be established to counter petitioners

utilities refers only to common shares because such shares are entitled to vote and it

allegations is the uniform interpretation by government agencies (such as the SEC),

is through voting that control over a corporation is exercised. Petitioner posits that the

institutions and corporations (such as the Philippine National Oil Company-Energy

term capital in Section 11, Article XII of the Constitution refers to the ownership of

Development Corporation or PNOC-EDC) of including both preferred shares and

common capital stock subscribed and outstanding, which class of shares alone, under

common shares in controlling interest in view of testing compliance with the 40%

the corporate set-up of PLDT, can vote and elect members of the board of directors.

constitutional limitation on foreign ownership in public utilities.35

It is undisputed that PLDTs non-voting preferred shares are held mostly by Filipino

Similarly, respondent Manuel V. Pangilinan does not define the term capital in

citizens.30 This arose from Presidential Decree No. 217,31 issued on 16 June 1973

Section 11, Article XII of the Constitution. Neither does he refute petitioners claim of

by then President Ferdinand Marcos, requiring every applicant of a PLDT telephone

foreigners holding more than 40 percent of PLDTs common shares. Instead,

line to subscribe to non-voting preferred shares to pay for the investment cost of

respondent Pangilinan focuses on the procedural flaws of the petition and the alleged

installing the telephone line.32

violation of the due process rights of foreigners. Respondent Pangilinan emphasizes

Petitioners-in-intervention basically reiterate petitioners arguments and adopt

in his Memorandum (1) the absence of this Courts jurisdiction over the petition; (2)

petitioners definition of the term capital.33 Petitioners-in-intervention allege that the

petitioners lack of standing; (3) mootness of the petition; (4) non-availability of

approximate foreign ownership of common capital stock of PLDT x x x already

declaratory relief; and (5) the denial of due process rights. Moreover, respondent

amounts to at least 63.54% of the total outstanding common stock, which means that

Pangilinan alleges that the issue should be whether owners of shares in PLDT as

foreigners exercise significant control over PLDT, patently violating the 40 percent

well as owners of shares in companies holding shares in PLDT may be required to

foreign equity limitation in public utilities prescribed by the Constitution.

relinquish their shares in PLDT and in those companies without any law requiring

Respondents, on the other hand, do not offer any definition of the term capital in

them to surrender their shares and also without notice and trial.

Section 11, Article XII of the Constitution. More importantly, private respondents
Nazareno and Pangilinan of PLDT do not dispute that more than 40 percent of the

Respondent Pangilinan further asserts that Section 11, [Article XII of the

common shares of PLDT are held by foreigners.

Constitution] imposes no nationality requirement on the shareholders of the utility


company as a condition for keeping their shares in the utility company. According to

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him, Section 11 does not authorize taking one persons property (the shareholders

Obviously, the intent of the framers of the Constitution in imposing limitations and

stock in the utility company) on the basis of another partys alleged failure to satisfy a

restrictions on fully nationalized and partially nationalized activities is for Filipino

requirement that is a condition only for that other partys retention of another piece of

nationals to be always in control of the corporation undertaking said activities.

property (the utility company being at least 60% Filipino-owned to keep its

Otherwise, if the Trial Courts ruling upholding respondents arguments were to be

franchise).36

given credence, it would be possible for the ownership structure of a public utility
corporation to be divided into one percent (1%) common stocks and ninety-nine

The

OSG,

representing

public

respondents

Secretary

Margarito

Teves,

percent (99%) preferred stocks. Following the Trial Courts ruling adopting

Undersecretary John P. Sevilla, Commissioner Ricardo Abcede, and Chairman Fe

respondents arguments, the common shares can be owned entirely by foreigners

Barin, is likewise silent on the definition of the term capital. In its Memorandum37

thus creating an absurd situation wherein foreigners, who are supposed to be minority

dated 24 September 2007, the OSG also limits its discussion on the supposed

shareholders, control the public utility corporation.

procedural defects of the petition, i.e. lack of standing, lack of jurisdiction, noninclusion of interested parties, and lack of basis for injunction. The OSG does not
present any definition or interpretation of the term capital in Section 11, Article XII of
the Constitution. The OSG contends that the petition actually partakes of a collateral

Thus, the 40% foreign ownership limitation should be interpreted to apply to both the

attack on PLDTs franchise as a public utility, which in effect requires a full-blown trial

beneficial ownership and the controlling interest.

where all the parties in interest are given their day in court.38
Clearly, therefore, the forty percent (40%) foreign equity limitation in public utilities
Respondent Francisco Ed Lim, impleaded as President and Chief Executive Officer

prescribed by the Constitution refers to ownership of shares of stock entitled to vote,

of the Philippine Stock Exchange (PSE), does not also define the term capital and

i.e., common shares. Furthermore, ownership of record of shares will not suffice but it

seeks the dismissal of the petition on the following grounds: (1) failure to state a

must be shown that the legal and beneficial ownership rests in the hands of Filipino

cause of action against Lim; (2) the PSE allegedly implemented its rules and required

citizens. Consequently, in the case of petitioner PLDT, since it is already admitted that

all listed companies, including PLDT, to make proper and timely disclosures; and (3)

the voting interests of foreigners which would gain entry to petitioner PLDT by the

the reliefs prayed for in the petition would adversely impact the stock market.

acquisition of SMART shares through the Questioned Transactions is equivalent to


82.99%, and the nominee arrangements between the foreign principals and the

In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to

Filipino owners is likewise admitted, there is, therefore, a violation of Section 11,

be a stockholder of record of PLDT, contended that the term capital in the 1987

Article XII of the Constitution.

Constitution refers to shares entitled to vote or the common shares. Fernandez


Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987 cited by the

explained thus:

Trial Court to support the proposition that the meaning of the word capital as used in
The forty percent (40%) foreign equity limitation in public utilities prescribed by the

Section 11, Article XII of the Constitution allegedly refers to the sum total of the

Constitution refers to ownership of shares of stock entitled to vote, i.e., common

shares subscribed and paid-in by the shareholder and it allegedly is immaterial how

shares, considering that it is through voting that control is being exercised. x x x

the stock is classified, whether as common or preferred, cannot stand in the face of a
clear legislative policy as stated in the FIA which took effect in 1991 or way after said

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opinions were rendered, and as clarified by the above-quoted Amendments. In this

17.

But even assuming that resort to the proceedings of the Constitutional

regard, suffice it to state that as between the law and an opinion rendered by an

Commission is necessary, there is nothing in the Record of the Constitutional

administrative agency, the law indubitably prevails. Moreover, said Opinions are

Commission (Vol. III) which petitioner misleadingly cited in the Petition x x x which

merely advisory and cannot prevail over the clear intent of the framers of the

supports petitioners view that only common shares should form the basis for

Constitution.

computing a public utilitys foreign equity.

In the same vein, the SECs construction of Section 11, Article XII of the Constitution
is at best merely advisory for it is the courts that finally determine what a law

xxxx

means.39

18.

On the other hand, respondents therein, Antonio O. Cojuangco, Manuel V. Pangilinan,

implementing the Corporation Code, and which also has the responsibility of ensuring

Carlos A. Arellano, Helen Y. Dee, Magdangal B. Elma, Mariles Cacho-Romulo, Fr.

compliance with the Constitutions foreign equity restrictions as regards nationalized

Bienvenido F. Nebres, Ray C. Espinosa, Napoleon L. Nazareno, Albert F. Del Rosario,

activities x x x has categorically ruled that both common and preferred shares are

and Orlando B. Vea, argued that the term capital in Section 11, Article XII of the

properly considered in determining outstanding capital stock and the nationality

Constitution includes preferred shares since the Constitution does not distinguish

composition thereof.40

among classes of stock, thus:

We agree with petitioner and petitioners-in-intervention. The term capital in Section

16.

11, Article XII of the Constitution refers only to shares of stock entitled to vote in the

The Constitution applies its foreign ownership limitation on the corporations

In addition, the SEC the government agency primarily responsible for

capital, without distinction as to classes of shares. x x

election of directors, and thus in the present case only to common shares,41 and not

In this connection, the Corporation Code which was already in force at the time the

to the total outstanding capital stock comprising both common and non-voting

present (1987) Constitution was drafted defined outstanding capital stock as follows:

preferred shares.

Section 137. Outstanding capital stock defined. The term outstanding capital
stock, as used in this Code, means the total shares of stock issued under binding

The Corporation Code of the Philippines42 classifies shares as common or preferred,

subscription agreements to subscribers or stockholders, whether or not fully or

thus:

partially paid, except treasury shares.

Sec. 6. Classification of shares. - The shares of stock of stock corporations may be

Section 137 of the Corporation Code also does not distinguish between common and

divided into classes or series of shares, or both, any of which classes or series of

preferred shares, nor exclude either class of shares, in determining the outstanding

shares may have such rights, privileges or restrictions as may be stated in the articles

capital stock (the capital) of a corporation. Consequently, petitioners suggestion to

of incorporation: Provided, That no share may be deprived of voting rights except

reckon PLDTs foreign equity only on the basis of PLDTs outstanding common shares

those classified and issued as preferred or redeemable shares, unless otherwise

is without legal basis. The language of the Constitution should be understood in the

provided in this Code: Provided, further, That there shall always be a class or series of

sense it has in common use.

shares which have complete voting rights. Any or all of the shares or series of shares

xxxx

may have a par value or have no par value as may be provided for in the articles of
incorporation: Provided, however, That banks, trust companies, insurance companies,
public utilities, and building and loan associations shall not be permitted to issue nopar value shares of stock.

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Preferred shares of stock issued by any corporation may be given preference in the

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially

distribution of the assets of the corporation in case of liquidation and in the distribution

all of the corporate property;

of dividends, or such other preferences as may be stated in the articles of


incorporation which are not violative of the provisions of this Code: Provided, That

4. Incurring, creating or increasing bonded indebtedness;

preferred shares of stock may be issued only with a stated par value. The Board of
Directors, where authorized in the articles of incorporation, may fix the terms and

5. Increase or decrease of capital stock;

conditions of preferred shares of stock or any series thereof: Provided, That such
terms and conditions shall be effective upon the filing of a certificate thereof with the

6. Merger or consolidation of the corporation with another corporation or other

Securities and Exchange Commission.

corporations;

Shares of capital stock issued without par value shall be deemed fully paid and non-

7. Investment of corporate funds in another corporation or business in accordance

assessable and the holder of such shares shall not be liable to the corporation or to

with this Code; and

its creditors in respect thereto: Provided; That shares without par value may not be
issued for a consideration less than the value of five (P5.00) pesos per share:

8. Dissolution of the corporation.

Provided, further, That the entire consideration received by the corporation for its nopar value shares shall be treated as capital and shall not be available for distribution

Except as provided in the immediately preceding paragraph, the vote necessary to

as dividends.

approve a particular corporate act as provided in this Code shall be deemed to refer
only to stocks with voting rights.

A corporation may, furthermore, classify its shares for the purpose of insuring

Indisputably, one of the rights of a stockholder is the right to participate in the control

compliance with constitutional or legal requirements.

or management of the corporation.43 This is exercised through his vote in the election
of directors because it is the board of directors that controls or manages the

Except as otherwise provided in the articles of incorporation and stated in the

corporation.44 In the absence of provisions in the articles of incorporation denying

certificate of stock, each share shall be equal in all respects to every other share.

voting rights to preferred shares, preferred shares have the same voting rights as
common shares. However, preferred shareholders are often excluded from any

Where the articles of incorporation provide for non-voting shares in the cases allowed

control, that is, deprived of the right to vote in the election of directors and on other

by this Code, the holders of such shares shall nevertheless be entitled to vote on the

matters, on the theory that the preferred shareholders are merely investors in the

following matters:

corporation for income in the same manner as bondholders.45 In fact, under the
Corporation Code only preferred or redeemable shares can be deprived of the right to

1. Amendment of the articles of incorporation;

vote.46 Common shares cannot be deprived of the right to vote in any corporate
meeting, and any provision in the articles of incorporation restricting the right of

2. Adoption and amendment of by-laws;

common shareholders to vote is invalid.47

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Considering that common shares have voting rights which translate to control, as

MR. VILLEGAS. That is right.

opposed to preferred shares which usually have no voting rights, the term capital in
Section 11, Article XII of the Constitution refers only to common shares. However, if
the preferred shares also have the right to vote in the election of directors, then the
MR. NOLLEDO. Thank you.

term capital shall include such preferred shares because the right to participate in
the control or management of the corporation is exercised through the right to vote in
the election of directors. In short, the term capital in Section 11, Article XII of the
Constitution refers only to shares of stock that can vote in the election of directors.

With respect to an investment by one corporation in another corporation, say, a


This interpretation is consistent with the intent of the framers of the Constitution to

corporation with 60-40 percent equity invests in another corporation which is

place in the hands of Filipino citizens the control and management of public utilities.

permitted by the Corporation Code, does the Committee adopt the grandfather rule?

As revealed in the deliberations of the Constitutional Commission, capital refers to


the voting stock or controlling interest of a corporation, to wit:
MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity
and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in
Section 15.
MR. VILLEGAS. That is right.

MR. NOLLEDO. Therefore, we need additional Filipino capital?

MR. NOLLEDO. In teaching law, we are always faced with this question: Where do
we base the equity requirement, is it on the authorized capital stock, on the
subscribed capital stock, or on the paid-up capital stock of a corporation? Will the
Committee please enlighten me on this?

MR. VILLEGAS. Yes.48

MR. VILLEGAS. We have just had a long discussion with the members of the team
from the UP Law Center who provided us a draft. The phrase that is contained here
which we adopted from the UP draft is 60 percent of voting stock.

xxxx
MR. NOLLEDO. That must be based on the subscribed capital stock, because unless

MR. AZCUNA. May I be clarified as to that portion that was accepted by the

declared delinquent, unpaid capital stock shall be entitled to vote.

Committee.

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MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase

controlling interest or shares entitled to vote, is the definition of a Philippine national

voting stock or controlling interest.

in the Foreign Investments Act of 1991,50 to wit:


SEC. 3. Definitions. - As used in this Act:
a. The term Philippine national shall mean a citizen of the Philippines; or a domestic

MR. AZCUNA. Hence, without the Davide amendment, the committee report would

partnership or association wholly owned by citizens of the Philippines; or a

read: corporations or associations at least sixty percent of whose CAPITAL is owned

corporation organized under the laws of the Philippines of which at least sixty percent

by such citizens.

(60%) of the capital stock outstanding and entitled to vote is owned and held by
citizens of the Philippines; or a corporation organized abroad and registered as doing
business in the Philippines under the Corporation Code of which one hundred percent
(100%) of the capital stock outstanding and entitled to vote is wholly owned by

MR. VILLEGAS. Yes.

Filipinos or a trustee of funds for pension or other employee retirement or separation


benefits, where the trustee is a Philippine national and at least sixty percent (60%) of
the fund will accrue to the benefit of Philippine nationals: Provided, That where a
corporation and its non-Filipino stockholders own stocks in a Securities and Exchange

MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of

Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital

the capital to be owned by citizens.

stock outstanding and entitled to vote of each of both corporations must be owned

MR. VILLEGAS. That is right.

and held by citizens of the Philippines and at least sixty percent (60%) of the

MR. AZCUNA. But the control can be with the foreigners even if they are the minority.

members of the Board of Directors of each of both corporations must be citizens of

Let us say 40 percent of the capital is owned by them, but it is the voting capital,

the Philippines, in order that the corporation, shall be considered a Philippine

whereas, the Filipinos own the nonvoting shares. So we can have a situation where

national. (Emphasis supplied)

the corporation is controlled by foreigners despite being the minority because they

In explaining the definition of a Philippine national, the Implementing Rules and

have the voting capital. That is the anomaly that would result here.

Regulations of the Foreign Investments Act of 1991 provide:

MR. BENGZON. No, the reason we eliminated the word stock as stated in the 1973
and 1935 Constitutions is that according to Commissioner Rodrigo, there are
associations that do not have stocks. That is why we say CAPITAL.

b. Philippine national shall mean a citizen of the Philippines or a domestic


partnership or association wholly owned by the citizens of the Philippines; or a

MR. AZCUNA. We should not eliminate the phrase controlling interest.

corporation organized under the laws of the Philippines of which at least sixty percent

MR. BENGZON. In the case of stock corporations, it is assumed.49 (Emphasis

[60%] of the capital stock outstanding and entitled to vote is owned and held by

supplied)

citizens of the Philippines; or a trustee of funds for pension or other employee

Thus, 60 percent of the capital assumes, or should result in, controlling interest in

retirement or separation benefits, where the trustee is a Philippine national and at

the corporation. Reinforcing this interpretation of the term capital, as referring to

least sixty percent [60%] of the fund will accrue to the benefit of the Philippine

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nationals; Provided, that where a corporation its non-Filipino stockholders own stocks

9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No. 10055; and (7) Ship

in a Securities and Exchange Commission [SEC] registered enterprise, at least sixty

Mortgage Decree or P.D. No. 1521. Hence, the term capital in Section 11, Article XII

percent [60%] of the capital stock outstanding and entitled to vote of both corporations

of the Constitution is also used in the same context in numerous laws reserving

must be owned and held by citizens of the Philippines and at least sixty percent [60%]

certain areas of investments to Filipino citizens.

of the members of the Board of Directors of each of both corporation must be citizens
of the Philippines, in order that the corporation shall be considered a Philippine

To construe broadly the term capital as the total outstanding capital stock, including

national. The control test shall be applied for this purpose.

both common and non-voting preferred shares, grossly contravenes the intent and

Compliance with the required Filipino ownership of a corporation shall be determined

letter of the Constitution that the State shall develop a self-reliant and independent

on the basis of outstanding capital stock whether fully paid or not, but only such

national economy effectively controlled by Filipinos. A broad definition unjustifiably

stocks which are generally entitled to vote are considered.

disregards who owns the all-important voting stock, which necessarily equates to

For stocks to be deemed owned and held by Philippine citizens or Philippine

control of the public utility.

nationals, mere legal title is not enough to meet the required Filipino equity. Full
beneficial ownership of the stocks, coupled with appropriate voting rights is essential.
Thus, stocks, the voting rights of which have been assigned or transferred to aliens
cannot be considered held by Philippine citizens or Philippine nationals.

We shall illustrate the glaring anomaly in giving a broad definition to the term capital.

Individuals or juridical entities not meeting the aforementioned qualifications are

Let us assume that a corporation has 100 common shares owned by foreigners and

considered as non-Philippine nationals. (Emphasis supplied)

1,000,000 non-voting preferred shares owned by Filipinos, with both classes of share

Mere legal title is insufficient to meet the 60 percent Filipino-owned capital required

having a par value of one peso (P1.00) per share. Under the broad definition of the

in the Constitution. Full beneficial ownership of 60 percent of the outstanding capital

term capital, such corporation would be considered compliant with the 40 percent

stock, coupled with 60 percent of the voting rights, is required. The legal and

constitutional limit on foreign equity of public utilities since the overwhelming majority,

beneficial ownership of 60 percent of the outstanding capital stock must rest in the

or more than 99.999 percent, of the total outstanding capital stock is Filipino owned.

hands of Filipino nationals in accordance with the constitutional mandate. Otherwise,

This is obviously absurd.

the corporation is considered as non-Philippine national[s].

In the example given, only the foreigners holding the common shares have voting

Under Section 10, Article XII of the Constitution, Congress may reserve to citizens of

rights in the election of directors, even if they hold only 100 shares. The foreigners,

the Philippines or to corporations or associations at least sixty per centum of whose

with a minuscule equity of less than 0.001 percent, exercise control over the public

capital is owned by such citizens, or such higher percentage as Congress may

utility. On the other hand, the Filipinos, holding more than 99.999 percent of the

prescribe, certain areas of investments. Thus, in numerous laws Congress has

equity, cannot vote in the election of directors and hence, have no control over the

reserved certain areas of investments to Filipino citizens or to corporations at least

public utility. This starkly circumvents the intent of the framers of the Constitution, as

sixty percent of the capital of which is owned by Filipino citizens. Some of these laws

well as the clear language of the Constitution, to place the control of public utilities in

are: (1) Regulation of Award of Government Contracts or R.A. No. 5183; (2) Philippine

the hands of Filipinos. It also renders illusory the State policy of an independent

Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro, Small and

national economy effectively controlled by Filipinos.

Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping Development

The example given is not theoretical but can be found in the real world, and in fact

Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004 or R.A. No.

exists in the present case.

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Holders of PLDT preferred shares are explicitly denied of the right to vote in the

election of directors, they also have very little and obviously negligible dividend

election of directors. PLDTs Articles of Incorporation expressly state that the holders

earning capacity compared to common shares.

of Serial Preferred Stock shall not be entitled to vote at any meeting of the
stockholders for the election of directors or for any other purpose or otherwise
participate in any action taken by the corporation or its stockholders, or to receive
notice of any meeting of stockholders.51

As shown in PLDTs 2010 GIS,60 as submitted to the SEC, the par value of PLDT

On the other hand, holders of common shares are granted the exclusive right to vote

common shares is P5.00 per share, whereas the par value of preferred shares is

in the election of directors. PLDTs Articles of Incorporation52 state that each holder

P10.00 per share. In other words, preferred shares have twice the par value of

of Common Capital Stock shall have one vote in respect of each share of such stock

common shares but cannot elect directors and have only 1/70 of the dividends of

held by him on all matters voted upon by the stockholders, and the holders of

common shares. Moreover, 99.44% of the preferred shares are owned by Filipinos

Common Capital Stock shall have the exclusive right to vote for the election of

while foreigners own only a minuscule 0.56% of the preferred shares.61 Worse,

directors and for all other purposes.53

preferred shares constitute 77.85% of the authorized capital stock of PLDT while

In short, only holders of common shares can vote in the election of directors, meaning

common shares constitute only 22.15%.62 This undeniably shows that beneficial

only common shareholders exercise control over PLDT. Conversely, holders of

interest in PLDT is not with the non-voting preferred shares but with the common

preferred shares, who have no voting rights in the election of directors, do not have

shares, blatantly violating the constitutional requirement of 60 percent Filipino control

any control over PLDT. In fact, under PLDTs Articles of Incorporation, holders of

and Filipino beneficial ownership in a public utility.

common shares have voting rights for all purposes, while holders of preferred shares

The legal and beneficial ownership of 60 percent of the outstanding capital stock must

have no voting right for any purpose whatsoever.

rest in the hands of Filipinos in accordance with the constitutional mandate. Full

It must be stressed, and respondents do not dispute, that foreigners hold a majority of

beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60

the common shares of PLDT. In fact, based on PLDTs 2010 General Information

percent of the voting rights, is constitutionally required for the States grant of authority

Sheet (GIS),54 which is a document required to be submitted annually to the

to operate a public utility. The undisputed fact that the PLDT preferred shares, 99.44%

Securities and Exchange Commission,55 foreigners hold 120,046,690 common

owned by Filipinos, are non-voting and earn only 1/70 of the dividends that PLDT

shares of PLDT whereas Filipinos hold only 66,750,622 common shares.56 In other

common shares earn, grossly violates the constitutional requirement of 60 percent

words, foreigners hold 64.27% of the total number of PLDTs common shares, while

Filipino control and Filipino beneficial ownership of a public utility.

Filipinos hold only 35.73%. Since holding a majority of the common shares equates to
control, it is clear that foreigners exercise control over PLDT. Such amount of control

In short, Filipinos hold less than 60 percent of the voting stock, and earn less than 60

unmistakably exceeds the allowable 40 percent limit on foreign ownership of public

percent of the dividends, of PLDT. This directly contravenes the express command in

utilities expressly mandated in Section 11, Article XII of the Constitution.

Section 11, Article XII of the Constitution that [n]o franchise, certificate, or any other

Moreover, the Dividend Declarations of PLDT for 2009,57 as submitted to the SEC,

form of authorization for the operation of a public utility shall be granted except to x x x

shows that per share the SIP58 preferred shares earn a pittance in dividends

corporations x x x organized under the laws of the Philippines, at least sixty per

compared to the common shares. PLDT declared dividends for the common shares at

centum of whose capital is owned by such citizens x x x.

P70.00 per share, while the declared dividends for the preferred shares amounted to

To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of

a measly P1.00 per share.59 So the preferred shares not only cannot vote in the

shares exercises the sole right to vote in the election of directors, and thus exercise

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control over PLDT; (2) Filipinos own only 35.73% of PLDTs common shares,

executing provisions of the Constitution. The rationale why these constitutional

constituting a minority of the voting stock, and thus do not exercise control over PLDT;

provisions are self-executing was explained in Manila Prince Hotel v. GSIS,66 thus:

(3) preferred shares, 99.44% owned by Filipinos, have no voting rights; (4) preferred
shares earn only 1/70 of the dividends that common shares earn;63 (5) preferred

x x x Hence, unless it is expressly provided that a legislative act is necessary to

shares have twice the par value of common shares; and (6) preferred shares

enforce a constitutional mandate, the presumption now is that all provisions of the

constitute 77.85% of the authorized capital stock of PLDT and common shares only

constitution are self-executing. If the constitutional provisions are treated as requiring

22.15%. This kind of ownership and control of a public utility is a mockery of the

legislation instead of self-executing, the legislature would have the power to ignore

Constitution.

and practically nullify the mandate of the fundamental law. This can be cataclysmic.

Incidentally, the fact that PLDT common shares with a par value of P5.00 have a

That is why the prevailing view is, as it has always been, that

current stock market value of P2,328.00 per share,64 while PLDT preferred shares

. . . in case of doubt, the Constitution should be considered self-executing rather than

with a par value of P10.00 per share have a current stock market value ranging from

non-self-executing. . . . Unless the contrary is clearly intended, the provisions of the

only P10.92 to P11.06 per share,65 is a glaring confirmation by the market that

Constitution should be considered self-executing, as a contrary rule would give the

control and beneficial ownership of PLDT rest with the common shares, not with the

legislature discretion to determine when, or whether, they shall be effective. These

preferred shares.

provisions would be subordinated to the will of the lawmaking body, which could make

Indisputably, construing the term capital in Section 11, Article XII of the Constitution

them entirely meaningless by simply refusing to pass the needed implementing

to include both voting and non-voting shares will result in the abject surrender of our

statute. (Emphasis supplied)

telecommunications industry to foreigners, amounting to a clear abdication of the

In Manila Prince Hotel, even the Dissenting Opinion of then Associate Justice

States constitutional duty to limit control of public utilities to Filipino citizens. Such an

Reynato S. Puno, later Chief Justice, agreed that constitutional provisions are

interpretation certainly runs counter to the constitutional provision reserving certain

presumed to be self-executing. Justice Puno stated:

areas of investment to Filipino citizens, such as the exploitation of natural resources


as well as the ownership of land, educational institutions and advertising businesses.

Courts as a rule consider the provisions of the Constitution as self-executing, rather

The Court should never open to foreign control what the Constitution has expressly

than as requiring future legislation for their enforcement. The reason is not difficult to

reserved to Filipinos for that would be a betrayal of the Constitution and of the national

discern. For if they are not treated as self-executing, the mandate of the fundamental

interest. The Court must perform its solemn duty to defend and uphold the intent and

law ratified by the sovereign people can be easily ignored and nullified by Congress.

letter of the Constitution to ensure, in the words of the Constitution, a self-reliant and

Suffused with wisdom of the ages is the unyielding rule that legislative actions may

independent national economy effectively controlled by Filipinos.

give breath to constitutional rights but congressional inaction should not suffocate
them.
Thus, we have treated as self-executing the provisions in the Bill of Rights on arrests,
searches and seizures, the rights of a person under custodial investigation, the rights

Section 11, Article XII of the Constitution, like other provisions of the Constitution

of an accused, and the privilege against self-incrimination. It is recognized that

expressly reserving to Filipinos specific areas of investment, such as the development

legislation is unnecessary to enable courts to effectuate constitutional provisions

of natural resources and ownership of land, educational institutions and advertising

guaranteeing the fundamental rights of life, liberty and the protection of property. The

business, is self-executing. There is no need for legislation to implement these self-

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same treatment is accorded to constitutional provisions forbidding the taking or

mandamus to hear and decide a possible violation of any law it administers or

damaging of property for public use without just compensation. (Emphasis supplied)

enforces when it is mandated by law to investigate such violation.

Thus, in numerous cases,67 this Court, even in the absence of implementing

Under Section 17(4)70 of the Corporation Code, the SEC has the regulatory function

legislation, applied directly the provisions of the 1935, 1973 and 1987 Constitutions

to reject or disapprove the Articles of Incorporation of any corporation where the

limiting land ownership to Filipinos. In Soriano v. Ong Hoo,68 this Court ruled:

required percentage of ownership of the capital stock to be owned by citizens of the

x x x As the Constitution is silent as to the effects or consequences of a sale by a

Philippines has not been complied with as required by existing laws or the

citizen of his land to an alien, and as both the citizen and the alien have violated the

Constitution. Thus, the SEC is the government agency tasked with the statutory duty

law, none of them should have a recourse against the other, and it should only be the

to enforce the nationality requirement prescribed in Section 11, Article XII of the

State that should be allowed to intervene and determine what is to be done with the

Constitution on the ownership of public utilities. This Court, in a petition for

property subject of the violation. We have said that what the State should do or could

declaratory relief that is treated as a petition for mandamus as in the present case,

do in such matters is a matter of public policy, entirely beyond the scope of judicial

can direct the SEC to perform its statutory duty under the law, a duty that the SEC

authority. (Dinglasan, et al. vs. Lee Bun Ting, et al., 6 G. R. No. L-5996, June 27,

has apparently unlawfully neglected to do based on the 2010 GIS that respondent

1956.) While the legislature has not definitely decided what policy should be followed

PLDT submitted to the SEC.

in cases of violations against the constitutional prohibition, courts of justice cannot go


beyond by declaring the disposition to be null and void as violative of the Constitution.

Under Section 5(m) of the Securities Regulation Code,71 the SEC is vested with the

x x x (Emphasis supplied)

power and function to suspend or revoke, after proper notice and hearing, the

To treat Section 11, Article XII of the Constitution as not self-executing would mean

franchise or certificate of registration of corporations, partnerships or associations,

that since the 1935 Constitution, or over the last 75 years, not one of the constitutional

upon any of the grounds provided by law. The SEC is mandated under Section 5(d)

provisions expressly reserving specific areas of investments to corporations, at least

of the same Code with the power and function to investigate x x x the activities of

60 percent of the capital of which is owned by Filipinos, was enforceable. In short,

persons to ensure compliance with the laws and regulations that SEC administers or

the framers of the 1935, 1973 and 1987 Constitutions miserably failed to effectively

enforces. The GIS that all corporations are required to submit to SEC annually should

reserve to Filipinos specific areas of investment, like the operation by corporations of

put the SEC on guard against violations of the nationality requirement prescribed in

public utilities, the exploitation by corporations of mineral resources, the ownership by

the Constitution and existing laws. This Court can compel the SEC, in a petition for

corporations of real estate, and the ownership of educational institutions. All the

declaratory relief that is treated as a petition for mandamus as in the present case, to

legislatures that convened since 1935 also miserably failed to enact legislations to

hear and decide a possible violation of Section 11, Article XII of the Constitution in

implement these vital constitutional provisions that determine who will effectively

view of the ownership structure of PLDTs voting shares, as admitted by respondents

control the national economy, Filipinos or foreigners. This Court cannot allow such an

and as stated in PLDTs 2010 GIS that PLDT submitted to SEC.

absurd interpretation of the Constitution.

WHEREFORE, we PARTLY GRANT the petition and rule that the term capital in

This Court has held that the SEC has both regulatory and adjudicative functions.69

Section 11, Article XII of the 1987 Constitution refers only to shares of stock entitled

Under its regulatory functions, the SEC can be compelled by mandamus to perform

to vote in the election of directors, and thus in the present case only to common

its statutory duty when it unlawfully neglects to perform the same. Under its

shares, and not to the total outstanding capital stock (common and non-voting

adjudicative or quasi-judicial functions, the SEC can be also be compelled by

preferred shares). Respondent Chairperson of the Securities and Exchange


Commission is DIRECTED to apply this definition of the term capital in determining

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the extent of allowable foreign ownership in respondent Philippine Long Distance

agrees with the Court's definition of the term "capital" in Section 11, Article XII of the

Telephone Company, and if there is a violation of Section 11, Article XII of the

Constitution. During the Oral Arguments on 26 June 2012, the OSG reiterated its

Constitution, to impose the appropriate sanctions under the law.

position consistent with the Court's 28 June 2011 Decision.

SO ORDERED.
G.R. No. 176579

October 9, 2012

We deny the motions for reconsideration.

HEIRS OF WILSON P. GAMBOA,* Petitioners,

I.

vs.
FINANCE

Far-reaching implications of the legal issue justify


SECRETARYMARGARITO

B.

TEVES,

FINANCE

treatment of petition for declaratory relief as one for mandamus.

UNDERSECRETARYJOHN P. SEVILLA, AND COMMISSIONER RICARDO ABCEDE


OF THE PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT(PCGG) IN

As we emphatically stated in the 28 June 2011 Decision, the interpretation of the term

THEIR CAPACITIES AS CHAIR AND MEMBERS, RESPECTIVELY, OF THE

"capital" in Section 11, Article XII of the Constitution has far-reaching implications to

PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC CO.,

the national economy. In fact, a resolution of this issue will determine whether

LTD. IN HIS CAPACITY AS DIRECTOR OF METRO PACIFIC ASSET HOLDINGS

Filipinos are masters, or second-class citizens, in their own country. What is at stake

INC., CHAIRMAN MANUEL V. PANGILINAN OF PHILIPPINE LONG DISTANCE

here is whether Filipinos or foreigners will have effective control of the Philippine

TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS MANAGING DIRECTOR OF

national economy. Indeed, if ever there is a legal issue that has far-reaching

FIRST PACIFIC CO., LTD., PRESIDENT NAPOLEON L. NAZARENO OF

implications to the entire nation, and to future generations of Filipinos, it is the

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, CHAIR FE BARIN OF THE

threshold legal issue presented in this case.

SECURITIES AND EXCHANGE COMMISSION, and PRESIDENT FRANCIS LIM OF


THE PHILIPPINE STOCK EXCHANGE, Respondents.

Contrary to Pangilinans narrow view, the serious economic consequences resulting in


the interpretation of the term "capital" in Section 11, Article XII of the Constitution

PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioner-in-Intervention.

undoubtedly demand an immediate adjudication of this issue. Simply put, the far-

RESOLUTION

reaching implications of this issue justify the treatment of the petition as one for

CARPIO, J.:

mandamus.7

This resolves the motions for reconsideration of the 28 June 2011 Decision filed by (1)

In Luzon Stevedoring Corp. v. Anti-Dummy Board,8 the Court deemed it wise and

the Philippine Stock Exchange's (PSE) President, 1 (2) Manuel V. Pangilinan

expedient to resolve the case although the petition for declaratory relief could be

(Pangilinan),2 (3) Napoleon L. Nazareno (Nazareno ),3 and ( 4) the Securities and

outrightly dismissed for being procedurally defective. There, appellant admittedly had

Exchange Commission (SEC)4 (collectively, movants ).

already committed a breach of the Public Service Act in relation to the Anti-Dummy
Law since it had been employing non- American aliens long before the decision in a

The Office of the Solicitor General (OSG) initially filed a motion for reconsideration on

prior similar case. However, the main issue in Luzon Stevedoring was of

behalfofthe SEC,5 assailing the 28 June 2011 Decision. However, it subsequently

transcendental importance, involving the exercise or enjoyment of rights, franchises,

filed a Consolidated Comment on behalf of the State,6 declaring expressly that it

privileges, properties and businesses which only Filipinos and qualified corporations

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could exercise or enjoy under the Constitution and the statutes. Moreover, the same

of stock, whether voting or non-voting. To repeat, until the present case there has

issue could be raised by appellant in an appropriate action. Thus, in Luzon

never been a Court ruling categorically defining the term "capital" found in the various

Stevedoring the Court deemed it necessary to finally dispose of the case for the

economic provisions of the 1935, 1973 and 1987 Philippine Constitutions.

guidance of all concerned, despite the apparent procedural flaw in the petition.
The opinions of the SEC, as well as of the Department of Justice (DOJ), on the
The circumstances surrounding the present case, such as the supposed procedural

definition of the term "capital" as referring to both voting and non-voting shares

defect of the petition and the pivotal legal issue involved, resemble those in Luzon

(combined total of common and preferred shares) are, in the first place, conflicting

Stevedoring. Consequently, in the interest of substantial justice and faithful adherence

and inconsistent. There is no basis whatsoever to the claim that the SEC and the DOJ

to the Constitution, we opted to resolve this case for the guidance of the public and all

have consistently and uniformly adopted a definition of the term "capital" contrary to

concerned parties.

the definition that this Court adopted in its 28 June 2011 Decision.

II.

In DOJ Opinion No. 130, s. 1985,10 dated 7 October 1985, the scope of the term

No change of any long-standing rule;

"capital" in Section 9, Article XIV of the 1973 Constitution was raised, that is, whether

thus, no redefinition of the term "capital."

the term "capital" includes "both preferred and common stocks." The issue was raised
in relation to a stock-swap transaction between a Filipino and a Japanese corporation,

Movants contend that the term "capital" in Section 11, Article XII of the Constitution

both stockholders of a domestic corporation that owned lands in the Philippines. Then

has long been settled and defined to refer to the total outstanding shares of stock,

Minister of Justice Estelito P. Mendoza ruled that the resulting ownership structure of

whether voting or non-voting. In fact, movants claim that the SEC, which is the

the corporation would be unconstitutional because 60% of the voting stock would be

administrative agency tasked to enforce the 60-40 ownership requirement in favor of

owned by Japanese while Filipinos would own only 40% of the voting stock, although

Filipino citizens in the Constitution and various statutes, has consistently adopted this

when the non-voting stock is added, Filipinos would own 60% of the combined voting

particular definition in its numerous opinions. Movants point out that with the 28 June

and non-voting stock. This ownership structure is remarkably similar to the current

2011 Decision, the Court in effect introduced a "new" definition or "midstream

ownership structure of PLDT. Minister Mendoza ruled:

redefinition"9 of the term "capital" in Section 11, Article XII of the Constitution.
xxxx
This is egregious error.
Thus, the Filipino group still owns sixty (60%) of the entire subscribed capital stock
For more than 75 years since the 1935 Constitution, the Court has not interpreted or

(common and preferred) while the Japanese investors control sixty percent (60%) of

defined the term "capital" found in various economic provisions of the 1935, 1973 and

the common (voting) shares.

1987 Constitutions. There has never been a judicial precedent interpreting the term
"capital" in the 1935, 1973 and 1987 Constitutions, until now. Hence, it is patently

It is your position that x x x since Section 9, Article XIV of the Constitution uses the

wrong and utterly baseless to claim that the Court in defining the term "capital" in its

word "capital," which is construed "to include both preferred and common shares" and

28 June 2011 Decision modified, reversed, or set aside the purported long-standing

"that where the law does not distinguish, the courts shall not distinguish."

definition of the term "capital," which supposedly refers to the total outstanding shares

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xxxx
Further, under, and for purposes of, the FIA, MLRC and BFDC are both Philippine
In light of the foregoing jurisprudence, it is my opinion that the stock-swap transaction

nationals, considering that: (1) sixty percent (60%) of their respective outstanding

in question may not be constitutionally upheld. While it may be ordinary corporate

capital stock entitled to vote is owned by a Philippine national (i.e., by the Trustee, in

practice to classify corporate shares into common voting shares and preferred non-

the case of MLRC; and by MLRC, in the case of BFDC); and (2) at least 60% of their

voting shares, any arrangement which attempts to defeat the constitutional purpose

respective board of directors are Filipino citizens. (Boldfacing and italicization

should be eschewed. Thus, the resultant equity arrangement which would place

supplied)

ownership of 60%11 of the common (voting) shares in the Japanese group, while
retaining 60% of the total percentage of common and preferred shares in Filipino

Clearly, these DOJ and SEC opinions are compatible with the Courts interpretation of

hands would amount to circumvention of the principle of control by Philippine

the 60-40 ownership requirement in favor of Filipino citizens mandated by the

stockholders that is implicit in the 60% Philippine nationality requirement in the

Constitution for certain economic activities. At the same time, these opinions highlight

Constitution. (Emphasis supplied)

the conflicting, contradictory, and inconsistent positions taken by the DOJ and the
SEC on the definition of the term "capital" found in the economic provisions of the

In short, Minister Mendoza categorically rejected the theory that the term "capital" in

Constitution.

Section 9, Article XIV of the 1973 Constitution includes "both preferred and common
stocks" treated as the same class of shares regardless of differences in voting rights

The opinions issued by SEC legal officers do not have the force and effect of SEC

and privileges. Minister Mendoza stressed that the 60-40 ownership requirement in

rules and regulations because only the SEC en banc can adopt rules and regulations.

favor of Filipino citizens in the Constitution is not complied with unless the corporation

As expressly provided in Section 4.6 of the Securities Regulation Code,12 the SEC

"satisfies the criterion of beneficial ownership" and that in applying the same "the

cannot delegate to any of its individual Commissioner or staff the power to adopt any

primordial consideration is situs of control."

rule or regulation. Further, under Section 5.1 of the same Code, it is the SEC as a
collegial body, and not any of its legal officers, that is empowered to issue opinions

On the other hand, in Opinion No. 23-10 dated 18 August 2010, addressed to Castillo

and approve rules and regulations. Thus:

Laman Tan Pantaleon & San Jose, then SEC General Counsel Vernette G. UmaliPaco applied the Voting Control Test, that is, using only the voting stock to determine

4.6. The Commission may, for purposes of efficiency, delegate any of its functions to

whether a corporation is a Philippine national. The Opinion states:

any department or office of the Commission, an individual Commissioner or staff


member of the Commission except its review or appellate authority and its power to

Applying the foregoing, particularly the Control Test, MLRC is deemed as a Philippine

adopt, alter and supplement any rule or regulation.

national because: (1) sixty percent (60%) of its outstanding capital stock entitled to
vote is owned by a Philippine national, the Trustee; and (2) at least sixty percent

The Commission may review upon its own initiative or upon the petition of any

(60%) of the ERF will accrue to the benefit of Philippine nationals. Still pursuant to the

interested party any action of any department or office, individual Commissioner, or

Control Test, MLRCs investment in 60% of BFDCs outstanding capital stock entitled

staff member of the Commission.

to vote shall be deemed as of Philippine nationality, thereby qualifying BFDC to own


private land.

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SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act
with transparency and shall have the powers and functions provided by this Code,

Thats correct, Your Honor.

Presidential Decree No. 902-A, the Corporation Code, the Investment Houses Law,
the Financing Company Act and other existing laws. Pursuant thereto the Commission

JUSTICE CARPIO:

shall have, among others, the following powers and functions:


Can the Commission En Banc delegate this function to an SEC officer?
xxxx
COMMISSIONER GAITE:
(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue
opinions and provide guidance on and supervise compliance with such rules,

Yes, Your Honor, we have delegated it to the General Counsel.

regulations and orders;


JUSTICE CARPIO:
x x x x (Emphasis supplied)
It can be delegated. What cannot be delegated by the Commission En Banc to a
Thus, the act of the individual Commissioners or legal officers of the SEC in issuing

commissioner or an individual employee of the Commission?

opinions that have the effect of SEC rules or regulations is ultra vires. Under Sections
4.6 and 5.1(g) of the Code, only the SEC en banc can "issue opinions" that have the

COMMISSIONER GAITE:

force and effect of rules or regulations. Section 4.6 of the Code bars the SEC en banc
from delegating to any individual Commissioner or staff the power to adopt rules or

Novel opinions that [have] to be decided by the En Banc...

regulations. In short, any opinion of individual Commissioners or SEC legal officers


does not constitute a rule or regulation of the SEC.

JUSTICE CARPIO:

The SEC admits during the Oral Arguments that only the SEC en banc, and not any of

What cannot be delegated, among others, is the power to adopt or amend rules and

its individual commissioners or legal staff, is empowered to issue opinions which have

regulations, correct?

the same binding effect as SEC rules and regulations, thus:


COMMISSIONER GAITE:
JUSTICE CARPIO:
Thats correct, Your Honor.
So, under the law, it is the Commission En Banc that can issue an
JUSTICE CARPIO:
SEC Opinion, correct?
So, you combine the two (2), the SEC officer, if delegated that power, can issue an
COMMISSIONER GAITE:13

opinion but that opinion does not constitute a rule or regulation, correct?

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The avowed purpose of the Constitution is to place in the hands of Filipinos the
COMMISSIONER GAITE:

exploitation of our natural resources. Necessarily, therefore, the Rule interpreting the
constitutional provision should not diminish that right through the legal fiction of

Correct, Your Honor.

corporate ownership and control. But the constitutional provision, as interpreted and
practiced via the 1967 SEC Rules, has favored foreigners contrary to the command of

JUSTICE CARPIO:

the Constitution. Hence, the Grandfather Rule must be applied to accurately


determine the actual participation, both direct and indirect, of foreigners in a

So, all of these opinions that you mentioned they are not rules and regulations,

corporation engaged in a nationalized activity or business.

correct?
Compliance with the constitutional limitation(s) on engaging in nationalized activities
COMMISSIONER GAITE:

must be determined by ascertaining if 60% of the investing corporations outstanding


capital stock is owned by "Filipino citizens", or as interpreted, by natural or individual

They are not rules and regulations.

Filipino citizens. If such investing corporation is in turn owned to some extent by


another investing corporation, the same process must be observed. One must not

JUSTICE CARPIO:

stop until the citizenships of the individual or natural stockholders of layer after layer of
investing corporations have been established, the very essence of the Grandfather

If they are not rules and regulations, they apply only to that particular situation and will

Rule.

not constitute a precedent, correct?


Lastly, it was the intent of the framers of the 1987 Constitution to adopt the
COMMISSIONER GAITE:

Grandfather Rule. In one of the discussions on what is now Article XII of the present
Constitution, the framers made the following exchange:

Yes, Your Honor.14 (Emphasis supplied)


MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity
Significantly, the SEC en banc, which is the collegial body statutorily empowered to

and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in

issue rules and opinions on behalf of the SEC, has adopted even the Grandfather

Section 15.

Rule in determining compliance with the 60-40 ownership requirement in favor of


Filipino citizens mandated by the Constitution for certain economic activities. This

MR. VILLEGAS. That is right.

prevailing SEC ruling, which the SEC correctly adopted to thwart any circumvention of
the required Filipino "ownership and control," is laid down in the 25 March 2010 SEC

MR. NOLLEDO. In teaching law, we are always faced with the question: Where do we

en banc ruling in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et

base the equity requirement, is it on the authorized capital stock, on the subscribed

al.,15 to wit:

capital stock, or on the paid-up capital stock of a corporation? Will the Committee
please enlighten me on this?

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MR. VILLEGAS. We have just had a long discussion with the members of the team
from the UP Law Center who provided us a draft. The phrase that is contained here

Both the Voting Control Test and the Beneficial Ownership Test must be applied to

which we adopted from the UP draft is 60 percent of voting stock.

determine whether a corporation is a "Philippine national."

MR. NOLLEDO. That must be based on the subscribed capital stock, because unless

The interpretation by legal officers of the SEC of the term "capital," embodied in

declared delinquent, unpaid capital stock shall be entitled to vote.

various opinions which respondents relied upon, is merely preliminary and an opinion
only of such officers. To repeat, any such opinion does not constitute an SEC rule or

MR. VILLEGAS. That is right.

regulation. In fact, many of these opinions contain a disclaimer which expressly


states: "x x x the foregoing opinion is based solely on facts disclosed in your query

MR. NOLLEDO. Thank you. With respect to an investment by one corporation in

and relevant only to the particular issue raised therein and shall not be used in the

another corporation, say, a corporation with 60-40 percent equity invests in another

nature of a standing rule binding upon the Commission in other cases whether of

corporation which is permitted by the Corporation Code, does the Committee adopt

similar or dissimilar circumstances."16 Thus, the opinions clearly make a caveat that

the grandfather rule?

they do not constitute binding precedents on any one, not even on the SEC itself.

MR. VILLEGAS. Yes, that is the understanding of the Committee.

Likewise, the opinions of the SEC en banc, as well as of the DOJ, interpreting the law
are neither conclusive nor controlling and thus, do not bind the Court. It is hornbook

MR. NOLLEDO. Therefore, we need additional Filipino capital?

doctrine that any interpretation of the law that administrative or quasi-judicial agencies
make is only preliminary, never conclusive on the Court. The power to make a final

MR. VILLEGAS. Yes. (Boldfacing and underscoring supplied; italicization in the

interpretation of the law, in this case the term "capital" in Section 11, Article XII of the

original)

1987 Constitution, lies with this Court, not with any other government entity.

This SEC en banc ruling conforms to our 28 June 2011 Decision that the 60-40

In his motion for reconsideration, the PSE President cites the cases of National

ownership requirement in favor of Filipino citizens in the Constitution to engage in

Telecommunications Commission v. Court of Appeals17 and Philippine Long Distance

certain economic activities applies not only to voting control of the corporation, but

Telephone Company v. National Telecommunications Commission18 in arguing that

also to the beneficial ownership of the corporation. Thus, in our 28 June 2011

the Court has already defined the term "capital" in Section 11, Article XII of the 1987

Decision we stated:

Constitution.19

Mere legal title is insufficient to meet the 60 percent Filipinoowned "capital" required in

The

the Constitution. Full beneficial ownership of 60 percent of the outstanding capital

Telecommunications v. Court of Appeals20 and Philippine Long Distance Telephone

stock, coupled with 60 percent of the voting rights, is required. The legal and

Company v. National Telecommunications Commission,21 the Court did not define

beneficial ownership of 60 percent of the outstanding capital stock must rest in the

the term "capital" as found in Section 11, Article XII of the 1987 Constitution. In fact,

hands of Filipino nationals in accordance with the constitutional mandate. Otherwise,

these two cases never mentioned, discussed or cited Section 11, Article XII of the

the corporation is "considered as non-Philippine national[s]." (Emphasis supplied)

Constitution or any of its economic provisions, and thus cannot serve as precedent in

230

PSE

President

is

grossly

mistaken.

In

both

cases

of

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the interpretation of Section 11, Article XII of the Constitution. These two cases dealt

and secure to ourselves and our posterity, the blessings of independence and

solely with the determination of the correct regulatory fees under Section 40(e) and (f)

democracy under the rule of law and a regime of truth, justice, freedom, love, equality,

of the Public Service Act, to wit:

and peace, do ordain and promulgate this Constitution. (Emphasis supplied)

(e) For annual reimbursement of the expenses incurred by the Commission in the

Consistent with these ideals, Section 19, Article II of the 1987 Constitution declares

supervision of other public services and/or in the regulation or fixing of their rates,

as State policy the development of a national economy "effectively controlled" by

twenty centavos for each one hundred pesos or fraction thereof, of the capital stock

Filipinos:

subscribed or paid, or if no shares have been issued, of the capital invested, or of the
property and equipment whichever is higher.

Section 19. The State shall develop a self-reliant and independent national economy
effectively controlled by Filipinos.

(f) For the issue or increase of capital stock, twenty centavos for each one hundred
pesos or fraction thereof, of the increased capital. (Emphasis supplied)

Fortifying the State policy of a Filipino-controlled economy, the Constitution decrees:

The Courts interpretation in these two cases of the terms "capital stock subscribed or

Section 10. The Congress shall, upon recommendation of the economic and planning

paid," "capital stock" and "capital" does not pertain to, and cannot control, the

agency, when the national interest dictates, reserve to citizens of the Philippines or to

definition of the term "capital" as used in Section 11, Article XII of the Constitution, or

corporations or associations at least sixty per centum of whose capital is owned by

any of the economic provisions of the Constitution where the term "capital" is found.

such citizens, or such higher percentage as Congress may prescribe, certain areas of

The definition of the term "capital" found in the Constitution must not be taken out of

investments. The Congress shall enact measures that will encourage the formation

context. A careful reading of these two cases reveals that the terms "capital stock

and operation of enterprises whose capital is wholly owned by Filipinos.

subscribed or paid," "capital stock" and "capital" were defined solely to determine the
basis for computing the supervision and regulation fees under Section 40(e) and (f) of

In the grant of rights, privileges, and concessions covering the national economy and

the Public Service Act.

patrimony, the State shall give preference to qualified Filipinos.

III.

The State shall regulate and exercise authority over foreign investments within its

Filipinization of Public Utilities

national jurisdiction and in accordance with its national goals and priorities.23

The Preamble of the 1987 Constitution, as the prologue of the supreme law of the

Under Section 10, Article XII of the 1987 Constitution, Congress may "reserve to

land, embodies the ideals that the Constitution intends to achieve.22 The Preamble

citizens of the Philippines or to corporations or associations at least sixty per centum

reads:

of whose capital is owned by such citizens, or such higher percentage as Congress


may prescribe, certain areas of investments." Thus, in numerous laws Congress has

We, the sovereign Filipino people, imploring the aid of Almighty God, in order to build

reserved certain areas of investments to Filipino citizens or to corporations at least

a just and humane society, and establish a Government that shall embody our ideals

sixty percent of the "capital" of which is owned by Filipino citizens. Some of these

and aspirations, promote the common good, conserve and develop our patrimony,

laws are: (1) Regulation of Award of Government Contracts or R.A. No. 5183; (2)

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Philippine Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro, Small

owned by Filipino citizens. In other words, under Section 11, Article XII of the 1987

and Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping

Constitution, to own and operate a public utility a corporations capital must at least be

Development Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004

60 percent owned by Philippine nationals.

or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No. 10055;
and (7) Ship Mortgage Decree or P.D. No. 1521.

IV.
Definition of "Philippine National"

With respect to public utilities, the 1987 Constitution specifically ordains:


Pursuant to the express mandate of Section 11, Article XII of the 1987 Constitution,
Section 11. No franchise, certificate, or any other form of authorization for the

Congress enacted Republic Act No. 7042 or the Foreign Investments Act of 1991

operation of a public utility shall be granted except to citizens of the Philippines or to

(FIA), as amended, which defined a "Philippine national" as follows:

corporations or associations organized under the laws of the Philippines, at least sixty
per centum of whose capital is owned by such citizens; nor shall such franchise,

SEC. 3. Definitions. - As used in this Act:

certificate, or authorization be exclusive in character or for a longer period than fifty


years. Neither shall any such franchise or right be granted except under the condition

a. The term "Philippine national" shall mean a citizen of the Philippines; or a domestic

that it shall be subject to amendment, alteration, or repeal by the Congress when the

partnership or association wholly owned by citizens of the Philippines; or a

common good so requires. The State shall encourage equity participation in public

corporation organized under the laws of the Philippines of which at least sixty percent

utilities by the general public. The participation of foreign investors in the governing

(60%) of the capital stock outstanding and entitled to vote is owned and held by

body of any public utility enterprise shall be limited to their proportionate share in its

citizens of the Philippines; or a corporation organized abroad and registered as doing

capital, and all the executive and managing officers of such corporation or association

business in the Philippines under the Corporation Code of which one hundred percent

must be citizens of the Philippines. (Emphasis supplied)

(100%) of the capital stock outstanding and entitled to vote is wholly owned by
Filipinos or a trustee of funds for pension or other employee retirement or separation

This provision, which mandates the Filipinization of public utilities, requires that any

benefits, where the trustee is a Philippine national and at least sixty percent (60%) of

form of authorization for the operation of public utilities shall be granted only to

the fund will accrue to the benefit of Philippine nationals: Provided, That where a

"citizens of the Philippines or to corporations or associations organized under the laws

corporation and its non-Filipino stockholders own stocks in a Securities and Exchange

of the Philippines at least sixty per centum of whose capital is owned by such

Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital

citizens." "The provision is [an express] recognition of the sensitive and vital position

stock outstanding and entitled to vote of each of both corporations must be owned

of public utilities both in the national economy and for national security."24

and held by citizens of the Philippines and at least sixty percent (60%) of the
members of the Board of Directors of each of both corporations must be citizens of

The 1987 Constitution reserves the ownership and operation of public utilities

the Philippines, in order that the corporation, shall be considered a "Philippine

exclusively to (1) Filipino citizens, or (2) corporations or associations at least 60

national." (Boldfacing, italicization and underscoring supplied)

percent of whose "capital" is owned by Filipino citizens. Hence, in the case of


individuals, only Filipino citizens can validly own and operate a public utility. In the
case of corporations or associations, at least 60 percent of their "capital" must be

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Thus, the FIA clearly and unequivocally defines a "Philippine national" as a Philippine
citizen, or a domestic corporation at least "60% of the capital stock outstanding and

In turn, the definition of a "Philippine national" under Article 15 of the Omnibus

entitled to vote" is owned by Philippine citizens.

Investments Code of 1987 was a reiteration of the meaning of such term as provided
in Article 14 of the Omnibus Investments Code of 1981,28 to wit:

The definition of a "Philippine national" in the FIA reiterated the meaning of such term
as provided in its predecessor statute, Executive Order No. 226 or the Omnibus

Article 14. "Philippine national" shall mean a citizen of the Philippines; or a domestic

Investments Code of 1987,25 which was issued by then President Corazon C.

partnership or association wholly owned by citizens of the Philippines; or a

Aquino. Article 15 of this Code states:

corporation organized under the laws of the Philippines of which at least sixty per cent
(60%) of the capital stock outstanding and entitled to vote is owned and held by

Article 15. "Philippine national" shall mean a citizen of the Philippines or a diplomatic

citizens of the Philippines; or a trustee of funds for pension or other employee

partnership or association wholly-owned by citizens of the Philippines; or a

retirement or separation benefits, where the trustee is a Philippine national and at

corporation organized under the laws of the Philippines of which at least sixty per cent

least sixty per cent (60%) of the fund will accrue to the benefit of Philippine nationals:

(60%) of the capital stock outstanding and entitled to vote is owned and held by

Provided, That where a corporation and its non-Filipino stockholders own stock in a

citizens of the Philippines; or a trustee of funds for pension or other employee

registered enterprise, at least sixty per cent (60%) of the capital stock outstanding and

retirement or separation benefits, where the trustee is a Philippine national and at

entitled to vote of both corporations must be owned and held by the citizens of the

least sixty per cent (60%) of the fund will accrue to the benefit of Philippine nationals:

Philippines and at least sixty per cent (60%) of the members of the Board of Directors

Provided, That where a corporation and its non-Filipino stockholders own stock in a

of both corporations must be citizens of the Philippines in order that the corporation

registered enterprise, at least sixty per cent (60%) of the capital stock outstanding and

shall be considered a Philippine national. (Boldfacing, italicization and underscoring

entitled to vote of both corporations must be owned and held by the citizens of the

supplied)

Philippines and at least sixty per cent (60%) of the members of the Board of Directors
of both corporations must be citizens of the Philippines in order that the corporation

Under Article 69(3) of the Omnibus Investments Code of 1981, "no corporation x x x

shall be considered a Philippine national. (Boldfacing, italicization and underscoring

which is not a Philippine national x x x shall do business x x x in the Philippines x x x

supplied)

without first securing a written certificate from the Board of Investments to the effect
that such business or economic activity x x x would not conflict with the Constitution

Under Article 48(3)26 of the Omnibus Investments Code of 1987, "no corporation x x

or laws of the Philippines."29 Thus, a "non-Philippine national" cannot own and

x which is not a Philippine national x x x shall do business

operate a reserved economic activity like a public utility. Again, this means that only a
"Philippine national" can own and operate a public utility.

x x x in the Philippines x x x without first securing from the Board of Investments a


written certificate to the effect that such business or economic activity x x x would not

Prior to the Omnibus Investments Code of 1981, Republic Act No. 518630 or the

conflict with the Constitution or laws of the Philippines."27 Thus, a "non-Philippine

Investment Incentives Act, which took effect on 16 September 1967, contained a

national" cannot own and operate a reserved economic activity like a public utility.

similar definition of a "Philippine national," to wit:

This means, of course, that only a "Philippine national" can own and operate a public
utility.

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(f) "Philippine National" shall mean a citizen of the Philippines; or a partnership or

The FIA is the basic law governing foreign investments in the Philippines, irrespective

association wholly owned by citizens of the Philippines; or a corporation organized

of the nature of business and area of investment. The FIA spells out the procedures

under the laws of the Philippines of which at least sixty per cent of the capital stock

by which non-Philippine nationals can invest in the Philippines. Among the key

outstanding and entitled to vote is owned and held by citizens of the Philippines; or a

features of this law is the concept of a negative list or the Foreign Investments

trustee of funds for pension or other employee retirement or separation benefits,

Negative List.32 Section 8 of the law states:

where the trustee is a Philippine National and at least sixty per cent of the fund will
accrue to the benefit of Philippine Nationals: Provided, That where a corporation and

SEC. 8. List of Investment Areas Reserved to Philippine Nationals [Foreign

its non-Filipino stockholders own stock in a registered enterprise, at least sixty per

Investment Negative List]. - The Foreign Investment Negative List shall have two 2

cent of the capital stock outstanding and entitled to vote of both corporations must be

component lists: A and B:

owned and held by the citizens of the Philippines and at least sixty per cent of the
members of the Board of Directors of both corporations must be citizens of the

a. List A shall enumerate the areas of activities reserved to Philippine nationals by

Philippines in order that the corporation shall be considered a Philippine National.

mandate of the Constitution and specific laws.

(Boldfacing, italicization and underscoring supplied)


b. List B shall contain the areas of activities and enterprises regulated pursuant to law:
Under Section 3 of Republic Act No. 5455 or the Foreign Business Regulations Act,
which took effect on 30 September 1968, if the investment in a domestic enterprise by

1. which are defense-related activities, requiring prior clearance and authorization

non-Philippine nationals exceeds 30% of its outstanding capital stock, such enterprise

from the Department of National Defense [DND] to engage in such activity, such as

must obtain prior approval from the Board of Investments before accepting such

the manufacture, repair, storage and/or distribution of firearms, ammunition, lethal

investment. Such approval shall not be granted if the investment "would conflict with

weapons, military ordinance, explosives, pyrotechnics and similar materials; unless

existing constitutional provisions and laws regulating the degree of required ownership

such manufacturing or repair activity is specifically authorized, with a substantial

by Philippine nationals in the enterprise."31 A "non-Philippine national" cannot own

export component, to a non-Philippine national by the Secretary of National Defense;

and operate a reserved economic activity like a public utility. Again, this means that

or

only a "Philippine national" can own and operate a public utility.


2. which have implications on public health and morals, such as the manufacture and
The FIA, like all its predecessor statutes, clearly defines a "Philippine national" as a

distribution of dangerous drugs; all forms of gambling; nightclubs, bars, beer houses,

Filipino citizen, or a domestic corporation "at least sixty percent (60%) of the capital

dance halls, sauna and steam bathhouses and massage clinics. (Boldfacing,

stock outstanding and entitled to vote" is owned by Filipino citizens. A domestic

underscoring and italicization supplied)

corporation is a "Philippine national" only if at least 60% of its voting stock is owned
by Filipino citizens. This definition of a "Philippine national" is crucial in the present

Section 8 of the FIA enumerates the investment areas "reserved to Philippine

case because the FIA reiterates and clarifies Section 11, Article XII of the 1987

nationals." Foreign Investment Negative List A consists of "areas of activities reserved

Constitution, which limits the ownership and operation of public utilities to Filipino

to Philippine nationals by mandate of the Constitution and specific laws," where

citizens or to corporations or associations at least 60% Filipino-owned.

foreign equity participation in any enterprise shall be limited to the maximum


percentage expressly prescribed by the Constitution and other specific laws. In short,

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to own and operate a public utility in the Philippines one must be a "Philippine

Counsel, I have some questions. You are aware of the Foreign Investments Act of

national" as defined in the FIA. The FIA is abundant notice to foreign investors to what

1991, x x x? And the FIA of 1991 took effect in 1991, correct? Thats over twenty (20)

extent they can invest in public utilities in the Philippines.

years ago, correct?

To repeat, among the areas of investment covered by the Foreign Investment

COMMISSIONER GAITE:

Negative List A is the ownership and operation of public utilities, which the
Constitution expressly reserves to Filipino citizens and to corporations at least 60%

Correct, Your Honor.

owned by Filipino citizens. In other words, Negative List A of the FIA reserves the
ownership and operation of public utilities only to "Philippine nationals," defined in

JUSTICE CARPIO:

Section 3(a) of the FIA as "(1) a citizen of the Philippines; x x x or (3) a corporation
organized under the laws of the Philippines of which at least sixty percent (60%) of

And Section 8 of the Foreign Investments Act of 1991 states that []only Philippine

the capital stock outstanding and entitled to vote is owned and held by citizens of the

nationals can own and operate public utilities[], correct?

Philippines; or (4) a corporation organized abroad and registered as doing business in


the Philippines under the Corporation Code of which one hundred percent (100%) of

COMMISSIONER GAITE:

the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a
trustee of funds for pension or other employee retirement or separation benefits,

Yes, Your Honor.

where the trustee is a Philippine national and at least sixty percent (60%) of the fund
will accrue to the benefit of Philippine nationals."

JUSTICE CARPIO:

Clearly, from the effectivity of the Investment Incentives Act of 1967 to the adoption of

And the same Foreign Investments Act of 1991 defines a "Philippine national" either

the Omnibus Investments Code of 1981, to the enactment of the Omnibus

as a citizen of the Philippines, or if it is a corporation at least sixty percent (60%) of

Investments Code of 1987, and to the passage of the present Foreign Investments

the voting stock is owned by citizens of the Philippines, correct?

Act of 1991, or for more than four decades, the statutory definition of the term
"Philippine national" has been uniform and consistent: it means a Filipino citizen, or a

COMMISSIONER GAITE:

domestic corporation at least 60% of the voting stock is owned by Filipinos. Likewise,
these same statutes have uniformly and consistently required that only "Philippine

Correct, Your Honor.

nationals" could own and operate public utilities in the Philippines. The following
exchange during the Oral Arguments is revealing:

JUSTICE CARPIO:

JUSTICE CARPIO:

And, you are also aware that under the predecessor law of the Foreign Investments
Act of 1991, the Omnibus Investments Act of 1987, the same provisions apply: x x x
only Philippine nationals can own and operate a public utility and the Philippine

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national, if it is a corporation, x x x sixty percent (60%) of the capital stock of that

is a corporation, x x x at least sixty percent (60%) of the voting stock must be owned

corporation must be owned by citizens of the Philippines, correct?

by citizens of the Philippines, correct?

COMMISSIONER GAITE:

COMMISSIONER GAITE:

Correct, Your Honor.

Correct, Your Honor.33 (Emphasis supplied)

JUSTICE CARPIO:

Government agencies like the SEC cannot simply ignore Sections 3(a) and 8 of the
FIA which categorically prescribe that certain economic activities, like the ownership

And even prior to the Omnibus Investments Act of 1987, under the Omnibus

and operation of public utilities, are reserved to corporations "at least sixty percent

Investments Act of 1981, the same rules apply: x x x only a Philippine national can

(60%) of the capital stock outstanding and entitled to vote is owned and held by

own and operate a public utility and a Philippine national, if it is a corporation, sixty

citizens of the Philippines." Foreign Investment Negative List A refers to "activities

percent (60%) of its x x x voting stock, must be owned by citizens of the Philippines,

reserved to Philippine nationals by mandate of the Constitution and specific laws."

correct?

The FIA is the basic statute regulating foreign investments in the Philippines.
Government agencies tasked with regulating or monitoring foreign investments, as

COMMISSIONER GAITE:

well as counsels of foreign investors, should start with the FIA in determining to what
extent a particular foreign investment is allowed in the Philippines. Foreign investors

Correct, Your Honor.

and their counsels who ignore the FIA do so at their own peril. Foreign investors and
their counsels who rely on opinions of SEC legal officers that obviously contradict the

JUSTICE CARPIO:

FIA do so also at their own peril.

And even prior to that, under [the]1967 Investments Incentives Act and the Foreign

Occasional opinions of SEC legal officers that obviously contradict the FIA should

Company Act of 1968, the same rules applied, correct?

immediately raise a red flag. There are already numerous opinions of SEC legal
officers that cite the definition of a "Philippine national" in Section 3(a) of the FIA in

COMMISSIONER GAITE:

determining whether a particular corporation is qualified to own and operate a


nationalized or partially nationalized business in the Philippines. This shows that SEC

Correct, Your Honor.

legal officers are not only aware of, but also rely on and invoke, the provisions of the
FIA in ascertaining the eligibility of a corporation to engage in partially nationalized

JUSTICE CARPIO:

industries. The following are some of such opinions:

So, for the last four (4) decades, x x x, the law has been very consistent only a

1. Opinion of 23 March 1993, addressed to Mr. Francis F. How;

Philippine national can own and operate a public utility, and a Philippine national, if it

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2. Opinion of 14 April 1993, addressed to Director Angeles T. Wong of the Philippine

the FIA expressly repealed Articles 44 to 56 of Book II of the Omnibus Investments

Overseas Employment Administration;

Code of 1987, which articles previously regulated foreign investments in nationalized


or partially nationalized industries.

3. Opinion of 23 November 1993, addressed to Messrs. Dominador Almeda and


Renato S. Calma;

The FIA is the applicable law regulating foreign investments in nationalized or partially
nationalized industries. There is nothing in the FIA, or even in the Omnibus

4. Opinion of 7 December 1993, addressed to Roco Bunag Kapunan Migallos &

Investments Code of 1987 or its predecessor statutes, that states, expressly or

Jardeleza;

impliedly, that the FIA or its predecessor statutes do not apply to enterprises not
availing of tax and fiscal incentives under the Code. The FIA and its predecessor

5. SEC Opinion No. 49-04, addressed to Romulo Mabanta Buenaventura Sayoc & De

statutes apply to investments in all domestic enterprises, whether or not such

Los Angeles;

enterprises enjoy tax and fiscal incentives under the Omnibus Investments Code of
1987 or its predecessor statutes. The reason is quite obvious mere non-availment of

6. SEC-OGC Opinion No. 17-07, addressed to Mr. Reynaldo G. David; and

tax and fiscal incentives by a non-Philippine national cannot exempt it from Section
11, Article XII of the Constitution regulating foreign investments in public utilities. In

7. SEC-OGC Opinion No. 03-08, addressed to Attys. Ruby Rose J. Yusi and Rudyard

fact, the Board of Investments Primer on Investment Policies in the Philippines,34

S. Arbolado.

which is given out to foreign investors, provides:

The SEC legal officers occasional but blatant disregard of the definition of the term

PART III. FOREIGN INVESTMENTS WITHOUT INCENTIVES

"Philippine national" in the FIA signifies their lack of integrity and competence in
resolving issues on the 60-40 ownership requirement in favor of Filipino citizens in

Investors who do not seek incentives and/or whose chosen activities do not qualify for

Section 11, Article XII of the Constitution.

incentives, (i.e., the activity is not listed in the IPP, and they are not exporting at least
70% of their production) may go ahead and make the investments without seeking

The PSE President argues that the term "Philippine national" defined in the FIA

incentives. They only have to be guided by the Foreign Investments Negative List

should be limited and interpreted to refer to corporations seeking to avail of tax and

(FINL).

fiscal incentives under investment incentives laws and cannot be equated with the
term "capital" in Section 11, Article XII of the 1987 Constitution. Pangilinan similarly

The FINL clearly defines investment areas requiring at least 60% Filipino ownership.

contends that the FIA and its predecessor statutes do not apply to "companies which

All other areas outside of this list are fully open to foreign investors. (Emphasis

have not registered and obtained special incentives under the schemes established

supplied)

by those laws."
V.
Both are desperately grasping at straws. The FIA does not grant tax or fiscal

Right to elect directors, coupled with beneficial ownership,

incentives to any enterprise. Tax and fiscal incentives to investments are granted

translates to effective control.

separately under the Omnibus Investments Code of 1987, not under the FIA. In fact,

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The 28 June 2011 Decision declares that the 60 percent Filipino ownership required

shares may be denied such right. Nonetheless, preferred shares, even if denied the

by the Constitution to engage in certain economic activities applies not only to voting

right to vote in the election of directors, are entitled to vote on the following corporate

control of the corporation, but also to the beneficial ownership of the corporation. To

matters: (1) amendment of articles of incorporation; (2) increase and decrease of

repeat, we held:

capital stock; (3) incurring, creating or increasing bonded indebtedness; (4) sale,
lease, mortgage or other disposition of substantially all corporate assets; (5)

Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required

investment of funds in another business or corporation or for a purpose other than the

in the Constitution. Full beneficial ownership of 60 percent of the outstanding capital

primary purpose for which the corporation was organized; (6) adoption, amendment

stock, coupled with 60 percent of the voting rights, is required. The legal and

and repeal of by-laws; (7) merger and consolidation; and (8) dissolution of

beneficial ownership of 60 percent of the outstanding capital stock must rest in the

corporation.37

hands of Filipino nationals in accordance with the constitutional mandate. Otherwise,


the corporation is "considered as non-Philippine national[s]." (Emphasis supplied)

Since a specific class of shares may have rights and privileges or restrictions different
from the rest of the shares in a corporation, the 60-40 ownership requirement in favor

This is consistent with Section 3 of the FIA which provides that where 100% of the

of Filipino citizens in Section 11, Article XII of the Constitution must apply not only to

capital stock is held by "a trustee of funds for pension or other employee retirement or

shares with voting rights but also to shares without voting rights. Preferred shares,

separation benefits," the trustee is a Philippine national if "at least sixty percent (60%)

denied the right to vote in the election of directors, are anyway still entitled to vote on

of the fund will accrue to the benefit of Philippine nationals." Likewise, Section 1(b) of

the eight specific corporate matters mentioned above. Thus, if a corporation, engaged

the Implementing Rules of the FIA provides that "for stocks to be deemed owned and

in a partially nationalized industry, issues a mixture of common and preferred non-

held by Philippine citizens or Philippine nationals, mere legal title is not enough to

voting shares, at least 60 percent of the common shares and at least 60 percent of

meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with

the preferred non-voting shares must be owned by Filipinos. Of course, if a

appropriate voting rights, is essential."

corporation issues only a single class of shares, at least 60 percent of such shares
must necessarily be owned by Filipinos. In short, the 60-40 ownership requirement in

Since the constitutional requirement of at least 60 percent Filipino ownership applies

favor of Filipino citizens must apply separately to each class of shares, whether

not only to voting control of the corporation but also to the beneficial ownership of the

common, preferred non-voting, preferred voting or any other class of shares. This

corporation, it is therefore imperative that such requirement apply uniformly and

uniform application of the 60-40 ownership requirement in favor of Filipino citizens

across the board to all classes of shares, regardless of nomenclature and category,

clearly breathes life to the constitutional command that the ownership and operation

comprising the capital of a corporation. Under the Corporation Code, capital stock35

of public utilities shall be reserved exclusively to corporations at least 60 percent of

consists of all classes of shares issued to stockholders, that is, common shares as

whose capital is Filipino-owned. Applying uniformly the 60-40 ownership requirement

well as preferred shares, which may have different rights, privileges or restrictions as

in favor of Filipino citizens to each class of shares, regardless of differences in voting

stated in the articles of incorporation.36

rights, privileges and restrictions, guarantees effective Filipino control of public


utilities, as mandated by the Constitution.

The Corporation Code allows denial of the right to vote to preferred and redeemable
shares, but disallows denial of the right to vote in specific corporate matters. Thus,

Moreover, such uniform application to each class of shares insures that the

common shares have the right to vote in the election of directors, while preferred

"controlling interest" in public utilities always lies in the hands of Filipino citizens. This

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addresses and extinguishes Pangilinans worry that foreigners, owning most of the
non-voting shares, will exercise greater control over fundamental corporate matters

MR. NOLLEDO. Thank you.

requiring two-thirds or majority vote of all shareholders.


With respect to an investment by one corporation in another corporation, say, a
VI.

corporation with 60-40 percent equity invests in another corporation which is

Intent of the framers of the Constitution

permitted by the Corporation Code, does the Committee adopt the grandfather rule?

While Justice Velasco quoted in his Dissenting Opinion38 a portion of the

MR. VILLEGAS. Yes, that is the understanding of the Committee.

deliberations of the Constitutional Commission to support his claim that the term
"capital" refers to the total outstanding shares of stock, whether voting or non-voting,

MR. NOLLEDO. Therefore, we need additional Filipino capital?

the following excerpts of the deliberations reveal otherwise. It is clear from the
following exchange that the term "capital" refers to controlling interest of a corporation,

MR. VILLEGAS. Yes.39

thus:
xxxx
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity
and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in

MR. AZCUNA. May I be clarified as to that portion that was accepted by the

Section 15.

Committee.

MR. VILLEGAS. That is right.

MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase
"voting stock or controlling interest."

MR. NOLLEDO. In teaching law, we are always faced with this question: "Where do
we base the equity requirement, is it on the authorized capital stock, on the

MR. AZCUNA. Hence, without the Davide amendment, the committee report would

subscribed capital stock, or on the paid-up capital stock of a corporation"? Will the

read: "corporations or associations at least sixty percent of whose CAPITAL is owned

Committee please enlighten me on this?

by such citizens."

MR. VILLEGAS. We have just had a long discussion with the members of the team

MR. VILLEGAS. Yes.

from the UP Law Center who provided us a draft. The phrase that is contained here
which we adopted from the UP draft is "60 percent of voting stock."

MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of
the capital to be owned by citizens.

MR. NOLLEDO. That must be based on the subscribed capital stock, because unless
declared delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS. That is right.

MR. VILLEGAS. That is right.

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MR. AZCUNA. But the control can be with the foreigners even if they are the minority.

explains that the deletion of the phrase "controlling interest" and replacement of the

Let us say 40 percent of the capital is owned by them, but it is the voting capital,

word "stock" with the term "capital" were intended specifically to extend the scope of

whereas, the Filipinos own the nonvoting shares. So we can have a situation where

the entities qualified to operate public utilities to include associations without stocks.

the corporation is controlled by foreigners despite being the minority because they

The framers omission of the phrase "controlling interest" did not mean the inclusion of

have the voting capital. That is the anomaly that would result here.

all shares of stock, whether voting or non-voting. The OSG reiterated essentially the
Courts declaration that the Constitution reserved exclusively to Philippine nationals

MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973

the ownership and operation of public utilities consistent with the States policy to

and 1935 Constitutions is that according to Commissioner Rodrigo, there are

"develop a self-reliant and independent national economy effectively controlled by

associations that do not have stocks. That is why we say "CAPITAL."

Filipinos."

MR. AZCUNA. We should not eliminate the phrase "controlling interest."

As we held in our 28 June 2011 Decision, to construe broadly the term "capital" as the
total outstanding capital stock, treated as a single class regardless of the actual

MR. BENGZON. In the case of stock corporations, it is assumed.40 (Boldfacing and

classification of shares, grossly contravenes the intent and letter of the Constitution

underscoring supplied)

that the "State shall develop a self-reliant and independent national economy
effectively controlled by Filipinos." We illustrated the glaring anomaly which would

Thus, 60 percent of the "capital" assumes, or should result in, a "controlling interest"

result in defining the term "capital" as the total outstanding capital stock of a

in the corporation.

corporation, treated as a single class of shares regardless of the actual classification


of shares, to wit:

The use of the term "capital" was intended to replace the word "stock" because
associations without stocks can operate public utilities as long as they meet the 60-40

Let us assume that a corporation has 100 common shares owned by foreigners and

ownership requirement in favor of Filipino citizens prescribed in Section 11, Article XII

1,000,000 non-voting preferred shares owned by Filipinos, with both classes of share

of the Constitution. However, this did not change the intent of the framers of the

having a par value of one peso (P 1.00) per share. Under the broad definition of the

Constitution to reserve exclusively to Philippine nationals the "controlling interest" in

term "capital," such corporation would be considered compliant with the 40 percent

public utilities.

constitutional limit on foreign equity of public utilities since the overwhelming majority,
or more than 99.999 percent, of the total outstanding capital stock is Filipino owned.

During the drafting of the 1935 Constitution, economic protectionism was "the battle-

This is obviously absurd.

cry of the nationalists in the Convention."41 The same battle-cry resulted in the
nationalization of the public utilities.42 This is also the same intent of the framers of

In the example given, only the foreigners holding the common shares have voting

the 1987 Constitution who adopted the exact formulation embodied in the 1935 and

rights in the election of directors, even if they hold only 100 shares. The foreigners,

1973 Constitutions on foreign equity limitations in partially nationalized industries.

with a minuscule equity of less than 0.001 percent, exercise control over the public
utility. On the other hand, the Filipinos, holding more than 99.999 percent of the

The OSG, in its own behalf and as counsel for the State,43 agrees fully with the

equity, cannot vote in the election of directors and hence, have no control over the

Courts interpretation of the term "capital." In its Consolidated Comment, the OSG

public utility. This starkly circumvents the intent of the framers of the Constitution, as

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well as the clear language of the Constitution, to place the control of public utilities in

Indeed, the only point of contention during the deliberations of the Constitutional

the hands of Filipinos. x x x

Commission on 23 August 1986 was the extent of majority Filipino control of public
utilities. This is evident from the following exchange:

Further, even if foreigners who own more than forty percent of the voting shares elect
an all-Filipino board of directors, this situation does not guarantee Filipino control and

THE PRESIDENT. Commissioner Jamir is recognized.

does not in any way cure the violation of the Constitution. The independence of the
Filipino board members so elected by such foreign shareholders is highly doubtful. As

MR. JAMIR. Madam President, my proposed amendment on lines 20 and 21 is to

the OSG pointed out, quoting Justice George Sutherlands words in Humphreys

delete the phrase "two thirds of whose voting stock or controlling interest," and instead

Executor v. US,44 "x x x it is quite evident that one who holds his office only during

substitute the words "SIXTY PERCENT OF WHOSE CAPITAL" so that the sentence

the pleasure of another cannot be depended upon to maintain an attitude of

will read: "No franchise, certificate, or any other form of authorization for the operation

independence against the latters will." Allowing foreign shareholders to elect a

of a public utility shall be granted except to citizens of the Philippines or to

controlling majority of the board, even if all the directors are Filipinos, grossly

corporations or associations organized under the laws of the Philippines at least

circumvents the letter and intent of the Constitution and defeats the very purpose of

SIXTY PERCENT OF WHOSE CAPITAL is owned by such citizens."

our nationalization laws.


xxxx
VII.
Last sentence of Section 11, Article XII of the Constitution

THE PRESIDENT: Will Commissioner Jamir first explain?

The last sentence of Section 11, Article XII of the 1987 Constitution reads:

MR. JAMIR. Yes, in this Article on National Economy and Patrimony, there were two
previous sections in which we fixed the Filipino equity to 60 percent as against 40

The participation of foreign investors in the governing body of any public utility

percent for foreigners. It is only in this Section 15 with respect to public utilities that

enterprise shall be limited to their proportionate share in its capital, and all the

the committee proposal was increased to two-thirds. I think it would be better to

executive and managing officers of such corporation or association must be citizens

harmonize this provision by providing that even in the case of public utilities, the

of the Philippines.

minimum equity for Filipino citizens should be 60 percent.

During the Oral Arguments, the OSG emphasized that there was never a question on

MR. ROMULO. Madam President.

the intent of the framers of the Constitution to limit foreign ownership, and assure
majority Filipino ownership and control of public utilities. The OSG argued, "while the

THE PRESIDENT. Commissioner Romulo is recognized.

delegates disagreed as to the percentage threshold to adopt, x x x the records show


they clearly understood that Filipino control of the public utility corporation can only be

MR. ROMULO. My reason for supporting the amendment is based on the discussions

and is obtained only through the election of a majority of the members of the board."

I have had with representatives of the Filipino majority owners of the international
record carriers, and the subsequent memoranda they submitted to me. x x x

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Their second point is that under the Corporation Code, the management and control

participation of foreign investors in the governing body of any public utility enterprise

of a corporation is vested in the board of directors, not in the officers but in the board

shall be limited to their proportionate share in its capital, and all the executive and

of directors. The officers are only agents of the board. And they believe that with 60

managing officers of such corporation or association must be citizens of the

percent of the equity, the Filipino majority stockholders undeniably control the board.

Philippines." In other words, the last sentence of Section 11, Article XII of the

Only on important corporate acts can the 40-percent foreign equity exercise a veto, x

Constitution mandates that (1) the participation of foreign investors in the governing

x x.

body of the corporation or association shall be limited to their proportionate share in


the capital of such entity; and (2) all officers of the corporation or association must be

x x x x45

Filipino citizens.

MS. ROSARIO BRAID. Madam President.

Commissioner Rosario Braid proposed the inclusion of the phrase requiring the
managing officers of the corporation or association to be Filipino citizens specifically

THE PRESIDENT. Commissioner Rosario Braid is recognized.

to prevent management contracts, which were designed primarily to circumvent the


Filipinization of public utilities, and to assure Filipino control of public utilities, thus:

MS. ROSARIO BRAID. Yes, in the interest of equal time, may I also read from a
memorandum by the spokesman of the Philippine Chamber of Communications on

MS. ROSARIO BRAID. x x x They also like to suggest that we amend this provision

why they would like to maintain the present equity, I am referring to the 66 2/3. They

by adding a phrase which states: "THE MANAGEMENT BODY OF EVERY

would prefer to have a 75-25 ratio but would settle for 66 2/3. x x x

CORPORATION OR ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY


CITIZENS OF THE PHILIPPINES." I have with me their position paper.

xxxx
THE PRESIDENT. The Commissioner may proceed.
THE PRESIDENT. Just to clarify, would Commissioner Rosario Braid support the
proposal of two-thirds rather than the 60 percent?

MS. ROSARIO BRAID. The three major international record carriers in the
Philippines,

which

Commissioner

Romulo

mentioned

Philippine

Global

MS. ROSARIO BRAID. I have added a clause that will put management in the hands

Communications, Eastern Telecommunications, Globe Mackay Cable are 40-

of Filipino citizens.

percent owned by foreign multinational companies and 60-percent owned by their


respective Filipino partners. All three, however, also have management contracts with

x x x x46

these foreign companies Philcom with RCA, ETPI with Cable and Wireless PLC,
and GMCR with ITT. Up to the present time, the general managers of these carriers

While they had differing views on the percentage of Filipino ownership of capital, it is

are foreigners. While the foreigners in these common carriers are only minority

clear that the framers of the Constitution intended public utilities to be majority

owners, the foreign multinationals are the ones managing and controlling their

Filipino-owned and controlled. To ensure that Filipinos control public utilities, the

operations by virtue of their management contracts and by virtue of their strength in

framers of the Constitution approved, as additional safeguard, the inclusion of the last

the governing bodies of these carriers.47

sentence of Section 11, Article XII of the Constitution commanding that "[t]he

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xxxx

FR. BERNAS. Will the committee accept a reformulation of the first part?

MR. OPLE. I think a number of us have agreed to ask Commissioner Rosario Braid to

MR. BENGZON. Let us hear it.

propose an amendment with respect to the operating management of public utilities,


and in this amendment, we are associated with Fr. Bernas, Commissioners Nieva and

FR. BERNAS. The reformulation will be essentially the formula of the 1973

Rodrigo. Commissioner Rosario Braid will state this amendment now.

Constitution which reads: "THE PARTICIPATION OF FOREIGN INVESTORS IN THE


GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED

Thank you.

TO THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF AND..."

MS. ROSARIO BRAID. Madam President.

MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH


CORPORATIONS

AND

ASSOCIATIONS

MUST

BE

CITIZENS

OF

THE

THE PRESIDENT. This is still on Section 15.

PHILIPPINES."

MS. ROSARIO BRAID. Yes.

MR. BENGZON. Will Commissioner Bernas read the whole thing again?

MR. VILLEGAS. Yes, Madam President.

FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE


GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED

xxxx

TO THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF..." I do not have


the rest of the copy.

MS. ROSARIO BRAID. Madam President, I propose a new section to read: THE
MANAGEMENT BODY OF EVERY CORPORATION OR ASSOCIATION SHALL IN

MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF

ALL CASES BE CONTROLLED BY CITIZENS OF THE PHILIPPINES."

SUCH CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE


PHILIPPINES." Is that correct?

This will prevent management contracts and assure control by Filipino citizens. Will
the committee assure us that this amendment will insure that past activities such as

MR. VILLEGAS. Yes.

management contracts will no longer be possible under this amendment?


MR. BENGZON. Madam President, I think that was said in a more elegant language.
xxxx

We accept the amendment. Is that all right with Commissioner Rosario Braid?

FR. BERNAS. Madam President.

MS. ROSARIO BRAID. Yes.

THE PRESIDENT. Commissioner Bernas is recognized.

xxxx

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MR. DE LOS REYES. The governing body refers to the board of directors and

MR. BENGZON. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE

trustees.

GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED


TO THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF AND ALL THE

MR. VILLEGAS. That is right.

EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATIONS OR


ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."

MR. BENGZON. Yes, the governing body refers to the board of directors.
MR.
MR. REGALADO. It is accepted.

VILLEGAS.

"NOR

SHALL

SUCH

FRANCHISE,

CERTIFICATE

OR

AUTHORIZATION BE EXCLUSIVE IN CHARACTER OR FOR A PERIOD LONGER


THAN TWENTY-FIVE YEARS RENEWABLE FOR NOT MORE THAN TWENTY-FIVE

MR. RAMA. The body is now ready to vote, Madam President.

YEARS. Neither shall any such franchise or right be granted except under the
condition that it shall be subject to amendment, alteration, or repeal by Congress

VOTING

when the common good so requires. The State shall encourage equity participation in
public utilities by the general public."

xxxx
VOTING
The results show 29 votes in favor and none against; so the proposed amendment is
approved.

xxxx

xxxx

The results show 29 votes in favor and 4 against; Section 15, as amended, is
approved.48 (Emphasis supplied)

THE PRESIDENT. All right. Can we proceed now to vote on Section 15?
The last sentence of Section 11, Article XII of the 1987 Constitution, particularly the
MR. RAMA. Yes, Madam President.

provision on the limited participation of foreign investors in the governing body of


public utilities, is a reiteration of the last sentence of Section 5, Article XIV of the 1973

THE PRESIDENT. Will the chairman of the committee please read Section 15?

Constitution,49 signifying its importance in reserving ownership and control of public


utilities to Filipino citizens.

MR. VILLEGAS. The entire Section 15, as amended, reads: "No franchise, certificate,
or any other form of authorization for the operation of a public utility shall be granted

VIII.

except to citizens of the Philippines or to corporations or associations organized under

The undisputed facts

the laws of the Philippines at least 60 PERCENT OF WHOSE CAPITAL is owned by


such citizens." May I request Commissioner Bengzon to please continue reading.

There is no dispute, and respondents do not claim the contrary, that (1) foreigners
own 64.27% of the common shares of PLDT, which class of shares exercises the sole
right to vote in the election of directors, and thus foreigners control PLDT; (2) Filipinos

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own only 35.73% of PLDTs common shares, constituting a minority of the voting
stock, and thus Filipinos do not control PLDT; (3) preferred shares, 99.44% owned by

7. For the Honorable Court to direct the Securities and Exchange Commission and

Filipinos, have no voting rights; (4) preferred shares earn only 1/70 of the dividends

Philippine Stock Exchange to require PLDT to make a public disclosure of all of its

that common shares earn;50 (5) preferred shares have twice the par value of common

foreign shareholdings and their actual and real beneficial owners.

shares; and (6) preferred shares constitute 77.85% of the authorized capital stock of
PLDT and common shares only 22.15%.

Other relief(s) just and equitable are likewise prayed for. (Emphasis supplied)

Despite the foregoing facts, the Court did not decide, and in fact refrained from ruling

As can be gleaned from his prayer, Gamboa clearly asks this Court to compel the

on the question of whether PLDT violated the 60-40 ownership requirement in favor of

SEC to perform its statutory duty to investigate whether "the required percentage of

Filipino citizens in Section 11, Article XII of the 1987 Constitution. Such question

ownership of the capital stock to be owned by citizens of the Philippines has been

indisputably calls for a presentation and determination of evidence through a hearing,

complied with [by PLDT] as required by x x x the Constitution."51 Such plea clearly

which is generally outside the province of the Courts jurisdiction, but well within the

negates SECs argument that it was not impleaded.

SECs statutory powers. Thus, for obvious reasons, the Court limited its decision on
the purely legal and threshold issue on the definition of the term "capital" in Section

Granting that only the SEC Chairman was impleaded in this case, the Court has

11, Article XII of the Constitution and directed the SEC to apply such definition in

ample powers to order the SECs compliance with its directive contained in the 28

determining the exact percentage of foreign ownership in PLDT.

June 2011 Decision in view of the far-reaching implications of this case. In Domingo v.
Scheer,52 the Court dispensed with the amendment of the pleadings to implead the

IX.

Bureau of Customs considering (1) the unique backdrop of the case; (2) the utmost

PLDT is not an indispensable party;

need to avoid further delays; and (3) the issue of public interest involved. The Court

SEC is impleaded in this case.

held:

In his petition, Gamboa prays, among others:

The Court may be curing the defect in this case by adding the BOC as partypetitioner. The petition should not be dismissed because the second action would only

xxxx

be a repetition of the first. In Salvador, et al., v. Court of Appeals, et al., we held that
this Court has full powers, apart from that power and authority which is inherent, to

5. For the Honorable Court to issue a declaratory relief that ownership of common or

amend the processes, pleadings, proceedings and decisions by substituting as party-

voting shares is the sole basis in determining foreign equity in a public utility and that

plaintiff the real party-in-interest. The Court has the power to avoid delay in the

any other government rulings, opinions, and regulations inconsistent with this

disposition of this case, to order its amendment as to implead the BOC as party-

declaratory relief be declared unconstitutional and a violation of the intent and spirit of

respondent. Indeed, it may no longer be necessary to do so taking into account the

the 1987 Constitution;

unique backdrop in this case, involving as it does an issue of public interest. After all,
the Office of the Solicitor General has represented the petitioner in the instant

6. For the Honorable Court to declare null and void all sales of common stocks to

proceedings, as well as in the appellate court, and maintained the validity of the

foreigners in excess of 40 percent of the total subscribed common shareholdings; and

deportation order and of the BOCs Omnibus Resolution. It cannot, thus, be claimed

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by the State that the BOC was not afforded its day in court, simply because only the
petitioner, the Chairperson of the BOC, was the respondent in the CA, and the

Notably, the foregoing issues were left untouched by the Court. The Court did not rule

petitioner in the instant recourse. In Alonso v. Villamor, we had the occasion to state:

on the factual issues raised by Gamboa, except the single and purely legal issue on
the definition of the term "capital" in Section 11, Article XII of the Constitution. The

There is nothing sacred about processes or pleadings, their forms or contents. Their

Court confined the resolution of the instant case to this threshold legal issue in

sole purpose is to facilitate the application of justice to the rival claims of contending

deference to the fact-finding power of the SEC.

parties. They were created, not to hinder and delay, but to facilitate and promote, the
administration of justice. They do not constitute the thing itself, which courts are

Needless to state, the Court can validly, properly, and fully dispose of the fundamental

always striving to secure to litigants. They are designed as the means best adapted to

legal issue in this case even without the participation of PLDT since defining the term

obtain that thing. In other words, they are a means to an end. When they lose the

"capital" in Section 11, Article XII of the Constitution does not, in any way, depend on

character of the one and become the other, the administration of justice is at fault and

whether PLDT was impleaded. Simply put, PLDT is not indispensable for a complete

courts are correspondingly remiss in the performance of their obvious duty.53

resolution of the purely legal question in this case.55 In fact, the Court, by treating the

(Emphasis supplied)

petition as one for mandamus,56 merely directed the SEC to apply the Courts
definition of the term "capital" in Section 11, Article XII of the Constitution in

In any event, the SEC has expressly manifested54 that it will abide by the Courts

determining whether PLDT committed any violation of the said constitutional

decision and defer to the Courts definition of the term "capital" in Section 11, Article

provision. The dispositive portion of the Courts ruling is addressed not to PLDT but

XII of the Constitution. Further, the SEC entered its special appearance in this case

solely to the SEC, which is the administrative agency tasked to enforce the 60-40

and argued during the Oral Arguments, indicating its submission to the Courts

ownership requirement in favor of Filipino citizens in Section 11, Article XII of the

jurisdiction. It is clear, therefore, that there exists no legal impediment against the

Constitution.

proper and immediate implementation of the Courts directive to the SEC.


Since the Court limited its resolution on the purely legal issue on the definition of the
PLDT is an indispensable party only insofar as the other issues, particularly the

term "capital" in Section 11, Article XII of the 1987 Constitution, and directed the SEC

factual questions, are concerned. In other words, PLDT must be impleaded in order to

to investigate any violation by PLDT of the 60-40 ownership requirement in favor of

fully resolve the issues on (1) whether the sale of 111,415 PTIC shares to First Pacific

Filipino citizens under the Constitution,57 there is no deprivation of PLDTs property

violates the constitutional limit on foreign ownership of PLDT; (2) whether the sale of

or denial of PLDTs right to due process, contrary to Pangilinan and Nazarenos

common shares to foreigners exceeded the 40 percent limit on foreign equity in PLDT;

misimpression. Due process will be afforded to PLDT when it presents proof to the

and (3) whether the total percentage of the PLDT common shares with voting rights

SEC that it complies, as it claims here, with Section 11, Article XII of the Constitution.

complies with the 60-40 ownership requirement in favor of Filipino citizens under the
Constitution for the ownership and operation of PLDT. These issues indisputably call

X.

for an examination of the parties respective evidence, and thus are clearly within the

Foreign Investments in the Philippines

jurisdiction of the SEC. In short, PLDT must be impleaded, and must necessarily be
heard, in the proceedings before the SEC where the factual issues will be thoroughly

Movants fear that the 28 June 2011 Decision would spell disaster to our economy, as

threshed out and resolved.

it may result in a sudden flight of existing foreign investors to "friendlier" countries and

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simultaneously deterring new foreign investors to our country. In particular, the PSE

to save our ailing economy contradicts his own theory that the solution is for

claims that the 28 June 2011 Decision may result in the following: (1) loss of more

government to take over these companies. Dr. Villegas is barking up the wrong tree

than P 630 billion in foreign investments in PSE-listed shares; (2) massive decrease in

since State ownership of public utilities and foreign investments in such industries are

foreign trading transactions; (3) lower PSE Composite Index; and (4) local investors

diametrically opposed concepts, which cannot possibly be reconciled.

not investing in PSE-listed shares.58


In any event, the experience of our neighboring countries cannot be used as
Dr. Bernardo M. Villegas, one of the amici curiae in the Oral Arguments, shared

argument to decide the present case differently for two reasons. First, the

movants apprehension. Without providing specific details, he pointed out the

governments of our neighboring countries have, as claimed by Dr. Villegas, taken over

depressing state of the Philippine economy compared to our neighboring countries

ownership and control of their strategic public utilities like the telecommunications

which boast of growing economies. Further, Dr. Villegas explained that the solution to

industry. Second, our Constitution has specific provisions limiting foreign ownership in

our economic woes is for the government to "take-over" strategic industries, such as

public utilities which the Court is sworn to uphold regardless of the experience of our

the public utilities sector, thus:

neighboring countries.

JUSTICE CARPIO:

In our jurisdiction, the Constitution expressly reserves the ownership and operation of
public utilities to Filipino citizens, or corporations or associations at least 60 percent of

I would like also to get from you Dr. Villegas if you have additional information on

whose capital belongs to Filipinos. Following Dr. Villegass claim, the Philippines

whether this high FDI59 countries in East Asia have allowed foreigners x x x control

appears to be more liberal in allowing foreign investors to own 40 percent of public

[of] their public utilities, so that we can compare apples with apples.

utilities, unlike in other Asian countries whose governments own and operate such
industries.

DR. VILLEGAS:
XI.
Correct, but let me just make a comment. When these neighbors of ours find an

Prospective Application of Sanctions

industry strategic, their solution is not to "Filipinize" or "Vietnamize" or "Singaporize."


Their solution is to make sure that those industries are in the hands of state

In its Motion for Partial Reconsideration, the SEC sought to clarify the reckoning

enterprises. So, in these countries, nationalization means the government takes over.

period of the application and imposition of appropriate sanctions against PLDT if

And because their governments are competent and honest enough to the public, that

found violating Section 11, Article XII of the Constitution.1avvphi1

is the solution. x x x 60 (Emphasis supplied)


As discussed, the Court has directed the SEC to investigate and determine whether
If government ownership of public utilities is the solution, then foreign investments in

PLDT violated Section 11, Article XII of the Constitution. Thus, there is no dispute that

our public utilities serve no purpose. Obviously, there can never be foreign

it is only after the SEC has determined PLDTs violation, if any exists at the time of the

investments in public utilities if, as Dr. Villegas claims, the "solution is to make sure

commencement of the administrative case or investigation, that the SEC may impose

that those industries are in the hands of state enterprises." Dr. Villegass argument

the statutory sanctions against PLDT. In other words, once the 28 June 2011 Decision

that foreign investments in telecommunication companies like PLDT are badly needed

becomes final, the SEC shall impose the appropriate sanctions only if it finds after

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due hearing that, at the start of the administrative case or investigation, there is an

Filipinos have only to remind themselves of how this country was exploited under the

existing violation of Section 11, Article XII of the Constitution. Under prevailing

Parity Amendment, which gave Americans the same rights as Filipinos in the

jurisprudence, public utilities that fail to comply with the nationality requirement under

exploitation of natural resources, and in the ownership and control of public utilities, in

Section 11, Article XII and the FIA can cure their deficiencies prior to the start of the

the Philippines. To do this the 1935 Constitution, which contained the same 60

administrative case or investigation.61

percent Filipino ownership and control requirement as the present 1987 Constitution,
had to be amended to give Americans parity rights with Filipinos. There was bitter

XII.

opposition to the Parity Amendment62 and many Filipinos eagerly awaited its

Final Word

expiration. In late 1968, PLDT was one of the American-controlled public utilities that
became Filipino-controlled when the controlling American stockholders divested in

The Constitution expressly declares as State policy the development of an economy

anticipation of the expiration of the Parity Amendment on 3 July 1974.63 No economic

"effectively controlled" by Filipinos. Consistent with such State policy, the Constitution

suicide happened when control of public utilities and mining corporations passed to

explicitly reserves the ownership and operation of public utilities to Philippine

Filipinos hands upon expiration of the Parity Amendment.

nationals, who are defined in the Foreign Investments Act of 1991 as Filipino citizens,
or corporations or associations at least 60 percent of whose capital with voting rights

Movants interpretation of the term "capital" would bring us back to the same evils

belongs to Filipinos. The FIAs implementing rules explain that "[f]or stocks to be

spawned by the Parity Amendment, effectively giving foreigners parity rights with

deemed owned and held by Philippine citizens or Philippine nationals, mere legal title

Filipinos, but this time even without any amendment to the present Constitution.

is not enough to meet the required Filipino equity. Full beneficial ownership of the

Worse, movants interpretation opens up our national economy to effective control not

stocks, coupled with appropriate voting rights is essential." In effect, the FIA clarifies,

only by Americans but also by all foreigners, be they Indonesians, Malaysians or

reiterates and confirms the interpretation that the term "capital" in Section 11, Article

Chinese, even in the absence of reciprocal treaty arrangements. At least the Parity

XII of the 1987 Constitution refers to shares with voting rights, as well as with full

Amendment, as implemented by the Laurel-Langley Agreement, gave the capital-

beneficial ownership. This is precisely because the right to vote in the election of

starved Filipinos theoretical parity the same rights as Americans to exploit natural

directors, coupled with full beneficial ownership of stocks, translates to effective

resources, and to own and control public utilities, in the United States of America.

control of a corporation.

Here, movants interpretation would effectively mean a unilateral opening up of our


national economy to all foreigners, without any reciprocal arrangements. That would

Any other construction of the term "capital" in Section 11, Article XII of the

mean that Indonesians, Malaysians and Chinese nationals could effectively control

Constitution contravenes the letter and intent of the Constitution. Any other meaning

our mining companies and public utilities while Filipinos, even if they have the capital,

of the term "capital" openly invites alien domination of economic activities reserved

could not control similar corporations in these countries.

exclusively to Philippine nationals. Therefore, respondents interpretation will


ultimately result in handing over effective control of our national economy to foreigners

The 1935, 1973 and 1987 Constitutions have the same 60 percent Filipino ownership

in patent violation of the Constitution, making Filipinos second-class citizens in their

and control requirement for public utilities like PLOT. Any deviation from this

own country.

requirement necessitates an amendment to the Constitution as exemplified by the


Parity Amendment. This Court has no power to amend the Constitution for its power
and duty is only to faithfully apply and interpret the Constitution.

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The subject matter of these consolidated petitions is the decision of the Court of
WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further

Appeals in CA-G.R. CV No. 66195 which modified the decision of the then Court of

pleadings shall be entertained.

First Instance of Manila in Civil Case No. 66135. The plaintiffs complaint (petitioner in
G.R. No. 84197) against all defendants (respondents in G.R. No. 84197) was

G.R. No. 84197

July 28, 1989

dismissed but in all other respects the trial court's decision was affirmed.

PIONEER INSURANCE & SURETY CORPORATION, petitioner,

The dispositive portion of the trial court's decision reads as follows:

vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT,

WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring Lim to

INC., (BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. LIM,

pay plaintiff the amount of P311,056.02, with interest at the rate of 12% per annum

respondents.

compounded monthly; plus 15% of the amount awarded to plaintiff as attorney's fees
from July 2,1966, until full payment is made; plus P70,000.00 moral and exemplary

G.R. No. 84157

July 28, 1989

damages.

JACOB S. LIM, petitioner,

It is found in the records that the cross party plaintiffs incurred additional

vs.

miscellaneous expenses aside from Pl51,000.00,,making a total of P184,878.74.

COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION,

Defendant Jacob S. Lim is further required to pay cross party plaintiff, Bormaheco, the

BORDER MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and

Cervanteses one-half and Maglana the other half, the amount of Pl84,878.74 with

MODESTO CERVANTES and CONSTANCIO MAGLANA, respondents.

interest from the filing of the cross-complaints until the amount is fully paid; plus moral
and exemplary damages in the amount of P184,878.84 with interest from the filing of

Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.

the cross-complaints until the amount is fully paid; plus moral and exemplary
damages in the amount of P50,000.00 for each of the two Cervanteses.

Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.


Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses,
Renato J. Robles for BORMAHECO, Inc. and Cervanteses.

and another P20,000.00 to Constancio B. Maglana as attorney's fees.

Leonardo B. Lucena for Constancio Maglana.

xxx

xxx

xxx

WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against


defendants Bormaheco, the Cervanteses and Constancio B. Maglana, is dismissed.
GUTIERREZ, JR., J.:

Instead, plaintiff is required to indemnify the defendants Bormaheco and the


Cervanteses the amount of P20,000.00 as attorney's fees and the amount of
P4,379.21, per year from 1966 with legal rate of interest up to the time it is paid.

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Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of

It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco),

P20,000.00 as attorney's fees and costs.

Francisco and Modesto Cervantes (Cervanteses) and Constancio Maglana


(respondents in both petitions) contributed some funds used in the purchase of the

No moral or exemplary damages is awarded against plaintiff for this action was filed in

above aircrafts and spare parts. The funds were supposed to be their contributions to

good faith. The fact that the properties of the Bormaheco and the Cervanteses were

a new corporation proposed by Lim to expand his airline business. They executed two

attached and that they were required to file a counterbond in order to dissolve the

(2) separate indemnity agreements (Exhibits D-1 and D-2) in favor of Pioneer, one

attachment, is not an act of bad faith. When a man tries to protect his rights, he

signed by Maglana and the other jointly signed by Lim for SAL, Bormaheco and the

should not be saddled with moral or exemplary damages. Furthermore, the rights

Cervanteses. The indemnity agreements stipulated that the indemnitors principally

exercised were provided for in the Rules of Court, and it was the court that ordered it,

agree and bind themselves jointly and severally to indemnify and hold and save

in the exercise of its discretion.

harmless Pioneer from and against any/all damages, losses, costs, damages, taxes,
penalties, charges and expenses of whatever kind and nature which Pioneer may

No damage is decided against Malayan Insurance Company, Inc., the third-party

incur in consequence of having become surety upon the bond/note and to pay,

defendant, for it only secured the attachment prayed for by the plaintiff Pioneer. If an

reimburse and make good to Pioneer, its successors and assigns, all sums and

insurance company would be liable for damages in performing an act which is clearly

amounts of money which it or its representatives should or may pay or cause to be

within its power and which is the reason for its being, then nobody would engage in

paid or become liable to pay on them of whatever kind and nature.

the insurance business. No further claim or counter-claim for or against anybody is


declared by this Court. (Rollo - G.R. No. 24197, pp. 15-16)

On June 10, 1965, Lim doing business under the name and style of SAL executed in
favor of Pioneer as deed of chattel mortgage as security for the latter's suretyship in

In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline

favor of the former. It was stipulated therein that Lim transfer and convey to the surety

business as owner-operator of Southern Air Lines (SAL) a single proprietorship.

the two aircrafts. The deed (Exhibit D) was duly registered with the Office of the
Register of Deeds of the City of Manila and with the Civil Aeronautics Administration

On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered

pursuant to the Chattel Mortgage Law and the Civil Aeronautics Law (Republic Act

into and executed a sales contract (Exhibit A) for the sale and purchase of two (2) DC-

No. 776), respectively.

3A Type aircrafts and one (1) set of necessary spare parts for the total agreed price of
US $109,000.00 to be paid in installments. One DC-3 Aircraft with Registry No. PIC-

Lim defaulted on his subsequent installment payments prompting JDA to request

718, arrived in Manila on June 7,1965 while the other aircraft, arrived in Manila on

payments from the surety. Pioneer paid a total sum of P298,626.12.

July 18,1965.
Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel
On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in

mortgage before the Sheriff of Davao City. The Cervanteses and Maglana, however,

G.R. No. 84197) as surety executed and issued its Surety Bond No. 6639 (Exhibit C)

filed a third party claim alleging that they are co-owners of the aircrafts,

in favor of JDA, in behalf of its principal, Lim, for the balance price of the aircrafts and
spare parts.

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On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for

alleged obligation to Pioneer amounts to P295,000.00, hence, plaintiffs instant action

a writ of preliminary attachment against Lim and respondents, the Cervanteses,

for the recovery of the amount of P298,666.28 from defendants will no longer prosper.

Bormaheco and Maglana.

Plaintiff Pioneer is not the real party in interest to institute the instant action as it does
not stand to be benefited or injured by the judgment.

In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims


against Lim alleging that they were not privies to the contracts signed by Lim and, by

Plaintiff Pioneer's contention that it is representing the reinsurer to recover the amount

way of counterclaim, sought for damages for being exposed to litigation and for

from defendants, hence, it instituted the action is utterly devoid of merit. Plaintiff did

recovery of the sums of money they advanced to Lim for the purchase of the aircrafts

not even present any evidence that it is the attorney-in-fact of the reinsurance

in question.

company, authorized to institute an action for and in behalf of the latter. To qualify a
person to be a real party in interest in whose name an action must be prosecuted, he

After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but

must appear to be the present real owner of the right sought to be enforced (Moran,

dismissed Pioneer's complaint against all other defendants.

Vol. I, Comments on the Rules of Court, 1979 ed., p. 155). It has been held that the
real party in interest is the party who would be benefited or injured by the judgment or

As stated earlier, the appellate court modified the trial court's decision in that the

the party entitled to the avails of the suit (Salonga v. Warner Barnes & Co., Ltd., 88

plaintiffs complaint against all the defendants was dismissed. In all other respects the

Phil. 125, 131). By real party in interest is meant a present substantial interest as

trial court's decision was affirmed.

distinguished from a mere expectancy or a future, contingent, subordinate or


consequential interest (Garcia v. David, 67 Phil. 27; Oglleaby v. Springfield Marine

We first resolve G.R. No. 84197.

Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers v. Germans, 1 NW 2d 424; Weber v. City
of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).

Petitioner Pioneer Insurance and Surety Corporation avers that:


Based on the foregoing premises, plaintiff Pioneer cannot be considered as the real
RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DISMISSED

party in interest as it has already been paid by the reinsurer the sum of P295,000.00

THE APPEAL OF PETITIONER ON THE SOLE GROUND THAT PETITIONER HAD

the bulk of defendants' alleged obligation to Pioneer.

ALREADY COLLECTED THE PROCEEDS OF THE REINSURANCE ON ITS BOND


IN FAVOR OF THE JDA AND THAT IT CANNOT REPRESENT A REINSURER TO

In addition to the said proceeds of the reinsurance received by plaintiff Pioneer from

RECOVER

its reinsurer, the former was able to foreclose extra-judicially one of the subject

THE AMOUNT

FROM

HEREIN PRIVATE

RESPONDENTS

AS

DEFENDANTS IN THE TRIAL COURT. (Rollo - G. R. No. 84197, p. 10)

airplanes and its spare engine, realizing the total amount of P37,050.00 from the sale
of the mortgaged chattels. Adding the sum of P37,050.00, to the proceeds of the

The petitioner questions the following findings of the appellate court:

reinsurance amounting to P295,000.00, it is patent that plaintiff has been overpaid in


the amount of P33,383.72 considering that the total amount it had paid to JDA totals

We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer had

to only P298,666.28. To allow plaintiff Pioneer to recover from defendants the amount

reinsured its risk of liability under the surety bond in favor of JDA and subsequently

in excess of P298,666.28 would be tantamount to unjust enrichment as it has already

collected the proceeds of such reinsurance in the sum of P295,000.00. Defendants'

been paid by the reinsurance company of the amount plaintiff has paid to JDA as

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surety of defendant Lim vis-a-vis defendant Lim's liability to JDA. Well settled is the

It appearing that Pioneer reinsured its risk of liability under the surety bond it had

rule that no person should unjustly enrich himself at the expense of another (Article

executed in favor of JDA, collected the proceeds of such reinsurance in the sum of

22, New Civil Code). (Rollo-84197, pp. 24-25).

P295,000, and paid with the said amount the bulk of its alleged liability to JDA under
the said surety bond, it is plain that on this score it no longer has any right to collect to

The petitioner contends that-(1) it is at a loss where respondent court based its finding

the extent of the said amount.

that petitioner was paid by its reinsurer in the aforesaid amount, as this matter has
never been raised by any of the parties herein both in their answers in the court below

On the question of why it is Pioneer, instead of the reinsurance (sic), that is suing

and in their respective briefs with respondent court; (Rollo, p. 11) (2) even assuming

defendants for the amount paid to it by the reinsurers, notwithstanding that the cause

hypothetically that it was paid by its reinsurer, still none of the respondents had any

of action pertains to the latter, Pioneer says: The reinsurers opted instead that the

interest in the matter since the reinsurance is strictly between the petitioner and the

Pioneer Insurance & Surety Corporation shall pursue alone the case.. . . . Pioneer

re-insurer pursuant to section 91 of the Insurance Code; (3) pursuant to the indemnity

Insurance & Surety Corporation is representing the reinsurers to recover the amount.'

agreements, the petitioner is entitled to recover from respondents Bormaheco and

In other words, insofar as the amount paid to it by the reinsurers Pioneer is suing

Maglana; and (4) the principle of unjust enrichment is not applicable considering that

defendants as their attorney-in-fact.

whatever amount he would recover from the co-indemnitor will be paid to the
reinsurer.

But in the first place, there is not the slightest indication in the complaint that Pioneer
is suing as attorney-in- fact of the reinsurers for any amount. Lastly, and most

The records belie the petitioner's contention that the issue on the reinsurance money

important of all, Pioneer has no right to institute and maintain in its own name an

was never raised by the parties.

action for the benefit of the reinsurers. It is well-settled that an action brought by an
attorney-in-fact in his own name instead of that of the principal will not prosper, and

A cursory reading of the trial court's lengthy decision shows that two of the issues

this is so even where the name of the principal is disclosed in the complaint.

threshed out were:


Section 2 of Rule 3 of the Old Rules of Court provides that 'Every action must be
xxx

xxx

xxx

prosecuted in the name of the real party in interest.' This provision is mandatory. The
real party in interest is the party who would be benefitted or injured by the judgment or

1.

Has Pioneer a cause of action against defendants with respect to so much of

is the party entitled to the avails of the suit.

its obligations to JDA as has been paid with reinsurance money?


This Court has held in various cases that an attorney-in-fact is not a real party in
2. If the answer to the preceding question is in the negative, has Pioneer still any

interest, that there is no law permitting an action to be brought by an attorney-in-fact.

claim against defendants, considering the amount it has realized from the sale of the

Arroyo v. Granada and Gentero, 18 Phil. Rep. 484; Luchauco v. Limjuco and Gonzalo,

mortgaged properties? (Record on Appeal, p. 359, Annex B of G.R. No. 84157).

19 Phil. Rep. 12; Filipinos Industrial Corporation v. San Diego G.R. No. L22347,1968, 23 SCRA 706, 710-714.

In resolving these issues, the trial court made the following findings:

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The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has collected
P295,000.00 from the reinsurers, the uninsured portion of what it paid to JDA is the

Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v.

difference between the two amounts, or P3,666.28. This is the amount for which

Heald Lumber Co. (101 Phil. 1031 [1957]) which we subsequently applied in Manila

Pioneer may sue defendants, assuming that the indemnity agreement is still valid and

Mahogany Manufacturing Corporation v. Court of Appeals (154 SCRA 650 [1987]):

effective. But since the amount realized from the sale of the mortgaged chattels are
P35,000.00 for one of the airplanes and P2,050.00 for a spare engine, or a total of

Note that if a property is insured and the owner receives the indemnity from the

P37,050.00, Pioneer is still overpaid by P33,383.72. Therefore, Pioneer has no more

insurer, it is provided in said article that the insurer is deemed subrogated to the rights

claim against defendants. (Record on Appeal, pp. 360-363).

of the insured against the wrongdoer and if the amount paid by the insurer does not
fully cover the loss, then the aggrieved party is the one entitled to recover the

The payment to the petitioner made by the reinsurers was not disputed in the

deficiency. Evidently, under this legal provision, the real party in interest with regard to

appellate court. Considering this admitted payment, the only issue that cropped up

the portion of the indemnity paid is the insurer and not the insured. (Emphasis

was the effect of payment made by the reinsurers to the petitioner. Therefore, the

supplied).

petitioner's argument that the respondents had no interest in the reinsurance contract
as this is strictly between the petitioner as insured and the reinsuring company

It is clear from the records that Pioneer sued in its own name and not as an attorney-

pursuant to Section 91 (should be Section 98) of the Insurance Code has no basis.

in-fact of the reinsurer.

In general a reinsurer, on payment of a loss acquires the same rights by subrogation

Accordingly, the appellate court did not commit a reversible error in dismissing the

as are acquired in similar cases where the original insurer pays a loss (Universal Ins.

petitioner's complaint as against the respondents for the reason that the petitioner

Co. v. Old Time Molasses Co. C.C.A. La., 46 F 2nd 925).

was not the real party in interest in the complaint and, therefore, has no cause of
action against the respondents.

The rules of practice in actions on original insurance policies are in general applicable
to actions or contracts of reinsurance. (Delaware, Ins. Co. v. Pennsylvania Fire Ins.

Nevertheless, the petitioner argues that the appeal as regards the counter

Co., 55 S.E. 330,126 GA. 380, 7 Ann. Con. 1134).

indemnitors should not have been dismissed on the premise that the evidence on
record shows that it is entitled to recover from the counter indemnitors. It does not,

Hence the applicable law is Article 2207 of the new Civil Code, to wit:

however, cite any grounds except its allegation that respondent "Maglanas defense
and evidence are certainly incredible" (p. 12, Rollo) to back up its contention.

Art. 2207. If the plaintiffs property has been insured, and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong or breach of

On the other hand, we find the trial court's findings on the matter replete with evidence

contract complained of, the insurance company shall be subrogated to the rights of

to substantiate its finding that the counter-indemnitors are not liable to the petitioner.

the insured against the wrongdoer or the person who has violated the contract. If the

The trial court stated:

amount paid by the insurance company does not fully cover the injury or loss, the
aggrieved party shall be entitled to recover the deficiency from the person causing the

Apart from the foregoing proposition, the indemnity agreement ceased to be valid and

loss or injury.

effective after the execution of the chattel mortgage.

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SAL or Lim, having failed to pay the second to the eight and last installments to JDA
Testimonies of defendants Francisco Cervantes and Modesto Cervantes.

and Pioneer as surety having made of the payments to JDA, the alternative remedies
open to Pioneer were as provided in Article 1484 of the New Civil Code, known as the

Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved,

Recto Law.

agreed to issue the bond provided that the same would be mortgaged to it, but this
was not possible because the planes were still in Japan and could not be mortgaged

Pioneer exercised the remedy of foreclosure of the chattel mortgage both by

here in the Philippines. As soon as the aircrafts were brought to the Philippines, they

extrajudicial foreclosure and the instant suit. Such being the case, as provided by the

would be mortgaged to Pioneer Insurance to cover the bond, and this indemnity

aforementioned provisions, Pioneer shall have no further action against the purchaser

agreement would be cancelled.

to recover any unpaid balance and any agreement to the contrary is void.' Cruz, et al.
v. Filipinas Investment & Finance Corp. No. L- 24772, May 27,1968, 23 SCRA 791,

The following is averred under oath by Pioneer in the original complaint:

795-6.

The various conflicting claims over the mortgaged properties have impaired and

The operation of the foregoing provision cannot be escaped from through the

rendered insufficient the security under the chattel mortgage and there is thus no

contention that Pioneer is not the vendor but JDA. The reason is that Pioneer is

other sufficient security for the claim sought to be enforced by this action.

actually exercising the rights of JDA as vendor, having subrogated it in such rights.
Nor may the application of the provision be validly opposed on the ground that these

This is judicial admission and aside from the chattel mortgage there is no other

defendants and defendant Maglana are not the vendee but indemnitors. Pascual, et

security for the claim sought to be enforced by this action, which necessarily means

al. v. Universal Motors Corporation, G.R. No. L- 27862, Nov. 20,1974, 61 SCRA 124.

that the indemnity agreement had ceased to have any force and effect at the time this
action was instituted. Sec 2, Rule 129, Revised Rules of Court.

The restructuring of the obligations of SAL or Lim, thru the change of their maturity
dates discharged these defendants from any liability as alleged indemnitors. The

Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage on

change of the maturity dates of the obligations of Lim, or SAL extinguish the original

the planes and spare parts, no longer has any further action against the defendants

obligations thru novations thus discharging the indemnitors.

as indemnitors to recover any unpaid balance of the price. The indemnity agreement
was ipso jure extinguished upon the foreclosure of the chattel mortgage. These

The principal hereof shall be paid in eight equal successive three months interval

defendants, as indemnitors, would be entitled to be subrogated to the right of Pioneer

installments, the first of which shall be due and payable 25 August 1965, the

should they make payments to the latter. Articles 2067 and 2080 of the New Civil

remainder of which ... shall be due and payable on the 26th day x x x of each

Code of the Philippines.

succeeding three months and the last of which shall be due and payable 26th May
1967.

Independently of the preceding proposition Pioneer's election of the remedy of


foreclosure precludes any further action to recover any unpaid balance of the price.

However, at the trial of this case, Pioneer produced a memorandum executed by SAL
or Lim and JDA, modifying the maturity dates of the obligations, as follows:

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The principal hereof shall be paid in eight equal successive three month interval

Pioneer's liability as surety to JDA had already prescribed when Pioneer paid the

installments the first of which shall be due and payable 4 September 1965, the

same. Consequently, Pioneer has no more cause of action to recover from these

remainder of which ... shall be due and payable on the 4th day ... of each succeeding

defendants, as supposed indemnitors, what it has paid to JDA. By virtue of an

months and the last of which shall be due and payable 4th June 1967.

express stipulation in the surety bond, the failure of JDA to present its claim to
Pioneer within ten days from default of Lim or SAL on every installment, released

Not only that, Pioneer also produced eight purported promissory notes bearing

Pioneer from liability from the claim.

maturity dates different from that fixed in the aforesaid memorandum; the due date of
the first installment appears as October 15, 1965, and those of the rest of the

Therefore, Pioneer is not entitled to exact reimbursement from these defendants thru

installments, the 15th of each succeeding three months, that of the last installment

the indemnity.

being July 15, 1967.


Art. 1318. Payment by a solidary debtor shall not entitle him to reimbursement from
These restructuring of the obligations with regard to their maturity dates, effected

his co-debtors if such payment is made after the obligation has prescribed or became

twice, were done without the knowledge, much less, would have it believed that these

illegal.

defendants Maglana (sic). Pioneer's official Numeriano Carbonel would have it


believed that these defendants and defendant Maglana knew of and consented to the

These defendants are entitled to recover damages and attorney's fees from Pioneer

modification of the obligations. But if that were so, there would have been the

and its surety by reason of the filing of the instant case against them and the

corresponding documents in the form of a written notice to as well as written

attachment and garnishment of their properties. The instant action is clearly

conformity of these defendants, and there are no such document. The consequence

unfounded insofar as plaintiff drags these defendants and defendant Maglana.'

of this was the extinguishment of the obligations and of the surety bond secured by

(Record on Appeal, pp. 363-369, Rollo of G.R. No. 84157).

the indemnity agreement which was thereby also extinguished. Applicable by analogy
are the rulings of the Supreme Court in the case of Kabankalan Sugar Co. v.

We find no cogent reason to reverse or modify these findings.

Pacheco, 55 Phil. 553, 563, and the case of Asiatic Petroleum Co. v. Hizon David, 45
Phil. 532, 538.

Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.

Art. 2079. An extension granted to the debtor by the creditor without the consent of

We now discuss the merits of G.R. No. 84157.

the guarantor extinguishes the guaranty The mere failure on the part of the creditor to
demand payment after the debt has become due does not of itself constitute any

Petitioner Jacob S. Lim poses the following issues:

extension time referred to herein, (New Civil Code).'


l.

What legal rules govern the relationship among co-investors whose

Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson & Co.,

agreement was to do business through the corporate vehicle but who failed to

Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571.

incorporate the entity in which they had chosen to invest? How are the losses to be
treated in situations where their contributions to the intended 'corporation' were
invested not through the corporate form? This Petition presents these fundamental

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questions which we believe were resolved erroneously by the Court of Appeals ('CA').

rights as members of the company to the property acquired by the company will be

(Rollo, p. 6).

recognized (Smith v. Schoodoc Pond Packing Co., 84 A. 268,109 Me. 555; Whipple v.
Parker, 29 Mich. 369). So, where certain persons associated themselves as a

These questions are premised on the petitioner's theory that as a result of the failure

corporation for the development of land for irrigation purposes, and each conveyed

of respondents Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner

land to the corporation, and two of them contracted to pay a third the difference in the

Lim to incorporate, a de facto partnership among them was created, and that as a

proportionate value of the land conveyed by him, and no stock was ever issued in the

consequence of such relationship all must share in the losses and/or gains of the

corporation, it was treated as a trustee for the associates in an action between them

venture in proportion to their contribution. The petitioner, therefore, questions the

for an accounting, and its capital stock was treated as partnership assets, sold, and

appellate court's findings ordering him to reimburse certain amounts given by the

the proceeds distributed among them in proportion to the value of the property

respondents to the petitioner as their contributions to the intended corporation, to wit:

contributed by each (Shorb v. Beaudry, 56 Cal. 446). However, such a relation does
not necessarily exist, for ordinarily persons cannot be made to assume the relation of

However, defendant Lim should be held liable to pay his co-defendants' cross-claims

partners, as between themselves, when their purpose is that no partnership shall exist

in the total amount of P184,878.74 as correctly found by the trial court, with interest

(London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed.

from the filing of the cross-complaints until the amount is fully paid. Defendant Lim

688), and it should be implied only when necessary to do justice between the parties;

should pay one-half of the said amount to Bormaheco and the Cervanteses and the

thus, one who takes no part except to subscribe for stock in a proposed corporation

other one-half to defendant Maglana. It is established in the records that defendant

which is never legally formed does not become a partner with other subscribers who

Lim had duly received the amount of Pl51,000.00 from defendants Bormaheco and

engage in business under the name of the pretended corporation, so as to be liable

Maglana representing the latter's participation in the ownership of the subject

as such in an action for settlement of the alleged partnership and contribution (Ward

airplanes and spare parts (Exhibit 58). In addition, the cross-party plaintiffs incurred

v. Brigham, 127 Mass. 24). A partnership relation between certain stockholders and

additional expenses, hence, the total sum of P 184,878.74.

other stockholders, who were also directors, will not be implied in the absence of an
agreement, so as to make the former liable to contribute for payment of debts illegally

We first state the principles.

contracted by the latter (Heald v. Owen, 44 N.W. 210, 79 Iowa 23). (Corpus Juris
Secundum, Vol. 68, p. 464). (Italics supplied).

While it has been held that as between themselves the rights of the stockholders in a
defectively incorporated association should be governed by the supposed charter and

In the instant case, it is to be noted that the petitioner was declared non-suited for his

the laws of the state relating thereto and not by the rules governing partners (Cannon

failure to appear during the pretrial despite notification. In his answer, the petitioner

v. Brush Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is ordinarily held

denied having received any amount from respondents Bormaheco, the Cervanteses

that persons who attempt, but fail, to form a corporation and who carry on business

and Maglana. The trial court and the appellate court, however, found through Exhibit

under the corporate name occupy the position of partners inter se (Lynch v.

58, that the petitioner received the amount of P151,000.00 representing the

Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where persons

participation of Bormaheco and Atty. Constancio B. Maglana in the ownership of the

associate themselves together under articles to purchase property to carry on a

subject airplanes and spare parts. The record shows that defendant Maglana gave

business, and their organization is so defective as to come short of creating a

P75,000.00 to petitioner Jacob Lim thru the Cervanteses.

corporation within the statute, they become in legal effect partners inter se, and their

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It is therefore clear that the petitioner never had the intention to form a corporation

file an adverse claim in the form of third party claim. Notwithstanding repeated oral

with the respondents despite his representations to them. This gives credence to the

demands made by defendants Bormaheco and Cervanteses, to defendant Lim, to

cross-claims of the respondents to the effect that they were induced and lured by the

surrender the possession of the two planes and their accessories and or return the

petitioner to make contributions to a proposed corporation which was never formed

amount advanced by the former amounting to an aggregate sum of P 178,997.14 as

because the petitioner reneged on their agreement. Maglana alleged in his cross-

evidenced by a statement of accounts, the latter ignored, omitted and refused to

claim:

comply with them. (Record on Appeal, pp. 341-342).

... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and

Applying therefore the principles of law earlier cited to the facts of the case,

Maglana to expand his airline business. Lim was to procure two DC-3's from Japan

necessarily, no de facto partnership was created among the parties which would

and secure the necessary certificates of public convenience and necessity as well as

entitle the petitioner to a reimbursement of the supposed losses of the proposed

the required permits for the operation thereof. Maglana sometime in May 1965, gave

corporation. The record shows that the petitioner was acting on his own and not in

Cervantes his share of P75,000.00 for delivery to Lim which Cervantes did and Lim

behalf of his other would-be incorporators in transacting the sale of the airplanes and

acknowledged receipt thereof. Cervantes, likewise, delivered his share of the

spare parts.

undertaking. Lim in an undertaking sometime on or about August 9,1965, promised to


incorporate his airline in accordance with their agreement and proceeded to acquire

WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the

the planes on his own account. Since then up to the filing of this answer, Lim has

Court of Appeals is AFFIRMED.

refused, failed and still refuses to set up the corporation or return the money of
Maglana. (Record on Appeal, pp. 337-338).

SO ORDERED.

while respondents Bormaheco and the Cervanteses alleged in their answer,


counterclaim, cross-claim and third party complaint:
Sometime in April 1965, defendant Lim lured and induced the answering defendants
to purchase two airplanes and spare parts from Japan which the latter considered as

[G.R. No. 125469. October 27, 1997]

their lawful contribution and participation in the proposed corporation to be known as


SAL. Arrangements and negotiations were undertaken by defendant Lim. Down

PHILIPPINE STOCK EXCHANGE, INC., petitioner, vs. THE HONORABLE COURT

payments were advanced by defendants Bormaheco and the Cervanteses and

OF APPEALS, SECURITIES AND EXCHANGE COMMISSION and PUERTO AZUL

Constancio Maglana (Exh. E- 1). Contrary to the agreement among the defendants,

LAND, INC., respondents.

defendant Lim in connivance with the plaintiff, signed and executed the alleged chattel

DECISION

mortgage and surety bond agreement in his personal capacity as the alleged

TORRES, JR., J.:

proprietor of the SAL. The answering defendants learned for the first time of this
trickery and misrepresentation of the other, Jacob Lim, when the herein plaintiff

The Securities and Exchange Commission is the government agency, under the direct

chattel mortgage (sic) allegedly executed by defendant Lim, thereby forcing them to

general supervision of the Office of the President,[1] with the immense task of

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enforcing the Revised Securities Act, and all other duties assigned to it by pertinent

among the stockholders of PALI, likewise appears to have been held and continue to

laws.

Among its inumerable functions, and one of the most important, is the

be held in trust by one Rebecco Panlilio for then President Marcos and now,

supervision of all corporations, partnerships or associations, who are grantees or

effectively for his estate, and requested PALIs application to be deferred. PALI was

primary franchise and/or a license or permit issued by the government to operate in

requested to comment upon the said letter.

the Philippines.[2] Just how far this regulatory authority extends, particularly, with
regard to the Petitioner Philippine Stock Exchange, Inc. is the issue in the case at bar.

PALIs answer stated that the properties forming part of Puerto Azul Beach Hotel and
Resort Complex were not claimed by PALI as its assets. On the contrary, the resort is

In this Petition for Review of Certiorari, petitioner assails the resolution of the

actually owned by Fantasia Filipina Resort, Inc. and the Puerto Azul Country Club,

respondent Court of Appeals, dated June 27, 1996, which affirmed the decision of the

entities distinct from PALI. Furthermore, the Ternate Development Corporation owns

Securities and Exchange Commission ordering the petitioner Philippine Stock

only 1.20% of PALI. The Marcoses responded that their claim is not confined to the

Exchange, Inc. to allow the private respondent Puerto Azul Land, Inc. to be listed in its

facilities forming part of the Puerto Azul Hotel and Resort Complex, thereby implying

stock market, thus paving the way for the public offering of PALIs shares.

that they are also asserting legal and beneficial ownership of other properties titled
under the name of PALI.

The facts of the case are undisputed, and are hereby restated in sum.
On February 20, 1996, the PSE wrote Chairman Magtanggol Gunigundo of the
The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had sought to

Presidential Commission on Good Government (PCGG) requesting for comments on

offer its shares to the public in order to raise funds allegedly to develop its properties

the letter of the PALI and the Marcoses. On March 4, 1996, the PSE was informed

and pay its loans with several banking institutions. In January, 1995, PALI was issued

that the Marcoses received a Temporary Restraining Order on the same date,

a Permit to Sell its shares to the public by the Securities and Exchange Commission

enjoining the Marcoses from, among others, further impeding, obstructing, delaying

(SEC). To facilitate the trading of its shares among investors, PALI sought to course

or interfering in any manner by or any means with the consideration, processing and

the trading of its shares through the Philippine Stock Exchange, Inc. (PSE), for which

approval by the PSE of the initial public offering of PALI. The TRO was issued by

purpose it filed with the said stock exchange an application to list its shares, with

Judge Martin S. Villarama, Executive Judge of the RTC of Pasig City in Civil Case No.

supporting documents attached.

65561, pending in Branch 69 thereof.

On February 8, 1996, the Listing Committee of the PSE, upon a perusal of PALIs

In its regular meeting held on March 27, 1996, the Board of Governors of the PSE

application, recommended to the PSEs Board of Governors the approval of PALIs

reached its decision to reject PALIs application, citing the existence of serious claims,

listing application.

issues and circumstances surrounding PALIs ownership over its assets that adversely
affect the suitability of listing PALIs shares in the stock exchange.

On February 14, 1996, before it could act upon PALIs application, the Board of
Governors of PSE received a letter from the heirs of Ferdinand E. Marcos, claiming

On April 11, 1996, PALI wrote a letter to the SEC addressed to the then Acting

that the late President Marcos was the legal and beneficial owner of certain properties

Chairman, Perfecto R. Yasay, Jr., bringing to the SECs attention the action taken by

forming part of the Puerto Azul Beach Hotel and Resort Complex which PALI claims

the PSE in the application of PALI for the listing of its shares with the PSE, and

to be among its assets and that the Ternate Development Corporation, which is

requesting that the SEC, in the exercise of its supervisory and regulatory powers over

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stock exchanges under Section 6(j) of P.D. No. 902-A, review the PSEs action on

regard, PALI is hereby ordered to amend its registration statements filed with the

PALIs listing application and institute such measures as are just and proper and

Commission to incorporate the full disclosure of these material facts and information.

under the circumstances.


Dissatisfied with this ruling, the PSE filed with the Court of Appeals on May 17, 1996
On the same date, or on April 11, 1996, the SEC wrote to the PSE, attaching thereto

a Petition for Review (with application for Writ of Preliminary Injunction and Temporary

the letter of PALI and directing the PSE to file its comments thereto within five days

Restraining Order), assailing the above mentioned orders of the SEC, submitting the

from its receipt and for its authorized representative to appear for an inquiry on the

following as errors of the SEC:

matter. On April 22, 1996, the PSE submitted a letter to the SEC containing its
comments to the April 11, 1996 letter of PALI.

I. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN


ISSUING THE ASSAILED ORDERS WITHOUT POWER, JURISDICTION, OR

On April 24, 1996, the SEC rendered its Order, reversing the PSEs decision. The

AUTHORITY; SEC HAS NO POWER TO ORDER THE LISTING AND SALE OF

dispositive portion of the said order reads:

SHARES OF PALI WHOSE ASSETS ARE SEQUESTERED AND TO REVIEW AND


SUBSTITUTE DECISIONS OF PSE ON LISTING APPLICATIONS;

WHEREFORE, premises considered, and invoking the Commissioners authority and


jurisdiction under Section 3 of the Revised Securities Act, in conjunction with Section

II. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN

3, 6(j) and 6(m) of the Presidential Decree No. 902-A, the decision of the Board of

FINDING THAT PSE ACTED IN AN ARBITRARY AND ABUSIVE MANNER IN

Governors of the Philippine Stock Exchange denying the listing of shares of Puerto

DISAPPROVING PALIS LISTING APPLICATION;

Azul Land, Inc., is hereby set aside, and the PSE is hereby ordered to immediately
cause the listing of the PALI shares in the Exchange, without prejudice to its authority

III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL AND VOID FOR ALLOWING

to require PALI to disclose such other material information it deems necessary for the

FURTHER DISPOSITION OF PROPERTIES IN CUSTODIA LEGIS AND WHICH

protection of the investing public.

FORM PART OF NAVAL/MILITARY RESERVATION; AND

This Order shall take effect immediately.

IV. THE FULL DISCLOSURE OF THE SEC WAS NOT PROPERLY PROMULGATED
AND ITS IMPLEMENTATION AND APPLICATION IN THIS CASE VIOLATES THE

SO ORDERED.

DUE PROCESS CLAUSE OF THE CONSTITUTION.

PSE filed a motion for reconsideration of the said order on April 29, 1996, which was,

On June 4, 1996, PALI filed its Comment to the Petition for Review and subsequently,

however denied by the Commission in its May 9, 1996 Order which states:

a Comment and Motion to Dismiss.

On June 10, 1996, PSE filed its Reply to

Comment and Opposition to Motion to Dismiss.


WHEREFORE, premises considered, the Commission finds no compelling reason to
consider its order dated April 24, 1996, and in the light of recent developments on the

On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing the

adverse claim against the PALI properties, PSE should require PALI to submit full

PSEs Petition for Review. Hence, this Petition by the PSE.

disclosure of material facts and information to protect the investing public. In this

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The appellate court had ruled that the SEC had both jurisdiction and authority to look

3.

It appears that the claims and issues on the title to PALIs properties were

into the decision of the petitioner PSE, pursuant to Section 3[3] of the Revised

even less serious than the claims against the assets of the other companies in that,

Securities Act in relation to Section 6(j) and 6(m)[4] of P.D. No. 902-A, and Section

the assertions of the Marcoses that they are owners of the disputed properties were

38(b)[5] of the Revised Securities Act, and for the purpose of ensuring fair

not substantiated enough to overcome the strength of a title to properties issued

administration of the exchange. Both as a corporation and as a stock exchange, the

under the Torrens System as evidence of ownership thereof;

petitioner is subject to public respondents jurisdiction, regulation and control.


Accepting the argument that the public respondent has the authority merely to

4.

No action has been filed in any court of competent jurisdiction seeking to

supervise or regulate, would amount to serious consequences, considering that the

nullify PALIs ownership over the disputed properties, neither has the government

petitioner is a stock exchange whose business is impressed with public interest.

instituted recovery proceedings against these properties. Yet the import of PSEs

Abuse is not remote if the public respondent is left without any system of control. If

decision in denying PALIs application is that it would be PALI, not the Marcoses, that

the securities act vested the public respondent with jurisdiction and control over all

must go to court to prove the legality of its ownership on these properties before its

corporations; the power to authorize the establishment of stock exchanges; the right

shares can be listed.

to supervise and regulate the same; and the power to alter and supplement rules of
the exchange in the listing or delisting of securities, then the law certainly granted to

In addition, the argument that the PALI properties belong to the Military/Naval

the public respondent the plenary authority over the petitioner; and the power of

Reservation does not inspire belief. The point is, the PALI properties are now titled.

review necessarily comes within its authority.

A property losses its public character the moment it is covered by a title. As a matter
of fact, the titles have long been settled by a final judgment; and the final decree

All in all, the court held that PALI complied with all the requirements for public listing,

having been registered, they can no longer be re-opened considering that the one

affirming the SECs ruling to the effect that:

year period has already passed. Lastly, the determination of what standard to apply in
allowing PALIs application for listing, whether the discretion method or the system of

x x x the Philippine Stock Exchange has acted in an arbitrary and abusive manner in

public disclosure adhered to by the SEC, should be addressed to the Securities

disapproving the application of PALI for listing of its shares in the face of the following

Commission, it being the government agency that exercises both supervisory and

considerations:

regulatory authority over all corporations.

1.

On August 15, 1996, the PSE, after it was granted an extension, filed an instant

PALI has clearly and admittedly complied with the Listing Rules and full

disclosure requirements of the Exchange;

Petition for Review on Certiorari, taking exception to the rulings of the SEC and the
Court of Appeals. Respondent PALI filed its Comment to the petition on October 17,

2.

In applying its clear and reasonable standards on the suitability for listing of

1996. On the same date, the PCGG filed a Motion for Leave to file a Petition for

shares, PSE has failed to justify why it acted differently on the application of PALI, as

Intervention. This was followed up by the PCGGs Petition for Intervention on October

compared to the IPOs of other companies similarly that were allowed listing in the

21, 1996. A supplemental Comment was filed by PALI on October 25, 1997. The

Exchange;

Office of the Solicitor General, representing the SEC and the Court of Appeals,
likewise filed its Comment on December 26, 1996. In answer to the PCGGs motion

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for leave to file petition for intervention, PALI filed its Comment thereto on January 17,

Corporation (MSDC), are under sequestration by the PCGG, and the subject of

1997, whereas the PSE filed its own Comment on January 20, 1997.

forfeiture proceedings in the Sandiganbayan. This ruling of the Court is the law of
the case between the Republic and the TDC and MSDC. It categorically declares

On February 25, 1996, the PSE filed its Consolidated Reply to the comments of

that the assets of these corporations were sequestered by the PCGG on March 10,

respondent PALI (October 17, 1996) and the Solicitor General (December 26, 1996).

1986 and April 4, 1988.

On may 16, 1997, PALI filed its Rejoinder to the said consolidated reply of PSE.
It is, likewise, intimidated that the Court of Appeals sanction that PALIs ownership
PSE submits that the Court of Appeals erred in ruling that the SEC had authority to

over its properties can no longer be questioned, since certificates of title have been

order the PSE to list the shares of PALI in the stock exchange. Under presidential

issued to PALI and more than one year has since lapsed, is erroneous and ignores

decree No. 902-A, the powers of the SEC over stock exchanges are more limited as

well settled jurisprudence on land titles. That a certificate of title issued under the

compared to its authority over ordinary corporations. In connection with this, the

Torrens System is a conclusive evidence of ownership is not an absolute rule and

powers of the SEC over stock exchanges under the Revised Securities Act are

admits certain exceptions. It is fundamental that forest lands or military reservations

specifically enumerated, and these do not include the power to reverse the decisions

are non-alienable.

of the stock exchange. Authorities are in abundance even in the United States, from

reservation, such title is void.

Thus, when a title covers a forest reserve or a government

which the countrys security policies are patterned, to the effect of giving the
Securities Commission less control over stock exchanges, which in turn are given

PSE, likewise, assails the SECs and the Court of Appeals reliance on the alleged

more lee-way in making the decision whether or not to allow corporations to offer their

policy of full disclosure to uphold the listing of the PALIs shares with the PSE, in the

stock to the public through the stock exchange. This is in accord with the business

absence of a clear mandate for the effectivity of such policy. As it is, the case records

judgment rule whereby the SEC and the courts are barred from intruding into

reveal the truth that PALI did not comply with the listing rules and disclosure

business judgments of corporations, when the same are made in good faith. The said

requirements. In fact, PALIs documents supporting its application contained

rule precludes the reversal of the decision of the PSE to deny PALIs listing

misrepresentations and misleading statements, and concealed material information.

application, absent a showing a bad faith on the part of the PSE. Under the listing

The matter of sequestration of PALIs properties and the fact that the same form part

rule of the PSE, to which PALI had previously agreed to comply, the PSE retains the

of military/naval/forest reservations were not reflected in PALIs application.

discretion to accept or reject applications for listing. Thus, even if an issuer has
complied with the PSE listing rules and requirements, PSE retains the discretion to

It is undeniable that the petitioner PSE is not an ordinary corporation, in that although

accept or reject the issuers listing application if the PSE determines that the listing

it is clothed with the marking of a corporate entity, its functions as the primary channel

shall not serve the interests of the investing public.

through which the vessels of capital trade ply. The PSEs relevance to the continued
operation and filtration of the securities transactions in the country gives it a distinct

Moreover, PSE argues that the SEC has no jurisdiction over sequestered

color of importance such that government intervention in its affairs becomes justified,

corporations, nor with corporations whose properties are under sequestration.

if not necessary. Indeed, as the only operational stock exchange in the country today,

reading of Republic of the Philippines vs. Sandiganbayan, G.R. No. 105205, 240

the PSE enjoys a monopoly of securities transactions, and as such, it yields an

SCRA 376, would reveal that the properties of PALI, which were derived from the

immense influence upon the countrys economy.

Ternate Development Corporation (TDC) and the Monte del Sol Development

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Due to this special nature of stock exchanges, the countrys lawmakers has seen it

We affirm that the SEC is the entity with the primary say as to whether or not

wise to give special treatment to the administration and regulation of stock exchanges.

securities, including shares of stock of a corporation, may be traded or not in the stock

[6]

exchange. This is in line with the SECs mission to ensure proper compliance with the
laws, such as the Revised Securities Act and to regulate the sale and disposition of

These provisions, read together with the general grant of jurisdiction, and right of

securities in the country.[9] As the appellate court explains:

supervision and control over all corporations under Sec. 3 of P.D. 902-A, give the SEC
the special mandate to be vigilant in the supervision of the affairs of stock exchanges

Paramount policy also supports the authority of the public respondent to review

so that the interests of the investing public may be fully safeguarded.

petitioners denial of the listing. Being a stock exchange, the petitioner performs a
function that is vital to the national economy, as the business is affected with public

Section 3 of Presidential Decree 902-A, standing alone, is enough authority to uphold

interest. As a matter of fact, it has often been said that the economy moves on the

the SECs challenged control authority over the petitioner PSE even as it provides that

basis of the rise and fall of stocks being traded. By its economic power, the petitioner

the Commission shall have absolute jurisdiction, supervision, and control over all

certainly can dictate which and how many users are allowed to sell securities thru the

corporations, partnerships or associations, who are the grantees of primary

facilities of a stock exchange, if allowed to interpret its own rules liberally as it may

franchises and/or a license or permit issued by the government to operate in the

please. Petitioner can either allow or deny the entry to the market of securities. To

Philippines The SECs regulatory authority over private corporations encompasses

repeat, the monopoly, unless accompanied by control, becomes subject to abuse;

a wide margin of areas, touching nearly all of a corporations concerns. This authority

hence, considering public interest, then it should be subject to government regulation.

springs from the fact that a corporation owes its existence to the concession of its
corporate franchise from the state.

The role of the SEC in our national economy cannot be minimized. The legislature,
through the Revised Securities Act, Presidential Decree No. 902-A, and other

The SECs power to look into the subject ruling of the PSE, therefore, may be implied

pertinent laws, has entrusted to it the serious responsibility of enforcing all laws

from or be considered as necessary or incidental to the carrying out of the SECs

affecting corporations and other forms of associations not otherwise vested in some

express power to insure fair dealing in securities traded upon a stock exchange or to

other government office.[10]

ensure the fair administration of such exchange.[7] It is, likewise, observed that the
principal function of the SEC is the supervision and control over corporations,

This is not to say, however, that the PSEs management prerogatives are under the

partnerships and associations with the end in view that investment in these entities

absolute control of the SEC. The PSE is, after all, a corporation authorized by its

may be encouraged and protected, and their activities pursued for the promotion of

corporate franchise to engage in its proposed and duly approved business. One of

economic development.[8]

the PSEs main concerns, as such, is still the generation of profit for its stockholders.
Moreover, the PSE has all the rights pertaining to corporations, including the right to

Thus, it was in the alleged exercise of this authority that the SEC reversed the

sue and be sued, to hold property in its own name, to enter (or not to enter) into

decision of the PSE to deny the application for listing in the stock exchange of the

contracts with third persons, and to perform all other legal acts within its allocated

private respondent PALI. The SECs action was affirmed by the Court of Appeals.

express or implied powers.

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A corporation is but an association of individuals, allowed to transact under an

effective protection to the investing public against fraudulent representations, or false

assumed corporate name, and with a distinct legal personality. In organizing itself as

promises, and the imposition of worthless ventures.[14]

a collective body, it waives no constitutional immunities and perquisites appropriate to


such body.[11] As to its corporate and management decisions, therefore, the state will

It is to be observed that the U.S. Securities Act emphasized its avowed protection to

generally not interfere with the same. Questions of policy and of management are left

acts detrimental to legitimate business, thus:

to the honest decision of the officers and directors of a corporation, and the courts are
without authority to substitute their judgment for the judgment of the board of

The Securities Act, often referred to as the truth in securities Act, was designed not

directors. The board is the business manager of the corporation, and so long as it

only to provide investors with adequate information upon which to base their decisions

acts in good faith, its orders are not reviewable by the courts.[12]

to buy and sell securities, but also to protect legitimate business seeking to obtain
capital through honest presentation against competition form crooked promoters and

Thus, notwithstanding the regulatory power of the SEC over the PSE, and the

to prevent

fraud in the sale of securities. (Tenth Annual Report, U.S. Securities and

resultant authority to reverse the PSEs decision in matters of application for listing in

Exchange Commission, p. 14).

the market, the SEC may exercise such power only if the PSEs judgment is attended
by bad faith. In board of Liquidators vs. Kalaw,[13] it was held that bad faith does not

As has been pointed out, the effects of such an act are chiefly (1) prevention of

simply connote bad judgment or negligence. It imports a dishonest purpose or some

excesses and fraudulent transactions, merely by requirement of that details be

moral obliquity and conscious doing of wrong. It means a breach of a known duty

revealed; (2) placing the market during the early stages of the offering of a security a

through some motive or interest of ill will, partaking of the nature of fraud.

body of information, which operating indirectly through investment services and expert
investors, will tend to produce a more accurate appraisal of a security. x x x. Thus,

In reaching its decision to deny the application for listing of PALI, the PSE considered

the Commission may refuse to permit a registration statement to become effective if it

important facts, which in the general scheme, brings to serious question the

appears on its face to be incomplete or inaccurate in any material respect, and

qualification of PALI to sell its shares to the public through the stock exchange.

empower the Commission to issue a stop order suspending the effectiveness of any

During the time for receiving objections to the application, the PSE heard from the

registration statement which is found to include any untrue statement of a material fact

representative of the late President Ferdinand E. Marcos and his family who claim the

or to omit to state any material fact required to be stated therein or necessary to make

properties of the private respondent to be part of the Marcos estate. In time, the

the statements therein not misleading. (Idem).

PCGG confirmed this claim.

In fact, an order of sequestration has been issued

covering the properties of PALI, and suit for reconveyance to the state has been filed

Also, as the primary market for securities, the PSE has established its name and

in the Sandiganbayan Court. How the properties were effectively transferred, despite

goodwill, and it has the right to protect such goodwill by maintaining a reasonable

the sequestration order, from the TDC and MSDC to Rebecco Panlilio, and to the

standard of propriety in the entities who choose to transact through its facilities. It

private respondent PALI, in only a short span of time, are not yet explained to the

was reasonable for PSE, therefore, to exercise its judgment in the manner it deems

Court, but it is clear that such circumstances give rise to serious doubt as to the

appropriate for its business identity, as long as no rights are trampled upon, and

integrity of PALI as a stock issuer. The petitioner was in the right when it refused

public welfare is safeguarded.

application of PALI, for a contrary ruling was not to the best interest of the general
public. The purpose of the Revised Securities Act, after all, is to give adequate and

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In this connection, it is proper to observe that the concept of government absolutism

consider appropriate in the public interest for the enforcement of the said laws. The

in a thing of the past, and should remain so.

second paragraph of Section 4 of the said law, on the other hand, provides that no
security, unless exempt by law, shall be issued, endorsed, sold, transferred or in any

The observation that the title of PALI over its properties is absolute and can no longer

other manner conveyed to the public, unless registered in accordance with the rules

be assailed is of no moment. At this juncture, there is the claim that the properties

and regulations that shall be promulgated in the public interest and for the protection

were owned by the TDC and MSDC and were transferred in violation of sequestration

of investors by the Commission. Presidential Decree No. 902-A, on the other hand,

orders, to Rebecco Panlilio and later on to PALI, besides the claim of the Marcoses

provides that the SEC, as regulatory agency, has supervision and control over all

that such properties belong to Marcos estate, and were held only in trust by Rebecco

corporations and over the securities market as a whole, and as such, is given ample

Panlilio. It is also alleged by the petitioner that these properties belong to naval and

authority in determining appropriate policies. Pursuant to this regulatory authority, the

forest reserves, and therefore beyond private dominion. If any of these claims is

SEC has manifested that it has adopted the policy of full material disclosure where

established to be true, the certificates of title over the subject properties now held by

all companies, listed or applying for listing, are required to divulge truthfully and

PALI may be disregarded, as it is an established rule that a registration of a certificate

accurately, all material information about themselves and the securities they sell, for

of title does not confer ownership over the properties described therein to the person

the protection of the investing public, and under pain of administrative, criminal and

named as owner. The inscription in the registry, to be effective, must be made in

civil sanctions. In connection with this, a fact is deemed material if it tends to induce

good faith. The defense of indefeasibility of a Torrens Title does not extend to a

or otherwise effect the sale or purchase of its securities.[15] While the employment of

transferee who takes the certificate of title with notice of a flaw.

this policy is recognized and sanctioned by laws, nonetheless, the Revised Securities
Act sets substantial and procedural standards which a proposed issuer of securities

In any case, for the purpose of determining whether PSE acted correctly in refusing

must satisfy.[16] Pertinently, Section 9 of the Revised Securities Act sets forth the

the application of PALI, the true ownership of the properties of PALI need not be

possible Grounds for the Rejection of the registration of a security:

determined as an absolute fact.

What is material is that the uncertainty of the

properties ownership and alienability exists, and this puts to question the qualification

- - The Commission may reject a registration statement and refuse to issue a permit

of PALIs public offering. In sum, the Court finds that the SEC had acted arbitrarily in

to sell the securities included in such registration statement if it finds that - -

arrogating unto itself the discretion of approving the application for listing in the PSE
of the private respondent PALI, since this is a matter addressed to the sound

(1)

The registration statement is on its face incomplete or inaccurate in any

discretion of the PSE, a corporate entity, whose business judgments are respected in

material respect or includes any untrue statement of a material fact or omits to state a

the absence of bad faith.

material facts required to be stated therein or necessary to make the statements


therein not misleading; or

The question as to what policy is, or should be relied upon in approving the
registration and sale of securities in the SEC is not for the Court to determine, but is
left to the sound discretion of the Securities and Exchange Commission.

(2)

The issuer or registrant - -

In

mandating the SEC to administer the Revised Securities Act, and in performing its

(i)

other functions under pertinent laws, the Revised Securities Act, under Section 3
thereof, gives the SEC the power to promulgate such rules and regulations as it may

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(ii)

has violated or has not complied with the provisions of this Act, or the rules

PALI, on at least two points (nos. 1 and 5) has failed to support the propriety of the

promulgated pursuant thereto, or any order of the Commission;

issue of its shares with unfailing clarity, thereby lending support to the conclusion that
the PSE acted correctly in refusing the listing of PALI in its stock exchange. This does

(iii) has failed to comply with any of the applicable requirements and conditions that

not discount the effectivity of whatever method the SEC, in the exercise of its vested

the Commission may, in the public interest and for the protection of investors, impose

authority, chooses in setting the standard for public offerings of corporations wishing

before the security can be registered;

to do so. However, the SEC must recognize and implement the mandate of the law,
particularly the Revised Securities Act, the provisions of which cannot be amended or

(iv)

had been engaged or is engaged or is about to engaged in fraudulent

supplanted my mere administrative issuance.

transactions;
In resum, the Court finds that the PSE has acted with justified circumspection,
(v)

is in any was dishonest of is not of good repute; or

discounting, therefore, any imputation of arbitrariness and whimsical animation on its


part. Its action in refusing to allow the listing of PALI in the stock exchange is justified

(vi)

does not conduct its business in accordance with law or is engaged in a

by the law and by the circumstances attendant to this case.

business that is illegal or contrary or government rules and regulations.


ACCORDINGLY, in view of the foregoing considerations, the Court hereby GRANTS
(3)

The enterprise or the business of the issuer is not shown to be sound or to

the Petition for Review on Certiorari. The decisions of the Court of Appeals and the

be based on sound business principles;

Securities and Exchage Commission dated July 27, 1996 and April 24, 1996,
respectively, are hereby REVERSED and SET ASIDE, and a new Judgment is hereby

(4)

An officer, member of the board of directors, or principal stockholder of the

ENTERED, affirming the decision of the Philippine Stock Exchange to deny the

issuer is disqualified to such officer, director or principal stockholder; or

application for listing of the private respondent Puerto Azul Land, Inc.

(5)

SO ORDERED.

The issuer or registrant has not shown to the satisfaction of the Commission

that the sale of its security would not work to the prejudice to the public interest or as
a fraud upon the purchaser or investors. (Emphasis Ours)
A reading of the foregoing grounds reveals the intention of the lawmakers to make the
registration and issuance of securities dependent, to a certain extent, on the merits of
the securities themselves, and of the issuer, to be determined by the Securities and
Exchange Commission.

This measure was meant to protect the interest of the

investing public against fraudulent and worthless securities, and the SEC is mandated
by law to safeguard these interests, following the policies and rules therefore
provided. The absolute reliance on the full disclosure method in the registration of
securities is, therefore, untenable. At it is, the Court finds that the private respondent

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cooperation in transnational investigations and prosecutions of persons involved in


money laundering activities wherever committed.
SEC. 3. Definitions. For purposes of this Act, the following terms are hereby
defined as follows:
(a) "Covered institution" refers to:
(1) banks, non-banks, quasi-banks, trust entities, and all other institutions and their
subsidiaries and affiliates supervised or regulated by the Bangko Sentral ng Pilipinas
(BSP);
(2) insurance companies and all other institutions supervised or regulated by the
Insurance Commission; and
(3) (i) securities dealers, brokers, salesmen, investment houses and other similar
entities managing securities or rendering services as investment agent, advisor, or
consultant, (ii) mutual funds, close-end investment companies, common trust funds,
pre-need companies and other similar entities, (iii) foreign exchange corporations,
money changers, money payment, remittance, and transfer companies and other
similar entities, and (iv) other entities administering or otherwise dealing in currency,
commodities or financial derivatives based thereon, valuable objects, cash substitutes
and other similar monetary instruments or property supervised or regulated by
Securities and Exchange Commission and Exchange Commission
(b) "Covered transaction" is a single, series, or combination of transactions involving a
total amount in excess of Four million Philippine pesos (Php4,000,000.00) or an
Anti-Money Laundering Act of 2001 (RA 9160)

equivalent amount in foreign currency based on the prevailing exchange rate within

AN ACT DEFINING THE CRIME OF MONEY LAUNDERING, PROVIDING

five (5) consecutive banking days except those between a covered institution and a

PENALTIES THEREFOR AND FOR OTHER PURPOSES

person who, at the time of the transaction was a properly identified client and the

Be it enacted by the Senate and House of Representatives of the Philippines in

amount is commensurate with the business or financial capacity of the client; or those

Congress assembled:

with an underlying legal or trade obligation, purpose, origin or economic justification.

SECTION 1. Short Title. This Act shall be known as the "Anti-Money Laundering

It likewise refers to a single, series or combination or pattern of unusually large and

Act of 2001."

complex transactions in excess of Four million Philippine pesos (Php4,000,000.00)

SEC. 2. Declaration of Policy. It is hereby declared the policy of the State to

especially cash deposits and investments having no credible purpose or origin,

protect and preserve the integrity and confidentiality of bank accounts and to ensure

underlying trade obligation or contract.

that the Philippines shall not be used as a money laundering site for the proceeds of

(c) "Monetary instrument" refers to:

any unlawful activity. Consistent with its foreign policy, the State shall extend

(1) coins or currency of legal tender of the Philippines, or of any other country;
(2) drafts, checks and notes;

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(3) securities or negotiable instruments, bonds, commercial papers, deposit

(11) Violations under Republic Act No. 8792, otherwise known as the Electronic

certificates, trust certificates, custodial receipts or deposit substitute instruments,

Commerce Act of 2000;

trading orders, transaction tickets and confirmations of sale or investments and

(12) Hijacking and other violations under Republic Act No. 6235; destructive arson

money market instruments; and

and murder, as defined under the Revised Penal Code, as amended, including those

(4) other similar instruments where title thereto passes to another by endorsement,

perpetrated by terrorists against non-combatant persons and similar targets;

assignment or delivery.

(13) Fraudulent practices and other violations under Republic Act No. 8799, otherwise

(d) "Offender" refers to any person who commits a money laundering offense.

known as the Securities Regulation Code of 2000;

(e) "Person" refers to any natural or juridical person.

(14) Felonies or offenses of a similar nature that are punishable under the penal laws

(f) "Proceeds" refers to an amount derived or realized from an unlawful activity.

of other countries.

(g) "Supervising Authority" refers to the appropriate supervisory or regulatory agency,

SEC. 4. Money Laundering Offense. Money laundering is a crime whereby the

department or office supervising or regulating the covered institutions enumerated in

proceeds of an unlawful activity are transacted, thereby making them appear to have

Section 3(a).

originated from legitimate sources. It is committed by the following:

(h) "Transaction" refers to any act establishing any right or obligation or giving rise to

(a) Any person knowing that any monetary instrument or property represents,

any contractual or legal relationship between the parties thereto. It also includes any

involves, or relates to, the proceeds of any unlawful activity, transacts or attempts to

movement of funds by any means with a covered institution.

transact said monetary instrument or property.

(i) "Unlawful activity" refers to any act or omission or series or combination thereof

(b) Any person knowing that any monetary instrument or property involves the

involving or having relation to the following:

proceeds of any unlawful activity, performs or fails to perform any act as a result of

(1) Kidnapping for ransom under Article 267 of Act No. 3815, otherwise known as the

which he facilitates the offense of money laundering referred to in paragraph (a)

Revised Penal Code, as amended;

above.

(2) Sections 3, 4, 5, 7, 8 and 9 of Article Two of Republic Act No. 6425, as amended,

(c) Any person knowing that any monetary instrument or property is required under

otherwise known as the Dangerous Drugs Act of 1972;

this Act to be disclosed and filed with the Anti-Money Laundering Council (AMLC),

(3) Section 3 paragraphs B, C, E, G, H and I of Republic Act No. 3019, as amended;

fails to do so.

otherwise known as the Anti-Graft and Corrupt Practices Act;

SEC. 5. Jurisdiction of Money Laundering Cases. The regional trial courts shall

(4) Plunder under Republic Act No. 7080, as amended;

have jurisdiction to try all cases on money laundering. Those committed by public

(5) Robbery and extortion under Articles 294, 295, 296, 299, 300, 301 and 302 of the

officers and private persons who are in conspiracy with such public officers shall be

Revised Penal Code, as amended;

under the jurisdiction of the Sandiganbayan.

(6) Jueteng and Masiao punished as illegal gambling under Presidential Decree No.

SEC. 6. Prosecution of Money Laundering.

1602;

(a) Any person may be charged with and convicted of both the offense of money

(7) Piracy on the high seas under the Revised Penal Code, as amended and

laundering and the unlawful activity as herein defined.

Presidential Decree No. 532;

(b) Any proceeding relating to the unlawful activity shall be given precedence over the

(8) Qualified theft under Article 310 of the Revised Penal Code, as amended;

prosecution of any offense or violation under this Act without prejudice to the freezing

(9) Swindling under Article 315 of the Revised Penal Code, as amended;

and other remedies provided.

(10) Smuggling under Republic Act Nos. 455 and 1937;

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SEC. 7. Creation of Anti-Money Laundering Council (AMLC). The Anti-Money

prevention, detection and investigation of money laundering offenses and prosecution

Laundering Council is hereby created and shall be composed of the Governor of the

of offenders.

Bangko Sentral ng Pilipinas as chairman, the Commissioner of the Insurance

SEC. 8. Creation of a Secretariat. The AMLC is hereby authorized to establish a

Commission and the Chairman of the Securities and Exchange Commission as

secretariat to be headed by an Executive Director who shall be appointed by the

members. The AMLC shall act unanimously in the discharge of its functions as

Council for a term of five (5) years. He must be a member of the Philippine Bar, at

defined hereunder:

least thirty-five (35) years of age and of good moral character, unquestionable

(1) to require and receive covered transaction reports from covered institutions;

integrity and known probity. All members of the Secretariat must have served for at

(2) to issue orders addressed to the appropriate Supervising Authority or the covered

least five (5) years either in the Insurance Commission, the Securities and Exchange

institution to determine the true identity of the owner of any monetary instrument or

Commission or the Bangko Sentral ng Pilipinas (BSP) and shall hold full-time

property subject of a covered transaction report or request for assistance from a

permanent positions within the BSP.

foreign State, or believed by the Council, on the basis of substantial evidence, to be,

SEC. 9. Prevention of Money Laundering; Customer Identification Requirements

in whole or in part, wherever located, representing, involving, or related to, directly or

and Record Keeping.

indirectly, in any manner or by any means, the proceeds of an unlawful activity;

(a) Customer Identification. - Covered institutions shall establish and record the true

(3) to institute civil forfeiture proceedings and all other remedial proceedings through

identity of its clients based on official documents. They shall maintain a system of

the Office of the Solicitor General;

verifying the true identity of their clients and, in case of corporate clients, require a

(4) to cause the filing of complaints with the Department of Justice or the Ombudsman

system of verifying their legal existence and organizational structure, as well as the

for the prosecution of money laundering offenses;

authority and identification of all persons purporting to act on their behalf.The

(5) to initiate investigations of covered transactions, money laundering activities and

provisions of existing laws to the contrary notwithstanding, anonymous accounts,

other violations of this Act;

accounts under fictitious names, and all other similar accounts shall be absolutely

(6) to freeze any monetary instrument or property alleged to be proceeds of any

prohibited. Peso and foreign currency non-checking numbered accounts shall be

unlawful activity;

allowed. The BSP may conduct annual testing solely limited to the determination of

(7) to implement such measures as may be necessary and justified under this Act to

the existence and true identity of the owners of such accounts.

counteract money laundering;

(b) Record Keeping. - All records of all transactions of covered institutions shall be

(8) to receive and take action in respect of, any request from foreign states for

maintained and safely stored for five (5) years from the dates of transactions. With

assistance in their own anti-money laundering operations provided in this Act;

respect to closed accounts, the records on customer identification, account files and

(9) to develop educational programs on the pernicious effects of money laundering,

business correspondence, shall be preserved and safely stored for at least five (5)

the methods and techniques used in money laundering, the viable means of

years from the dates when they were closed.

preventing money laundering and the effective ways of prosecuting and punishing

(c) Reporting of Covered Transactions. - Covered institutions shall report to the AMLC

offenders; and

all covered transactions within five (5) working days from occurrence thereof, unless

(10) to enlist the assistance of any branch, department, bureau, office, agency or

the Supervising Authority concerned prescribes a longer period not exceeding ten

instrumentality of the government, including government-owned and -controlled

(10) working days.

corporations, in undertaking any and all anti-money laundering operations, which may

When reporting covered transactions to the AMLC, covered institutions and their

include the use of its personnel, facilities and resources for the more resolute

officers, employees, representatives, agents, advisors, consultants or associates shall

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not be deemed to have violated Republic Act No. 1405, as amended; Republic Act

No court shall issue a temporary restraining order or writ of injunction against any

No. 6426, as amended; Republic Act No. 8791 and other similar laws, but are

freeze order issued by the AMLC except the Court of Appeals or the Supreme Court.

prohibited from communicating, directly or indirectly, in any manner or by any means,

SEC. 11. Authority to Inquire into Bank Deposits. Notwithstanding the provisions

to any person the fact that a covered transaction report was made, the contents

of Republic Act No. 1405, as amended; Republic Act No. 6426, as amended;

thereof, or any other information in relation thereto. In case of violation thereof, the

Republic Act No. 8791, and other laws, the AMLC may inquire into or examine any

concerned officer, employee, representative, agent, advisor, consultant or associate of

particular deposit or investment with any banking institution or non-bank financial

the covered institution, shall be criminally liable. However, no administrative, criminal

institution upon order of any competent court in cases of violation of this Act when it

or civil proceedings, shall lie against any person for having made a covered

has been established that there is probable cause that the deposits or investments

transaction report in the regular performance of his duties and in good faith, whether

involved are in any way related to a money laundering offense: Provided, That this

or not such reporting results in any criminal prosecution under this Act or any other

provision shall not apply to deposits and investments made prior to the effectivity of

Philippine law.

this Act.

When reporting covered transactions to the AMLC, covered institutions and their

SEC. 12. Forfeiture Provisions.

officers, employees, representatives, agents, advisors, consultants or associates are

(a) Civil Forfeiture. - When there is a covered transaction report made, and the court

prohibited from communicating, directly or indirectly, in any manner or by any means,

has, in a petition filed for the purpose ordered seizure of any monetary instrument or

to any person, entity, the media, the fact that a covered transaction report was made,

property, in whole or in part, directly or indirectly, related to said report, the Revised

the contents thereof, or any other information in relation thereto. Neither may such

Rules of Court on civil forfeiture shall apply.

reporting be published or aired in any manner or form by the mass media, electronic

(b) Claim on Forfeited Assets. - Where the court has issued an order of forfeiture of

mail, or other similar devices. In case of violation thereof, the concerned officer,

the monetary instrument or property in a criminal prosecution for any money

employee, representative, agent, advisor, consultant or associate of the covered

laundering offense defined under Section 4 of this Act, the offender or any other

institution, or media shall be held criminally liable.

person claiming an interest therein may apply, by verified petition, for a declaration

SEC. 10. Authority to Freeze. Upon determination that probable cause exists that

that the same legitimately belongs to him and for segregation or exclusion of the

any deposit or similar account is in any way related to an unlawful activity, the AMLC

monetary instrument or property corresponding thereto. The verified petition shall be

may issue a freeze order, which shall be effective immediately, on the account for a

filed with the court which rendered the judgment of conviction and order of forfeiture,

period not exceeding fifteen (15) days. Notice to the depositor that his account has

within fifteen (15) days from the date of the order of forfeiture, in default of which the

been frozen shall be issued simultaneously with the issuance of the freeze order. The

said order shall become final and executory. This provision shall apply in both civil

depositor shall have seventy-two (72) hours upon receipt of the notice to explain why

and criminal forfeiture.

the freeze order should be lifted. The AMLC has seventy-two (72) hours to dispose of

(c) Payment in Lieu of Forfeiture. - Where the court has issued an order of forfeiture of

the depositors explanation. If it fails to act within seventy-two (72) hours from receipt

the monetary instrument or property subject of a money laundering offense defined

of the depositors explanation, the freeze order shall automatically be dissolved. The

under Section 4, and said order cannot be enforced because any particular monetary

fifteen (15)-day freeze order of the AMLC may be extended upon order of the court,

instrument or property cannot, with due diligence, be located, or it has been

provided that the fifteen (15)-day period shall be tolled pending the courts decision to

substantially altered, destroyed, diminished in value or otherwise rendered worthless

extend the period.

by any act or omission, directly or indirectly, attributable to the offender, or it has been
concealed, removed, converted or otherwise transferred to prevent the same from

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being found or to avoid forfeiture thereof, or it is located outside the Philippines or has

foreign State, applying with the proper court therein for an order to enter any premises

been placed or brought outside the jurisdiction of the court, or it has been

belonging to or in the possession or control of, any or all of the persons named in said

commingled with other monetary instruments or property belonging to either the

request, and/or search any or all such persons named therein and/or remove any

offender himself or a third person or entity, thereby rendering the same difficult to

document, material or object named in said request: Provided, That the documents

identify or be segregated for purposes of forfeiture, the court may, instead of enforcing

accompanying the request in support of the application have been duly authenticated

the order of forfeiture of the monetary instrument or property or part thereof or interest

in accordance with the applicable law or regulation of the foreign State; and (4)

therein, accordingly order the convicted offender to pay an amount equal to the value

applying for an order of forfeiture of any monetary instrument or property in the proper

of said monetary instrument or property. This provision shall apply in both civil and

court in the foreign State: Provided, That the request is accompanied by an

criminal forfeiture.

authenticated copy of the order of the regional trial court ordering the forfeiture of said

SEC. 13. Mutual Assistance among States.

monetary instrument or property of a convicted offender and an affidavit of the clerk of

(a) Request for Assistance from a Foreign State. - Where a foreign State makes a

court stating that the conviction and the order of forfeiture are final and that no further

request for assistance in the investigation or prosecution of a money laundering

appeal lies in respect of either.

offense, the AMLC may execute the request or refuse to execute the same and inform

(d) Limitations on Requests for Mutual Assistance. - The AMLC may refuse to comply

the foreign State of any valid reason for not executing the request or for delaying the

with any request for assistance where the action sought by the request contravenes

execution thereof. The principles of mutuality and reciprocity shall, for this purpose, be

any provision of the Constitution or the execution of a request is likely to prejudice the

at all times recognized.

national interest of the Philippines unless there is a treaty between the Philippines and

(b) Powers of the AMLC to Act on a Request for Assistance from a Foreign State. -

the requesting State relating to the provision of assistance in relation to money

The AMLC may execute a request for assistance from a foreign State by: (1) tracking

laundering offenses.

down, freezing, restraining and seizing assets alleged to be proceeds of any unlawful

(e) Requirements for Requests for Mutual Assistance from Foreign States. - A request

activity under the procedures laid down in this Act; (2) giving information needed by

for mutual assistance from a foreign State must (1) confirm that an investigation or

the foreign State within the procedures laid down in this Act; and (3) applying for an

prosecution is being conducted in respect of a money launderer named therein or that

order of forfeiture of any monetary instrument or property in the court: Provided, That

he has been convicted of any money laundering offense; (2) state the grounds on

the court shall not issue such an order unless the application is accompanied by an

which any person is being investigated or prosecuted for money laundering or the

authenticated copy of the order of a court in the requesting State ordering the

details of his conviction; (3) give sufficient particulars as to the identity of said person;

forfeiture of said monetary instrument or property of a person who has been convicted

(4) give particulars sufficient to identify any covered institution believed to have any

of a money laundering offense in the requesting State, and a certification or an

information, document, material or object which may be of assistance to the

affidavit of a competent officer of the requesting State stating that the conviction and

investigation or prosecution; (5) ask from the covered institution concerned any

the order of forfeiture are final and that no further appeal lies in respect of either.

information, document, material or object which may be of assistance to the

(c) Obtaining Assistance from Foreign States. - The AMLC may make a request to any

investigation or prosecution; (6) specify the manner in which and to whom said

foreign State for assistance in (1) tracking down, freezing, restraining and seizing

information, document, material or object obtained pursuant to said request, is to be

assets alleged to be proceeds of any unlawful activity; (2) obtaining information that it

produced; (7) give all the particulars necessary for the issuance by the court in the

needs relating to any covered transaction, money laundering offense or any other

requested State of the writs, orders or processes needed by the requesting State; and

matter directly or indirectly related thereto; (3) to the extent allowed by the law of the

(8) contain such other information as may assist in the execution of the request.

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(f) Authentication of Documents. - For purposes of this Section, a document is

against any person shall be subject to a penalty of six (6) months to four (4) years

authenticated if the same is signed or certified by a judge, magistrate or equivalent

imprisonment and a fine of not less than One hundred thousand Philippine pesos

officer in or of, the requesting State, and authenticated by the oath or affirmation of a

(Php100, 000.00) but not more than Five hundred thousand Philippine pesos

witness or sealed with an official or public seal of a minister, secretary of State, or

(Php500, 000.00), at the discretion of the court: Provided, That the offender is not

officer in or of, the government of the requesting State, or of the person administering

entitled to avail the benefits of the Probation Law.

the government or a department of the requesting territory, protectorate or colony. The

If the offender is a corporation, association, partnership or any juridical person, the

certificate of authentication may also be made by a secretary of the embassy or

penalty shall be imposed upon the responsible officers, as the case may be, who

legation, consul general, consul, vice consul, consular agent or any officer in the

participated in the commission of the crime or who shall have knowingly permitted or

foreign service of the Philippines stationed in the foreign State in which the record is

failed to prevent its commission. If the offender is a juridical person, the court may

kept, and authenticated by the seal of his office.

suspend or revoke its license. If the offender is an alien, he shall, in addition to the

(g) Extradition. - The Philippines shall negotiate for the inclusion of money laundering

penalties herein prescribed, be deported without further proceedings after serving the

offenses as herein defined among extraditable offenses in all future treaties.

penalties herein prescribed. If the offender is a public official or employee, he shall, in

SEC. 14. Penal Provisions.

addition to the penalties prescribed herein, suffer perpetual or temporary absolute

(a) Penalties for the Crime of Money Laundering. The penalty of imprisonment

disqualification from office, as the case may be.

ranging from seven (7) to fourteen (14) years and a fine of not less than Three million

Any public official or employee who is called upon to testify and refuses to do the

Philippine pesos (Php 3,000,000.00) but not more than twice the value of the

same or purposely fails to testify shall suffer the same penalties prescribed herein.

monetary instrument or property involved in the offense, shall be imposed upon a

(d) Breach of Confidentiality. The punishment of imprisonment ranging from three (3)

person convicted under Section 4(a) of this Act.

to eight (8) years and a fine of not less than Five hundred thousand Philippine pesos

The penalty of imprisonment from four (4) to seven (7) years and a fine of not less

(Php500,000.00) but not more than One million Philippine pesos (Php1,000,000.00),

than One million five hundred thousand Philippine pesos (Php1,500,000.00) but not

shall be imposed on a person convicted for a violation under Section 9(c).

more than Three million Philippine pesos (Php3,000,000.00), shall be imposed upon a

SEC. 15. System of Incentives and Rewards. A system of special incentives and

person convicted under Section 4(b) of this Act.

rewards is hereby established to be given to the appropriate government agency and

The penalty of imprisonment from six (6) months to four (4) years or a fine of not less

its personnel that led and initiated an investigation, prosecution and conviction of

than One hundred thousand Philippine pesos (Php100,000.00) but not more than Five

persons involved in the offense penalized in Section 4 of this Act.

hundred thousand Philippine pesos (Php500,000.00), or both, shall be imposed on a

SEC. 16. Prohibitions Against Political Harassment. This Act shall not be used

person convicted under Section 4(c) of this Act.

for political persecution or harassment or as an instrument to hamper competition in

(b) Penalties for Failure to Keep Records. The penalty of imprisonment from six (6)

trade and commerce.

months to one (1) year or a fine of not less than One hundred thousand Philippine

No case for money laundering may be filed against and no assets shall be frozen,

pesos (Php100,000.00) but not more than Five hundred thousand Philippine pesos

attached or forfeited to the prejudice of a candidate for an electoral office during an

(Php500,000.00), or both, shall be imposed on a person convicted under Section 9(b)

election period.

of this Act.

SEC. 17. Restitution. Restitution for any aggrieved party shall be governed by the

(c) Malicious Reporting. Any person who, with malice, or in bad faith, reports or files a

provisions of the New Civil Code.

completely unwarranted or false information relative to money laundering transaction

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SEC. 18. Implementing Rules and Regulations. Within thirty (30) days from the

SEC. 20. Appropriations Clause. The AMLC shall be provided with an initial

effectivity of this Act, the Bangko Sentral ng Pilipinas, the Insurance Commission and

appropriation of Twenty-five million Philippine pesos (Php25,000,000.00) to be drawn

the Securities and Exchange Commission shall promulgate the rules and regulations

from the national government. Appropriations for the succeeding years shall be

to implement effectively the provisions of this Act. Said rules and regulations shall be

included in the General Appropriations Act.

submitted to the Congressional Oversight Committee for approval.

SEC. 21. Separability Clause. If any provision or section of this Act or the

Covered institutions shall formulate their respective money laundering prevention

application thereof to any person or circumstance is held to be invalid, the other

programs in accordance with this Act including, but not limited to, information

provisions or sections of this Act, and the application of such provision or section to

dissemination on money laundering activities and its prevention, detection and

other persons or circumstances, shall not be affected thereby.

reporting, and the training of responsible officers and personnel of covered

SEC. 22. Repealing Clause. All laws, decrees, executive orders, rules and

institutions.

regulations or parts thereof, including the relevant provisions of Republic Act No.

SEC. 19. Congressional Oversight Committee. There is hereby created a

1405, as amended; Republic Act No. 6426, as amended; Republic Act No. 8791, as

Congressional Oversight Committee composed of seven (7) members from the

amended and other similar laws, as are inconsistent with this Act, are hereby

Senate and seven (7) members from the House of Representatives. The members

repealed, amended or modified accordingly.

from the Senate shall be appointed by the Senate President based on the proportional

SEC. 23. Effectivity. This Act shall take effect fifteen (15) days after its complete

representation of the parties or coalitions therein with at least two (2) Senators

publication in the Official Gazette or in at least two (2) national newspapers of general

representing the minority. The members from the House of Representatives shall be

circulation.

appointed by the Speaker also based on proportional representation of the parties or

The provisions of this Act shall not apply to deposits and investments made prior to its

coalitions therein with at least two (2) members representing the minority.

effectivity.

The Oversight Committee shall have the power to promulgate its own rules, to
oversee the implementation of this Act, and to review or revise the implementing rules
issued by the Anti-Money Laundering Council within thirty (30) days from the
promulgation of the said rules.

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